VSE CORPORATION
2550 Huntington Avenue, Alexandria, Virginia 22303-1499
Notice of 2004
Annual Meeting of
Stockholders and
Proxy Statement
Fellow Stockholders:
You are cordially invited to attend the annual meeting of
stockholders of VSE Corporation to be held on Monday, May 3, 2004,
commencing at 10:00 a.m., Washington, D.C. time, at the VSE Corporation
Building, 2550 Huntington Avenue, Alexandria, Virginia 22303-1499. The
matters expected to be considered at the annual meeting are described in
the accompanying notice of meeting and proxy statement.
At the meeting we will also review the activities of the company
during the past year and its current activities. Stockholders will have an
opportunity to ask questions. I hope you will be able to join us.
To ensure that your VSE common stock is voted at the meeting, please
promptly sign and date the enclosed proxy card and return it to VSE in the
enclosed envelope. Your vote is important.
Please note the location for this meeting. The VSE Corporation
Building is located at 2550 Huntington Avenue, Alexandria, Virginia
22303-1499, just off I-95/I-495 at Exit 176 (Telegraph Road - South). The
building is also within walking distance of the Huntington Avenue Metro
Station (Yellow Line), using the Lower Level exit to Huntington Avenue.
Very truly yours,
VSE CORPORATION
/s/ D. M. Ervine
D. M. Ervine
Chairman, President, CEO and COO
April 2, 2004
VSE CORPORATION
2550 Huntington Avenue, Alexandria, Virginia 22303-1499
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 3, 2004
To the Stockholders of VSE Corporation:
Notice is hereby given that the annual meeting of stockholders of
VSE Corporation, a Delaware corporation ("VSE"), will be held on
Monday, May 3, 2004, commencing at 10:00 a.m., Washington, D.C. time, at
the VSE Corporation Building, 2550 Huntington Avenue, Alexandria, Virginia
22303-1499, for the following purposes:
1. To elect eight directors to serve until the next annual meeting
of stockholders and until their successors are duly elected and
qualified;
2. To ratify the appointment of Ernst & Young LLP as VSE's
independent certified public accountants for the year ending
December 31, 2004;
3. To approve the adoption of the VSE Corporation 2004 Stock Option
Plan;
4. To approve the adoption of the VSE Corporation 2004 Directors
Stock Plan; and
5. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only record holders of VSE common stock as of the close of business
on March 19, 2004, will be entitled to notice of, and to vote at, the
meeting or any adjournments thereof. The list of stockholders entitled to
vote at the meeting or any adjournments thereof will be open to the
examination of any stockholder during the 10 days prior to the meeting at
VSE's offices located at 2550 Huntington Avenue, Alexandria, Virginia
22303-1499, during ordinary business hours.
The VSE Corporation 2003 Annual Report to Stockholders, which
contains consolidated financial statements and other information of
interest to stockholders, accompanies this proxy material.
Even if you expect to attend the meeting, please promptly complete,
sign, date and return the enclosed proxy. To return your proxy you may use the
self-addressed STAMPED envelope. If you attend the meeting, you may, if you
wish, withdraw your proxy and vote your shares personally.
By Order of the Board of Directors
/s/ C. S. Weber
C. S. Weber, Secretary
April 2, 2004
VSE CORPORATION
PROXY STATEMENT
Annual Meeting of Stockholders
to be held on May 3, 2004
INTRODUCTION
General
This proxy statement is being furnished to the stockholders of VSE
Corporation, a Delaware corporation ("VSE"), in connection with the solicitation
of proxies by VSE's board of directors (the "Board") for use at VSE's annual
meeting of stockholders to be held on Monday, May 3, 2004, commencing at 10:00
a.m., Washington, D.C. time, at the VSE Corporation Building, 2550 Huntington
Avenue, Alexandria, Virginia 22303-1499, and at any adjournments thereof for the
purposes specified in the accompanying notice of meeting (the "Meeting").
The mailing address of VSE's principal executive office is 2550 Huntington
Avenue, Alexandria, Virginia 22303-1499. VSE's telephone number is
(703) 960-4600. This proxy statement and the accompanying notice and form of
proxy are first being sent or given to the holders of VSE common stock, par
value $.05 per share (the "stockholders"), on or about April 2, 2004.
The close of business on March 19, 2004, is the record date for the
determination of stockholders entitled to notice of, and to vote at, the
Meeting. Holders of a majority of VSE's outstanding common stock, par value
$.05 per share (the "Stock" or "VSE Stock"), as of March 19, 2004, must be
present at the Meeting, either in person or represented by proxy, to
constitute a quorum for the transaction of business at the Meeting. As of the
close of business on March 19, 2004, there were 2,218,886 shares of Stock
outstanding and approximately 290 stockholders of record. Each stockholder
is entitled to one vote for each share of Stock held of record as of the close
of business on March 19, 2004, on all matters which may be submitted to the
stockholders at the Meeting.
Voting and Revocation of Proxies
All Stock represented by valid proxies will be voted at the Meeting in
accordance with the directions on the proxies. If no direction is indicated on
a proxy, the Stock represented thereby will be voted as recommended by the
Board, including for (a) the election as VSE directors of the eight nominees
listed below under "Election of Directors," (b) the ratification of the
appointment of Ernst & Young LLP as VSE's independent certified public
accountants for the year ending December 31, 2004 as discussed below under Item
2; (c) the adoption of the VSE Corporation 2004 Stock Option Plan, as discussed
below under Item 3; and (d) the adoption of the VSE Corporation 2004 Directors
Stock Plan, as discussed below under Item 4.
