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Vse Corp · 10-Q · For 6/30/02

Filed On 7/25/02 1:07pm ET · SEC File 0-03676 · Accession Number 102752-2-13

  As Of                Filer                Filing    For/On/As Docs:Size

 7/25/02  Vse Corp                          10-Q        6/30/02    1:19

Quarterly Report · Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Vse Corporation Form 10-Q June 30, 2002               19     82K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) BAV Contract Business Termination and New Business Start-ups Contract Expiration Exhibits and Reports on Form 8-K Forward Looking Statements Goodwill and Other Intangible Assets Part II. Other Information
1	1st Page - Filing Submission
2	Forward Looking Statements
12	BAV Contract
"	Contract Expiration
"	Business Termination and New Business Start-ups
16	Goodwill and Other Intangible Assets
18	Part II. Other Information
"	Item 6. Exhibits and Reports on Form 8-K

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SECURITIES AND EXCHANGE COMMISSION      
Washington, D.C. 20549      

FORM 10-Q     

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)      
OF THE SECURITIES EXCHANGE ACT OF 1934      

For the Quarter Ended June 30, 2002         Commission File Number:  0-3676     

VSE CORPORATION     
(Exact Name of Registrant as Specified in its Charter)      

DELAWARE                                    54-0649263  
(State or Other Jurisdiction of                     (I.R.S. Employer          
Incorporation or Organization)                     Identification No.)      

2550 Huntington Avenue                                            
Alexandria, Virginia                             22303-1499     
(Address of Principal Executive Offices)               (Zip Code)           

Registrant's Telephone Number, Including Area Code:  (703) 960-4600             

Securities registered pursuant to Section 12(b) of the Act:  None               
Securities registered pursuant to Section 12(g) of the Act:                     

Common Stock, par value $.05 per share            
(Title of Class)            

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was re- 
quired to file such reports), and (2) has been subject to such filing require-  
ments for the past 90 days.  Yes [x]    No [ ]                                  

Number of shares of Common Stock outstanding as of July 25, 2002: 2,181,540.    

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VSE Corporation and Subsidiaries                                                

Forward Looking Statements                                                      

       This filing contains statements which, to the extent they are not
recitations of historical fact, constitute "forward looking statements" under   
federal securities laws. All such statements are intended to be subject to the  
safe harbor protection provided by applicable securities laws. For discussions  
identifying some important factors that could cause actual VSE Corporation      
("VSE" or the "company") results to differ materially from those anticipated in 
the forward looking statements contained in this filing, see VSE's "Narrative   
Description of Business", "Management's Discussion and Analysis" and "Notes to  
Consolidated Financial Statements" contained in VSE's Annual Report and Form    
10-K for the fiscal year ended December 31, 2001 (Form 10-K) filed with the     
Securities and Exchange Commission. Readers are cautioned not to place undue    
reliance on these forward looking statements, which reflect management's        
analysis only as of the date hereof.  The company undertakes no obligation to   
publicly revise these forward looking statements to reflect events or           
circumstances that arise after the date hereof.  Readers should carefully review
the risk factors described in other documents the company files from time to    
time with the Securities and Exchange Commission, including this Quarterly      
Report on Form 10-Q to be filed by the company subsequent to the Annual Report  
on Form 10-K and any Current Reports on Form 8-K filed by the company.          

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                                                                [Download Table]
VSE Corporation and Subsidiaries                                              
Consolidated Financial Statements (Unaudited)                                 

Consolidated Balance Sheets                                                   
------------------------------------------------------------------------------
(in thousands, except share amounts)                                          

                                                        June 30,  December 31,
                                                          2002        2001    
                                                          ----        ----    
                                                                              
Assets                                                                        
Current assets:                                                               
  Cash and cash equivalents  . . . . . . . . . . . .   $    247    $    209   
  Accounts receivable, principally                                            
    U.S. Government, net . . . . . . . . . . . . . .     25,902      20,849   
  Deferred tax assets  . . . . . . . . . . . . . . .      1,081         695   
  Other current assets . . . . . . . . . . . . . . .      1,801       1,984   
                                                       --------    --------   
    Total current assets . . . . . . . . . . . . . .     29,031      23,737   

Property and equipment, net  . . . . . . . . . . . .      3,817       4,211   
Deferred tax assets  . . . . . . . . . . . . . . . .        678         793   
Intangible assets, net . . . . . . . . . . . . . . .      1,726       1,822   
Other assets . . . . . . . . . . . . . . . . . . . .      2,419       2,646   
                                                       --------    --------   
    Total assets . . . . . . . . . . . . . . . . . .   $ 37,671    $ 33,209   
                                                       ========    ========   
Liabilities and Stockholders' Investment                                      
Current liabilities:                                                          
  Bank notes payable . . . . . . . . . . . . . . . .   $  1,477    $      -   
  Accounts payable   . . . . . . . . . . . . . . . .     13,453      10,609   
  Accrued expenses   . . . . . . . . . . . . . . . .      4,569       4,235   
  Dividends payable  . . . . . . . . . . . . . . . .         87          86   
                                                       --------    --------   
    Total current liabilities  . . . . . . . . . . .     19,586      14,930   

