ITEM 1. Business
(a) General Development of Business
VSE was established and incorporated in Delaware in 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") and VSE Services International, Inc. ("VSI"). Unincorporated divisions include BAV Division ("BAV"), Fleet Maintenance Division ("Fleet Maintenance"), Ordnance Division ("Ordnance"), GSA Services Division ("GSA Services"), Telecommunications Technologies Division ("TTD"), 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.
TTD was established in 2000, and GSA Services, SRR and VSI were established in 1999. VSE also acquired certain assets from a TTD strategic partner in 2000. The Health Care Services division of HRSI was sold in 2000 and CMstat Corporation ("CMstat") was sold in 1999 (see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the sale of CMstat).
The company's business operations consist primarily of diversified engineering, technical, and management services, performed on a contract basis. Substantially all of the company's contracts are with agencies of the United States Government (the "government") and other government prime contractors. The company's customers also include non-government organizations and commercial entities.
VSE seeks to provide its customers with competitive, cost effective solutions to specific problems. These problems generally require a detailed technical knowledge of materials, processes, functional characteristics, information systems, technology and products, and an in-depth understanding of the basic requirements for effective systems and equipment. Customers are generally billed for a specified level-of-effort incurred in performing a project or providing a service or, less frequently, for installed products, systems and maintenance charges.
(b) Financial Information
VSE operations are conducted within a single industry and financial information is presented on a company-wide basis. Financial information for the three years ended December 31, 2000 appears in the "Consolidated Statements of Operations" contained in this Form 10-K.
(c) Narrative Description of Business
Services and Products
VSE engineering, technical, management and information technology services include a broad array of capabilities and resources used in program planning; design and engineering, including prototype development; ship reactivation and transfer support; logistics management; ship maintenance, repair, overhaul planning and follow-on technical support; ship dismantlement and recycling services; the design and installation of intelligent conference rooms; office automation systems and support; training; technology research, development and demonstration programs involving energy conservation and efficiency, advanced technology transfers, and feasibility, assessment and development programs.
Typical engineering and technical services projects include sustaining engineering support for military vehicles and combat trailers; depot repair operations; logistics management support; 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; technical data package preparation; multimedia, computer LAN, and telecommunications systems; cross-platform technical data, product data and technical manual 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. Other significant customers include: the U.S. Army, the U.S. Postal Service, and the Department of Energy. 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 2000, the company's four largest contracts accounted for approximately 75% of total revenues. The company's largest contract, performed by BAV, is with the U.S. Navy and accounted for approximately 41% and 50% of consolidated revenues in 2000 and 1999, respectively. This contract is a ten year contract awarded in 1995, and it has the potential to generate total revenues of over one billion dollars from 1995 through 2005. Other major contracts include U.S. Navy contracts performed by VSE (parent company) and Ordnance, and a U.S. Army contract performed by VSE (parent company).
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 2000, the company provided services to the government and other customers under approximately 200 contracts and approximately 800 delivery orders or task orders.
Backlog
During 2000 and 1999, VSE was awarded contracts and delivery orders having potential ceiling values of approximately $119 million and $115 million, respectively.
VSE's funded backlog of contract work as of December 31, 2000, 1999 and 1998 was approximately $81 million, $108 million and $122 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 $804 million, $946 million and $1 billion, as of December 31, 2000, 1999 and 1998, 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, 2000, VSE had proposals pending for engineering services contracts covering approximately $300 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 2006. 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, with these activities centrally coordinated through the company's Strategic Planning and Business Development Department. 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, and technical personnel having high levels of education, experience, training and skills. As of February 2001, VSE employed approximately 600 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) multimedia and computer design engineers, and (e) graphic designers and technicians. The expertise required by VSE customers also frequently includes knowledge of government administrative procedures. Many VSE employees have had experience as government employees or have served in the U.S. armed forces. The company considers its relationships with employees to be excellent.
Competition and Risks
Competition. The professional and technical services industry in which VSE is engaged is very competitive. There are a substantial number of other organizations, including large, diversified firms with greater financial resources and larger technical staffs, which are capable of providing essentially the same services as those offered by VSE. Such companies may be publicly owned or privately held and may be divisions of much larger organiza- tions including large manufacturing corporations. 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 provides a schedule of services at fixed prices which may be ordered outside of the solicitation process. The company has been awarded four 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 that VSE will encounter as a result of changing economic or competitive conditions, customer requirements, or technological developments. VSE believes the principal competitive factors for the professional and technical services business in which it is engaged are technical and financial qualifications, quality and innovation of services and products, past performance and low price.
Risks. In recent years, the government has initiated a series of changes designed to improve and streamline its acquisition policies and procedures. Such changes include an emphasis on very large contracts, which may make it more difficult for VSE to qualify as a potential bidder; past performance, which may be used to exclude entrance into new government markets; and multiple-award schedules, which may result in unequal contract awards between successful contractors.
VSE's business with the government is subject to the risk that one or more of its potential contracts or contract extensions may be awarded by the contracting agency to a "small and disadvantaged" or minority-owned business pursuant to "set-aside" programs administered by the Small Business Administration or may be bundled into omnibus contracts for very large businesses. In addition, government contract business is subject to funding delays, extensions, and moratoriums caused by political and administrative disagreements. To date, the effect of such negotiations and disagreements on the company has not been material; however, no assurances can be given about such risks with respect to future years.
Government contracts are subject to termination at the government's convenience, which means that the government may terminate the contract at any time, without cause. If a government contract is terminated for convenience, the contractor is generally reimbursed for its allowable costs to the date of termination and is paid a proportionate amount of the stipulated profit or fee for the work actually performed. VSE has not suffered any material losses or disruptions of its business due to government terminations for convenience.
VSE's business is subject to the risks arising from global economic conditions associated with potential foreign customers served through the company's contracts with the U.S. Government. For example, economic slowdowns in certain countries served under the BAV contract could potentially affect BAV sales. In addition, the company's subsidiary VSI 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
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, 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive officers of the Registrant as of March 7, 2001. Each person named has served as an executive officer of VSE, or has served in a similar executive capacity in VSE, for more than the past five years, except for Mr. Todd.
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 - ---- --- ------------------------ Byron S. Bartholomew 73 Executive Vice President, Business Development
Donald M. Ervine 64 Chairman and Chief Executive Officer
Michael E. Hamerly 55 Senior Vice President and General Manager, anager Fleet Maintenance and Ordnance Divisions
James M. Knowlton 58 Executive Vice President and President, BAV Division, President, Ship Remediation and Recycling, Inc., President, VSE Services International, Inc., General Manager, Telecommunications Technologies Division
Thomas R. Loftus 45 Senior Vice President and Comptroller
James M. Todd* 54 President and Chief Operating Officer
Jayne M. Tuohig 54 Senior Vice President and General Manager, VSS and Postal Divisions
John J. Werbowski 51 Senior Vice President, Strategic Planning and New Business Development
Craig S. Weber 56 Executive Vice President, Chief Financial Officer and Secretary
* Prior to joining VSE in November 2000, Mr. Todd served as Vice President of the Industrial Consulting and Systems Group of American Management Systems, Inc., where he worked as a program manager since 1993. He has worked as a program manager in industry since 1991 and, before that, as a program manager for the U.S. Navy during a distinguished career from 1969 to his retirement as a Captain in 1991.
