ITEM 1. Business
(a) General Development of Business
VSE Corporation ("VSE" or the "company") was established and incorporated in Delaware January 1959. The company's business operations consist of the operations of the parent company, operations of the company's wholly owned subsidiaries and operations of the company's divisions. Wholly owned subsidiaries include Energetics Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"), Ship Remediation and Recycling, Inc. ("SRR", formerly VSE Services Corporation) and VSE Services International Inc. ("VSI"). The company sold its CMstat Corporation subsidiary in May 1999. Unincorporated divisions include BAV Division ("BAV"), Fleet Maintenance Division ("Fleet Maintenance"), Ordnance Division ("Ordnance"), VSE IT Services Division ("IT Services"), and Value Systems Services Division ("VSS"). The term "VSE" or "company" means VSE and its subsidiaries and divisions unless the context indicates operations of the parent company only.
The company's business operations consist primarily of diversified engineering, technical, and management services, performed on a contract basis. A large majority of the company's contracts are with agencies of the United States Government (the "government") and other government prime contractors. The company's customers also include non-government organizations and commercial entities.
	VSE seeks to provide its customers with competitive, cost effective solutions to specific problems. These problems generally require a detailed technical knowledge of materials, processes, functional characteristics, information systems, technology and products, and an in-depth understanding of the basic requirements for effective systems and equipment. Customers are
generally billed for a specified level-of-effort incurred in performing a project or providing a service or, less frequently, for installed products, systems and maintenance charges.
(b) Financial Information About Industry Segments
Financial information about industry segments for the three years ended December 31, 1999, appears in Note 10 (Segment Information) of "Notes to Consolidated Financial Statements" contained in this Form 10-K.
(c) Narrative Description of Business
	During the three years ended December 31, 1999, the company operated in two business segments. The engineering, logistics, management and technical services segment ("ELMTS") includes the operations of the parent company and all of the subsidiaries and divisions except CMstat. The software products and services segment ("SPS") was comprised of the operations of CMstat prior to the sale of CMstat in May 1999. The company has not had any operations in SPS since May 1999.
Services and Products
Engineering, Logistics, Management and Technical Services Segment
	VSE engineering, technical, management and information technology services include a broad array of capabilities and resources used in program planning; design and engineering, including prototype development; ship reactivation and transfer support; logistics management; ship maintenance, repair, overhaul planning and follow-on technical support; ship dismantlement and recycling services; office automation systems and support; training; technology research, development and demonstration programs involving energy conservation and efficiency, advanced technology transfers, and feasibility, assessment and development programs.
	Typical engineering and technical services projects include sustaining engineering support for military vehicles, combat trailers, bridging systems and amphibious transport; ocean engineering and mooring systems; depot repair operations; logistics management support for military aircraft; machinery condition analysis; specification preparation for ship alterations and repairs; ship force crew training; ship dismantlement and ship sales; energy conservation and advanced technology demonstration projects; and technical data package preparation.
VSE information technology services and products include cross-platform technical data, product data and configuration management (CM/PDM) support, bar coding and inventory application, and database management and control.
Contracts
	Depending on solicitation requirements and other factors, VSE offers its professional and technical services and products through various
competitive contract arrangements and business units which are responsive to customer requirements and which may also provide an opportunity for diversification. Such arrangements include prime contracts, subcontracts, cooperative arrangements, joint ventures, dedicated ventures, dedicated cost centers (divisions) and subsidiaries.
	Substantially all of the company's revenues are derived from contract services performed for the government. The U.S. Navy is VSE's largest single customer, and most of the company's operating divisions and subsidiaries derive a majority or all of their work from the Navy. Other significant customers include: the U.S. Army, served by VSE (parent company); the U.S. Postal Service, served by VSE (parent company) and by HRSI; and the Department of Energy, which comprises the majority of Energetics' work. The company's customers also include various other government agencies, non- government organizations, and commercial entities.
The government's procurement practices in recent years have tended toward the bundling of various work efforts under large comprehensive ("omnibus") management contracts. As a result, the growth opportunities available to the company will probably continue to occur in large unpredictable increments. The company has elected to pursue these larger efforts by assembling teams of subcontractors and forming joint venture partnerships to offer the range of technical competencies required by these omnibus contracts. The company has also elected to pursue more of its contract work through its operating divisions and subsidiaries to focus on particular lines of work or specific customer bases.
As a result of the bundling trend described above, the company has several divisions for which revenues are derived predominantly from one major contract effort. During 1999, the company's six largest contracts accounted for approximately 80% of total revenues. The company's largest contract, performed by BAV, is with the U.S. Navy and accounted for more than 50% of consolidated revenues in 1999 and 1998. This contract is a ten year contract awarded in 1995, and it has the potential to generate total revenues of over one billion dollars from 1995 through 2005. Other major contracts include U.S. Navy contracts performed by VSE (parent company), VSS, and Ordnance divisions, and a U.S. Postal Service contract and a U.S. Army contract performed by VSE (parent company). The VSS contract and the U.S. Postal Service contract are expected to be re-bid in 2000, and the company is actively pursuing the continuance of this work.
The company's contracts with the government are typically performed under cost plus fee, time and materials, or fixed price contracts. Under cost
plus fee contracts, the customer reimburses the company for its allowable costs and pays a fee as determined by the contract terms. Under time and materials contracts, the customer pays the company contract specific hourly rates for labor services and reimburses the company for the cost of materials. Under fixed price contracts, the customer pays a contract specific price for services or products. Some of the contracts permit the contracting agency to issue delivery orders or task orders in an expeditious manner to satisfy relatively short-term requirements for engineering and technical services. The services ordered pursuant to such arrangements are normally performed and completed within one year. During 1999, the company provided services to the government and other customers under approximately 210 contracts and approximately 795 delivery orders or task orders.
Backlog
During 1999 and 1998, VSE was awarded contracts having potential ceiling values of approximately $115 million and $124 million, respectively.
	VSE's funded backlog of contract work as of December 31, 1999, 1998 and 1997 was approximately $108 million, $122 million and $110 million, respectively. Funded backlog is defined as orders for services that have not been fully rendered and for which funding has been provided either at the time of award or thereafter. Substantially all the funded backlog is expected to be completed within one year.
The excess of unfulfilled contract estimates over the incremental funding authorized represents an unfunded backlog. Based on the total estimated value of contracts actually awarded, the company's potential revenues for work remaining to be performed under existing contracts (both funded and unfunded backlog) was approximately $946 million, $1 billion and $1.2 billion, as of December 31, 1999, 1998 and 1997, respectively. The company has no reasonable basis on which to determine when or if such unfunded backlog will be funded. Because of uncertainties associated with changing program requirements and the ultimate availability of funds, VSE believes that measurements of unfunded backlog are of limited use in evaluating future workload.
	As of December 31, 1999, VSE had proposals pending for engineering services contracts covering approximately $618 million in services for the Department of Defense or other government agencies or prime contractors. If these contracts are awarded to VSE, resulting ordering periods could extend through 2005. There is no assurance that VSE will be the successful bidder for any of these contracts. Additionally, there can be no assurance that contracts awarded will result in revenues to VSE because (a) contract awards may be rescinded as a result of the government's bid protest procedures, (b) contracts may not be funded at the nominal amounts cited in competitive bid announcements and (c) contracts when funded may be terminated at the convenience of the government.
Marketing
	VSE marketing activities are conducted by its professional staff of engineers, analysts, program managers, contract administrators and other personnel. Information concerning new programs and requirements becomes
available in the course of contract performance, through formal and informal briefings, from participation in professional organizations, and from literature published by the government, trade associations, professional organizations and commercial entities.
Personnel
	VSE services are provided by a staff of professional, scientific, medical and technical personnel having high levels of education, experience, training and skills. As of February 2000, VSE employed approximately 900 employees, including approximately 150 part-time personnel.
	Principal categories of VSE personnel include (a) engineers, scientists and technicians in mechanical, electrical, electronic, chemical, industrial, energy and environmental services, marine and ocean engineering disciplines, (b) information technology professionals in computer systems, applications and products, configuration, change and data management disciplines, (c) technical editors and writers, (d) graphic designers and technicians and (e) health care service personnel. The expertise required by VSE customers also frequently includes knowledge of government administrative procedures. Many VSE employees have had experience as government employees or have served in the U.S. armed forces. The company considers its relationships with employees to be excellent.
Competition and Risks
	Competition. The professional and technical services industry in which VSE is engaged is very competitive. There are a substantial number of other organizations, including large, diversified firms with greater financial resources and larger technical staffs, which are capable of providing essentially the same services as those offered by VSE. Such companies may be publicly owned or privately held and may be divisions of much larger organizations including large manufacturing corporations. Competition in the government contract business has intensified in recent years due to declining government budgets.
	Government agencies have placed an increased emphasis on awarding contracts of the types performed by VSE on a competitive basis as opposed to a non-competitive basis. All significant contracts currently being performed by VSE were either initially awarded on a competitive basis or have been renewed at least once on a competitive basis. Government agencies also order work through contracts awarded by the General Services Administration ("GSA") which provide a schedule of services at fixed prices which may be ordered outside of the solicitation process. The company has been awarded three separate GSA schedule contracts for various classes of services, but there is no assurance regarding the level of work under these contract arrangements.
	It is not possible to predict the extent and range of competition which VSE will encounter as a result of changing economic or competitive conditions, customer requirements, or technological developments. VSE believes the principal competitive factors for the professional and technical services business in which it is engaged are technical and financial
qualifications, quality and innovation of services and products, past performance and low price.
	Risks. Since 1993, the government has initiated a series of changes designed to improve and streamline its acquisition policies and procedures. Such changes include an emphasis on very large contracts, which may make it more difficult for VSE to qualify as a potential bidder; past performance, which may be used to exclude entrance into new government markets; and multiple-award schedules, which may result in unequal contract awards between successful contractors.
	VSE's business with the government is subject to the risk that one or more of its potential contracts or contract extensions may be awarded by the contracting agency to a "small and disadvantaged" or minority-owned business pursuant to "set-aside" programs administered by the Small Business Administration or may be bundled into omnibus contracts for very large businesses. In addition, government contract business is subject to funding delays, extensions, and moratoriums caused by political and administrative disagreements such as occurred during the 1996 U.S. Government budget negotiations. To date, the effect of such negotiations and disagreements on the company has not been material; however, no assurances can be given about such risks with respect to future years.