Long-term debt . . . . . . . . . . . . . . . . . . .          -         351   
Deferred compensation  . . . . . . . . . . . . . . .      1,135       1,453   
                                                       --------    --------   
    Total liabilities  . . . . . . . . . . . . . . .     20,721      16,734   
                                                       --------    --------   
Commitments and contingencies                                                 

Stockholders' investment:                                                     
  Common stock, par value $.05 per share, authorized                          
    5,000,000 shares; issued and outstanding                                  
    2,181,540 shares in 2002 and 2,150,540 in 2001 .        109         107   
  Paid-in surplus  . . . . . . . . . . . . . . . . .      3,549       3,294   
  Retained earnings  . . . . . . . . . . . . . . . .     13,292      13,074   
                                                       --------    --------   
    Total stockholders' investment . . . . . . . . .     16,950      16,475   
                                                       --------    --------   
    Total liabilities and stockholders' investment .   $ 37,671    $ 33,209   
                                                       ========    ========   

The accompanying notes are an integral part of these financial statements.      

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                                                                [Download Table]
VSE Corporation and Subsidiaries                                                
Consolidated Financial Statements (Unaudited)                                   

Consolidated Statements of Income   For the three and six months ended June 30, 
--------------------------------------------------------------------------------
(in thousands, except share amounts)                                            

                                         Three Months             Six Months    
                                       2002        2001        2002        2001 
                                       ----        ----        ----        ---- 
                                                                                
Revenues, principally from                                                      
  contracts . . . . . . . . . . .  $  36,353   $  24,633   $  65,433   $  55,075

Costs and expenses of contracts .     35,835      24,010      64,651      53,958
                                   ---------   ---------   ---------   ---------
Gross profit  . . . . . . . . . .        518         623         782       1,117

Selling, general and administrative                                             
  expenses . . . . .                      35          64          63         113

Interest expense, net of interest                                               
  income  . . . . . . . . . . . .         29          14          46          29
                                   ---------   ---------   ---------   ---------
Income before income taxes  . . .        454         545         673         975

Provision for income taxes  . . .        180         211         280         385
                                   ---------   ---------   ---------   ---------
Net income  . . . . . . . . . . .  $     274   $     334   $     393   $     590
                                   =========   =========   =========   =========

Basic earnings per share:                                                       

Net income  . . . . . . . . . . .  $     .12   $     .16   $     .18   $     .28
                                   =========   =========   =========   =========
Basic weighted average shares                                                   
  outstanding                      2,173,790   2,130,863   2,163,826   2,128,720
                                   =========   =========   =========   =========

Diluted earnings per share:                                                     

Net income  . . . . . . . . . . .  $     .12   $     .16   $     .18   $     .28
                                   =========   =========   =========   =========
Diluted weighted average shares                                                 
  outstanding                      2,199,866   2,130,863   2,188,685   2,128,720
                                   =========   =========   =========   =========

The accompanying notes are an integral part of these financial statements.      

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                                                                [Download Table]
VSE Corporation and Subsidiaries                                                
Consolidated Financial Statements (Unaudited)                                   

Consolidated Statements of Stockholders' Investment                             
--------------------------------------------------------------------------------
(in thousands)                                                                  

                                  Common Stock    Paid-In   Retained    Treasury
                                Shares   Amount   Surplus   Earnings      Stock 
                                ------   ------   -------   --------      ----- 
                                                                                
Balance at                                                                      
  December 31, 2000 . . . .      2,198   $  110   $ 3,914   $ 12,561   $ (792)  

Net income                                                                      
  for the year  . . . . . .         --       --        --        855       --   

Issuance of                                                                     
  Treasury stock  . . . . .         --       --       (81)        --      220   

Retirement of                                                                   
  Treasury stock  . . . . .        (52)      (3)     (569)        --      572   

Issuance of stock . . . . .          4       --        30         --       --   

Dividends declared                                                              
  ($.16)  . . . . . . . . .         --       --        --       (342)      --   
                                 -----   ------   -------   --------   ------   
Balance at                                                                      
  December 31, 2001 . . . .      2,150      107     3,294     13,074       --   

Net income                                                                      
  for the period  . . . . .         --       --        --        393       --   

Issuance of stock . . . . .         31        2       255         --       --   

Dividends declared                                                              
  ($.08)  . . . . . . . . .         --       --        --       (175)      --   
                                 -----   ------   -------   --------   ------   
Balance at                                                                      
  June 30, 2002 . . . . . .      2,181   $  109   $ 3,549   $ 13,292   $   --   
                                 =====   ======   =======   ========   ======   

The accompanying notes are an integral part of these financial statements.      