Votes cast by proxy or in person at the Meeting will be tabulated by the
inspectors of election appointed for the Meeting. The inspectors of election
will treat abstentions as Stock that is present and entitled to vote for
purposes of determining the presence of a quorum, but as unvoted for purposes
of determining the approval of any matter submitted to stockholders for a vote.
If a broker indicates on a proxy that such broker does not have discretionary
authority as to certain Stock to vote on a particular matter, such shares will
be included in determining the presence of a quorum, but will not be entitled
to be voted with respect to such matter.
As of the date of this proxy statement, the Board does not intend to
present, and has not been informed that any other person intends to present,
any matter for action at the Meeting other than those matters specifically
referred to herein. If, however, any other matters are properly presented to
the Meeting for action, the proxy holders will vote the proxies, which confer
authority on such holders to vote on such matters, in accordance with their
best judgment. The persons named as attorneys-in-fact in the proxies are VSE
officers.
A stockholder returning a proxy to VSE may revoke it at any time before it
is exercised by granting a later proxy with respect to the same Stock or by
communicating such revocation in writing to VSE's secretary. In addition, any
stockholder who has executed a proxy but attends the Meeting may cancel a
previously given proxy by voting in person whether or not the proxy has been
revoked in writing.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Stock as of March 19, 2004 based on VSE records, information filed
with the Securities and Exchange Commission (the "SEC"), and information
provided to VSE. The voting and investment powers of the Stock listed below are
held solely by the reported owner unless otherwise indicated.
Shares beneficially Percent of
Name of Beneficial Owner owned class
------------------------- ------------------- ----------
Certain Beneficial Owners
-------------------------
VSE Corporation Employee
ESOP/401(k) Plan (a) 310,448 14.0%
Non-employee Directors
----------------------
Clifford M. Kendall (b) 27,515 1.2%
Calvin S. Koonce (b) (c) 522,764 23.5%
James F. Lafond (b) 457 *
David M. Osnos (b) 5,375 *
Jimmy D. Ross (b) 9,615 *
Bonnie K. Wachtel (b) 32,433 1.5%
Executive Officers and Other Directors
--------------------------------------
Thomas G. Dacus (b) 3,345 *
Donald M. Ervine (b) 107,724 4.7%
Robert J. Kelly (b) 2,500 *
James M. Knowlton (b) 55,874 2.5%
Thomas R. Loftus (b) 22,024 1.0%
Craig S. Weber (b) 77,060 3.4%
Group
-----
Directors, Nominees, and
Executive Officers as a group
(12 persons) (b) (d) 866,686 36.9%
* Represents less than one percent.
(a) These shares are held in trust for the benefit of the ESOP/401(k) Plan
participants. Two VSE officers serve as Plan trustees. The Plan
participants have voting power over 247,712 shares allocated to their
respective ESOP accounts, while the Plan trustees share voting and
investment power over the remaining 62,736 shares. The mailing address for
the ESOP/401(k) Plan is 2550 Huntington Avenue, Alexandria, Virginia
22303-1499.
(b) Includes the following number of shares of Stock which the non-employee
directors, executive officers, other directors, and all directors,
nominees, and executive officers as a group (12 persons) have the right to
purchase pursuant to the exercise of stock options which are exercisable
within the next 60 days: Clifford M. Kendall 1,688, James F. Lafond 188,
each of Calvin S. Koonce, David M. Osnos, Jimmy D. Ross, and Bonnie K.
Wachtel 2,625, Thomas G. Dacus 3,250, Donald M. Ervine 53,000, Robert J.
Kelly 2,500, James M. Knowlton 26,375, Thomas R. Loftus 14,125,
Craig S. Weber 18,750, and all directors, nominees, and executive officers
as a group (12 persons) 130,376.
(c) Mr. Koonce's mailing address is 6550 Rock Spring Drive, Suite 600,
Bethesda, Maryland 20817. Includes 57,650 shares held in brokerage
accounts for which Mr. Koonce has discretionary authority.
(d) The group consists of 12 persons. The 866,686 shares beneficially owned
include 62,736 shares beneficially owned or controlled by the trustees of
the ESOP/401(k) Plan.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), requires VSE officers and directors and persons who own more than 10% of
VSE's Stock to file reports of ownership and changes in ownership with the SEC.
Such officers, directors and stockholders are required by SEC regulations to
furnish VSE with copies of all such reports that they file. Based solely on a
review of copies of reports filed with the SEC and written representations by
certain officers and directors, VSE believes that all persons subject to the
reporting requirements of Section 16(a) filed their reports on a timely basis,
except that one Form 3 reporting no holdings of VSE Stock for James F. Lafond,
who was appointed a VSE director on September 2, 2003, was inadvertently not
filed until November 17, 2003.
Item No. 1
----------
ELECTION OF DIRECTORS
Nominees
At the Meeting, stockholders will elect, by a plurality of the votes cast,
eight VSE directors, who will constitute the entire Board. Each nominee listed
below is currently serving as a VSE director and was elected by the stockholders
at the last annual meeting of stockholders, except for James F. Lafond who was
appointed by the Board on September 2, 2003. Each nominee elected as a director
will serve until the next annual meeting of stockholders and until his or her
successor is elected and qualified. If any nominee should become unable to serve
for any reason, the proxies will be voted for such substitute nominee as shall
be designated by the Board.