	Government contracts are subject to termination at the government's convenience, which means that the government may terminate the contract at any time, without cause. If a government contract is terminated for convenience, the contractor is generally reimbursed for its allowable costs to the date of termination and is paid a proportionate amount of the stipulated profit or fee for the work actually performed. VSE has not suffered any material losses or disruptions of its business due to government terminations for convenience.
	VSE's business is subject to the risks arising from global economic conditions associated with potential foreign customers served through the company's contracts with the U.S. Government. For example, economic slowdowns in certain countries served under the BAV contract could potentially affect BAV sales. In addition, the company's subsidiary VSE Services International, Inc. is also expected to serve foreign customers on a direct sales basis and may be subject to such economic slowdowns.
ITEM 2.
ITEM 2. Properties
	VSE's principal executive and administrative offices are located in a five story building in Alexandria, Virginia, leased by VSE through April 30, 2003. This building contains approximately 108,000 square feet of engineering, shop, and administrative space. VSE also provides services and products from approximately 11 U.S. branch offices located at or near customer sites to facilitate communications and enhance project performance. Branch offices are generally occupied under short term leases and currently include an aggregate of approximately 195,000 square feet of office and warehouse space. VSE employees often provide services at customer facilities, limiting VSE's requirement for additional space. BAV provides services from several locations outside of the United States (generally at foreign shipyards); these services are often of short duration based on "tiger team" or "as-ordered" requirements.
	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.
ITEM 3. Legal Proceedings
Litigation
	None.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
	No matters were submitted to a vote of stockholders, through the solicitation of proxies or otherwise, during the three month period ended December 31, 1999.
		 EXECUTIVE OFFICERS OF THE REGISTRANT
	The following table sets forth information concerning the executive officers of the Registrant as of March 15, 2000.
	The executive officers are chosen annually to serve until the first meeting of the Board of Directors following the next annual meeting of stockholders and until their successors are elected and have qualified, or until death, resignation or removal, whichever is sooner.
Name Age Position with Registrant - ---- --- ------------------------ William R. Albertolli 57 Senior Vice President and 						 President, VSS Division
Byron S. Bartholomew 72 Executive Vice President, 						 Business Development
Donald M. Ervine 63 Chairman and Chief Executive 					 Officer
James M. Knowlton 57 President and Chief Operating 						 Officer, President and 						 General Manager, BAV Division
Jayne M. Tuohig 53 Senior Vice President and 						 General Manager, Postal 						 Service Program Center
Paul A. Vander Myde 63 Senior Vice President, 						 Corporate Affairs
Craig S. Weber 55 Senior Vice President, 						 Chief Financial Officer and 					 Corporate Secretary
				 PART II
ITEM 5.
ITEM 5. Market for Registrant's Common Stock and Related Stockholder 	Matters
(a) Market Information
	The company's common stock ($.05 par value) is traded in the Nasdaq National Market System, trading symbol: VSEC, Newspaper listing: VSE.
	The following table sets forth the range of high and low sales price information on VSE common stock for each quarter and annually during the last two years based on information reported by the Nasdaq National Market System.
(b) Holders
	There were approximately 1,200 stockholders of VSE common stock as of March 1, 2000, consisting of about 300 stockholders of record plus the number of beneficial owner proxy sets provided in connection with VSE's 1999 Annual Meeting of Stockholders to (a) brokers, banks, and nominees and (b) participants in the VSE Corporation Employee ESOP/401(k) Plan.
(c) Dividends
	Cash dividends were declared at the rate of $.144 per share during 1999 and 1998. Pursuant to its bank loan agreement (see Note 4 of "Notes to Consolidated Financial Statements"), the payment of cash dividends by VSE is subject to annual rate restrictions. VSE has paid cash dividends each year since 1973.
Per share amounts have been adjusted to reflect stock splits effected in 1996 and 1997.
(A) The increase in revenues in 1996 as compared to 1995 are attributed to the award of the BAV contract and the acquisitions of Energetics Incorporated and CMstat Incorporated.
This consolidated summary of selected financial data should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report.
ITEM 7. Management's Discussion and Analysis of Financial Condition 	and Results of Operations
	VSE and its subsidiaries and divisions have two reportable segments: the engineering, logistics, management and technical services segment ("ELMTS") and the software products and services segment ("SPS"). The term "VSE" or "company" means VSE and its subsidiaries and divisions unless the context indicates operations of the parent company only.
The ELMTS business operations consist of the operations of the parent company, operations of the company's wholly owned subsidiaries and operations of the company's divisions. Wholly owned subsidiaries in this segment include Energetics Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"), Ship Remediation and Recycling, Inc. ("SRR", formerly VSE Services Corporation) and VSE Services International Inc ("VSI") incorporated in August 1999. Unincorporated divisions in this segment include BAV Division ("BAV"), Fleet Maintenance Division ("Fleet Maintenance") formed in June 1999, Ordnance Division ("Ordnance"), VSE IT Services Division ("IT Services"), formed in January 1999, and Value Systems Services Division ("VSS").
The SPS business operations include sales of developed software products and the services related to the installation and use of the software. This is the primary business of VSE's former subsidiary CMstat Corporation ("CMstat"), sold in May 1999. (See "Divestiture" below).
The company is engaged principally in providing engineering, software development, testing and management services to the U.S. Government (the "government"). Intercompany sales are principally at cost and have been eliminated from the consolidated financial statements.
Results of Operations
Revenues
	The following table shows the revenues from operations of VSE and subsidiaries and such revenues as a percent of total revenues:
	The consolidated statements of operations have been restated and include the revenues and income from the SPS segment on the "Loss on CMstat operations" line.
Engineering, Logistics, Management and Technical Services Segment
	The largest customer for the ELMTS segment is the U.S. Department of Defense ("Defense"), including agencies of the U.S. Army, Navy and Air Force. VSE's ELMTS segment revenues have historically been subject to annual fluctuations resulting from changes in the level of Defense spending. Accordingly, there can be no assurance that future reductions in Defense spending will not have a material adverse impact on the company's results of operations or financial position.
	Substantially all of the company's revenues from this segment depend on the award of new contracts, on current contracts not being terminated for the convenience of the government, and on the exercise of option periods and the satisfaction of incremental funding requirements on current contracts. In 1999, 1998 and 1997, the company did not experience any terminations of contracts for the convenience of the government nor any non-exercise of option periods on current contracts which were material to the company's results of operations or financial position.
	During 1998 and 1999, the Ordnance and Fleet Maintenance divisions bid on contract work that had been traditionally performed by VSE. This enabled the company to use an operating structure that was better suited to perform certain types of contract work. In prior years, the company has utilized this strategy to win contracts and generate new revenue in the BAV and VSS divisions. The company anticipates that it will continue this strategy to better service the needs of its customers. As the use of operating divisions to bid and win new contracts increases, the company expects that the revenue of VSE (the parent company) will be further reduced in the future as parent company contracts are replaced by operating division contracts. Management believes that the use of operating divisions to perform future work and the associated improvements in servicing customers will better position the consolidated entity for future revenue growth.
	BAV Contract. Since August 1995, VSE's BAV Division has had a contract with the U.S. Navy to provide engineering, technical and logistical support services associated with the sale, lease or transfer of Navy ships to foreign governments. This contract has the potential, if all options are exercised, to generate revenues in excess of one billion dollars over a ten year period from 1995 through 2005. The contract accounted for approximately 50% and 52% of consolidated revenues from operations during 1999 and 1998, respectively. The level of revenues generated by this contract will vary depending on a number of factors including the timing of ship transfers and associated support services ordered by foreign governments and economic conditions of potential customers worldwide. The company experienced significant quarterly and annual revenue fluctuations from 1997 through 1999 and anticipates that future revenues will be subject to significant variations primarily due to this contract.
	New Business. The company has been successful in bidding and winning new types of work in the ELMTS segment. IT Services was formed in January 1999 to bid and perform on work issued through the government's GSA schedule. This division was awarded a second purchase agreement in October 1999 to support the U.S. Navy's Engineering Investigations (EI) safety program related to naval aircraft and aircraft systems and subsystems.
	VSI was formed in August 1999 to expand VSE's international presence and perform services for foreign government and commercial customers similar to the services VSE has traditionally provided in the United States. VSI received its first work order in September 1999.
	SRR is a participant in a joint venture that was awarded a contract associated with a new program to dismantle and recycle retired U.S. Navy ships. Work on this contract began in January 2000.
	Each of these three new business units is engaged in bidding on and performing work that could potentially increase the future revenues of the company.
Software Products and Services Segment
	The company sold its CMstat subsidiary in May 1999. (See "Divestiture" below). The revenues and pretax losses of this segment for 1999 include the activity of CMstat through May 21, 1999, and the pretax loss includes a loss on the sale of CMstat. Accordingly, year to year comparisons of revenue and
income for this segment are not meaningful. As a result of the sale of CMstat, the company will no longer have any active business operations in the software products and services segment. The company's 1999 operating results for the SPS segment are therefore not a good indicator of future quarterly results.
Income from Operations Before Income Taxes
	The following table shows consolidated revenues and income from operations before income taxes of VSE segments, other items of income and expense, and such amounts as a percent of segment revenues.
Engineering, Logistics, Management and Technical Services Segment
	Costs and expenses of operations, as a percentage of ELMTS segment revenues, were fairly stable during 1999, 1998 and 1997. The small percentage differences between 1999, 1998 and 1997 are due to a combination of factors, some of which are offsetting, including (a) differences between
costs incurred and costs billable (whether they may be billed based on contract provisions), (b) the effects of increases or decreases in facility and equipment lease renewals, fringe benefit programs and similar period expenses, (c) costs associated with contract start-up and termination phases, (d) narrower profit margins on new work due to increased competition, (e) increased labor costs reflecting a more competitive marketplace for attracting and retaining our employees, (f) the establishment and reversal of reserves for potential contract disallowances due to the timing of government audits on costs incurred, g) the amount of work performed on certain contracts as a percentage of total revenues, (h) the timing of contract award fees and (i) effective project and cost management.