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                                                                [Download Table]
VSE Corporation and Subsidiaries                                               
Consolidated Financial Statements (Unaudited)                                  

Consolidated Statements of Cash Flows         For the six months ended June 30,
-------------------------------------------------------------------------------
(in thousands)                                                                 


                                                              2002     2001    
                                                              ----     ----    
                                                                               
Cash flows from operating activities:                                          
 Net income    . . . . . . . . . . . . . . . . . . . . . .  $   393  $   590   
 Adjustments to reconcile net income to net cash                               
   (used in) provided by operating activities:                                 
     Depreciation and amortization . . . . . . . . . . . .      726      754   
     Loss on sale of property and equipment  . . . . . . .        9       26   
     Change in deferred compensation . . . . . . . . . . .     (191)     (48)  
     Change in deferred taxes  . . . . . . . . . . . . . .     (271)     (76)  
 Change in operating assets and liabilities:                                   
   (Increase) decrease in:                                                     
     Accounts receivable . . . . . . . . . . . . . . . . .   (5,053)     912   
     Other current assets and noncurrent assets  . . . . .      410     (537)  
   Increase (decrease) in:                                                     
     Accounts payable  . . . . . . . . . . . . . . . . . .    2,717   (2,230)  
     Accrued expenses  . . . . . . . . . . . . . . . . . .      334       40   
                                                            -------  -------   
       Net cash used in operating activities                   (926)    (569)  
                                                            -------  -------   
Cash flows from investing activities:                                          
  Purchase of property and equipment,                                          
    (net of dispositions)  . . . . . . . . . . . . . . . .     (245)    (800)  
                                                            -------  -------   
       Net cash used in investing activities                   (245)    (800)  
                                                            -------  -------   
Cash flows from financing activities:                                          
  Net proceeds from bank notes payable . . . . . . . . . .    1,126    1,338   
  Cash dividends paid  . . . . . . . . . . . . . . . . . .     (174)    (170)  
  Issuance of common stock . . . . . . . . . . . . . . . .      257      139   
                                                            -------  -------   
       Net cash provided by financing activities              1,209    1,307   
                                                            -------  -------   

Net increase (decrease) in cash and cash equivalents . . .       38      (62)  
  Cash and cash equivalents at beginning of period . . . .      209      647   
                                                            -------  -------   
  Cash and cash equivalents at end of period . . . . . . .  $   247  $   585   
                                                            =======  =======   

The accompanying notes are an integral part of these financial statements.      

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VSE CORPORATION AND SUBSIDIARIES                                                
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      
(Unaudited)                                                                     

Basis of Presentation                                                           

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of       
Regulation S-X.  Accordingly, they do not include all of the information and    
footnotes required by generally accepted accounting principles for complete     
financial statements.  In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have 
been included.  Operating results for the three and six month periods ended June
30, 2002 are not necessarily indicative of the results that may be expected for 
the year ending December 31, 2002.  For further information refer to the        
consolidated financial statements and footnotes thereto included in the VSE     
Corporation Annual Report on Form 10-K for the year ended December 31, 2001. The
company operates within one reportable segment.                                 

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.                               

Debt                                                                            

VSE has a revolving loan agreement with a bank on which the company can borrow  
up to $15 million, subject to a borrowing formula based on billed receivables.  
Under terms of the agreement, the company pays a fixed amount annual commitment 
fee and interest on any borrowings at a prime-based rate or an optional LIBOR-  
based rate. The expiration date of the revolving loan is May 31, 2003. The loan 
agreement contains collateral requirements by which company assets secure       
amounts outstanding, restrictive covenants that include minimum tangible net    
worth and profitability requirements, a limit on annual dividends, and other    
affirmative and negative covenants. This loan agreement replaced the previous   
loan agreement that had a maximum commitment of $30 million. The company        
determined that the new loan agreement was adequate to cover current and future 
liquidity requirements.  The amount borrowed under this loan agreement was      
approximately $1.5 million as of June 30, 2002.                                 

As of June 30, 2002, the loan expiration date was less than twelve months in the
future and is classified as a current obligation. VSE and the bank have agreed  
to extend the loan expiration date to a date further into the future, and VSE is
waiting for bank loan committee approval and is expecting formal documentation  
of this extension in August 2002.                                               

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VSE CORPORATION AND SUBSIDIARIES                                                
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      
(Unaudited)                                                                     

Due to the write off of a note receivable associated with the divestiture of a  
former VSE subsidiary company prior to year end 2000 and to certain operating   
losses, including losses associated with start-up costs of TTD and MSD, the     
company did not achieve the original minimum amount established in the          
profitability covenant for each quarter between December 31, 2000 and June 30,  
2002. The company and the bank have made amendments to the loan agreement during
2001 and 2002 to restate this covenant and as a result, the company is in       
compliance during 2000, 2001, and 2002.                                         

Earnings Per Share                                                              

Basic earnings per share has been computed by dividing net income available to  
common stockholders by the weighted average number of shares of common stock    
outstanding during each period. Shares issued during the period and shares      
reacquired during the period are weighted for the portion of the period that    
they were outstanding.  Diluted earnings per share have been computed in a      
manner consistent with that of basic earnings per share while giving effect to  
all potentially dilutive common shares that were outstanding during each period.