The eight nominees for election as VSE directors and certain information
regarding them are as follows:
Name and Principal Occupation Age Director since
----------------------------- --- --------------
David M. Osnos 72 1968
Of counsel (previously senior partner) at Arent Fox PLLC,
attorneys-at-law (for more than the past five years);
also a director of EastGroup Properties, Inc., and
Washington Real Estate Investment Trust.
Donald M. Ervine 67 1987
VSE Chairman of the Board and Chief Executive Officer since
1992. Also appointed President and Chief Operating Officer
in March 2002.
Bonnie K. Wachtel 48 1991
Vice President and General Counsel, Wachtel & Co., Inc.,
Brokers and Underwriters (for more than the past five
years). Also a director of Integral Systems Inc. and
Information Analysis Inc.
Calvin S. Koonce 66 1992
Chairman, Koonce Securities, Inc., a securities
broker/dealer firm (for more than the past five years).
Jimmy D. Ross 67 1994
General, U.S. Army (Ret.), formerly Commanding General,
U.S. Army Materiel Command. General Ross is a senior
logistics consultant for, and from 2000 to 2003 was an
executive officer of, Cypress International, Inc., a defense
business development consulting firm. From 1994 to 1998 he
served as Senior Vice President and in 1999 as Chief
Operating Officer of the American Red Cross.
Robert J. Kelly 66 1996
Admiral, U.S. Navy (Ret.), formerly Commander in Chief,
U.S. Pacific Fleet. Admiral Kelly has served as Chairman
of the Board of Energetics Incorporated, a VSE subsidiary
("Energetics"), since August 1995, and as President of
Energetics since March 1999.
Clifford M. Kendall 72 2001
Private Investor. Mr. Kendall is Chairman of the Board of
Regents of the University System of Maryland and a director
of Washington Real Estate Investment Trust. Mr. Kendall was
one of the founders of Computer Data Systems, Inc. in 1968,
and he served as its Chairman and Chief Executive Officer
from 1970 to 1991 and as Chairman until December 1997.
James F. Lafond 61 2003
Retired executive and certified public accountant. From 1998
to 2002, Mr. Lafond was Washington Area Managing Partner,
Pricewaterhouse-Coopers LLP. He previously served in various
leadership positions at Coopers & Lybrand (1964 to 1998).
He is a director of WGL Holdings, Inc., and was from
October 24, 2002, to March 31, 2004, a director of IWT
Tesoro Corporation.
Board of Directors, Committees and Corporate Governance
There are currently eight members of our Board. With the exception of
Mr. Ervine, who serves as VSE's Chairman, President, Chief Executive Officer
and Chief Operating Officer, and Admiral Kelly, all of our current directors are
"independent" as defined by the applicable rule of The NASDAQ Stock Market, Inc.
("NASDAQ"). The independent directors regularly have the opportunity to meet
without Mr. Ervine and Admiral Kelly in attendance. During the last fiscal year,
there were six regular Board meetings and one special Board meeting, and no
director attended (during the period which he or she was a director) less than
75% of the aggregate of (a) the total number of Board meetings (in person or by
telephone) and (b) meetings of Board committees on which he or she served
(during the period that he or she served). VSE does not have a specific policy
regarding attendance at the annual stockholders meeting. All directors, however,
are encouraged to attend if available, and VSE tries to ensure that at least one
independent director is present at the annual stockholder meetings and available
to answer any stockholder questions. At last year's annual stockholders meeting
five directors, including three independent directors, were present.
The Board has an Audit Committee, a Nominating and Corporate Governance
Committee, a Compensation Committee, a Finance Committee and a Planning
Committee. The current charters of the Audit Committee, Nominating and Corporate
Governance Committee and Compensation Committee are available on VSE's Internet
site, www.vsecorp.com.
Audit Committee. The primary purpose of the Audit Committee is to oversee
VSE's accounting and financial reporting processes and the audits of its
financial statements. The Audit Committee is directly responsible for, among
other things, the appointment, compensation, retention and oversight of the
Company's independent auditors. A copy of the Audit Committee's charter, which
specifies the other responsibilities and powers of the committee, is attached as
Appendix A to this Proxy Statement.
During the past fiscal year, the Audit Committee was composed of Mr. Lafond
(Chairman and a member since October 27, 2003), Mr. Kendall, Mr. Koonce, General
Ross and Ms. Wachtel. Effective as of the Meeting, the Audit Committee will be
composed of Mr. Lafond (Chairman), Mr. Kendall and Ms. Wachtel. All of the Audit
Committee members during the past fiscal year, and all of the members who will
be appointed for the current fiscal year, are independent in accordance with
applicable rules of the SEC and NASDAQ. Mr. Koonce, however, by virtue of his
beneficial ownership of VSE Stock is considered an "affiliated person" of VSE
and is not considered an independent member of the Audit Committee within the
meaning of Exchange Act Section 10A-3(b)(1)(ii). Effective as of the Meeting,
Mr. Koonce will no longer be an Audit Committee member. Each member is able to
read and understand fundamental financial statements, including the Company's
balance sheet, income statement and cash flow statement. The Board has
determined that Mr. Lafond is an "audit committee financial expert" as defined
in Exchange Act Regulation S-K Item 401(h). During 2003, the Audit Committee
met four times.
Compensation Committee. The primary purpose of the Compensation Committee
is to recommend to the Board the compensation to be paid to the Company's Chief
Executive Officer and review the salaries and bonuses of VSE's other officers.