	Selling, general and administrative expenses as a percentage of segment revenues increased slightly in 1999 as compared to 1998 and in 1998 as compared to 1997. Selling, general and administrative expenses will vary from year to year due to various types of nonreimbursable costs, including costs associated with the start up of new divisions or subsidiaries, costs of discontinued operations and unrecoverable contract costs.
	Interest expense as a percentage of segment revenues increased slightly in 1999 as compared to 1998 due primarily to an increase in average levels of bank debt resulting from the sale of CMstat. Interest expense as a percentage of segment revenues decreased approximately 0.1% in 1998 as compared to 1997 due primarily to the application of earnings to reduce the bank debt of this segment and to the improved cash collection cycles on government contracts.
Divestiture
	On May 22, 1999, VSE sold its wholly owned subsidiary CMstat. Under the terms of the transaction, VSE sold all of the outstanding capital stock of CMstat to an officer of CMstat in exchange for a promissory note for which principal is payable in installments from September 1, 1999 through May 20, 2006. The transaction resulted in a pretax loss of approximately $1.1 million. An additional pretax loss from CMstat operations prior to the sale date of approximately $400 thousand was incurred in 1999.
	The sale of CMstat is a divestiture for legal and tax purposes. For accounting purposes, the sale is not afforded discontinued operations treatment under Staff Accounting Bulletin No. 30 "Accounting for Divestiture of a Subsidiary or Other Business Operation"("SAB No. 30") since the sale did not transfer the risks of ownership because the sales price is primarily dependent on the buyer's ability to repay the promissory note.
	The company sustained significant losses on CMstat operations during 1999, 1998 and 1997. Management believes that the divestiture of CMstat will allow the company to focus on its core business lines and improve profitability in the future.
Liquidity and Capital Resources
Cash Flows
	The company's level of net cash and cash equivalents did not change significantly during 1999. Approximately $4.2 million in net cash provided by
operations was used for financing activities of approximately $3.1 million and for investing activities of approximately $1.1 million. Significant financing activities included decreases in bank loan borrowings and the current portion of long-term debt of approximately $1.5 million and $1.3 million, respectively. Significant investing activities included approximate- ly $1.2 million associated with the purchase of property and equipment, primarily computer equipment. Cash flows provided by operating activities increased in 1999 as compared to 1998 due primarily to changes in the levels of accounts receivable and accounts payable in 1999 resulting from a decrease in revenues on the BAV contract as compared with the previous year.
	A net increase in cash and cash equivalents of approximately $34 thousand during 1998 resulted from approximately $2.9 million provided by operations, approximately $1.4 million used in financing activities, and approximately $1.5 million used in investing activities. Significant financing activities included a decrease in bank loan borrowings of approximately $1.9 million. Significant investing activities included approximately $1.5 million associated primarily with the purchase of computer equipment. Cash flows provided by operating activities decreased in 1998 as compared to 1997 due primarily to an increase in the level of accounts receivable in 1998 resulting from the increased revenues in 1998 as compared with a significant decrease in accounts receivable in 1997 due to collections of accounts receivable on the BAV contract. The decrease in cash flows provided by operating activities due to changes in the level of accounts receivable was offset slightly by cash provided by the increase in net income and the increase in accounts payable.
	A net decrease in cash and cash equivalents of approximately $399 thousand during 1997 resulted from approximately $3.5 million provided by operations, approximately $2 million used in financing activities, and approximately $1.8 million used in investing activities. Significant financing activities included a decrease in bank loan borrowings of $1.9 million. Significant investing activities included approximately $1.8 million associated with the purchase of property and equipment.
	The company's principal requirements for cash are to finance the costs of operations pending the collection of accounts receivable, to acquire capital assets including leaseholds for office and computer support and to pay cash dividends. Performance of work under the BAV contract has the potential to cause substantial requirements for cash; however, management believes that the cash flows from future operations and the bank revolving loan commitment are adequate to meet current operating cash requirements.
Working Capital
	VSE's requirements for working capital are affected significantly by its revenues and accounts receivable, which are primarily derived from billings made by the company to the government or other government prime contractors for services rendered. Such accounts receivable generally do not present liquidity or collection problems. Working capital is also affected by (a) contract retainages, (b) start-up and termination costs associated with new or completed contracts, (c) capital equipment requirements, (d) differences between the provisional billing rates authorized by the government compared to the costs actually incurred by the company and (e) profitability.
	Government contracts generally require VSE to pay for material and subcontract costs included in VSE's contract billings prior to receiving payment for such costs from the government. However, such contracts generally provide for progress payments on a monthly or semimonthly basis, thereby reducing requirements for working capital.
Dividends
	Cash dividends were declared at the rate of $.144 per share during 1999, 1998, and 1997. Pursuant to its bank loan agreement (see Note 4 of "Notes to Consolidated Financial Statements"), the payment of cash dividends by VSE is subject to annual rate restrictions. VSE has paid cash dividends each year since 1973.
ESOP Advances
	Prior to December 1998 the company made advances to the ESOP trust totaling $792 thousand in connection with distributions made to terminated participants. In December 1998, the company and the ESOP entered into an agreement in which the ESOP repaid the advances. Under the terms of the agreement, the company purchased 72,000 shares of VSE stock from the ESOP at market price and the ESOP simultaneously returned the proceeds of $792,000 from the stock sale to the company as repayment of the advances.
Inflation and Pricing
	Most of the contracts performed by VSE provide for estimates of future labor costs to be escalated for any option periods provided by the contracts, while the non-labor costs included in such contracts are normally considered reimbursable at cost. VSE property and equipment consists principally of computer systems equipment and furniture and fixtures. The overall impact of inflation on replacement costs of such property and equipment is expected to be insignificant.
Global Economic Conditions
	VSE's business is subject to the risks arising from global economic conditions associated with potential foreign customers served through VSE's contracts with the U.S. Government. For example, an economic slowdown in countries served under the BAV contract could potentially affect BAV sales. Management is unable to predict what, if any, impact such conditions may have on the company's financial position or results of operations.
Year 2000
	Overview. The company is not currently aware of any Year 2000 issues that have affected its business. During 1999, the company completed a detailed assessment of all its information technology and non-information technology hardware and software with regard to the Year 2000 issue, with special emphasis on mission critical systems. Prior to December 31, 1999, information and non-information technology hardware and software were
inventoried and those not Year 2000 ready were identified, remediated (i.e., corrected or replaced) and tested to ensure that they would, in fact, operate as desired according to Year 2000 requirements. It is possible that the company's computerized systems could be affected in the future by the Year 2000 issue. The company will continue to monitor its mission critical computer applications throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
	Costs. Costs incurred to date for Year 2000 readiness efforts have been minimal and are included as part of the company's ongoing administrative costs and have not been separately identified. The company continues to upgrade and improve its information technology systems as part of its normal effort to maintain a competitive edge. As these upgrades and improvements are made, the company is ensuring that all are Year 2000 ready. Therefore, the majority of costs incurred for computer systems that ensure Year 2000 readiness are expenditures that are made in the normal course of business. Total property and equipment expenditures for 1999 and 1998, including expenditures for computers and computer systems, were approximately $1.2 million and $1.5 million, respectively. Accordingly, management believes that the incremental costs of addressing the Year 2000 readiness issue have not materially affected the company's consolidated financial position, liquidity, or results of operations through December 31, 1999 and will not materially affect them through 2000.
	Impact on Operations. The company did not materially alter its spending patterns for information technology as a result of the Year 2000 issue. The company has not experienced any material revenue fluctuations due to increases or decreases in customer purchasing activity related to the Year 2000 issue during late 1999 or early 2000 and does not expect to experience such fluctuations. The company has not experienced and does not expect to experience any significant returns of products or services purchased in 1999 by customers in preparation for Year 2000. Accordingly, the company does not anticipate that the Year 2000 issue will materially impact its results of operations in 2000 as compared to 1999.
	Risks. The full range of potential risks associated with the Year 2000 issue will continue to be monitored. Potential risks include obligations related to contract performance on current and past contracts, the reliance on infrastructure services to conduct the company's business operations, and the possibility of liquidity issues caused by payment problems with VSE's banks or government customers. Although management believes that the risks associated with internal issues regarding the Year 2000 problem will be minimal, the risks associated with external issues are difficult to predict. If these external issues cause massive failures to systems upon which the company is reliant, the results could materially affect the company's consolidated financial position, liquidity, or results of operations.
Market Risk
	The Company does not use derivative instruments to alter the interest characteristics of its debt instruments. The aggregate fair value of the company's financial instruments approximates the carrying value at December 31, 1999.
ITEM 8. Financial Statements and Supplementary Data
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	Report of Independent Public Accountants 22 	Consolidated Balance Sheets as of December 31, 1999 and 1998 23 	Consolidated Statements of Operations for the years ended 	 	December 31, 1999, 1998 and 1997 24 	Consolidated Statements of Stockholders' Investment 		for the years ended December 31, 1999, 1998 and 1997 25 	Consolidated Statements of Cash Flows for the years ended 		December 31, 1999, 1998 and 1997 26 	Notes to Consolidated Financial Statements 27
	 	 Report of Independent Public Accountants
To the Stockholders of VSE Corporation:
	We have audited the accompanying consolidated balance sheets of VSE Corporation (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' investment and cash flows for the three years ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
	We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
	In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of VSE Corporation as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the three years ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
	 					ARTHUR ANDERSEN LLP
Vienna, Virginia March 3, 2000
	 	 See accompanying notes
			 See accompanying notes
			 See accompanying notes
			 See accompanying notes
			VSE CORPORATION AND SUBSIDIARIES 		 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include two segments: the engineering, logistics, management, and technical services ("ELMTS") segment and the software products and services ("SPS") segment. ELMTS business operations consist of the operations of the parent company, operations of the company's wholly owned subsidiaries, and operations of the company's divisions. Wholly owned subsidiaries in this segment include Energetics Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"), Ship Remediation and Recycling, Inc. ("SRR", formerly VSE Services Corporation), and VSE Services International, Inc. ("VSI"). Unincorporated divisions in this segment include BAV Division ("BAV"), Fleet Maintenance Division ("Fleet Maintenance"), Ordnance Division ("Ordnance"), VSE IT Services Division ("IT Services"), and Value Systems Services Division ("VSS"). This segment is engaged principally in providing engineering, testing, management and information technology services to the U.S. Government (the "government") and other government prime contractors. The SPS segment business operations consist of the operations of wholly owned subsidiary CMstat, sold in May 1999 (see note 10), which was engaged principally in software development and sales of software products and services primarily to government prime contractors.