Litigation                                                                      

In June 2001 a personal injury lawsuit was filed against VSE, Astoria Metals    
Corporation (AAMC@), Ship Dismantlement and Recycling Joint Venture, Earth Tech,
Inc., and Tyco International Ltd. While the plaintiffs' complaint does not      
specify the amount of alleged damages suffered, the plaintiffs have provided the
defendants with a notice of damages aggregating approximately $20 million.  VSE 
provided notice of the suit to its insurance carrier, Travelers Insurance, which
is defending the company in this matter.  While there is no assurance, VSE      
believes that the resolution of the lawsuit will not have a material adverse    
effect on VSE's consolidated financial position or results of operations.       

The company and its subsidiaries have, in the normal course of business, certain
other claims against them and against other parties.  In the opinion of         
management, the resolution of these claims will not have a material adverse     
effect on the company=s results of operations or financial position.            

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VSE CORPORATION AND SUBSIDIARIES                                                
Management Discussion and Analysis                                              

Company Organization and Overview                                               

Company Organization                                                            

The term "VSE" or "company" refers to VSE and its subsidiaries and divisions    
unless the context indicates operations of the parent company only. VSE's       
business operations consist primarily of services performed by the company's    
wholly owned subsidiaries and divisions. Wholly owned subsidiaries include      
Energetics Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"),  
Ship Remediation and Recycling, Inc. ("SRR") and VSE Services International,    
Inc. ("VSI"). Unincorporated divisions include BAV Division ("BAV"), Coast      
Guard Division ("VCG") beginning in February 2002, Fleet Maintenance Division   
("Fleet Maintenance"), GSA Services Division ("GSA Services"), Ordnance Division
("Ordnance"), Value Systems Services Division ("VSS"), Telecommunications       
Technologies Division ("TTD"), and Land Systems Division ("Land Systems")       
beginning in February 2001, and Management Sciences Division ("MSD") beginning  
in December 2001. As of June 30, 2002, SRR, VSI, GSA Services, and Ordnance are 
not conducting any current business operations.  Currently, all work contracted 
under GSA schedules is performed directly by each of the operating divisions or 
subsidiaries.                                                                   

Several of the company's operating divisions were formed in recent years to bid 
on and perform contract work that had been previously performed by VSE (parent  
company). The formation of these divisions has enabled the company to use an    
operating structure that is better suited to perform certain types of contract  
work. The company anticipates that it will continue using its operating         
divisions to bid and perform new contract work to better serve the needs of     
customers.  Management believes that the use of operating divisions to perform  
future work and the associated improvements in servicing customers will better  
position the consolidated entity for future revenue growth.                     

Overview of Services                                                            

The company is engaged principally in providing engineering, design, logistics, 
management and technical services to the U.S. Government (the "government"),    
other government prime contractors, and commercial entities. The largest        
customer for the services rendered by the company is the U.S. Department of     
Defense ("Defense"), including agencies of the U.S. Army, Navy, and Air Force.  
BAV is a major player in providing logistics, training, and technical assistance
in support of the Navy's ship transfer program. Fleet Maintenance, Ordnance (in 
2001 and prior), and VSS also support the Navy by providing a variety of        
services including ship installation efforts, combat systems inspections, ship  
repair and overhaul availability planning, harpoon weapons management, ordnance 
alteration, air combat logistics, and outsourcing decision assistance. SRR (in  
2001 and prior) has provided environmentally sound solutions for the dismantling
and disposal of inactive ships. Land Systems provides the Army with engineering 
and technical support for ground weapons, logistics and training services,      
material procurement support, and prototype  development support for combat     
vehicles.  MSD provides the Army and                                            

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VSE CORPORATION AND SUBSIDIARIES                                                
Management Discussion and Analysis                                              

other government agencies and commercial organizations with quality training    
services for product, process, and management optimization.                     

VSE also provides services to other government agencies and industry. The       
company has provided support services to the U.S. Postal Service for over twenty
years and is continuing to support this customer through its HRSI subsidiary.   
Energetics is focused on providing the Department of Energy and other government
and industry customers with expert consulting services in environmental         
management and energy supply, resource management, and conservation. TTD markets
the company's capability to provide government and industry customers with the  
latest products, services, and support in network, multimedia, and audio-visual 
technology. This includes design, installation, management and support for a    
wide variety of voice, data, multimedia and related projects. These projects    
include facility security solutions and intelligent conference rooms which      
provide an ideal balance between technology and human interaction. VCG began    
providing logistics, training, and technical assistance support to the U.S.     
Coast Guard in February 2002.                                                   