The committee also administers the Company's stock option plans and meets either
independently or in conjunction with the full Board to grant options to eligible
individuals in accordance with the respective plans. Awards, however, of
discretionary stock option grants approved by the Compensation Committee are
subject to ratification by the Board. During the past fiscal year, the
Compensation Committee was composed of General Ross (Chairman), Mr. Kendall, Mr.
Koonce and Ms. Wachtel, and effective as of the Meeting the Compensation
Committee will be composed of General Ross (Chairman), Mr. Kendall and Mr.
Koonce. Each of the committee members is independent in accordance with
applicable NASDAQ rules. During the last fiscal year, the Compensation Committee
met three times.
Nominating and Corporate Governance Committee. The primary purpose of the
Nominating and Corporate Governance Committee is to make recommendations to the
Board with respect to nominees to be proposed for election as directors and with
corporate policies regarding, among other things, business conduct, securities
trading, indemnification of VSE officers and directors, and conflicts of
interest involving VSE officers, directors, and employees. During the past
fiscal year the Committee was composed of Admiral Kelly and Mr. Osnos. Effective
as of the Meeting, the Committee will be composed of Mr. Kendall (Chairman),
Mr. Lafond, Mr. Osnos, Mr. Koonce, General Ross and Ms. Wachtel, all of whom are
independent in accordance with applicable NASDAQ rules. During 2003, the
Committee met four times.
Finance Committee. The Finance Committee is primarily concerned with making
recommendations to the Board with respect to VSE's capitalization and long-term
funding requirements. The Committee is composed of Mr. Osnos (Chairman), Mr.
Ervine, Mr. Koonce and Ms. Wachtel. The Finance Committee met once during 2003.
Planning Committee. The Planning Committee is primarily concerned with
making recommendations to the Board with respect to business development
opportunities, including acquisitions. The Committee is composed of Mr. Ervine
(Chairman), Admiral Kelly, Mr. Koonce and General Ross and effective as of the
Meeting will be composed of such members and Mr. Lafond and Ms. Wachtel. The
Planning Committee met once during 2003.
Director Nominations and Qualifications. Stockholders of VSE may recommend
persons to be nominated for election as directors of VSE at the annual meeting
of stockholders. To be considered, such recommendation must be submitted in
accordance with VSE's by-laws and must be received in writing by the secretary
of VSE no later than 90 days before the date in the current year which
corresponds to the date on which the meeting was held during the immediate prior
year. Such recommendation shall be accompanied by the name of the stockholder
proposing the candidate, evidence that such stockholder is a beneficial owner of
VSE Stock, the name of candidate being proposed for nomination, and the
candidate's biographical data and qualifications.
The policy of the Nominating and Corporate Governance Committee is to
consider properly submitted stockholder nominations for candidates for Board
membership as described below. In evaluating such nominations, the Nominating
and Corporate Governance Committee seeks to achieve a balance of knowledge,
experience and capability on the Board and to address the membership criteria
discussed below.
Under these criteria for Board nominations, Board members should have the
highest professional and personal ethics and values, consistent with
longstanding VSE values and standards. They should have broad experience at the
policy-making level in business, government, education, technology or public
interest. They should be committed to enhancing stockholder value and should
have sufficient time to carry out their duties and to provide insight and
practical wisdom based on experience. Their service on other boards of public
companies should be limited to a number that permits them, given their
individual circumstances, to perform responsibly all director duties. Each
director must represent the interests of all stockholders.
The Nominating and Corporate Governance Committee utilizes a variety of
methods for identifying and evaluating nominees for director. Such Committee
periodically assesses the appropriate size of the Board, and whether any
vacancies on the Board are expected due to retirement or otherwise. If vacancies
are anticipated, or otherwise arise, the Nominating and Corporate Governance
Committee will consider various potential candidates for director. Candidates
may come to the attention of the Nominating and Corporate Governance Committee
through current Board members, professional search firms, stockholders or other
persons. These candidates are evaluated at regular or special meetings of the
Nominating and Corporate Governance Committee, and may be considered at any
point during the year. As described above, the Nominating and Corporate
Governance Committee will consider properly submitted stockholder nominations
for candidates for the Board. Following verification of the stockholder status
of persons proposing candidates, recommendations will be aggregated and
considered by the Nominating and Corporate Governance Committee at a regularly
scheduled meeting. If any materials are provided by a stockholder in connection
with the nomination of a director candidate, such materials will be forwarded to
the Nominating and Corporate Governance Committee. Such Committee also will
review materials provided by professional search firms or other parties in
connection with a nominee who is not proposed by a stockholder. In evaluating
such nominations, the Nominating and Corporate Governance Committee seeks to
achieve a balance of knowledge, experience and capability on the Board. The
Committee has not in the past retained any third party to assist in identifying
nominees for Board membership.
Lead Independent Director
The Board has established the position of Lead Independent Director, effective
as of the Meeting. The Lead Independent Director will assist the Chairman and
the other Board members in assuring effective corporate governance. Mr. Kendall,
who effective as of the Meeting will also serve as Chairman of the Nominating
and Corporate Governance Committee, was appointed to serve as the Lead
Independent Director.
Communications with the Board
Individuals may communicate with the Board by submitting an e-mail to VSE's
Board at board@vsecorp.com. All directors have access to this e-mail address.
Communications that are intended specifically for non-management directors
should be sent to the e-mail address above to the attention of the Chair of the
Nominating and Corporate Governance Committee. Communication to the Board by
mail can be addressed to The Board of Directors or a particular Board member
c/o VSE Corporation, 2550 Huntington Avenue, Alexandria, Virginia 22303-1499.