The term "VSE" or "company" means VSE and its subsidiaries and divisions unless the context indicates operations of the parent company only. Intercompany sales are principally at cost. All significant intercompany transactions have been eliminated in consolidation. Certain prior year balances have been reclassified for comparative purposes.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Stockholders' Investment and Earnings Per Share
At December 31, 1999, options to purchase 149,023 shares, 38,063 shares, 36,563 shares and 55,438 shares of common stock at $10.91, $13.04, $9.42 and $10.93 per share, respectively, were outstanding. There was no dilutive impact on reported earnings per share for 1999, 1998 and 1997.
Cash and Cash Equivalents
The company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
The company has classified all debt and equity securities as available-for- sale. Available-for-sale securities are carried at fair value with unrealized gains and losses, net of tax, reported as a component of stockholders' investment. Realized gains and losses are included in other income. Available-for-sale debt securities as of December 31, 1999 and December 31, 1998 consisted of overnight money market accounts of $1.7 million and $3.3 million, respectively, secured by Government agency securities. The estimated fair value of these securities approximated cost, and the amount of gross unrealized gains and losses was not significant.
Concentration of Credit Risk/Fair Value of Financial Instruments
Financial instruments that potentially subject the company to concentration of credit risk consist primarily of cash, cash equivalents and trade accounts receivable. The company believes that concentrations of credit risk with respect to trade accounts receivable are limited as they are primarily Government receivables. The company believes that the fair market value of all financial instruments approximates book value.
Contract Revenues
Substantially all of the company's revenues result from contract services performed for the Government or for contractors engaged in work for the Government under a variety of contracts. Revenues on cost-type contracts are recorded on the basis of recoverable costs incurred and fees earned.
Revenues on fixed price contracts are recorded as services are performed, using the percentage-of-completion method of accounting, primarily based on contract costs incurred to date compared with total estimated costs at completion. Revenues on time and material contracts are recorded on the basis of hours delivered plus other allowable direct costs as incurred.
Potential revenue related to work performed at risk is not recognized either as income or as an offset against a potential loss until it can be reliably estimated and its realization is probable. The company provides for anticipated losses on contracts by a charge to income during the period in which losses are first identified.
A substantial portion of the contract and administrative costs is subject to audit by the Defense Contract Audit Agency. The company's indirect cost rates have been audited and approved for 1997 and prior years, with the exception of VSS which has been audited and approved through 1996. In the opinion of management, the audits of the indirect cost rates for 1999, 1998 and the VSS 1997 audit will not result in material adjustments, if any, to the company's results of operations or financial position.
Property and Equipment
Depreciation and amortization expense for property and equipment was approximately $1.8 million for 1999, $1.3 million for 1998 and $1.2 million for 1997. Depreciation of computer systems equipment is provided principally by the double-declining method over periods of four to six years. Depreciation of furniture and fixtures is provided principally by the straight-line method over approximately nine years. Depreciation of all other property and equipment is provided principally by the double-declining method over periods of three to twenty years. Depreciation of buildings and land improvements is provided principally by the straight-line method over approximately thirty years.
Note Receivable
As discussed in footnote 10, as part of the sale of CMstat, VSE received a seven year, $800,000 promissory note with an effective interest rate of 8%. As of December 31, 1999 this note had a balance of $756,630. Approximately $92 thousand of this balance has been appropriately classified as short term and included as a component of accounts receivable.
Deferred Compensation Plans
Deferred compensation plan expense for the years ended December 31, 1999, 1998 and 1997 was approximately $29 thousand, $140 thousand and $6 thousand, respectively.
Included in other assets are assets of the deferred compensation plans which include equity securities recorded at fair value. The fair value of these securities was approximately $1.8 million as of December 31, 1999 and 1998. Because plan participants are at risk for market value changes in these assets, the liability to plan participants fluctuates with the asset values.
Impairment Review
The company performs a periodic review of certain assets to determine if impairment has occurred. If impaired, the company writes down the asset to its fair market value.
(2) Goodwill
As part of the August 29, 1995 acquisition of Energetics, the company recorded approximately $1.7 million of goodwill in connection with this acquisition, including approximately $200 thousand of additional goodwill due to contingency requirements established in the purchase agreement. Goodwill is being amortized by the straight-line method over fifteen years, and approximately $1.3 million of unamortized goodwill remains on the books as of December 31, 1999.
(3) Accounts Receivable
The "Unbilled: Other" included in accounts receivable are reported net of an allowance for contract disallowances of approximately $422 thousand as of December 31, 1999 and approximately $333 thousand as of December 31, 1998. "Unbilled: Other" also includes certain costs which are not reimbursable under current contracts, but which the company believes will be reimbursable on execution of contract documentation or amendments increasing funding. Amounts not presently reimbursable included in "Unbilled: Other" were approximately $287 thousand and $485 thousand as of December 31, 1999, and 1998, respectively.
Contracts with the Government, primarily with the U.S. Department of Defense, accounted for more than 95% of revenues in all years presented. These contracts were primarily for engineering services. A contract awarded in 1995 with the U.S. Navy accounted for approximately 50% and 52% of such revenues in 1999 and 1998, respectively.
The company generally expects to collect all accounts receivable other than retainages within one year.
(4) Debt
Long-term debt as of December 31, 1998 was as follows (in thousands):
							 ---- Bank loan borrowings and commitments . . . . . . . $ 2,836 Less portion due within one year . . . . . . . . . (1,333) 							------- 							$ 1,503 							=======
VSE has a loan agreement with a syndicate of banks that includes a revolving loan and a term loan and contains certain financial covenants. Under the revolving loan portion of the agreement, VSE can borrow up to $30 million, subject to a borrowing formula based on billed receivables. Interest is charged at a prime-based rate or an optional LIBOR-based rate. Commitment fees are charged on the unused portion of the revolving loan commitment. The termination date of the revolving loan is May 31, 2001. The original principal amount of the term loan was $4 million and the term of the loan was four years. During September 1999, VSE repaid the principal amount in full, and the term loan portion of the loan agreement no longer exists. Repayment of the term loan did not cause any changes in the terms related to the revolving loan portion of the agreement. The loan agreement contains collateral requirements by which company assets secure amounts outstanding, restrictive covenants that include minimum tangible net worth and cash flow coverage ratio requirements, a limit on annual dividends, and limits on investments and loans to certain affiliates.
Due to losses incurred by VSE's CMstat subsidiary, the company was not in compliance with certain original loan covenants during 1999 and 1998. The company's banks amended the loan agreement in these years to restate certain terms and conditions of the loan, including the covenants with which the company was not compliant. The company was in compliance during 1999 and 1998 with all covenants of the loan agreement as amended.
(5) Accrued Expenses
(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 portion was discontinued and replaced by a plan provision whereby employer 401(k) contributions are made on behalf of the eligible employee participants based on the employees' 401(k) payroll deferrals. The employer contribution is equal to 50% of the employee deferral on the first 5% of the employee pay deferred. The company expense associated with this plan for 1999, 1998, and 1997 was approximately $333 thousand, $359 thousand, and $236 thousand, respectively.
The ESOP/401(k) plan held 582,761 shares and 688,522 shares of VSE stock as of December 31, 1999 and 1998, respectively, which receive dividend payments and are included in the weighted average shares for earnings per share calculations.
During 1998 and 1997, the company advanced the ESOP trust $112 thousand and $330 thousand, respectively, in connection with distributions made to terminated participants. The advances were payable to the company when the funds became available. The unallocated shares of the company's common stock related to these transactions are not included in the weighted average shares for earnings per share calculations. On December 31, 1998 the ESOP trust sold shares to the company and repaid the advances. These shares were accounted for as treasury stock.
Energetics maintains a profit sharing plan for employees. All employees who have completed two years of service are members of the profit sharing plan. At its discretion, Energetics may make contributions to the plan. The plan expense for 1999, 1998, and 1997 was approximately $312 thousand, $443 thousand, and $420 thousand, respectively.
(7) Stock Option Plans
1996 and 1998 Stock Option Plans
Under the 1996 Plan, the company may grant options for and sell up to an aggregate of 273,698 shares of the common stock of the company. Through December 31, 1999 the company has granted options for 267,725 shares of common stock priced at 100% of the fair value of the stock at the time of the grant of the option. The maximum term of the options granted is five years. The vesting period is three years and allows for 25% vesting immediately upon date of the grant and an additional 25% on each successive anniversary date thereafter. Vesting may be accelerated for shares granted to certain individuals as determined by the Board of Directors. The 1996 Plan will terminate on the earliest of February 5, 2006, or the date on which all options under the 1996 plan have been exercised or terminated.
Under the 1998 Plan, the company may grant options for and sell up to an aggregate of 343,750 shares of common stock. Of the shares available for grant, 15,625 shares may be granted to non-employee directors of VSE, and 328,125 shares may be granted to executive officers and key employees. Through December 31, 1999 the company has granted options for 69,750 shares of common stock priced at 100% of the fair value of the stock at the time of the grant of the option. The vesting period is three years and allows for 25% vesting immediately upon date of the grant and an additional 25% on each successive anniversary date thereafter. The 1998 Plan will terminate on the earliest of May 6, 2008, or the date on which all options under the 1998 Plan have been exercised or terminated.
(8) Income Taxes
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The company has established such a valuation allowance for the deferred tax asset associated with certain real property because of the uncertainty that the deferred tax asset will be fully realized.
(9) Commitments and Contingencies
Leases
The principal facilities of the company and its subsidiaries are generally rented under noncancelable operating leases for periods of one to ten years. The company and its subsidiaries also lease furniture and equipment generally under noncancelable operating leases for periods of one to five years. Rent expense for 1999, 1998 and 1997 was approximately $1.9 million, $2.1 million, and $2.7 million, respectively, which was net of sublease income of approximately $686 thousand, $464 thousand and $318 thousand, respectively. The future minimum annual rental required under leases having remaining noncancelable lease terms in excess of one year, net of noncancelable sublease income, will approximate $1.1 million in 2000, 2001 and 2002, and $716 thousand in 2003 and $519 thousand in 2004 and $1.8 million thereafter.