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 about 1,400 stockholders of VSE common stock as of March 7, 2001, consisting of approximately 300 stockholders of record plus the number of beneficial owner proxy sets provided in connection with VSE's 2001 Annual Meeting of Stockholders to (a) brokers, banks, and nominees and (b) participants in the VSE Corporation Employee ESOP/401(k) Plan.
(c) Dividends
Cash dividends were declared at the rate of $.16 per share during 2000 and $.144 per share during 1999. Pursuant to its bank loan agreement (see Note 4 of "Notes to Consolidated Financial Statements"), the payment of cash dividends by VSE is subject to annual rate restrictions. VSE has paid cash dividends each year since 1973.
Per share amounts have been adjusted to reflect stock splits effected in 1996 and 1997.
This consolidated summary of selected financial data should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-K.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The term "VSE" or "company" means VSE and its subsidiaries and divisions unless the context indicates operations of the parent company only. VSE'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") and VSE Services International, Inc. ("VSI"). Unincorporated divisions include BAV Division ("BAV"), Ordnance Division ("Ordnance"), Value Systems Services Division ("VSS"), Fleet Maintenance Division ("Fleet Maintenance"), Telecommunications Technologies Division ("TTD") formed in September 2000, and GSA Services Division ("GSA Services").
The company is engaged principally in providing engineering, logistics, management and technical services to the U.S. Government (the "government") and other government prime contractors. All significant intercompany transactions have been eliminated in consolidation. Certain prior year balances have been reclassified for comparative purposes.
Results of Operations
Revenues
The following table shows the revenues from operations of VSE, its subsidiaries and divisions, and such revenues as a percent of total revenues:
VSE's largest customer is the U.S. Department of Defense ("Defense"), including agencies of the U.S. Army, Navy and Air Force. The company's 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 fluctuations in Defense spending will not have a material impact on the company's results of operations or financial position.
Substantially all of the company's revenues depend on the ability of the company to win new contracts and on the amount of work ordered by the government under the company's existing contracts. The company's ability to win new contracts is affected by government acquisition policies and procedures, including government procurement practices that in recent years have tended toward bundling work efforts under large comprehensive ("omnibus") management contracts. This emphasis on large contracts presents challenges to winning new contract work, including making it more difficult for the company to qualify as a bidder, increases in the level of competition due to the award of fewer contracts, and forcing the company into competition with larger organizations that have greater financial resources and larger technical staffs. Other government procurement practices that can affect the company's revenues are the use of past performance criteria that may preclude entrance into new government markets and government social programs that limit contract work to small, woman, or minority owned businesses. Additional risk factors that could potentially affect the company's revenues are the government's right to terminate contracts for convenience, the government's right to not exercise all of the option periods on a contract, and funding delays caused by government political or administrative actions. In 2000, 1999, and 1998, 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.
Several of the company's operating divisions were formed in recent years to bid on and perform contract work that had been traditionally performed by VSE (parent company). The formation of these divisions has enabled the company to use an operating structure that is better suited to perform certain types of contract work. The company anticipates that it will continue using its operating divisions to bid and perform new contract work to better serve the needs of customers. As the use of operating divisions for new contracts increases, the company expects that the revenue of VSE (the parent company) will be 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. VSE's BAV Division has a contract with the U.S. Navy to provide engineering, technical and logistical support services associated with the sale, lease, or transfer of Navy ships to foreign governments. The contract accounted for approximately 41% and 50% of consolidated revenues from operations during 2000 and 1999, respectively. The level of revenues generated by this contract varies depending on a number of factors including the timing of ship transfers and associated support services ordered by foreign governments and economic conditions of potential customers worldwide. The decline in the company's revenues during 2000 as compared to 1999 and in 1999 as compared to 1998 is primarily due to the decline in services ordered through this contract. The company has experienced significant quarterly and annual revenue fluctua- tions and anticipates that future quarterly and annual revenues will be subject to significant variations primarily due to changes in the level of activity on this contract.
VSS Contract. VSE's VSS Division had a U.S. Navy contract to provide data management and documentation, logistics support services and configuration management services to the Naval Air Systems command. VSS began work on this
contract in 1994 and the last option year was scheduled to end in 1999. The government extended the contract through April 28, 2000. VSS was not awarded the successor contract and work on this contract effort terminated as of April 28, 2000. The contract accounted for a majority of the work in the VSS Division during the period from 1995 through 1999, but represented less than 10% of the company's revenues during this time. The loss of revenues associated with the expiration of this contract contributed to the decline in revenues in 2000 as compared to prior years.
Income from Continuing Operations Before Income Taxes
The following table shows consolidated revenues and income from continuing operations before income taxes of VSE, other items of income and expense, and such amounts as a percent of revenues.
Costs and expenses of operations, as a percentage of revenues, increased slightly in 2000 as compared to 1999 and 1998. This increase on a percentage basis is primarily attributable to the decrease in revenues while a portion of the costs and expenses of operating the company remain fixed. Other factors that affect the percentage of costs and expenses to revenues include (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 amount of work performed on certain contracts as a percentage of total revenues, (g) the timing of contract award fees and (h) effective project and cost management.
Selling, general and administrative expenses as a percentage of revenues decreased slightly in 2000 as compared to 1999 and increased slightly in 1999 as compared to 1998. Selling, general and administrative expenses will vary from year to year due to various types of nonreimbursable costs.
The application of earnings to reduce average bank borrowings and invest short term cash surpluses, reduced receivables financing requirements due to the reduction in revenues, and improved cash collection cycles on government
contracts resulted in interest income in 2000 as compared to interest expense in 1999. Interest expense as a percentage of revenues increased slightly in 1999 as compared to 1998 due to an increase in average levels of bank debt resulting from the fluctuation in activity among various different contracts.
Discontinued Operations
On May 21, 1999, the company sold all of its interests in the SPS segment. This entailed selling its CMstat subsidiary for an $800 thousand promissory note. While the sale was a divestiture for legal and tax purposes, for accounting purposes, the sale was not originally provided discontinued operations treatment under Staff Accounting Bulletin No. 30 "Accounting for Divestiture of a Subsidiary or Other Business Operation"("SAB No. 30") since the sale did not transfer the risks of ownership because the sales price was primarily dependent on the buyer's ability to repay the promissory note.
As of December 31, 2000, the company has determined that the promissory note acquired from the sale of its CMstat subsidiary is not collectible and has written off the remaining balance. Accordingly, the consolidated financial statements have been restated to reflect the disposition of its CMstat subsidiary as discontinued operations. The revenues, costs and expenses, assets and liabilities and cash flows from the CMstat subsidiary have been excluded from the respective captions in the Consolidated Statement of Operations, Balance Sheets, Cash Flows and related footnotes.
Financial Condition
VSE's financial condition did not change materially during 2000. The company's largest asset is its accounts receivable and its largest liabilities are its accounts payable and accrued expenses. These assets and liabilities remained substantially unchanged at December 31, 2000 as compared to December 31, 1999. The increase in total stockholder's investment in 2000 resulted from earnings and dividend activity.