Code of Business Conduct and Ethics
The Board has adopted a Code of Business Ethics and Conduct that applies
to all of its directors, officers, including principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, and employees. The Code is posted on VSE's
Internet website www.vsecorp.com. VSE intends to satisfy the disclosure
requirements under Item 10 of Exchange Act Form 8-K regarding any waiver or
amendment of the Code with respect to VSE's principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, by posting such required information on
VSE's Internet website.
Compensation of Directors
During 2003 each non-employee director was compensated at an annual rate
of $17,200, prorated in the event of a partial year of service. Directors who
are VSE employees receive no additional compensation for service as a director.
In addition, no compensation is paid to a director for personal services
rendered to VSE pursuant to a consulting services agreement between the director
and VSE, or any of VSE's subsidiaries unless authorized as a special assignment
by the Board. No such authorization was requested for or on behalf of any
director in 2003. The foregoing procedures do not restrict reimbursement for
expenses incurred by a director for attending meetings of the Board or its
authorized committees.
Each non-employee director, including each of the non-employee directors
named in the foregoing table, is granted, as of January 1 each year, a
nondiscretionary five-year option to purchase up to 750 shares of VSE Stock (750
shares represents the maximum number of shares which may be covered by options
issued annually to each non-employee director pursuant to the VSE Corporation
1998 Stock Option Plan). Each option is vested 25% on the date of the grant and
on each of the first three successive anniversary dates of the date of grant
(100% vested after three years). The option price per share for each
nondiscretionary grant is not less than the fair market value of VSE Stock as of
the date the option is awarded. See "Security Ownership of Certain Beneficial
Owners and Management" above for further information on the stock options held
by each VSE director.
Pursuant to the VSE Corporation 1998 Non-employee Directors Stock Plan (the
"Directors Stock Plan"), each non-employee director has the ability to elect
that payment of all or a portion of his or her annual compensation for service
as a VSE director ($17,200 per year) be paid in VSE Stock at fair market value
determined in accordance with the Directors Stock Plan. For 2003 each of Mr.
Kendall, Mr. Koonce, Mr. Lafond, General Ross, and Ms. Wachtel elected to have
60% of his or her annual compensation paid in VSE Stock.
Increase in Compensation of Directors
Effective January 1, 2004, each non-employee director is compensated at an
annual rate of $20,000, and the Chairman of the Audit Committee is additionally
compensated at an annual rate of $5,000, with payment of all such fees prorated
in the event of a partial year of service. Also, if the stockholders approve the
VSE Corporation 2004 Stock Option Plan at the Meeting, each non-employee
director (currently Messrs. Kendall, Koonce, Lafond and Osnos, General Ross, and
Ms. Wachtel), will be granted, as of January 1 each year commencing with
January 1, 2005, a nondiscretionary five-year option to purchase up to 1,000
shares of VSE Stock (1,000 shares represents the maximum number of shares which
may be covered by options issued annually to each non-employee director pursuant
to either or both of the VSE Corporation 1998 and 2004 Stock Option Plans). Each
option will vest 25% on the date of the grant and on each of the first three
successive anniversary dates of the date of grant (100% vested after three
years). The option price per share for each nondiscretionary grant is not less
than the fair market value of VSE Stock as of the date the option is granted.
See "Security Ownership of Certain Beneficial Owners and Management" above for
further information on the stock options held by each VSE director.
Certain Relationships and Related Transactions
Pursuant to an agreement dated as of October 21, 1998, Donald M. Ervine
serves as the Chief Executive Officer of VSE at a base salary of $270,000 per
annum. Mr. Ervine is employed for a term ending on January 1, 2005, subject to
automatic extensions for successive one-year periods unless notice to terminate
is given by Mr. Ervine at least 90 days prior to the expiration of the term or
any such one-year extension of the term. Mr. Ervine's base salary is subject to
review in January of each year, provided that the base salary shall not be less
than $254,000 per annum. Mr. Ervine is also eligible to receive an annual
performance bonus each year as determined by the Board or its Compensation
Committee. Mr. Ervine's employment may be terminated by the Board for willful
and gross misconduct and in the case of death or disability which prevents Mr.
Ervine from substantially fulfilling his duties for a period in excess of six
months. If Mr. Ervine's employment is terminated because of death or illness
or disability, he or his beneficiary, as the case may be, will be paid his
annual base salary then in effect for one full year from the date of death or
disability. Mr. Ervine's employment may also be terminated without cause on 60
days prior notice and on payment of a lump sum severance compensation payment
equal to two times his annual base salary then in effect. The agreement includes
a covenant by Mr. Ervine not to be involved, directly or indirectly, in a
business enterprise that competes with VSE during the term of his employment and
for two years thereafter. Under the terms of the agreement, Mr. Ervine will be
nominated to serve as a director and will be elected Chairman of the Board
during the term of his employment. If a change of control of VSE, as defined,
occurs, Mr. Ervine may terminate the agreement and will be entitled to a lump
sum severance compensation payment equal to three times his annual base salary
then in effect.
Pursuant to an agreement dated as of January 15, 1999, Admiral Robert J.
Kelly, U.S. Navy (Ret.), serves as President and Chief Operating Officer of
Energetics Incorporated ("Energetics"), a wholly owned subsidiary of VSE.
Admiral Kelly is employed for a term ending on January 1, 2005, subject to
automatic extensions for successive one-year periods unless notice to terminate
is given by either Admiral Kelly or VSE at least 90 days prior to the expiration
of the term or any such one-year extension of the term. Other terms and
conditions of Admiral Kelly's agreement are substantially similar to those of
Mr. Ervine's 1998 agreement, including change of control rights, except that
Admiral Kelly is employed at a minimum base salary of $166,000 per annum, and
will be nominated as a director of VSE and of Energetics during the term of the
agreement.