Litigation
The company and its subsidiaries have, in the normal course of business, certain claims against them and against other parties. The company is not aware of any present claims which would have a material adverse effect on the company's results of operations or financial position.
(10) Segment Information
Prior to May 21, 1999, VSE had two reportable segments: the engineering, logistics, management, and technical services segment ("ELMTS"), which provides diversified engineering, technical and management services principally to agencies of the United States Government and to other government prime contractors; and the software products and services segment ("SPS"), which provided application software and services related to the installation of the software to primarily commercial customers. As discussed below, the SPS segment was sold on May 21, 1999.
The accounting policies are the same as those described in the summary of significant accounting policies for each segment. VSE's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. The software products and services segment was acquired as a unit, and the management had been maintained separately since the acquisition.
Divestiture
On May 21, 1999, the company sold all of its interests in the SPS segment. This entailed selling its CMstat subsidiary for an $800 thousand promissory note. The sale is a divestiture for legal and tax purposes. For accounting purposes, the sale is not afforded discontinued operations treatment under Staff Accounting Bulletin No. 30 "Accounting for Divestiture of a Subsidiary or Other Business Operation"("SAB No. 30") since the sale did not transfer the risks of ownership because the sales price is primarily dependent on the buyer's ability to repay the promissory note.
As prescribed by SAB No. 30, the revenues, costs and expenses, assets and liabilities and cash flows for the SPS segment have been excluded from the respective captions in the Consolidated Statements of Operations, Balance Sheets, Cash Flows and related footnotes.
As such, the results of operations for the SPS segment are reflected as a single line item "Loss on CMstat operations" in the Consolidated Statements of Operations for each year presented. Additionally, a $1,098 thousand loss from the disposal of CMstat was recognized for the year ended December 31, 1999. The assets and liabilities are presented in the Consolidated Balance Sheets as "Net assets of business transferred under contractual arrangement" and "Net liabilities of business transferred under contractual arrangement", respectively.
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, 1999, with the Securities and Exchange Commission pursuant to Regulation 14A (the "Proxy Statement"). Certain information relating to Executive Officers of the company appears on page 10 of this Form 10-K Annual Report.
ITEM 11. Executive Compensation
	Information with respect to this item is incorporated by reference from the Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and 	 Management
	Information with respect to this item is incorporated by reference from the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
	Information with respect to this item is incorporated by reference from the Proxy Statement.
				 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.
				 SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
				 VSE CORPORATION
Date: March 15, 2000 By: /s/ C. S. Weber 	 				 ------------------------ 					 C. S. Weber, Senior Vice 					 President and Chief Financial 					 Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 14, 2000, by the following persons on behalf of the Registrant and in the capacities indicated.
(a) Principal Executive Officers:
/s/ D. M. Ervine --------------------------------------------------------------- D. M. Ervine, Chairman of the Board and Chief Executive Officer
/s/ J. M. Knowlton --------------------------------------------------------------- J. M. Knowlton, President and Chief Operating Officer
(b) Principal Financial Officer: (c) Principal Accounting Officer:
/s/ C. S. Weber /s/ T. R. Loftus ----------------------------- ---------------------------- C. S. Weber, Senior Vice T. R. Loftus, Vice President President and Chief Financial and Comptroller Officer
(b) Directors:
/s/ D. M. Ervine /s/ D. M. Osnos ----------------------------- ---------------------------- D. M. Ervine D. M. Osnos
/s/ R. J. Kelly /s/ J. D. Ross ----------------------------- ---------------------------- R. J. Kelly J. D. Ross
/s/ C. S. Koonce /s/ B. K. Wachtel ----------------------------- ---------------------------- C. S. Koonce B. K. Wachtel
/s/ J. M. Knowlton ----------------------------- J. M. Knowlton
				 EXHIBIT INDEX
Reference No. Exhibit No. per Item 601 of in this Regulation S-K Description of Exhibit Form 10-K - -------------- ---------------------- --------- 2 Plan of acquisition, reorganization, arrangement, 	 liquidation or succession 	 Exchange Agreement dated as of March 25, 1992, 	 amended as of September 1, 1992, by and between VSE 	 Corporation and JBT Holding Corp., et al. (Exhibit A 	 to Exhibit 1, Proxy Statement, filed on 	 Form 8-K on November 2, 1992) * 3 Articles of incorporation and by-laws 	 Restated Certificate of Incorporation of VSE 		 Corporation dated as of February 6, 1996 * 	 By-Laws of VSE Corporation as amended through 		 July 14, 1998 (Exhibit V to Form 10-K dated 		 March 18, 1999) * 4 Instruments defining the rights of security holders, 	 including indentures 	 Specimen Stock Certificate as of May 19, 1983 	 (Exhibit 4 to Registration Statement No. 2-83255 	 dated April 22, 1983 on Form S-2) * 9 Voting trust agreement Not Applicable 10 Material contracts 	 Employment Agreement entered into as of October 21, 	 1998, by and between VSE Corporation and 	 Donald M. Ervine (Exhibit VI to Form 10-K dated 	 March 18, 1999) * 	 Employment Agreement entered into as of January 15, 	 1999, by and between VSE Corporation and 	 Energetics, Incorporated and Robert J. Kelly 	 (Exhibit VII to Form 10-K dated March 18, 1999) * 	 Employment Agreement entered into as of June 3, 	 1999, by and between VSE Corporation and 	 James M. Knowlton Exhibit V 	 VSE Corporation Deferred Supplemental Compensation 	 Plan effective January 1, 1994 (Exhibit III to 	 Form 10-K dated March 23, 1995) * 	 Stock Purchase Agreement dated August 29, 1995 by 	 and between VSE Corporation and the shareholders 	 of Energetics Incorporated (Exhibit 2 to Form 8-K 	 dated September 13, 1995 and Amendment 1 on Form 	 8-K/A dated November 9, 1995) * 	 VSE Corporation 1996 Stock Option Plan (Appendix A to 	 Registrant's definitive proxy statement dated 	 April 3, 1996) 		VSE Corporation 1998 Stock Option Plan (Appendix A to 	 Registrant's definitive proxy statement for the Annual 	 Meeting of Stockholders held on May 6, 1998) 		VSE Corporation 1998 Non-employee Directors Stock Plan 	 (Appendix B to Registrant's definitive proxy statement 	 for the Annual Meeting of Stockholders held on May 6, 1998)
				 EXHIBIT INDEX
Reference No. Exhibit No. per Item 601 of in this Regulation S-K Description of Exhibit Form 10-K - -------------- ---------------------- --------- 12 Statements re computation of ratios Not Applicable 13 Annual report to security holders, Form 10-Q 	 or quarterly report to security holders Exhibit II 16 Letter re change in certifying accountant Not Applicable 18 Letter re change in accounting principles Not Applicable 21 Subsidiaries of the registrant Exhibit I 22 Published report regarding matters submitted 	 to vote of security holders Not Applicable 23 Consents of experts and counsel Exhibit IV 24 Power of attorney Not Applicable 27 Financial Data Schedule Exhibit III 99 Additional exhibits Not Applicable
*Document has been filed as indicated and is incorporated by reference herein.
ITEM 7. Management's Discussion and Analysis of Financial Condition 	and Results of Operations
	VSE and its subsidiaries and divisions have two reportable segments: the engineering, logistics, management and technical services segment ("ELMTS") and the software products and services segment ("SPS"). The term "VSE" or "company" means VSE and its subsidiaries and divisions unless the context indicates operations of the parent company only.
The ELMTS business operations consist of the operations of the parent company, operations of the company's wholly owned subsidiaries and operations of the company's divisions. Wholly owned subsidiaries in this segment include Energetics Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"), Ship Remediation and Recycling, Inc. ("SRR", formerly VSE Services Corporation) and VSE Services International Inc ("VSI") incorporated in August 1999. Unincorporated divisions in this segment include BAV Division ("BAV"), Fleet Maintenance Division ("Fleet Maintenance") formed in June 1999, Ordnance Division ("Ordnance"), VSE IT Services Division ("IT Services"), formed in January 1999, and Value Systems Services Division ("VSS").
The SPS business operations include sales of developed software products and the services related to the installation and use of the software. This is the primary business of VSE's former subsidiary CMstat Corporation ("CMstat"), sold in May 1999. (See "Divestiture" below).
The company is engaged principally in providing engineering, software development, testing and management services to the U.S. Government (the "government"). Intercompany sales are principally at cost and have been eliminated from the consolidated financial statements.
Results of Operations
Revenues
	The following table shows the revenues from operations of VSE and subsidiaries and such revenues as a percent of total revenues:
	The consolidated statements of operations have been restated and include the revenues and income from the SPS segment on the "Loss on CMstat operations" line.
Engineering, Logistics, Management and Technical Services Segment
	The largest customer for the ELMTS segment is the U.S. Department of Defense ("Defense"), including agencies of the U.S. Army, Navy and Air Force. VSE's ELMTS segment revenues have historically been subject to annual fluctuations resulting from changes in the level of Defense spending. Accordingly, there can be no assurance that future reductions in Defense spending will not have a material adverse impact on the company's results of operations or financial position.
	Substantially all of the company's revenues from this segment depend on the award of new contracts, on current contracts not being terminated for the convenience of the government, and on the exercise of option periods and the satisfaction of incremental funding requirements on current contracts. In 1999, 1998 and 1997, the company did not experience any terminations of contracts for the convenience of the government nor any non-exercise of option periods on current contracts which were material to the company's results of operations or financial position.
	During 1998 and 1999, the Ordnance and Fleet Maintenance divisions bid on contract work that had been traditionally performed by VSE. This enabled the company to use an operating structure that was better suited to perform certain types of contract work. In prior years, the company has utilized this strategy to win contracts and generate new revenue in the BAV and VSS divisions. The company anticipates that it will continue this strategy to better service the needs of its customers. As the use of operating divisions to bid and win new contracts increases, the company expects that the revenue of VSE (the parent company) will be further reduced in the future as parent company contracts are replaced by operating division contracts. Management believes that the use of operating divisions to perform future work and the associated improvements in servicing customers will better position the consolidated entity for future revenue growth.