Liquidity and Capital Resources
A net increase in cash and cash equivalents of $585 thousand during 2000 resulted from approximately $1.8 million provided by continuing operations, approximately $1.1 million used in investing activities, $311 thousand used in financing activities, and $248 thousand provided by discontinued operations. Significant investing activities included $700 thousand associated with the acquisition of certain contract and marketing rights and $424 thousand used to purchase property and equipment. Financing activities consisted primarily of $331 thousand used to pay cash dividends. Cash flows provided by continuing operations decreased in 2000 as compared to 1999 due primarily to the changes in the levels of accounts receivable and accounts payable on the BAV contract in 2000 as compared to 1999, as well as a decrease in the company's net income.
The company's level of net cash and cash equivalents did not change significantly during 1999. Approximately $12.2 million in net cash was provided by continuing operations. Discontinued operations used approximately $8 million, financing activities used approximately $3.1 million, and
investing activities used approximately $1.1 million. Significant financing activities included decreases in long-term bank loans and the current portion of long-term bank debt of approximately $1.5 million and $1.3 million, respectively. Significant investing activities included approximately $1.1 million associated with the purchase of property and equipment, primarily computer equipment. Cash flows provided by continuing operations 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 $34 thousand during 1998 resulted from approximately $3 million provided by operations, approximately $1.5 million used in investing activities and approximately $1.4 million used in financing activities. Significant financing activities included a decrease in long-term bank loans of approximately $1.9 million. Significant investing activities included approximately $1.5 million associated with the purchase of property and equipment, primarily computer equipment.
The company's internal sources of liquidity result primarily from operating activities, specifically from changes in the level of revenues and associated accounts receivable from period to period and from profitability. Significant increases or decreases in revenue and accounts receivable can cause significant increases or decreases in internal liquidity. The decrease in revenues and associated accounts receivable in the current year has resulted in an increase in internally generated cash flows. Accounts receivable arise primarily from billings made by the company to the government or other government prime contractors for services rendered and generally do not present collection problems. The company has made use of recent electronic billing and payment initiatives implemented by the government to decrease the time to collect billed accounts receivable, thereby improving internal liquidity. Accounts receivable levels can also be affected by contract retainages, start-up and termination costs associated with new or completed contracts, and differences between the provisional billing rates authorized by the government compared to the costs actually incurred by the company. Internal liquidity is also affected by the acquisition of capital assets for office and computer support and by the payment of cash dividends. Purchases of capital assets for office and computer support have not varied significantly in recent years.
VSE's external sources of liquidity consist of a revolving bank loan agreement that provides loan financing based on the company's accounts receivable. (See Note 4 of "Notes to Consolidated Financial Statements".) The bank financing complements the internal sources of liquidity by providing increasing levels of borrowing capacity as accounts receivable levels increase. The bank loan agreement provided loan financing up to a maximum commitment of $15 million dollars as of December 31, 2000. This loan agreement replaced the previous loan agreement that had a maximum commitment of $30 million dollars. The company determined that the new loan agreement was adequate to cover current and future liquidity requirements.
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 loan commitment are adequate to meet current operating cash requirements.
Cash dividends were declared at the rate of $.16 per share during 2000 and $.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.
Inflation and Pricing
Most of the contracts performed by VSE provide for estimates of future labor costs to be escalated for any option periods provided by the contracts, while the non-labor costs included in such contracts are normally considered reimbursable at cost. VSE property and equipment consists principally of computer systems equipment and furniture and fixtures. The overall impact of inflation on replacement costs of such property and equipment is expected to be insignificant.
Forward-Looking Disclosures
U. S. Postal Service Contract
VSE had a contract to provide engineering support services to the U.S. Postal Service. The last option year on this contract was scheduled to end December 31, 2000. The contract was extended through January 2001. VSE was not awarded the successor contract, and work on this contract effort terminated as of January 31, 2001. Revenues on this contract represented approximately 8% of the company's revenues during 2000. The company's future revenues will be reduced by the loss of revenues associated with the expiration of this contract.
New Business
VSE has begun several new business initiatives during 2000 and 1999. The company expects each of these new business initiatives to contribute to future revenue growth.
In August 2000, VSE formed TTD to continue a strategy to support customers with effective knowledge management and information technology solutions. In December 2000, VSE invested $960 thousand in the acquisition of certain contract and marketing rights to enhance TTD's growth opportunities. TTD markets the company's growing capability to provide customers with the latest products, services, and support in network, multimedia, and audio-visual technology. TTD specializes in maintaining and staffing products and services to create state of the art, network and multimedia technology systems. This includes "turnkey" design, installation, management and support for a wide variety of voice, data, multimedia and related projects.
In August 1999, VSE formed VSI to expand VSE's international presence and perform services for foreign governments and commercial customers similar to the services it has traditionally provided in the United States.
In June 1999, VSE formed SRR to pursue business opportunities associated with dismantling ships that are no longer usable. SRR is a partner in a joint venture that was awarded a contract associated with a new government program to
dismantle and recycle inactive U.S. Navy ships. The contract requires the joint venture to dismantle U.S. Navy ships and recover costs by selling salvageable materials and parts. Work on this contract began in February 2000.
In January 1999, VSE formed GSA Services to bid on and perform work issued through the government's Federal Supply Schedule Program. Services are performed under these schedules primarily by other VSE divisions and subsidiaries. VSE's divisions and subsidiaries performed approximately $1.6 million and $161 thousand of services for GSA Services in 2000 and 1999, respectively. These amounts are included in the revenues of the divisions or subsidiaries that performed the services.
Quantitative and Qualitative Disclosures about Market Risk
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.
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the effective date of SFAS No. 133 was amended to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of Effective Date of FASB Statement No. 133". The Company does not use derivative instruments. The aggregate fair value of the company's financial instruments approximates the carrying value at December 31, 2000.
ITEM 8. Financial Statements and Supplementary Data
Page ---- Report of Independent Public Accountants 21 Consolidated Balance Sheets as of December 31, 2000 and 1999 22 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 23 Consolidated Statements of Stockholders' Investment for the years ended December 31, 2000, 1999 and 1998 24 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 25 Notes to Consolidated Financial Statements 26
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, 2000 and 1999, and the related consolidated statements of operations, stockholders' investment and cash flows for the three years ended December 31, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows for the three years ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia February 23, 2001
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 consist of the operations of the parent company, operations of the company's wholly owned subsidiaries, and operations of the company's divisions. Wholly owned subsidiaries include Energetics Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"), Ship Remediation and Recycling, Inc. ("SRR"), and VSE Services International, Inc. ("VSI"). Unincorporated divisions include BAV Division ("BAV"), Ordnance Division ("Ordnance"), Value Systems Services Division ("VSS"), Fleet Maintenance Division ("Fleet Maintenance"), Telecommunications Technologies Division ("TTD"), and GSA Services Division ("GSA Services"). The company is engaged principally in providing engineering, testing, management and informa- tion technology services to the U.S. Government (the "government") and other government prime contractors.
The term "VSE" or "company" means VSE and its subsidiaries and divisions unless the context indicates operations of the parent company only. Inter- company sales are principally at cost. All significant intercompany transactions have been eliminated in consolidation. Certain prior year balances have been reclassified for comparative purposes.