Pursuant to separate agreements entered into in December 1997 and expiring
on January 1, 2005, subject to automatic extensions for successive one-year
periods unless notice to terminate is given at least 90 days prior to the
expiration of the term or any such one-year extension of the term, Mr. Knowlton
and Mr. Weber each have agreements with VSE to continue to serve in the
executive officer's current or in a comparable capacity. The terms and
conditions in the executive officer agreements are similar to those of Mr.
Ervine's 1998 agreement except that (a) each of the executive officers is
employed at a minimum base salary equal to the executive officer's annual base
salary in effect on the date the agreement was signed, subject to annual and
special reviews, (b) each of the executive officers will be reappointed to serve
in the executive officer's current or comparable capacity, (c) in the event of
termination without cause, each executive officer's lump sum severance
compensation payment shall equal his or her annual base salary then in effect,
and (d) in the event of a change of control of VSE, as defined, each executive
officer may terminate the agreement and will be entitled to a lump sum severance
compensation payment equal to two times his annual base salary then in effect.
Pursuant to an agreement dated as of March 10, 2004, Thomas G. Dacus serves
as Senior Vice President and Director of the VSE Federal Group. Mr. Dacus is
employed for a term ending on December 31, 2006, subject to automatic extensions
for successive one-year periods unless notice to terminate is given by either
Mr. Dacus or VSE at least 90 days prior to the expiration of the term or any
such one-year extension of the term. Other terms and conditions of Mr. Dacus's
agreement are substantially similar to those of Mr. Ervine's 1998 agreement
except that (a) Mr. Dacus is employed at a minimum base salary of $150,280 per
annum, (b) he will be assigned only the duties of the type, nature, and dignity
normally assigned to Group Directors, (c) in the event of termination without
cause, he will receive a lump sum severance compensation payment equal to one
times his annual base salary then in effect, and (d) in the event of a change of
control of VSE, as defined, he may terminate the agreement and will be entitled
to a lump sum severance compensation payment equal to one times his annual base
salary then in effect.
There is no family relationship between any director or executive officer
of VSE and any other director or executive officer of VSE.
The law firm of Arent Fox PLLC, of which Mr. Osnos is of counsel, has
represented and is expected to continue to represent VSE on various legal
matters.
VSE and the trustees of its employee benefit plans have in the past
effected certain of their transactions in VSE Stock through Wachtel & Co., Inc.,
of which Ms. Wachtel is a director, officer and shareholder, and through Koonce
Securities, Inc., which is wholly owned by Mr. Koonce. No transactions in VSE
Stock occurred with Wachtel & Co., Inc. or Koonce Securities, Inc. in 2003.
The Board recommends a vote FOR the proposal to elect each of the eight
persons nominated to serve as a director of VSE for the ensuing year, as
discussed above, and your proxy will be so voted unless you specify otherwise.
Item No. 2
----------
APPOINTMENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Based on the recommendation of its Audit Committee, the Board has appointed
the firm of Ernst & Young LLP to be VSE's independent certified public
accountants for the year ending December 31, 2004, and recommends to
stockholders that they vote for ratification of that appointment. Although not
required to do so, the Board has determined that it would be desirable to
request stockholders' approval of this appointment. The ratification of the
appointment of VSE's independent certified public accountants will require the
affirmative vote by the holders of a majority of the outstanding Stock present
in person or represented by proxy at the Meeting. If such approval is not
received, the Board will reconsider the appointment.
In 2003 and 2002 Ernst & Young LLP services included an examination of
VSE's consolidated financial statements and the financial statements of certain
subsidiaries and benefit plans and reviews of the consolidated financial
statements included in VSE Form 10-Qs filed with the SEC for each of the
quarters ended March 31, June 30, and September 30.
Ernst & Young LLP billed VSE for professional services rendered for the
years ended December 31, 2003 and December 31, 2002, as follows:
2003 2002
---- ----
Audit fees . . . . . . . . . . . . . $151,500 (1) $118,000 (1)
Audit related fees . . . . . . . . . $ 15,493 (2) $ 15,000 (2)
Tax fees and all other fees . . . . . $ -0- $ -0-
_______________
(1) Includes fees for reviews of quarterly consolidated financial
statements included in VSE Form 10-Qs filed with the SEC.
(2) Includes employee benefit plan audit.
The Audit Committee pre-approves all audit and non-audit services provided
by the independent auditors prior to their engagement with respect to such
services. The Audit Committee has delegated to the Chairman of the Audit
Committee the authority to pre-approve additional audit-related and non-audit
services not prohibited by law to be performed by VSE's independent auditors and
associated fees up to a maximum for any one non-audit service equal to the
lesser of $30,000 or 25% of the audit fees for VSE's most recent completed
fiscal year, provided that the Chair shall report any decisions to pre-approve
such audit-related or non-audit services and fees to the full Audit Committee
at its next regular meeting.
A representative of Ernst & Young LLP is expected to attend the Meeting,
will have an opportunity to make a statement, if he or she desires to do so, and
will be available to respond to appropriate questions.
The Board recommends a vote FOR the proposal to ratify the appointment of
Ernst & Young LLP to serve as VSE's independent certified public accountants for
the fiscal year ending December 31, 2004, and your proxy will be so voted unless
you specify otherwise.