	BAV Contract. Since August 1995, VSE's BAV Division has had a contract with the U.S. Navy to provide engineering, technical and logistical support services associated with the sale, lease or transfer of Navy ships to foreign governments. This contract has the potential, if all options are exercised, to generate revenues in excess of one billion dollars over a ten year period from 1995 through 2005. The contract accounted for approximately 50% and 52% of consolidated revenues from operations during 1999 and 1998, respectively. The level of revenues generated by this contract will vary depending on a number of factors including the timing of ship transfers and associated support services ordered by foreign governments and economic conditions of potential customers worldwide. The company experienced significant quarterly and annual revenue fluctuations from 1997 through 1999 and anticipates that future revenues will be subject to significant variations primarily due to this contract.
	New Business. The company has been successful in bidding and winning new types of work in the ELMTS segment. IT Services was formed in January 1999 to bid and perform on work issued through the government's GSA schedule. This division was awarded a second purchase agreement in October 1999 to support the U.S. Navy's Engineering Investigations (EI) safety program related to naval aircraft and aircraft systems and subsystems.
	VSI was formed in August 1999 to expand VSE's international presence and perform services for foreign government and commercial customers similar to the services VSE has traditionally provided in the United States. VSI received its first work order in September 1999.
	SRR is a participant in a joint venture that was awarded a contract associated with a new program to dismantle and recycle retired U.S. Navy ships. Work on this contract began in January 2000.
	Each of these three new business units is engaged in bidding on and performing work that could potentially increase the future revenues of the company.
Software Products and Services Segment
	The company sold its CMstat subsidiary in May 1999. (See "Divestiture" below). The revenues and pretax losses of this segment for 1999 include the activity of CMstat through May 21, 1999, and the pretax loss includes a loss on the sale of CMstat. Accordingly, year to year comparisons of revenue and
income for this segment are not meaningful. As a result of the sale of CMstat, the company will no longer have any active business operations in the software products and services segment. The company's 1999 operating results for the SPS segment are therefore not a good indicator of future quarterly results.
Income from Operations Before Income Taxes
	The following table shows consolidated revenues and income from operations before income taxes of VSE segments, other items of income and expense, and such amounts as a percent of segment revenues.
Engineering, Logistics, Management and Technical Services Segment
	Costs and expenses of operations, as a percentage of ELMTS segment revenues, were fairly stable during 1999, 1998 and 1997. The small percentage differences between 1999, 1998 and 1997 are due to a combination of factors, some of which are offsetting, including (a) differences between
costs incurred and costs billable (whether they may be billed based on contract provisions), (b) the effects of increases or decreases in facility and equipment lease renewals, fringe benefit programs and similar period expenses, (c) costs associated with contract start-up and termination phases, (d) narrower profit margins on new work due to increased competition, (e) increased labor costs reflecting a more competitive marketplace for attracting and retaining our employees, (f) the establishment and reversal of reserves for potential contract disallowances due to the timing of government audits on costs incurred, g) the amount of work performed on certain contracts as a percentage of total revenues, (h) the timing of contract award fees and (i) effective project and cost management.
	Selling, general and administrative expenses as a percentage of segment revenues increased slightly in 1999 as compared to 1998 and in 1998 as compared to 1997. Selling, general and administrative expenses will vary from year to year due to various types of nonreimbursable costs, including costs associated with the start up of new divisions or subsidiaries, costs of discontinued operations and unrecoverable contract costs.
	Interest expense as a percentage of segment revenues increased slightly in 1999 as compared to 1998 due primarily to an increase in average levels of bank debt resulting from the sale of CMstat. Interest expense as a percentage of segment revenues decreased approximately 0.1% in 1998 as compared to 1997 due primarily to the application of earnings to reduce the bank debt of this segment and to the improved cash collection cycles on government contracts.
Divestiture
	On May 22, 1999, VSE sold its wholly owned subsidiary CMstat. Under the terms of the transaction, VSE sold all of the outstanding capital stock of CMstat to an officer of CMstat in exchange for a promissory note for which principal is payable in installments from September 1, 1999 through May 20, 2006. The transaction resulted in a pretax loss of approximately $1.1 million. An additional pretax loss from CMstat operations prior to the sale date of approximately $400 thousand was incurred in 1999.
	The sale of CMstat is a divestiture for legal and tax purposes. For accounting purposes, the sale is not afforded discontinued operations treatment under Staff Accounting Bulletin No. 30 "Accounting for Divestiture of a Subsidiary or Other Business Operation"("SAB No. 30") since the sale did not transfer the risks of ownership because the sales price is primarily dependent on the buyer's ability to repay the promissory note.
	The company sustained significant losses on CMstat operations during 1999, 1998 and 1997. Management believes that the divestiture of CMstat will allow the company to focus on its core business lines and improve profitability in the future.
Liquidity and Capital Resources
Cash Flows
	The company's level of net cash and cash equivalents did not change significantly during 1999. Approximately $4.2 million in net cash provided by
operations was used for financing activities of approximately $3.1 million and for investing activities of approximately $1.1 million. Significant financing activities included decreases in bank loan borrowings and the current portion of long-term debt of approximately $1.5 million and $1.3 million, respectively. Significant investing activities included approximate- ly $1.2 million associated with the purchase of property and equipment, primarily computer equipment. Cash flows provided by operating activities increased in 1999 as compared to 1998 due primarily to changes in the levels of accounts receivable and accounts payable in 1999 resulting from a decrease in revenues on the BAV contract as compared with the previous year.
	A net increase in cash and cash equivalents of approximately $34 thousand during 1998 resulted from approximately $2.9 million provided by operations, approximately $1.4 million used in financing activities, and approximately $1.5 million used in investing activities. Significant financing activities included a decrease in bank loan borrowings of approximately $1.9 million. Significant investing activities included approximately $1.5 million associated primarily with the purchase of computer equipment. Cash flows provided by operating activities decreased in 1998 as compared to 1997 due primarily to an increase in the level of accounts receivable in 1998 resulting from the increased revenues in 1998 as compared with a significant decrease in accounts receivable in 1997 due to collections of accounts receivable on the BAV contract. The decrease in cash flows provided by operating activities due to changes in the level of accounts receivable was offset slightly by cash provided by the increase in net income and the increase in accounts payable.
	A net decrease in cash and cash equivalents of approximately $399 thousand during 1997 resulted from approximately $3.5 million provided by operations, approximately $2 million used in financing activities, and approximately $1.8 million used in investing activities. Significant financing activities included a decrease in bank loan borrowings of $1.9 million. Significant investing activities included approximately $1.8 million associated with the purchase of property and equipment.
	The company's principal requirements for cash are to finance the costs of operations pending the collection of accounts receivable, to acquire capital assets including leaseholds for office and computer support and to pay cash dividends. Performance of work under the BAV contract has the potential to cause substantial requirements for cash; however, management believes that the cash flows from future operations and the bank revolving loan commitment are adequate to meet current operating cash requirements.
Working Capital
	VSE's requirements for working capital are affected significantly by its revenues and accounts receivable, which are primarily derived from billings made by the company to the government or other government prime contractors for services rendered. Such accounts receivable generally do not present liquidity or collection problems. Working capital is also affected by (a) contract retainages, (b) start-up and termination costs associated with new or completed contracts, (c) capital equipment requirements, (d) differences between the provisional billing rates authorized by the government compared to the costs actually incurred by the company and (e) profitability.
	Government contracts generally require VSE to pay for material and subcontract costs included in VSE's contract billings prior to receiving payment for such costs from the government. However, such contracts generally provide for progress payments on a monthly or semimonthly basis, thereby reducing requirements for working capital.
Dividends
	Cash dividends were declared at the rate of $.144 per share during 1999, 1998, and 1997. Pursuant to its bank loan agreement (see Note 4 of "Notes to Consolidated Financial Statements"), the payment of cash dividends by VSE is subject to annual rate restrictions. VSE has paid cash dividends each year since 1973.
ESOP Advances
	Prior to December 1998 the company made advances to the ESOP trust totaling $792 thousand in connection with distributions made to terminated participants. In December 1998, the company and the ESOP entered into an agreement in which the ESOP repaid the advances. Under the terms of the agreement, the company purchased 72,000 shares of VSE stock from the ESOP at market price and the ESOP simultaneously returned the proceeds of $792,000 from the stock sale to the company as repayment of the advances.
Inflation and Pricing
	Most of the contracts performed by VSE provide for estimates of future labor costs to be escalated for any option periods provided by the contracts, while the non-labor costs included in such contracts are normally considered reimbursable at cost. VSE property and equipment consists principally of computer systems equipment and furniture and fixtures. The overall impact of inflation on replacement costs of such property and equipment is expected to be insignificant.
Global Economic Conditions
	VSE's business is subject to the risks arising from global economic conditions associated with potential foreign customers served through VSE's contracts with the U.S. Government. For example, an economic slowdown in countries served under the BAV contract could potentially affect BAV sales. Management is unable to predict what, if any, impact such conditions may have on the company's financial position or results of operations.
Year 2000
	Overview. The company is not currently aware of any Year 2000 issues that have affected its business. During 1999, the company completed a detailed assessment of all its information technology and non-information technology hardware and software with regard to the Year 2000 issue, with special emphasis on mission critical systems. Prior to December 31, 1999, information and non-information technology hardware and software were
inventoried and those not Year 2000 ready were identified, remediated (i.e., corrected or replaced) and tested to ensure that they would, in fact, operate as desired according to Year 2000 requirements. It is possible that the company's computerized systems could be affected in the future by the Year 2000 issue. The company will continue to monitor its mission critical computer applications throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
	Costs. Costs incurred to date for Year 2000 readiness efforts have been minimal and are included as part of the company's ongoing administrative costs and have not been separately identified. The company continues to upgrade and improve its information technology systems as part of its normal effort to maintain a competitive edge. As these upgrades and improvements are made, the company is ensuring that all are Year 2000 ready. Therefore, the majority of costs incurred for computer systems that ensure Year 2000 readiness are expenditures that are made in the normal course of business. Total property and equipment expenditures for 1999 and 1998, including expenditures for computers and computer systems, were approximately $1.2 million and $1.5 million, respectively. Accordingly, management believes that the incremental costs of addressing the Year 2000 readiness issue have not materially affected the company's consolidated financial position, liquidity, or results of operations through December 31, 1999 and will not materially affect them through 2000.