Segment Information
The company operates within one reportable segment. Prior to May 21, 1999, VSE had two reportable segments: the engineering, logistics, management, and technical services segment ("ELMTS"), which provides diversified engineering, technical and management services principally to agencies of the United States Government and to other government prime contractors, and the software products and services segment ("SPS"), which provided application software and services related to the installation of the software to primarily commercial customers. The SPS segment was sold on May 21, 1999, and is reflected as a discontinued operation (see note 10).
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999 the effective date of SFAS No. 133 was amended to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of Effective Date of FASB Statement No. 133". The Company does not use derivative instruments.
In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, "Revenue Recognition In Financial Statements" ("SAB No. 101"). SAB No. 101 establishes guidelines in applying generally accepted accounting principles to the recognition of revenue in financial statements based on the following four criteria; persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller's price to the buyer is fixed or determinable, and collectibility is reasonably assured. In the opinion of management, the adoption of SAB No. 101 will not have a material effect, if any, on the company's financial position or results of operations.
Stockholders' Investment and Earnings Per Share
At December 31, 2000, options to purchase 144,330 shares, 32,500 shares, 37,125 shares, 53,000 shares, 66,500 shares and 10,000 shares of common stock at $10.91, $13.04, $9.42, $10.93, $8.03 and $6.94 per share, respectively, were outstanding. There was no dilutive impact on reported earnings per share for 2000, 1999 and 1998, due to the market value of VSE stock.
Cash and Cash Equivalents
Cash and cash equivalents reported by the company consist of cash balances in the company's bank accounts and short term temporary invested balances connected to the bank accounts with sweep arrangements, netted by checks issued on the company's bank accounts that have not yet been presented to the bank for collection. The company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
The company has classified all debt and equity securities as available-for- sale. Available-for-sale securities are carried at fair value with unrealized gains and losses, net of tax, reported as a component of stockholders' investment. Realized gains and losses are included in other income. Available- for-sale debt securities as of December 31, 2000 and December 31, 1999 consisted of overnight money market accounts of $853 thousand and $1.7 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 billable rates times hours delivered plus material and other reimbursable costs 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 1998 and prior years. In the opinion of management, the audits of the indirect cost rates for 2000 and 1999 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 $1.4 million for 2000, $1.6 million for 1999 and $1.3 million for 1998. 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.
Deferred Compensation Plans
Deferred compensation plan expense for the years ended December 31, 2000, 1999 and 1998 was $117 thousand, $29 thousand and $140 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, 2000 and 1999. 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 and Intangible Assets
As part of the August 29, 1995, acquisition of Energetics, the company recorded approximately $1.7 million of goodwill in connection with this acquisition, including approximately $200 thousand of additional goodwill due to contingency requirements established in the purchase agreement. Goodwill is being amortized by the straight-line method over fifteen years, and approximately $1.2 million of unamortized goodwill remains on the books as of December 31, 2000.
On December 28, 2000, VSE invested $960 thousand in the acquisition of certain contract and marketing rights. The company will amortize this intangible asset over a period not to exceed five years.
Amortization expense for goodwill and intangible assets was $115 thousand, $180 thousand and $337 thousand for 2000, 1999, and 1998, respectively.
(3) Accounts Receivable
The "Unbilled: Other" included in accounts receivable are reported net of an allowance for contract disallowances of $201 thousand as of December 31, 2000 and $422 thousand as of December 31, 1999. "Unbilled: Other" also includes certain costs for work performed at risk which are not reimbursable under current contracts, but which the company believes will be reimbursable on execution of contract documentation or amendments increasing funding. Amounts not presently reimbursable included in "Unbilled: Other" were $307 thousand and $287 thousand as of December 31, 2000, and 1999, 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 40%, 50% and 52% of such revenues in 2000, 1999 and 1998, respectively.
The company generally expects to collect all accounts receivable other than retainages within one year.
(4) Debt
VSE has a revolving loan agreement with a bank on which the company can borrow up to $15 million, subject to a borrowing formula based on billed receivables. Under terms of the agreement, the company pays a fixed amount annual commitment fee and interest on any borrowings at a prime-based rate or an optional LIBOR-based rate. The expiration date of the revolving loan is May 31, 2002. The loan agreement contains collateral requirements by which company assets secure amounts outstanding, restrictive covenants that include minimum tangible net worth and profitability requirements, a limit on annual dividends, and other affirmative and negative covenants. There were no outstanding amounts borrowed on the loan as of December 31, 2000. The company had a similar predecessor revolving loan agreement with the same bank as of December 31, 1999. There were no outstanding amounts borrowed under this loan agreement as of December 31, 1999.
Due to losses incurred by VSE's CMstat subsidiary, the disposal of CMstat, and the write off of the CMstat note receivable (see Note 10 "Discontinued Operations"), the company was not in compliance with certain original loan covenants during 2000 and 1999. The company's bank amended the loan agreements in these years to restate certain terms and conditions of the loans, including the covenants with which the company was not compliant. The
company was in compliance during 2000 and 1999 with all covenants of the loan agreements 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 2000, 1999, and 1998 was $245 thousand, $333 thousand, and $359 thousand, respectively.
The ESOP/401(k) plan held 521,014 shares and 582,761 shares of VSE stock as of December 31, 2000 and 1999, respectively. Such shares receive dividend payments and are included in the weighted average shares for earnings per share calculations.
Energetics maintains a profit sharing plan for employees. All employees who have completed two years of service are members of the profit sharing plan. At its discretion, Energetics may make contributions to the plan. The plan expense for 2000, 1999, and 1998 was $400 thousand, $312 thousand, and $443 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, 2000 the company has granted options for 223,955 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, 2000 the company has granted options for 119,500 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 had established such a valuation allowance for the deferred tax asset associated with certain real property because of the uncertainty that the deferred tax asset would be fully realized. It was determined that this valuation allowance was no longer necessary. As a result, the allowance was reversed as of December 31, 2000.
(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 2000, 1999 and 1998 was approximately $1.9 million, $1.9 million, and $2.1 million, respectively, which was net of sublease income of $694 thousand, $686 thousand and $464 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 $1.7 million in 2001 and 2002 and $1.3 million 2003, 2004 and 2005, and $1.4 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 financial condition or results of operations.
(10) Discontinued Operations
On May 21, 1999, the company sold all of its interests in the SPS segment. This entailed selling its CMstat subsidiary for an $800 thousand promissory note. While the sale was a divestiture for legal and tax purposes, for accounting purposes, the sale was not originally provided discontinued operations treatment under Staff Accounting Bulletin No. 30 "Accounting for Divestiture of a Subsidiary or Other Business Operation"("SAB No. 30") since the sale did not transfer the risks of ownership because the sales price was primarily dependent on the buyer's ability to repay the promissory note.
As of December 31, 2000, the company has determined that the promissory note acquired from the sale of its CMstat subsidiary is not collectible and has written off the remaining balance. Accordingly, the consolidated financial statements have been restated to reflect the disposition of its CMstat subsidiary as discontinued operations. The revenues, costs and expenses, assets and liabilities and cash flows from the CMstat subsidiary have been excluded from the respective captions in the Consolidated Statement of Operations, Balance Sheets, Cash Flows and related footnotes.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes in the company's independent public accountants or disagreements with such accountants on accounting principles or practices or financial statement disclosures.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information with respect to Directors of the company is incorporated by reference from the registrant's definitive proxy statement for its annual meeting of stockholders to be filed not later than 120 days after December 31, 2000, 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 7, 2001 By: /s/ C. S. Weber ----------------------------- C. S. Weber, Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 6, 2001, by the following persons on behalf of the Registrant and in the capacities indicated.