On May 15, 2002, as recommended by the Audit Committee and approved by the
Board, VSE terminated Arthur Andersen LLP ("AA") as its independent auditor, as
noted in a Form 8-K filed with the SEC. Then VSE, as approved by its Board,
retained Ernst & Young LLP to serve as VSE's independent public accountants for
the fiscal year ending December 31, 2002. AA's reports on VSE's consolidated
financial statements for the years ended December 31, 2001 and December 31, 2000
did not contain an adverse opinion or disclaimer of opinion, nor were such
reports qualified or modified as to uncertainty, audit scope or accounting
principles. During the years ended December 31, 2001 and 2000, and the interim
period between December 31, 2001 and the May 17, 2002 filing date of the above-
mentioned Form 8-K, there were no disagreements between VSE and AA on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure which, if not resolved to AA's satisfaction, would
have caused them to make reference to the subject matter of the disagreement in
connection with their report for such years; and there were no reportable events
as defined in Exchange Act Regulation S-K, Item 304(a)(1)(v). During the years
ended December 31, 2001 and 2000, and the interim period between December 31,
2001 and May 17, 2002, neither VSE nor anyone acting on its behalf consulted
Ernst & Young LLP with respect to the application of accounting principles to
a specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our consolidated financial statements, or any
other matters or reportable events as set forth in Exchange Act Regulation S-K,
Items 304(a)(2)(i) and (ii). Pursuant to Exchange Act Regulation S-K,
Item 304(a)(3), VSE requested that AA furnish VSE with a letter addressed to the
SEC stating whether or not AA agreed with the above referenced statements. AA
submitted a letter dated May 17, 2002 to the SEC stating that it agreed with
VSE's above-referenced statements.
Item No. 3
----------
VSE CORPORATION 2004 STOCK OPTION PLAN
The stockholders are asked to consider and vote on a proposal to approve
the adoption of the VSE Corporation 2004 Stock Option Plan (the "2004 Plan"),
which was adopted by the Board on October 7, 2003. Approval of the 2004 Plan
will require the affirmative vote by the holders of a majority of the
outstanding Stock present in person or represented by proxy at the Meeting. If
such approval is not received, the Board will reconsider the 2004 Plan. The
following summary of the 2004 Plan is qualified in its entirety by reference to
the complete text of the 2004 Plan which is set forth as Appendix B to this
Proxy Statement and is incorporated herein.
The purpose of the 2004 Plan is to make awards to non-employee directors,
executive officers, and key employees of VSE and its subsidiaries, and thereby
to further VSE's growth by providing long-term incentives and an identity of
interests with the stockholders. VSE operates in a highly specialized field in
which success is substantially dependent on the expertise of qualified and
highly motivated key personnel. Management believes that adoption of the 2004
Plan will be of material assistance in recruiting, motivating, and retaining key
personnel.
Currently VSE has six non-employee directors, six executive officers, 10
other officers and approximately 25 other key employees.
Prior to 1996 VSE did not have a stock option plan. In 1996 the
stockholders approved the VSE Corporation 1996 Stock Option Plan (the "1996
Plan"), and in 1998 the stockholders approved the VSE Corporation 1998 Stock
Option Plan. In 2002 the stockholders approved an amendment to the VSE 1998
Stock Option Plan to increase the number of shares issuable thereunder by 75,500
shares, as amended (the "1998 Plan"). The 1996 Plan and the 1998 Plan provided
for the grant of options covering up to 272,698 shares of Stock and for 419,250
shares of Stock, respectively. The 1996 Plan and all of the options granted
thereunder expired as of December 31, 2002, and no options are outstanding or
may be granted under the 1996 Plan. As of March 16, 2004, grants outstanding
under the 1998 Plan covered a total of 273,250 shares of Stock, representing
about 12.3% of the currently outstanding Stock. As of March 16, 2004, the 1998
Plan had about 1,500 non-discretionary shares and 6,000 discretionary shares
available for stock option grants.
Options under the 1998 Plan are not intended to qualify as "incentive stock
options" under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). (See "Federal Income Tax Consequences" below). The 1998 Plan will
terminate on the earlier of December 3, 2007, or the date on which all options
under the 1998 Plan have been exercised or terminated. As of January 1, 2004,
grants covering approximately 411,750 shares or all but about 7,500 shares of
the shares available for grants under the 1998 Plan had been made. Accordingly,
the Compensation Committee has recommended, and the Board has adopted, subject
to stockholder approval, the 2004 Plan for future grants of options to purchase
Stock.
Under the 2004 Plan, an aggregate of up to 350,000 shares of Stock
(representing about 15.8% of the currently outstanding Stock) may be purchased
pursuant to the grant of options. Under the 2004 Plan, 30,000 shares will be
available for grants to non-employee directors of VSE, and 320,000 shares will
be available for grants to executive officers and key employees. In no event
shall a grant to an executive officer or key employee be made under the 2004
Plan, if the total Stock underlying unexercised outstanding options granted
under the 2004 Plan and under the 1998 Plan either exceeds 15% of the total
outstanding Stock or would exceed 15% of the total outstanding Stock if such
grant was made.
Options under the 2004 Plan are not intended to qualify as "incentive stock
options" under Code Section 422. (See "Federal Income Tax Consequences" below.)
The 2004 Plan will terminate on the earlier of May 8, 2014, or the date on which
all options under the 2004 Plan have been exercised or terminated.