	Impact on Operations. The company did not materially alter its spending patterns for information technology as a result of the Year 2000 issue. The company has not experienced any material revenue fluctuations due to increases or decreases in customer purchasing activity related to the Year 2000 issue during late 1999 or early 2000 and does not expect to experience such fluctuations. The company has not experienced and does not expect to experience any significant returns of products or services purchased in 1999 by customers in preparation for Year 2000. Accordingly, the company does not anticipate that the Year 2000 issue will materially impact its results of operations in 2000 as compared to 1999.
	Risks. The full range of potential risks associated with the Year 2000 issue will continue to be monitored. Potential risks include obligations related to contract performance on current and past contracts, the reliance on infrastructure services to conduct the company's business operations, and the possibility of liquidity issues caused by payment problems with VSE's banks or government customers. Although management believes that the risks associated with internal issues regarding the Year 2000 problem will be minimal, the risks associated with external issues are difficult to predict. If these external issues cause massive failures to systems upon which the company is reliant, the results could materially affect the company's consolidated financial position, liquidity, or results of operations.
Market Risk
	The Company does not use derivative instruments to alter the interest characteristics of its debt instruments. The aggregate fair value of the company's financial instruments approximates the carrying value at December 31, 1999.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
									 Page 									 ----
	Report of Independent Public Accountants 22 	Consolidated Balance Sheets as of December 31, 1999 and 1998 23 	Consolidated Statements of Operations for the years ended 	 	December 31, 1999, 1998 and 1997 24 	Consolidated Statements of Stockholders' Investment 		for the years ended December 31, 1999, 1998 and 1997 25 	Consolidated Statements of Cash Flows for the years ended 		December 31, 1999, 1998 and 1997 26 	Notes to Consolidated Financial Statements 27
	 	 Report of Independent Public Accountants
To the Stockholders of VSE Corporation:
	We have audited the accompanying consolidated balance sheets of VSE Corporation (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' investment and cash flows for the three years ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
	We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
	In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of VSE Corporation as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the three years ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
	 					ARTHUR ANDERSEN LLP
Vienna, Virginia March 3, 2000
	 	 See accompanying notes
			 See accompanying notes
			 See accompanying notes
			 See accompanying notes
			VSE CORPORATION AND SUBSIDIARIES 		 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include two segments: the engineering, logistics, management, and technical services ("ELMTS") segment and the software products and services ("SPS") segment. ELMTS business operations consist of the operations of the parent company, operations of the company's wholly owned subsidiaries, and operations of the company's divisions. Wholly owned subsidiaries in this segment include Energetics Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"), Ship Remediation and Recycling, Inc. ("SRR", formerly VSE Services Corporation), and VSE Services International, Inc. ("VSI"). Unincorporated divisions in this segment include BAV Division ("BAV"), Fleet Maintenance Division ("Fleet Maintenance"), Ordnance Division ("Ordnance"), VSE IT Services Division ("IT Services"), and Value Systems Services Division ("VSS"). This segment is engaged principally in providing engineering, testing, management and information technology services to the U.S. Government (the "government") and other government prime contractors. The SPS segment business operations consist of the operations of wholly owned subsidiary CMstat, sold in May 1999 (see note 10), which was engaged principally in software development and sales of software products and services primarily to government prime contractors.
The term "VSE" or "company" means VSE and its subsidiaries and divisions unless the context indicates operations of the parent company only. Intercompany sales are principally at cost. All significant intercompany transactions have been eliminated in consolidation. Certain prior year balances have been reclassified for comparative purposes.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Stockholders' Investment and Earnings Per Share
At December 31, 1999, options to purchase 149,023 shares, 38,063 shares, 36,563 shares and 55,438 shares of common stock at $10.91, $13.04, $9.42 and $10.93 per share, respectively, were outstanding. There was no dilutive impact on reported earnings per share for 1999, 1998 and 1997.
Cash and Cash Equivalents
The company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
The company has classified all debt and equity securities as available-for- sale. Available-for-sale securities are carried at fair value with unrealized gains and losses, net of tax, reported as a component of stockholders' investment. Realized gains and losses are included in other income. Available-for-sale debt securities as of December 31, 1999 and December 31, 1998 consisted of overnight money market accounts of $1.7 million and $3.3 million, respectively, secured by Government agency securities. The estimated fair value of these securities approximated cost, and the amount of gross unrealized gains and losses was not significant.
Concentration of Credit Risk/Fair Value of Financial Instruments
Financial instruments that potentially subject the company to concentration of credit risk consist primarily of cash, cash equivalents and trade accounts receivable. The company believes that concentrations of credit risk with respect to trade accounts receivable are limited as they are primarily Government receivables. The company believes that the fair market value of all financial instruments approximates book value.
Contract Revenues
Substantially all of the company's revenues result from contract services performed for the Government or for contractors engaged in work for the Government under a variety of contracts. Revenues on cost-type contracts are recorded on the basis of recoverable costs incurred and fees earned.
Revenues on fixed price contracts are recorded as services are performed, using the percentage-of-completion method of accounting, primarily based on contract costs incurred to date compared with total estimated costs at completion. Revenues on time and material contracts are recorded on the basis of hours delivered plus other allowable direct costs as incurred.
Potential revenue related to work performed at risk is not recognized either as income or as an offset against a potential loss until it can be reliably estimated and its realization is probable. The company provides for anticipated losses on contracts by a charge to income during the period in which losses are first identified.
A substantial portion of the contract and administrative costs is subject to audit by the Defense Contract Audit Agency. The company's indirect cost rates have been audited and approved for 1997 and prior years, with the exception of VSS which has been audited and approved through 1996. In the opinion of management, the audits of the indirect cost rates for 1999, 1998 and the VSS 1997 audit will not result in material adjustments, if any, to the company's results of operations or financial position.
Property and Equipment
Depreciation and amortization expense for property and equipment was approximately $1.8 million for 1999, $1.3 million for 1998 and $1.2 million for 1997. Depreciation of computer systems equipment is provided principally by the double-declining method over periods of four to six years. Depreciation of furniture and fixtures is provided principally by the straight-line method over approximately nine years. Depreciation of all other property and equipment is provided principally by the double-declining method over periods of three to twenty years. Depreciation of buildings and land improvements is provided principally by the straight-line method over approximately thirty years.
Note Receivable
As discussed in footnote 10, as part of the sale of CMstat, VSE received a seven year, $800,000 promissory note with an effective interest rate of 8%. As of December 31, 1999 this note had a balance of $756,630. Approximately $92 thousand of this balance has been appropriately classified as short term and included as a component of accounts receivable.
Deferred Compensation Plans
Deferred compensation plan expense for the years ended December 31, 1999, 1998 and 1997 was approximately $29 thousand, $140 thousand and $6 thousand, respectively.
Included in other assets are assets of the deferred compensation plans which include equity securities recorded at fair value. The fair value of these securities was approximately $1.8 million as of December 31, 1999 and 1998. Because plan participants are at risk for market value changes in these assets, the liability to plan participants fluctuates with the asset values.
Impairment Review
The company performs a periodic review of certain assets to determine if impairment has occurred. If impaired, the company writes down the asset to its fair market value.
(2) Goodwill
As part of the August 29, 1995 acquisition of Energetics, the company recorded approximately $1.7 million of goodwill in connection with this acquisition, including approximately $200 thousand of additional goodwill due to contingency requirements established in the purchase agreement. Goodwill is being amortized by the straight-line method over fifteen years, and approximately $1.3 million of unamortized goodwill remains on the books as of December 31, 1999.
(3) Accounts Receivable
The "Unbilled: Other" included in accounts receivable are reported net of an allowance for contract disallowances of approximately $422 thousand as of December 31, 1999 and approximately $333 thousand as of December 31, 1998. "Unbilled: Other" also includes certain costs which are not reimbursable under current contracts, but which the company believes will be reimbursable on execution of contract documentation or amendments increasing funding. Amounts not presently reimbursable included in "Unbilled: Other" were approximately $287 thousand and $485 thousand as of December 31, 1999, and 1998, respectively.
Contracts with the Government, primarily with the U.S. Department of Defense, accounted for more than 95% of revenues in all years presented. These contracts were primarily for engineering services. A contract awarded in 1995 with the U.S. Navy accounted for approximately 50% and 52% of such revenues in 1999 and 1998, respectively.
The company generally expects to collect all accounts receivable other than retainages within one year.
(4) Debt
Long-term debt as of December 31, 1998 was as follows (in thousands):
							 ---- Bank loan borrowings and commitments . . . . . . . $ 2,836 Less portion due within one year . . . . . . . . . (1,333) 							------- 							$ 1,503 							=======
VSE has a loan agreement with a syndicate of banks that includes a revolving loan and a term loan and contains certain financial covenants. Under the revolving loan portion of the agreement, VSE can borrow up to $30 million, subject to a borrowing formula based on billed receivables. Interest is charged at a prime-based rate or an optional LIBOR-based rate. Commitment fees are charged on the unused portion of the revolving loan commitment. The termination date of the revolving loan is May 31, 2001. The original principal amount of the term loan was $4 million and the term of the loan was four years. During September 1999, VSE repaid the principal amount in full, and the term loan portion of the loan agreement no longer exists. Repayment of the term loan did not cause any changes in the terms related to the revolving loan portion of the agreement. The loan agreement contains collateral requirements by which company assets secure amounts outstanding, restrictive covenants that include minimum tangible net worth and cash flow coverage ratio requirements, a limit on annual dividends, and limits on investments and loans to certain affiliates.
Due to losses incurred by VSE's CMstat subsidiary, the company was not in compliance with certain original loan covenants during 1999 and 1998. The company's banks amended the loan agreement in these years to restate certain terms and conditions of the loan, including the covenants with which the company was not compliant. The company was in compliance during 1999 and 1998 with all covenants of the loan agreement as amended.
(5) Accrued Expenses
(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 portion was discontinued and replaced by a plan provision whereby employer 401(k) contributions are made on behalf of the eligible employee participants based on the employees' 401(k) payroll deferrals. The employer contribution is equal to 50% of the employee deferral on the first 5% of the employee pay deferred. The company expense associated with this plan for 1999, 1998, and 1997 was approximately $333 thousand, $359 thousand, and $236 thousand, respectively.