Principal Executive Officers:
/s/ D. M. Ervine --------------------------------------------------------------- D. M. Ervine, Chairman of the Board and Chief Executive Officer
/s/ J. M. Todd --------------------------------------------------------------- J. M. Todd, President and Chief Operating Officer
(b) Principal Financial Officer: (c) Principal Accounting Officer:
/s/ C. S. Weber /s/ T. R. Loftus ----------------------------- ---------------------------- C. S. Weber, Executive Vice T. R. Loftus, Senior Vice President and Chief Financial President and Comptroller Officer
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/ B. K. Wachtel ----------------------------- ---------------------------- C. M. Kendall B. K. Wachtel
/s/ C. S. Koonce ----------------------------- C. S. Koonce
EXHIBIT INDEX
Reference No. Exhibit No. per Item 601 of in this Regulation S-K Description of Exhibit Form 10-K - -------------- ---------------------- --------- 2 Plan of acquisition, reorganization, arrangement, liquidation or succession Exchange Agreement dated as of March 25, 1992, amended as of September 1, 1992, by and between VSE Corporation and JBT Holding Corp., et al. (Exhibit A to Exhibit 1, Proxy Statement, filed on Form 8-K on November 2, 1992) * 3 Articles of incorporation and by-laws Restated Certificate of Incorporation of VSE Corporation dated as of February 6, 1996 * By-Laws of VSE Corporation as amended through May 16, 2000 (Exhibit 3.2 to Form 10-Q dated October 27, 2000) * 4 Instruments defining the rights of security holders, including indentures Specimen Stock Certificate as of May 19, 1983 (Exhibit 4 to Registration Statement No. 2-83255 dated April 22, 1983 on Form S-2) * 9 Voting trust agreement Not Applicable 10 Material contracts Employment Agreement entered into as of December 10, 1997, by and between VSE Corporation and Byron S. Bartholomew Exhibit VI Employment Agreement entered into as of December 10, 1997, by and between VSE Corporation and Jayne M. Tuohig Exhibit VII Employment Agreement entered into as of December 10, 1997, by and between VSE Corporation and Craig S. Weber Exhibit VIII Employment Agreement entered into as of October 21, 1998, by and between VSE Corporation and Donald M. Ervine (Exhibit VI to Form 10-K dated March 18, 1999) * Employment Agreement entered into as of January 15, 1999, by and between VSE Corporation and Energetics, Incorporated and Robert J. Kelly (Exhibit VII to Form 10-K dated March 18, 1999) * Employment Agreement entered into as of June 3, 1999, by and between VSE Corporation and James M. Knowlton (Exhibit V to Form 10-K dated March 15, 2000) * Employment Agreement dated as of November 1, 2000, by and between VSE Corporation and James M. Todd Exhibit V VSE Corporation Deferred Supplemental Compensation Plan effective January 1, 1994 (Exhibit III to Form 10-K dated March 23, 1995) *
EXHIBIT INDEX
Reference No. Exhibit No. per Item 601 of in this Regulation S-K Description of Exhibit Form 10-K - -------------- ---------------------- --------- Stock Purchase Agreement dated August 29, 1995 by and between VSE Corporation and the shareholders of Energetics Incorporated (Exhibit 2 to Form 8-K dated September 13, 1995 and Amendment 1 on Form 8-K/A dated November 9, 1995) * VSE Corporation 1996 Stock Option Plan (Appendix A to Registrant's definitive proxy statement dated April 3, 1996) VSE Corporation 1998 Stock Option Plan (Appendix A to Registrant's definitive proxy statement for the Annual Meeting of Stockholders held on May 6, 1998) VSE Corporation 1998 Non-employee Directors Stock Plan (Appendix B to Registrant's definitive proxy statement for the Annual Meeting of Stockholders held on May 6, 1998) 12 Statements re computation of ratios Not Applicable 13 Annual report to security holders, Form 10-Q or 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 independent public accountants 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
The term "VSE" or "company" means VSE and its subsidiaries and divisions unless the context indicates operations of the parent company only. VSE'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") and VSE Services International, Inc. ("VSI"). Unincorporated divisions include BAV Division ("BAV"), Ordnance Division ("Ordnance"), Value Systems Services Division ("VSS"), Fleet Maintenance Division ("Fleet Maintenance"), Telecommunications Technologies Division ("TTD") formed in September 2000, and GSA Services Division ("GSA Services").
The company is engaged principally in providing engineering, logistics, management and technical services to the U.S. Government (the "government") and other government prime contractors. All significant intercompany transactions have been eliminated in consolidation. Certain prior year balances have been reclassified for comparative purposes.
Results of Operations
Revenues
The following table shows the revenues from operations of VSE, its subsidiaries and divisions, and such revenues as a percent of total revenues:
VSE's largest customer is the U.S. Department of Defense ("Defense"), including agencies of the U.S. Army, Navy and Air Force. The company's 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 fluctuations in Defense spending will not have a material impact on the company's results of operations or financial position.
Substantially all of the company's revenues depend on the ability of the company to win new contracts and on the amount of work ordered by the government under the company's existing contracts. The company's ability to win new contracts is affected by government acquisition policies and procedures, including government procurement practices that in recent years have tended toward bundling work efforts under large comprehensive ("omnibus") management contracts. This emphasis on large contracts presents challenges to winning new contract work, including making it more difficult for the company to qualify as a bidder, increases in the level of competition due to the award of fewer contracts, and forcing the company into competition with larger organizations that have greater financial resources and larger technical staffs. Other government procurement practices that can affect the company's revenues are the use of past performance criteria that may preclude entrance into new government markets and government social programs that limit contract work to small, woman, or minority owned businesses. Additional risk factors that could potentially affect the company's revenues are the government's right to terminate contracts for convenience, the government's right to not exercise all of the option periods on a contract, and funding delays caused by government political or administrative actions. In 2000, 1999, and 1998, 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.
Several of the company's operating divisions were formed in recent years to bid on and perform contract work that had been traditionally performed by VSE (parent company). The formation of these divisions has enabled the company to use an operating structure that is better suited to perform certain types of contract work. The company anticipates that it will continue using its operating divisions to bid and perform new contract work to better serve the needs of customers. As the use of operating divisions for new contracts increases, the company expects that the revenue of VSE (the parent company) will be 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. VSE's BAV Division has a contract with the U.S. Navy to provide engineering, technical and logistical support services associated with the sale, lease, or transfer of Navy ships to foreign governments. The contract accounted for approximately 41% and 50% of consolidated revenues from operations during 2000 and 1999, respectively. The level of revenues generated by this contract varies depending on a number of factors including the timing of ship transfers and associated support services ordered by foreign governments and economic conditions of potential customers worldwide. The decline in the company's revenues during 2000 as compared to 1999 and in 1999 as compared to 1998 is primarily due to the decline in services ordered through this contract. The company has experienced significant quarterly and annual revenue fluctua- tions and anticipates that future quarterly and annual revenues will be subject to significant variations primarily due to changes in the level of activity on this contract.