Substantially all of the company's services are performed for its customers on  
a contract basis. The three primary types of contracts used are cost-type       
contracts, time and materials contracts, and fixed-price contracts. Revenues    
result from work performed on these contracts by the company's employees and    
from pass-through of costs for material and work performed by subcontractors.   
Revenues on cost-type contracts are recorded as contract allowable costs are    
incurred and fees earned. Profits on cost-type contracts are equal to the fees  
that are earned. Revenues for time and materials contracts are recorded on the  
basis of contract allowable labor hours worked times the contract defined       
billing rates, plus the cost of materials used in performance on the contract.  
Profits on time and material contracts result from the difference between the   
cost of services performed and the contract defined billing rates for these     
services. Revenues on fixed-price contracts are recorded as services are        
performed, using the percentage-of-completion method of accounting, primarily   
based on contract costs incurred to date compared with total estimated costs    
at completion. Profits on fixed-price contracts result from the difference      
between the costs of services performed and the revenue earned based on         
percentage-of-completion. Occasionally, VSE will perform contract work prior    
to receiving formal contractual coverage, based on preliminary approval of      
contract funding. VSE recognizes this "risk funding" as revenue when the        
associated costs are incurred or the work is performed.  As of June 30, 2002,   
VSE has recognized approximately $67 thousand in risk funding.                  

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VSE CORPORATION AND SUBSIDIARIES                                                
Management Discussion and Analysis                                              

                                                                [Download Table]
The following table sets forth certain items including consolidated revenues, 
pretax income and net income, and the changes in these items for the three and
six month periods ended June 30, 2002, and 2001 (in thousands):               

                                                                  2002        
                                                                Compared      
                                                                   to         
                                                                  2001        
                          Three Months        Six Months    ----------------  
                         Ended June 30,     Ended June 30,  Three      Six    
                         2002      2001     2002     2001   Months    Months  
                         ----      ----     ----     ----   ------    ------  
                                                                              
Revenues . . . . . . . $36,353  $24,633  $65,433  $55,075   $11,720   $10,358 

Pretax income  . . . . $   454  $   545  $   673  $   975   $   (91)  $  (302)
Provision for income                                                          
  taxes  . . . . . . .     180      211      280      385       (31)     (105)
                       -------  -------  -------  -------   -------   ------- 
Net income  . . .  . . $   274  $   334  $   393  $   590   $   (60)  $  (197)
                       =======  =======  =======  =======   =======   ======= 


The discussion and analysis that follow are intended to assist in understanding 
and evaluating the results of operations, financial condition, and certain other
matters of the company.                                                         

Results of Operations                                                           

Revenues increased by approximately 48% and 19% for the three and six month     
periods ended June 30, 2002, as compared to the same periods of 2001. The       
increase in revenues was primarily due to a significant increase in BAV's ship  
transfer and overhaul work (See "BAV Contract" below). Revenues also increased  
due to higher levels of subcontract pass-through work in Fleet Maintenance.     
These increases in revenue were partially offset by decreased revenues          
associated with the expiration of an Ordnance contract (see "Contract           
Expiration" below), and to a reduction in revenue associated with the company's 
decision to discontinue SRR's ship remediation and recycling efforts (See       
"Business Termination and New Business Start-ups" below).                       

Pretax income decreased by approximately 17% and 31%, respectively, for the     
three month and six month periods ended June 30, 2002, as compared to the same  
periods of 2001. The decrease in pretax income for these periods is primarily   
due to a reduction in profits in Land Systems due to losses on a certain        
contract and a temporary suspension of work on a program previously performed   
under the expired Ordnance contract, to larger losses in TTD, and to a non-     
recurring VSE sublease transaction that resulted in an addition to pre-tax      
income of $250,000 during the second quarter of 2001. The decrease in pretax    
income for these periods was partially offset by the elimination of losses in   
VSI and increased profits in Energetics. During the six month periods ended     
June 30, 2002, and 2001, VSE incurred losses on the operations of Fleet         
Maintenance and TTD. Estimated future losses have been reserved in Fleet        
Maintenance and cost reduction efforts have been implemented in TTD which       

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VSE CORPORATION AND SUBSIDIARIES                                                
Management Discussion and Analysis                                              

should help to reduce the losses in these divisions.  HRSI has operated at      
substantially break even. Other currently active divisions and subsidiaries of  
VSE remain profitable.                                                          

BAV does not recognize award fee until a contract modification authorizes such  
an amount.  As of June 30, 2002, BAV has recognized award fee based on a        
contract modification received for the period ending April 30, 2002.  The       
potential award fee associated in part with the increased revenues of BAV       
through June 30, 2002, will be recognized when the award fee period closes and  
the award fee contract modification is received during the fourth quarter of    
2002.                                                                           

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. Contract terms specify 
award fee payments to BAV that are determined by performance and level of       
contract activity. The contract accounted for approximately 49% and 37% of      
consolidated revenues from operations during the six month periods ended        
June 30, 2002 and 2001, respectively. Revenues on this contract increased by    
approximately 60% during the six months ended June 30, 2002 as compared to the  
same period of 2001, primarily due to work orders to support new client         
countries, including the Kingdom of Bahrain. The level of revenues and          
associated profits resulting from fee income generated by this contract varies  
depending on a number of factors including the timing of ship transfers and     
associated support services ordered by foreign governments and economic         
conditions of potential customers worldwide. The company has experienced        
significant quarterly and annual revenue fluctuations and anticipates that      
future quarterly and annual revenues will be subject to significant variations  
primarily due to changes in the level of activity on this contract.             