The ESOP/401(k) plan held 582,761 shares and 688,522 shares of VSE stock as of December 31, 1999 and 1998, respectively, which receive dividend payments and are included in the weighted average shares for earnings per share calculations.
During 1998 and 1997, the company advanced the ESOP trust $112 thousand and $330 thousand, respectively, in connection with distributions made to terminated participants. The advances were payable to the company when the funds became available. The unallocated shares of the company's common stock related to these transactions are not included in the weighted average shares for earnings per share calculations. On December 31, 1998 the ESOP trust sold shares to the company and repaid the advances. These shares were accounted for as treasury stock.
Energetics maintains a profit sharing plan for employees. All employees who have completed two years of service are members of the profit sharing plan. At its discretion, Energetics may make contributions to the plan. The plan expense for 1999, 1998, and 1997 was approximately $312 thousand, $443 thousand, and $420 thousand, respectively.
(7) Stock Option Plans
1996 and 1998 Stock Option Plans
Under the 1996 Plan, the company may grant options for and sell up to an aggregate of 273,698 shares of the common stock of the company. Through December 31, 1999 the company has granted options for 267,725 shares of common stock priced at 100% of the fair value of the stock at the time of the grant of the option. The maximum term of the options granted is five years. The vesting period is three years and allows for 25% vesting immediately upon date of the grant and an additional 25% on each successive anniversary date thereafter. Vesting may be accelerated for shares granted to certain individuals as determined by the Board of Directors. The 1996 Plan will terminate on the earliest of February 5, 2006, or the date on which all options under the 1996 plan have been exercised or terminated.
Under the 1998 Plan, the company may grant options for and sell up to an aggregate of 343,750 shares of common stock. Of the shares available for grant, 15,625 shares may be granted to non-employee directors of VSE, and 328,125 shares may be granted to executive officers and key employees. Through December 31, 1999 the company has granted options for 69,750 shares of common stock priced at 100% of the fair value of the stock at the time of the grant of the option. The vesting period is three years and allows for 25% vesting immediately upon date of the grant and an additional 25% on each successive anniversary date thereafter. The 1998 Plan will terminate on the earliest of May 6, 2008, or the date on which all options under the 1998 Plan have been exercised or terminated.
(8) Income Taxes
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The company has established such a valuation allowance for the deferred tax asset associated with certain real property because of the uncertainty that the deferred tax asset will be fully realized.
(9) Commitments and Contingencies
Leases
The principal facilities of the company and its subsidiaries are generally rented under noncancelable operating leases for periods of one to ten years. The company and its subsidiaries also lease furniture and equipment generally under noncancelable operating leases for periods of one to five years. Rent expense for 1999, 1998 and 1997 was approximately $1.9 million, $2.1 million, and $2.7 million, respectively, which was net of sublease income of approximately $686 thousand, $464 thousand and $318 thousand, respectively. The future minimum annual rental required under leases having remaining noncancelable lease terms in excess of one year, net of noncancelable sublease income, will approximate $1.1 million in 2000, 2001 and 2002, and $716 thousand in 2003 and $519 thousand in 2004 and $1.8 million thereafter.
Litigation
The company and its subsidiaries have, in the normal course of business, certain claims against them and against other parties. The company is not aware of any present claims which would have a material adverse effect on the company's results of operations or financial position.
(10) Segment Information
Prior to May 21, 1999, VSE had two reportable segments: the engineering, logistics, management, and technical services segment ("ELMTS"), which provides diversified engineering, technical and management services principally to agencies of the United States Government and to other government prime contractors; and the software products and services segment ("SPS"), which provided application software and services related to the installation of the software to primarily commercial customers. As discussed below, the SPS segment was sold on May 21, 1999.
The accounting policies are the same as those described in the summary of significant accounting policies for each segment. VSE's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. The software products and services segment was acquired as a unit, and the management had been maintained separately since the acquisition.
Divestiture
On May 21, 1999, the company sold all of its interests in the SPS segment. This entailed selling its CMstat subsidiary for an $800 thousand promissory note. The sale is a divestiture for legal and tax purposes. For accounting purposes, the sale is not afforded discontinued operations treatment under Staff Accounting Bulletin No. 30 "Accounting for Divestiture of a Subsidiary or Other Business Operation"("SAB No. 30") since the sale did not transfer the risks of ownership because the sales price is primarily dependent on the buyer's ability to repay the promissory note.
As prescribed by SAB No. 30, the revenues, costs and expenses, assets and liabilities and cash flows for the SPS segment have been excluded from the respective captions in the Consolidated Statements of Operations, Balance Sheets, Cash Flows and related footnotes.
As such, the results of operations for the SPS segment are reflected as a single line item "Loss on CMstat operations" in the Consolidated Statements of Operations for each year presented. Additionally, a $1,098 thousand loss from the disposal of CMstat was recognized for the year ended December 31, 1999. The assets and liabilities are presented in the Consolidated Balance Sheets as "Net assets of business transferred under contractual arrangement" and "Net liabilities of business transferred under contractual arrangement", respectively.
ITEM 9.
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.
ITEM 10. Directors and Executive Officers of the Registrant
	Information with respect to Directors of the company is incorporated by reference from the registrant's definitive proxy statement for its annual meeting of stockholders to be filed not later than 120 days after December 31, 1999, with the Securities and Exchange Commission pursuant to Regulation 14A (the "Proxy Statement"). Certain information relating to Executive Officers of the company appears on page 10 of this Form 10-K Annual Report.
ITEM 11.
ITEM 11. Executive Compensation
	Information with respect to this item is incorporated by reference from the Proxy Statement.
ITEM 12.
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.
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.
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.
				 SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
				 VSE CORPORATION
Date: March 15, 2000 By: /s/ C. S. Weber 	 				 ------------------------ 					 C. S. Weber, Senior Vice 					 President and Chief Financial 					 Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 14, 2000, by the following persons on behalf of the Registrant and in the capacities indicated.
(a) Principal Executive Officers:
/s/ D. M. Ervine --------------------------------------------------------------- D. M. Ervine, Chairman of the Board and Chief Executive Officer
/s/ J. M. Knowlton --------------------------------------------------------------- J. M. Knowlton, President and Chief Operating Officer
(b) Principal Financial Officer: (c) Principal Accounting Officer:
/s/ C. S. Weber /s/ T. R. Loftus ----------------------------- ---------------------------- C. S. Weber, Senior Vice T. R. Loftus, Vice President President and Chief Financial and Comptroller Officer
(b) Directors:
/s/ D. M. Ervine /s/ D. M. Osnos ----------------------------- ---------------------------- D. M. Ervine D. M. Osnos
/s/ R. J. Kelly /s/ J. D. Ross ----------------------------- ---------------------------- R. J. Kelly J. D. Ross
/s/ C. S. Koonce /s/ B. K. Wachtel ----------------------------- ---------------------------- C. S. Koonce B. K. Wachtel
/s/ J. M. Knowlton ----------------------------- J. M. Knowlton
				 EXHIBIT INDEX
Reference No. Exhibit No. per Item 601 of in this Regulation S-K Description of Exhibit Form 10-K - -------------- ---------------------- --------- 2 Plan of acquisition, reorganization, arrangement, 	 liquidation or succession 	 Exchange Agreement dated as of March 25, 1992, 	 amended as of September 1, 1992, by and between VSE 	 Corporation and JBT Holding Corp., et al. (Exhibit A 	 to Exhibit 1, Proxy Statement, filed on 	 Form 8-K on November 2, 1992) * 3 Articles of incorporation and by-laws 	 Restated Certificate of Incorporation of VSE 		 Corporation dated as of February 6, 1996 * 	 By-Laws of VSE Corporation as amended through 		 July 14, 1998 (Exhibit V to Form 10-K dated 		 March 18, 1999) * 4 Instruments defining the rights of security holders, 	 including indentures 	 Specimen Stock Certificate as of May 19, 1983 	 (Exhibit 4 to Registration Statement No. 2-83255 	 dated April 22, 1983 on Form S-2) * 9 Voting trust agreement Not Applicable 10 Material contracts 	 Employment Agreement entered into as of October 21, 	 1998, by and between VSE Corporation and 	 Donald M. Ervine (Exhibit VI to Form 10-K dated 	 March 18, 1999) * 	 Employment Agreement entered into as of January 15, 	 1999, by and between VSE Corporation and 	 Energetics, Incorporated and Robert J. Kelly 	 (Exhibit VII to Form 10-K dated March 18, 1999) * 	 Employment Agreement entered into as of June 3, 	 1999, by and between VSE Corporation and 	 James M. Knowlton Exhibit V 	 VSE Corporation Deferred Supplemental Compensation 	 Plan effective January 1, 1994 (Exhibit III to 	 Form 10-K dated March 23, 1995) * 	 Stock Purchase Agreement dated August 29, 1995 by 	 and between VSE Corporation and the shareholders 	 of Energetics Incorporated (Exhibit 2 to Form 8-K 	 dated September 13, 1995 and Amendment 1 on Form 	 8-K/A dated November 9, 1995) * 	 VSE Corporation 1996 Stock Option Plan (Appendix A to 	 Registrant's definitive proxy statement dated 	 April 3, 1996) 		VSE Corporation 1998 Stock Option Plan (Appendix A to 	 Registrant's definitive proxy statement for the Annual 	 Meeting of Stockholders held on May 6, 1998) 		VSE Corporation 1998 Non-employee Directors Stock Plan 	 (Appendix B to Registrant's definitive proxy statement 	 for the Annual Meeting of Stockholders held on May 6, 1998)
				 EXHIBIT INDEX
Reference No. Exhibit No. per Item 601 of in this Regulation S-K Description of Exhibit Form 10-K - -------------- ---------------------- --------- 12 Statements re computation of ratios Not Applicable 13 Annual report to security holders, Form 10-Q 	 or quarterly report to security holders Exhibit II 16 Letter re change in certifying accountant Not Applicable 18 Letter re change in accounting principles Not Applicable 21 Subsidiaries of the registrant Exhibit I 22 Published report regarding matters submitted 	 to vote of security holders Not Applicable 23 Consents of experts and counsel Exhibit IV 24 Power of attorney Not Applicable 27 Financial Data Schedule Exhibit III 99 Additional exhibits Not Applicable
*Document has been filed as indicated and is incorporated by reference herein.