VSS Contract. VSE's VSS Division had a U.S. Navy contract to provide data management and documentation, logistics support services and configuration management services to the Naval Air Systems command. VSS began work on this
contract in 1994 and the last option year was scheduled to end in 1999. The government extended the contract through April 28, 2000. VSS was not awarded the successor contract and work on this contract effort terminated as of April 28, 2000. The contract accounted for a majority of the work in the VSS Division during the period from 1995 through 1999, but represented less than 10% of the company's revenues during this time. The loss of revenues associated with the expiration of this contract contributed to the decline in revenues in 2000 as compared to prior years.
Income from Continuing Operations Before Income Taxes
The following table shows consolidated revenues and income from continuing operations before income taxes of VSE, other items of income and expense, and such amounts as a percent of revenues.
Costs and expenses of operations, as a percentage of revenues, increased slightly in 2000 as compared to 1999 and 1998. This increase on a percentage basis is primarily attributable to the decrease in revenues while a portion of the costs and expenses of operating the company remain fixed. Other factors that affect the percentage of costs and expenses to revenues include (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 amount of work performed on certain contracts as a percentage of total revenues, (g) the timing of contract award fees and (h) effective project and cost management.
Selling, general and administrative expenses as a percentage of revenues decreased slightly in 2000 as compared to 1999 and increased slightly in 1999 as compared to 1998. Selling, general and administrative expenses will vary from year to year due to various types of nonreimbursable costs.
The application of earnings to reduce average bank borrowings and invest short term cash surpluses, reduced receivables financing requirements due to the reduction in revenues, and improved cash collection cycles on government
contracts resulted in interest income in 2000 as compared to interest expense in 1999. Interest expense as a percentage of revenues increased slightly in 1999 as compared to 1998 due to an increase in average levels of bank debt resulting from the fluctuation in activity among various different contracts.
Discontinued Operations
On May 21, 1999, the company sold all of its interests in the SPS segment. This entailed selling its CMstat subsidiary for an $800 thousand promissory note. While the sale was a divestiture for legal and tax purposes, for accounting purposes, the sale was not originally provided discontinued operations treatment under Staff Accounting Bulletin No. 30 "Accounting for Divestiture of a Subsidiary or Other Business Operation"("SAB No. 30") since the sale did not transfer the risks of ownership because the sales price was primarily dependent on the buyer's ability to repay the promissory note.
As of December 31, 2000, the company has determined that the promissory note acquired from the sale of its CMstat subsidiary is not collectible and has written off the remaining balance. Accordingly, the consolidated financial statements have been restated to reflect the disposition of its CMstat subsidiary as discontinued operations. The revenues, costs and expenses, assets and liabilities and cash flows from the CMstat subsidiary have been excluded from the respective captions in the Consolidated Statement of Operations, Balance Sheets, Cash Flows and related footnotes.
Financial Condition
VSE's financial condition did not change materially during 2000. The company's largest asset is its accounts receivable and its largest liabilities are its accounts payable and accrued expenses. These assets and liabilities remained substantially unchanged at December 31, 2000 as compared to December 31, 1999. The increase in total stockholder's investment in 2000 resulted from earnings and dividend activity.
Liquidity and Capital Resources
A net increase in cash and cash equivalents of $585 thousand during 2000 resulted from approximately $1.8 million provided by continuing operations, approximately $1.1 million used in investing activities, $311 thousand used in financing activities, and $248 thousand provided by discontinued operations. Significant investing activities included $700 thousand associated with the acquisition of certain contract and marketing rights and $424 thousand used to purchase property and equipment. Financing activities consisted primarily of $331 thousand used to pay cash dividends. Cash flows provided by continuing operations decreased in 2000 as compared to 1999 due primarily to the changes in the levels of accounts receivable and accounts payable on the BAV contract in 2000 as compared to 1999, as well as a decrease in the company's net income.
The company's level of net cash and cash equivalents did not change significantly during 1999. Approximately $12.2 million in net cash was provided by continuing operations. Discontinued operations used approximately $8 million, financing activities used approximately $3.1 million, and
investing activities used approximately $1.1 million. Significant financing activities included decreases in long-term bank loans and the current portion of long-term bank debt of approximately $1.5 million and $1.3 million, respectively. Significant investing activities included approximately $1.1 million associated with the purchase of property and equipment, primarily computer equipment. Cash flows provided by continuing operations 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 $34 thousand during 1998 resulted from approximately $3 million provided by operations, approximately $1.5 million used in investing activities and approximately $1.4 million used in financing activities. Significant financing activities included a decrease in long-term bank loans of approximately $1.9 million. Significant investing activities included approximately $1.5 million associated with the purchase of property and equipment, primarily computer equipment.
The company's internal sources of liquidity result primarily from operating activities, specifically from changes in the level of revenues and associated accounts receivable from period to period and from profitability. Significant increases or decreases in revenue and accounts receivable can cause significant increases or decreases in internal liquidity. The decrease in revenues and associated accounts receivable in the current year has resulted in an increase in internally generated cash flows. Accounts receivable arise primarily from billings made by the company to the government or other government prime contractors for services rendered and generally do not present collection problems. The company has made use of recent electronic billing and payment initiatives implemented by the government to decrease the time to collect billed accounts receivable, thereby improving internal liquidity. Accounts receivable levels can also be affected by contract retainages, start-up and termination costs associated with new or completed contracts, and differences between the provisional billing rates authorized by the government compared to the costs actually incurred by the company. Internal liquidity is also affected by the acquisition of capital assets for office and computer support and by the payment of cash dividends. Purchases of capital assets for office and computer support have not varied significantly in recent years.
VSE's external sources of liquidity consist of a revolving bank loan agreement that provides loan financing based on the company's accounts receivable. (See Note 4 of "Notes to Consolidated Financial Statements".) The bank financing complements the internal sources of liquidity by providing increasing levels of borrowing capacity as accounts receivable levels increase. The bank loan agreement provided loan financing up to a maximum commitment of $15 million dollars as of December 31, 2000. This loan agreement replaced the previous loan agreement that had a maximum commitment of $30 million dollars. The company determined that the new loan agreement was adequate to cover current and future liquidity requirements.
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 loan commitment are adequate to meet current operating cash requirements.
Cash dividends were declared at the rate of $.16 per share during 2000 and $.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.
Inflation and Pricing
Most of the contracts performed by VSE provide for estimates of future labor costs to be escalated for any option periods provided by the contracts, while the non-labor costs included in such contracts are normally considered reimbursable at cost. VSE property and equipment consists principally of computer systems equipment and furniture and fixtures. The overall impact of inflation on replacement costs of such property and equipment is expected to be insignificant.
Forward-Looking Disclosures
U. S. Postal Service Contract
VSE had a contract to provide engineering support services to the U.S. Postal Service. The last option year on this contract was scheduled to end December 31, 2000. The contract was extended through January 2001. VSE was not awarded the successor contract, and work on this contract effort terminated as of January 31, 2001. Revenues on this contract represented approximately 8% of the company's revenues during 2000. The company's future revenues will be reduced by the loss of revenues associated with the expiration of this contract.