Contract Expiration. VSE's Ordnance Division had a contract with the U.S. Navy  
to provide program management and logistics services that expired in December   
2001. VSE re-bid and was awarded the successor contract in its Fleet Maintenance
Division. Future work under the successor contract will be conducted by Fleet   
Maintenance. This contract is a five year contract awarded in October 2001, and 
it has the potential to generate total revenues of approximately $72.5 million  
from 2001 through 2006. One program performed by Land Systems under the         
predecessor contract was not renewed under the new contract, and this work was  
not performed by the company during the first three months of 2002. The lapse in
contract coverage for this program resulted in a loss of revenue and profit for 
the company during this period. A subsequent contract was obtained in April of  
2002 and work on the program resumed.                                           

Business Termination and New Business Start-ups. VSE decided in 2001 to         
discontinue SRR's ship remediation and recycling efforts at the Hunters Point   
Shipyard in San Francisco, California, due to the limited business opportunities
associated with ship dismantlement work, due in part to an absence of any       
significant amount of government funding for these efforts. Profitability from  
the SRR work has been marginal for VSE. Concurrent with the                     

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VSE CORPORATION AND SUBSIDIARIES                                                
Management Discussion and Analysis                                              

decision to cease SRR operations, VSE formed MSD to offer government and        
commercial organizations quality training and product, process, and management  
optimization services.  In February 2002, VCG began work for the U.S. Coast     
Guard under a contract that has potential to generate total revenues of         
approximately $25.4 million over five years. VSE expects revenues from MSD and  
VCG to substantially offset the loss of revenues formerly generated by SRR, with
profit margins higher than the marginal profitability provided by SRR. The net  
effect of these events is expected to be favorable to the company's future      
revenue and profitability.                                                      

Government Procurement Policies and Practices                                   

VSE's business is subject to the risks arising from domestic economic conditions
and political factors that may impact the budgets and program funding of        
customers served through VSE's contracts. VSE's revenues have historically been 
subject to annual fluctuations resulting from changes in the level of Defense   
spending. Future budgetary and funding decisions by government lawmakers or     
Defense restructuring efforts could affect the types and level of services      
provided by VSE to its government customers and could potentially have a        
material adverse impact on the company=s results of operations or financial     
condition.                                                                      

The company's revenues depend on the ability of the company to win new contracts
and on the amount of work ordered by the government under the company's existing
contracts. The company's ability to win new contracts is affected by government 
acquisition policies and procedures, including government procurement practices 
that in recent years have tended toward bundling work efforts under large       
comprehensive ("omnibus") management contracts. This emphasis on large contracts
presents challenges to winning new contract work, including making it more      
difficult for the company to qualify as a bidder, increases in the level of     
competition due to the award of fewer contracts, and forcing the company into   
competition with larger organizations that have greater financial resources and 
larger technical staffs. Other government procurement practices that can affect 
the company's revenues are the use of past performance criteria that may        
preclude entrance into new government markets and government social programs    
that limit contract work to small, woman, or minority owned businesses.         
Additional risk factors that could potentially affect the company's results of  
operations are the government's right to terminate contracts for convenience,   
the government's right to not exercise all of the option periods on a contract, 
and funding delays caused by government political or administrative actions.    

Risk funding revenue recognized for the six month period ended June 30, 2002 is 
$67 thousand. VSE believes that it will receive formal contractual coverage for 
all of this risk funding revenue. If formal contractual coverage is not         
received, VSE is at risk of loss for any risk funding coverage not received.    

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VSE CORPORATION AND SUBSIDIARIES                                                
Management Discussion and Analysis                                              

Global Economic Conditions and Political Factors                                

VSE's business is subject to the risks arising from global economic conditions  
and political factors associated with current and potential foreign customers   
served through VSE's contracts with the U.S. Government and in particular, the  
BAV contract. An economic slowdown in countries served under the BAV contract   
could  potentially affect sales.  The international  conflict initiated by the  
terrorist attacks in New York and Washington, D. C. on September 11, 2001 and   
the continuing conflict in the Middle-East could potentially increase the       
political risks associated with BAV contract revenues. Failure by the government
of a potential foreign customer to approve and fund acquisition of U.S. Navy    
ships serviced under the BAV contract could affect sales. In any one year, a    
significant amount of the company's revenues may result from sales on the       
BAV contract to a single foreign government. Severe adverse results arising from
these global economic and political risks could potentially have a material     
adverse impact on the company's results of operations.                          

Financial Condition                                                             

VSE's financial condition did not change materially during the six month period 
ended June 30, 2002. The company's largest asset is its accounts receivable and 
its largest liabilities are its accounts payable and accrued expenses. Accounts 
receivable increased approximately 24% and accounts payable increased by        
approximately 27% at June 30, 2002 as compared to December 31, 2001 due         
primarily to an increase in BAV's business during 2002.                         

The net increase in total stockholder's investment in 2002 resulted from        
earnings and dividend activity.                                                 

Liquidity and Capital Resources                                                 

Cash Flows                                                                      

Cash and cash equivalents increased by approximately $38 thousand during the six
month period ended June 30, 2002. The increase in cash and cash equivalents     
during this period resulted from cash provided by financing activities of       
approximately $1.2 million, cash used in operating activities of approximately  
$900 thousand, and cash used in investing activities of approximately $200      
thousand. Significant financing activities included an increase of approximately
$1.1 million in bank loan borrowings. Cash flow used in operating activities was
primarily due to an increase in accounts receivable associated with the increase
in BAV work and losses incurred by TTD. Investing activities consisted of       
purchases of property and equipment, net of dispositions.                       

Cash and cash equivalents decreased by approximately $62 thousand during the six
month period ended June 30, 2001. Cash provided by financing activities was     
approximately $1.3 million. Cash used in investing activities was approximately 
$800  thousand  and  cash  used  in  operating  activities  was                 

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VSE CORPORATION AND SUBSIDIARIES                                                
Management Discussion and Analysis                                              

approximately $600 thousand. Significant financing activities included an       
increase of approximately $1.3 million in bank loan borrowings. Investing       
activities consisted of purchases of property and equipment, net of             
dispositions.                                                                   

The difference between cash used in operating activities of approximately $900  
thousand  in  2002  as compared  to  approximately  $600 thousand  in  2001 is  
primarily due to changes in the levels of accounts receivable and accounts      
payable and accrued expenses resulting from fluctuations in contract activity.  

Quarterly cash dividends at the rate of $.04 per share were declared during the 
six month  period ended  June 30, 2002.   Per its bank loan agreement, the      
payment of cash dividends by VSE is subject to a maximum annual rate.  VSE has  
paid cash dividends each year since 1973.                                       

Sources of Liquidity                                                            

The company's internal sources of liquidity result primarily from operating     
activities, specifically from changes in the level of revenues and associated   
accounts receivable from period to period and from profitability. Significant   
increases or decreases in revenue and accounts receivable can cause significant 
increases or decreases in internal liquidity. Accounts receivable arise         
primarily from billings made by the company to the government or other          
government prime contractors for services rendered and generally do not present 
collection problems. Accounts receivable levels can also be affected by contract
retainages, differences between the provisional billing rates authorized by the 
government compared to the costs actually incurred by the company, government   
delays in processing administrative paperwork for contract funding, and the     
timing of large materials purchases and subcontractor efforts used in           
performance on the company's contracts. An increase in accounts receivable      
associated with increased levels of work by BAV and generally slower collection 
of accounts receivables in TTD contributed to a decrease in internally generated
cash flows during this period. Internal liquidity is also affected by the       
acquisition of capital assets for office and computer support, facilities       
improvements, and by the payment of cash dividends. Purchases of capital assets 
for office and computer support and facilities improvements during the six      
months ended June 30, 2002 did not substantially affect internal liquidity.     

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   
"Notes to Consolidated Financial Statements".) The bank financing complements   
the internal sources of liquidity by providing increasing levels of borrowing   
capacity as accounts receivable levels increase. The bank loan agreement        
provided loan financing up to a maximum commitment of $15 million as of June 30,
2002.  This loan agreement replaced a previous loan agreement that had a maximum
commitment of $30 million. The company determined that the $15 million          
commitment was adequate to cover current and future liquidity requirements.     

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VSE CORPORATION AND SUBSIDIARIES                                                
Management Discussion and Analysis                                              

Performance of work under the BAV contract has the potential to cause           
substantial requirements for working capital; however, management believes that 
the cash flows from future operations and the bank loan commitment are adequate 
to meet current operating cash requirements.                                    

Inflation and Pricing                                                           

Most of the contracts performed by VSE provide for estimates of future labor    
costs to be escalated for any option periods provided by the contracts, while   
the non-labor costs included in such contracts are normally considered          
reimbursable at cost.  VSE property and equipment consists principally of       
computer systems equipment and furniture and fixtures.   The overall impact of  
inflation on replacement costs of such property and equipment is expected to be 
insignificant.                                                                  

Forward-Looking Disclosures                                                     

New Business                                                                    

In December 2001, VSE formed MSD to provide government and commercial           
organizations with quality training and product, process, and management        
optimization services. While VSE management expects MSD to provide only a       
minimal amount of revenue growth, profit margins on the type of work performed  
by MSD are expected to be higher than profit margins in other VSE operations,   
and therefore, should play a part in improving the future profitability of VSE  
operations. In February 2002, VSE formed VCG to provide logistics, training, and
technical assistance support to the U.S. Coast Guard under a new contract that  
has the potential to generate total revenue of approximately $25.4 million over 
five years.                                                                     

Goodwill and Other Intangible Assets                                            

In June 2001, the Financial Accounting Standards Board issued Statement of      
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"  
("SFAS No. 142"). SFAS No. 142 modifies the accounting rules governing goodwill 
and intangible assets. Under SFAS No. 142, goodwill will no longer be subject to
amortization over its estimated useful life and intangible assets with          
indefinite lives will no longer be amortized over an arbitrary number of years. 
The effective date for VSE's implementation of SFAS No. 142 is January 1, 2002. 
The adoption of SFAS No. 142 has not had a material impact, either positive or  
negative, on results of operations or financial condition.                      