New Business
VSE has begun several new business initiatives during 2000 and 1999. The company expects each of these new business initiatives to contribute to future revenue growth.
In August 2000, VSE formed TTD to continue a strategy to support customers with effective knowledge management and information technology solutions. In December 2000, VSE invested $960 thousand in the acquisition of certain contract and marketing rights to enhance TTD's growth opportunities. TTD markets the company's growing capability to provide customers with the latest products, services, and support in network, multimedia, and audio-visual technology. TTD specializes in maintaining and staffing products and services to create state of the art, network and multimedia technology systems. This includes "turnkey" design, installation, management and support for a wide variety of voice, data, multimedia and related projects.
In August 1999, VSE formed VSI to expand VSE's international presence and perform services for foreign governments and commercial customers similar to the services it has traditionally provided in the United States.
In June 1999, VSE formed SRR to pursue business opportunities associated with dismantling ships that are no longer usable. SRR is a partner in a joint venture that was awarded a contract associated with a new government program to
dismantle and recycle inactive U.S. Navy ships. The contract requires the joint venture to dismantle U.S. Navy ships and recover costs by selling salvageable materials and parts. Work on this contract began in February 2000.
In January 1999, VSE formed GSA Services to bid on and perform work issued through the government's Federal Supply Schedule Program. Services are performed under these schedules primarily by other VSE divisions and subsidiaries. VSE's divisions and subsidiaries performed approximately $1.6 million and $161 thousand of services for GSA Services in 2000 and 1999, respectively. These amounts are included in the revenues of the divisions or subsidiaries that performed the services.
Quantitative and Qualitative Disclosures about Market Risk
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.
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the effective date of SFAS No. 133 was amended to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of Effective Date of FASB Statement No. 133". The Company does not use derivative instruments. The aggregate fair value of the company's financial instruments approximates the carrying value at December 31, 2000.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
Page ---- Report of Independent Public Accountants 21 Consolidated Balance Sheets as of December 31, 2000 and 1999 22 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 23 Consolidated Statements of Stockholders' Investment for the years ended December 31, 2000, 1999 and 1998 24 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 25 Notes to Consolidated Financial Statements 26
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, 2000 and 1999, and the related consolidated statements of operations, stockholders' investment and cash flows for the three years ended December 31, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows for the three years ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia February 23, 2001
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 consist of the operations of the parent company, operations of the company's wholly owned subsidiaries, and operations of the company's divisions. Wholly owned subsidiaries include Energetics Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"), Ship Remediation and Recycling, Inc. ("SRR"), and VSE Services International, Inc. ("VSI"). Unincorporated divisions include BAV Division ("BAV"), Ordnance Division ("Ordnance"), Value Systems Services Division ("VSS"), Fleet Maintenance Division ("Fleet Maintenance"), Telecommunications Technologies Division ("TTD"), and GSA Services Division ("GSA Services"). The company is engaged principally in providing engineering, testing, management and informa- tion technology services to the U.S. Government (the "government") and other government prime contractors.
The term "VSE" or "company" means VSE and its subsidiaries and divisions unless the context indicates operations of the parent company only. Inter- company sales are principally at cost. All significant intercompany transactions have been eliminated in consolidation. Certain prior year balances have been reclassified for comparative purposes.
Segment Information
The company operates within one reportable segment. Prior to May 21, 1999, VSE had two reportable segments: the engineering, logistics, management, and technical services segment ("ELMTS"), which provides diversified engineering, technical and management services principally to agencies of the United States Government and to other government prime contractors, and the software products and services segment ("SPS"), which provided application software and services related to the installation of the software to primarily commercial customers. The SPS segment was sold on May 21, 1999, and is reflected as a discontinued operation (see note 10).
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999 the effective date of SFAS No. 133 was amended to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of Effective Date of FASB Statement No. 133". The Company does not use derivative instruments.
In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, "Revenue Recognition In Financial Statements" ("SAB No. 101"). SAB No. 101 establishes guidelines in applying generally accepted accounting principles to the recognition of revenue in financial statements based on the following four criteria; persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller's price to the buyer is fixed or determinable, and collectibility is reasonably assured. In the opinion of management, the adoption of SAB No. 101 will not have a material effect, if any, on the company's financial position or results of operations.
Stockholders' Investment and Earnings Per Share
At December 31, 2000, options to purchase 144,330 shares, 32,500 shares, 37,125 shares, 53,000 shares, 66,500 shares and 10,000 shares of common stock at $10.91, $13.04, $9.42, $10.93, $8.03 and $6.94 per share, respectively, were outstanding. There was no dilutive impact on reported earnings per share for 2000, 1999 and 1998, due to the market value of VSE stock.
Cash and Cash Equivalents
Cash and cash equivalents reported by the company consist of cash balances in the company's bank accounts and short term temporary invested balances connected to the bank accounts with sweep arrangements, netted by checks issued on the company's bank accounts that have not yet been presented to the bank for collection. The company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
The company has classified all debt and equity securities as available-for- sale. Available-for-sale securities are carried at fair value with unrealized gains and losses, net of tax, reported as a component of stockholders' investment. Realized gains and losses are included in other income. Available- for-sale debt securities as of December 31, 2000 and December 31, 1999 consisted of overnight money market accounts of $853 thousand and $1.7 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 billable rates times hours delivered plus material and other reimbursable costs 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 1998 and prior years. In the opinion of management, the audits of the indirect cost rates for 2000 and 1999 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 $1.4 million for 2000, $1.6 million for 1999 and $1.3 million for 1998. 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.
Deferred Compensation Plans
Deferred compensation plan expense for the years ended December 31, 2000, 1999 and 1998 was $117 thousand, $29 thousand and $140 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, 2000 and 1999. 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 and Intangible Assets
As part of the August 29, 1995, acquisition of Energetics, the company recorded approximately $1.7 million of goodwill in connection with this acquisition, including approximately $200 thousand of additional goodwill due to contingency requirements established in the purchase agreement. Goodwill is being amortized by the straight-line method over fifteen years, and approximately $1.2 million of unamortized goodwill remains on the books as of December 31, 2000.
On December 28, 2000, VSE invested $960 thousand in the acquisition of certain contract and marketing rights. The company will amortize this intangible asset over a period not to exceed five years.
Amortization expense for goodwill and intangible assets was $115 thousand, $180 thousand and $337 thousand for 2000, 1999, and 1998, respectively.
(3) Accounts Receivable
The "Unbilled: Other" included in accounts receivable are reported net of an allowance for contract disallowances of $201 thousand as of December 31, 2000 and $422 thousand as of December 31, 1999. "Unbilled: Other" also includes certain costs for work performed at risk which are not reimbursable under current contracts, but which the company believes will be reimbursable on execution of contract documentation or amendments increasing funding. Amounts not presently reimbursable included in "Unbilled: Other" were $307 thousand and $287 thousand as of December 31, 2000, and 1999, 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 40%, 50% and 52% of such revenues in 2000, 1999 and 1998, respectively.
The company generally expects to collect all accounts receivable other than retainages within one year.
(4) Debt
VSE has a revolving loan agreement with a bank on which the company can borrow up to $15 million, subject to a borrowing formula based on billed receivables. Under terms of the agreement, the company pays a fixed amount annual commitment fee and interest on any borrowings at a prime-based rate or an optional LIBOR-based rate. The expiration date of the revolving loan is May 31, 2002. The loan agreement contains collateral requirements by which company assets secure amounts outstanding, restrictive covenants that include minimum tangible net worth and profitability requirements, a limit on annual dividends, and other affirmative and negative covenants. There were no outstanding amounts borrowed on the loan as of December 31, 2000. The company had a similar predecessor revolving loan agreement with the same bank as of December 31, 1999. There were no outstanding amounts borrowed under this loan agreement as of December 31, 1999.
Due to losses incurred by VSE's CMstat subsidiary, the disposal of CMstat, and the write off of the CMstat note receivable (see Note 10 "Discontinued Operations"), the company was not in compliance with certain original loan covenants during 2000 and 1999. The company's bank amended the loan agreements in these years to restate certain terms and conditions of the loans, including the covenants with which the company was not compliant. The
company was in compliance during 2000 and 1999 with all covenants of the loan agreements 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 2000, 1999, and 1998 was $245 thousand, $333 thousand, and $359 thousand, respectively.
The ESOP/401(k) plan held 521,014 shares and 582,761 shares of VSE stock as of December 31, 2000 and 1999, respectively. Such shares receive dividend payments and are included in the weighted average shares for earnings per share calculations.
Energetics maintains a profit sharing plan for employees. All employees who have completed two years of service are members of the profit sharing plan. At its discretion, Energetics may make contributions to the plan. The plan expense for 2000, 1999, and 1998 was $400 thousand, $312 thousand, and $443 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, 2000 the company has granted options for 223,955 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, 2000 the company has granted options for 119,500 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 had established such a valuation allowance for the deferred tax asset associated with certain real property because of the uncertainty that the deferred tax asset would be fully realized. It was determined that this valuation allowance was no longer necessary. As a result, the allowance was reversed as of December 31, 2000.
(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 2000, 1999 and 1998 was approximately $1.9 million, $1.9 million, and $2.1 million, respectively, which was net of sublease income of $694 thousand, $686 thousand and $464 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 $1.7 million in 2001 and 2002 and $1.3 million 2003, 2004 and 2005, and $1.4 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 financial condition or results of operations.
(10) Discontinued Operations
On May 21, 1999, the company sold all of its interests in the SPS segment. This entailed selling its CMstat subsidiary for an $800 thousand promissory note. While the sale was a divestiture for legal and tax purposes, for accounting purposes, the sale was not originally provided discontinued operations treatment under Staff Accounting Bulletin No. 30 "Accounting for Divestiture of a Subsidiary or Other Business Operation"("SAB No. 30") since the sale did not transfer the risks of ownership because the sales price was primarily dependent on the buyer's ability to repay the promissory note.
As of December 31, 2000, the company has determined that the promissory note acquired from the sale of its CMstat subsidiary is not collectible and has written off the remaining balance. Accordingly, the consolidated financial statements have been restated to reflect the disposition of its CMstat subsidiary as discontinued operations. The revenues, costs and expenses, assets and liabilities and cash flows from the CMstat subsidiary have been excluded from the respective captions in the Consolidated Statement of Operations, Balance Sheets, Cash Flows and related footnotes.
ITEM 9.
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, 2000, 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 7, 2001 By: /s/ C. S. Weber ----------------------------- C. S. Weber, Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 6, 2001, by the following persons on behalf of the Registrant and in the capacities indicated.
Principal Executive Officers:
/s/ D. M. Ervine --------------------------------------------------------------- D. M. Ervine, Chairman of the Board and Chief Executive Officer
/s/ J. M. Todd --------------------------------------------------------------- J. M. Todd, President and Chief Operating Officer
(b) Principal Financial Officer: (c) Principal Accounting Officer:
/s/ C. S. Weber /s/ T. R. Loftus ----------------------------- ---------------------------- C. S. Weber, Executive Vice T. R. Loftus, Senior Vice President and Chief Financial President and Comptroller Officer
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/ B. K. Wachtel ----------------------------- ---------------------------- C. M. Kendall B. K. Wachtel
/s/ C. S. Koonce ----------------------------- C. S. Koonce
EXHIBIT INDEX
Reference No. Exhibit No. per Item 601 of in this Regulation S-K Description of Exhibit Form 10-K - -------------- ---------------------- --------- 2 Plan of acquisition, reorganization, arrangement, liquidation or succession Exchange Agreement dated as of March 25, 1992, amended as of September 1, 1992, by and between VSE Corporation and JBT Holding Corp., et al. (Exhibit A to Exhibit 1, Proxy Statement, filed on Form 8-K on November 2, 1992) * 3 Articles of incorporation and by-laws Restated Certificate of Incorporation of VSE Corporation dated as of February 6, 1996 * By-Laws of VSE Corporation as amended through May 16, 2000 (Exhibit 3.2 to Form 10-Q dated October 27, 2000) * 4 Instruments defining the rights of security holders, including indentures Specimen Stock Certificate as of May 19, 1983 (Exhibit 4 to Registration Statement No. 2-83255 dated April 22, 1983 on Form S-2) * 9 Voting trust agreement Not Applicable 10 Material contracts Employment Agreement entered into as of December 10, 1997, by and between VSE Corporation and Byron S. Bartholomew Exhibit VI Employment Agreement entered into as of December 10, 1997, by and between VSE Corporation and Jayne M. Tuohig Exhibit VII Employment Agreement entered into as of December 10, 1997, by and between VSE Corporation and Craig S. Weber Exhibit VIII Employment Agreement entered into as of October 21, 1998, by and between VSE Corporation and Donald M. Ervine (Exhibit VI to Form 10-K dated March 18, 1999) * Employment Agreement entered into as of January 15, 1999, by and between VSE Corporation and Energetics, Incorporated and Robert J. Kelly (Exhibit VII to Form 10-K dated March 18, 1999) * Employment Agreement entered into as of June 3, 1999, by and between VSE Corporation and James M. Knowlton (Exhibit V to Form 10-K dated March 15, 2000) * Employment Agreement dated as of November 1, 2000, by and between VSE Corporation and James M. Todd Exhibit V VSE Corporation Deferred Supplemental Compensation Plan effective January 1, 1994 (Exhibit III to Form 10-K dated March 23, 1995) *
EXHIBIT INDEX
Reference No. Exhibit No. per Item 601 of in this Regulation S-K Description of Exhibit Form 10-K - -------------- ---------------------- --------- Stock Purchase Agreement dated August 29, 1995 by and between VSE Corporation and the shareholders of Energetics Incorporated (Exhibit 2 to Form 8-K dated September 13, 1995 and Amendment 1 on Form 8-K/A dated November 9, 1995) * VSE Corporation 1996 Stock Option Plan (Appendix A to Registrant's definitive proxy statement dated April 3, 1996) VSE Corporation 1998 Stock Option Plan (Appendix A to Registrant's definitive proxy statement for the Annual Meeting of Stockholders held on May 6, 1998) VSE Corporation 1998 Non-employee Directors Stock Plan (Appendix B to Registrant's definitive proxy statement for the Annual Meeting of Stockholders held on May 6, 1998) 12 Statements re computation of ratios Not Applicable 13 Annual report to security holders, Form 10-Q or 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 independent public accountants 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.