Impairment or Disposal of Long-Lived Assets                                     

In September 2001, the Financial Accounting Standards Board issued Statement of 
Financial Accounting Standards No. 144, "Accounting for the Impairment or       
Disposal of Long-Lived Assets" ("SFAS No. 144").  SFAS No. 144 addresses        
financial  accounting  and  reporting for the impairment and disposal of long-  

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VSE CORPORATION AND SUBSIDIARIES                                                
Management Discussion and Analysis                                              

lived assets. The effective date for VSE's implementation of SFAS No. 144 is    
January 1, 2002. The adoption of SFAS No. 144 has not had a material impact,    
either positive or negative, on results of operations or financial condition.   

Disclosures About Market Risk                                                   

Interest Rates                                                                  

VSE's bank loan financing provides available borrowing to the company at        
variable interest rates. The company has not borrowed significant amounts on the
loan in recent years. Accordingly, the company does not believe that any move-  
ment in interest rates would have a  material impact on future earnings or      
cash flows. If VSE were to significantly increase borrowings on the current loan
arrangement, future interest rate changes could potentially have such a material
impact.                                                                         

Foreign Currency                                                                

While a significant amount of the company's business results from the services  
provided by BAV related to the transfer of ships to foreign governments, the BAV
contract payments are made to BAV by the U.S. Government in U.S. dollars.       
Additionally, most funding requirements to support work performed or services   
purchased in foreign countries are made in U.S. dollars, and the infrequent     
disbursements that are made in foreign currencies are reimbursable to BAV in    
post conversion dollars. Foreign currency transactions of other VSE divisions   
or subsidiaries are virtually non-existent. Accordingly, the company does not   
believe that it is exposed to any material foreign currency risk.               

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VSE CORPORATION AND SUBSIDIARIES                                                

PART II.   Other Information                                                    

Item 6.    Exhibits and Reports on Form 8-K.                                    

(a)  Exhibits.                                            

None.                                                 

(b)  Reports on Form 8-K.                                 

On May 21, 2002, the Registrant filed a Current Report on Form 8-K/A to amend   
the Current Report on Form 8-K dated May 17, 2002, as filed on May 17, 2002,    
for the purpose of adding Exhibit 16   Letter of Arthur Andersen LLP regarding  
change in certifying accountant to Item 7. Financial Statement and Exhibits.    

On May 17, 2002, the Registrant filed a Current Report on Form 8-K reporting    
Changes in Registrant's Certifying Accountant.  On May 15, 2002, on the         
recommendation of its Audit Committee, the Board of Directors dismissed Arthur  
Andersen LLP (Andersen) as VSE Corporation's (VSE's) independent public         
accountants and approved the selection of Ernst & Young LLP to serve as VSE's   
independent public accountants for the current fiscal year which ends on        
December 31, 2002.  The change in independent public accountants was effective  
immediately.                                                                    

Pursuant to the requirements of the Securities Exchange Act of 1934, the        
Registrant has omitted all other items contained in "Part II. Other Information"
because such other items are not applicable or are not required if the answer is
negative or because the information required to be reported therein has been    
previously reported.                                                            

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VSE CORPORATION AND SUBSIDIARIES                                                

SIGNATURES              

Pursuant to the requirements 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               

             /s/ C. S. Weber
Date:  July 25, 2002                   ______________________________________   
                                    C. S. Weber, Executive Vice President,
                                  Secretary, and Chief
                                    Administrative Officer

              /s/ T. R. Loftus
Date:  July 25, 2002                   ______________________________________   
                                  T. R. Loftus, Senior Vice President,
                                 and Chief Financial Officer
                                  (Principal Accounting Officer)

The financial information included in this report reflects all known adjustments
normally determined or settled at year-end which are, in the opinion of         
management, necessary to a fair statement of the results for the interim        
periods.  The accompanying notes to consolidated financial statements are an    
integral part of this report.                                                   

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Dates Referenced Herein and Documents Incorporated By Reference

		Referenced-On Page
This 10-Q Filing	Date	First	Last	Other Filings

	12/31/00	5	8	10-K405, 11-K, DEF 14A
	6/30/01	11	14	10-Q
	9/11/01	14
	12/31/01	2	14	10-K405, DEF 14A
	1/1/02	16	17
	4/30/02	12		10-Q
	5/15/02	18
	5/17/02	18		8-K
	5/21/02	18		8-K/A
For The Period Ended	6/30/02	1	15
Filed On / Filed As Of	7/25/02	1	19
	12/31/02	7	18	10-K, DEF 14A
	5/31/03	7

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Vse Corp · 10-Q · For 6/30/02

Filed On 7/25/02 1:07pm ET · SEC File 0-03676 · Accession Number 102752-2-13

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