Under the 2004 Plan, each non-employee director will receive as of January
1 of each year (commencing with January 1, 2005) a nondiscretionary option
covering 1,000 shares of VSE Stock (1,000 shares represents the maximum number
of shares which may be covered by options issued annually to each non-employee
director pursuant to either or both of the 1998 Plan and the 2004 Plan). Each
option is vested 25% on the date of the grant and on each of the first three
successive anniversary dates after the date of grant. The option price per share
for each nondiscretionary grant is not less than the fair market value of VSE
Stock as of the date the option is awarded. See "Security Ownership of Certain
Beneficial Owners and Management" above for further information on the stock
options held by each VSE director.
The Board is authorized, subject to the provisions of the 2004 Plan, to
construe and interpret the 2004 Plan, and to make all determinations necessary
or advisable for the administration of the 2004 Plan. The Board may designate
persons other than Board members to carry out its responsibilities under the
2004 Plan, under such conditions and limitations as it may prescribe, except
that the Board may not delegate its authority with respect to the grant of
options under the 2004 Plan. The portion of the 2004 Plan which relates to the
grant of options will be administered by the Board, provided that a majority of
the Board and a majority of the members acting on the matter are non-employee
directors. Alternatively, if the Board shall not satisfy the foregoing
provisions, or if the Board shall otherwise so specify, the portion of the 2004
Plan which relates to the grant of options shall be administered by a committee
of at least three directors, all of whom must be non-employee directors. In
administering the 2004 Plan, the Board may (but is not required to) consider
the recommendations of its Compensation Committee.
Under the 2004 Plan, the option price per share shall not be less than the
fair market value of the Stock as of the date each option is granted. The fair
market value of the Stock, as defined in the 2004 Plan, means on any given date
the closing price of the Stock as reported on NASDAQ for the date in question.
If no sales of Stock were made on NASDAQ on that date, the closing price as
reported on NASDAQ for the preceding day on which sales of Stock were made on
NASDAQ will be substituted. The closing price of the Stock on March 11, 2004,
was $17.77 per share, as reported by NASDAQ.
Options will be exercisable over the exercise period specified by the
Board, but in no event will such period exceed five years from the date of
grant. Options will terminate three months following voluntary termination of
employment. If the participant dies while an employee, vested options may be
exercised within one year after the participant's death (but not after the
option termination date). If the participant retires, vested options may be
exercised within three years after the retirement date (but not after the option
termination date). If the participant's employment is terminated for disability
or without cause (as defined) by VSE, vested options may be exercised within one
year after termination (but not after the option termination date). Also, if a
participant's employment is terminated for cause (as defined in the 2004 Plan),
all of his or her options will terminate on the date of such termination for
cause.
If any stock option is being exercised, such exercise shall be accompanied
by payment in full of the purchase price by cash or check or in other form
acceptable to the Board, including Stock or partly in cash or check and partly
in Stock, except that the Board may, from time to time, impose limits and
conditions on the use of Stock for payment.
Each option granted under the 2004 Plan will vest 25% on the date of the
grant and on each of the first three successive anniversary dates of the date of
the grant. If a "change-of-control" of VSE (as defined in the 2004 Plan) occurs,
all options granted under the 2004 Plan which have not terminated and are held
by participants will become immediately vested and may be exercised without
regard to any vesting period.
Subject to stockholder approval of the 2004 Plan, it is anticipated that
no grants will be made under the 2004 Plan until January 1, 2005. Under the 2004
Plan, however, grants may be made at any time after the stockholders approve the
2004 Plan.
Federal Income Tax Consequences
The following is a brief summary of certain federal income tax consequences
relating to options granted under the 2004 Plan. The summary does not purport to
be complete, is solely for general information and does not make specific
representations to any participant. The tax treatment under foreign, state or
local law is not covered in this summary. In addition, tax laws are subject to
change at any time. Therefore, each participant is urged to consult with his or
her own tax adviser regarding federal, state, local and foreign tax consequences
relating to participation in the 2004 Plan.
The grant of stock options will have no immediate tax consequences to VSE
or the optionee. If Stock received on the exercise of an option is not subject
to a substantial risk of forfeiture, the optionee will recognize ordinary income
equal to the excess, if any, of the fair market value of the shares at the time
of exercise over the exercise price. It is not contemplated that VSE will, upon
the exercise of an option, issue or deliver Stock that is subject to a
substantial risk of forfeiture.
Stock received on the exercise of an option will be treated as subject to
a substantial risk of forfeiture for up to a six-month period if the sale of the
shares at a profit during such six months could subject the optionee to suit
under Exchange Act Section 16(b) ("Section 16(b)"). Under these circumstances,
however, the optionee has a right to elect, within a 30-day period from the date
of exercise of the option, to include in his or her taxable income for the
taxable year of exercise an amount equal to the excess of the fair market value
of such shares at the time of the exercise over the exercise price. If the
optionee does not make the preceding election, the optionee will recognize
ordinary income upon the expiration of the above-referenced six-month period.
The amount of such income will be equal to the excess of the fair market value
of the shares at that time over the exercise price, and the holding period for
determining whether any capital gain or loss on the subsequent sale or exchange
of the shares is long-term or short-term capital gain or loss will commence at
that time.
Where ordinary income is recognized by an optionee as described above in
connection with shares received on the exercise of an option, VSE will be
entitled to a deduction in the amount of ordinary income so recognized by the
optionee, provided appropriate tax withholding procedures are implemented or VSE
otherwise establishes that the optionee has reported the income on his or her
tax return. The 2004 Plan requires the employee to pay or make arrangements
acceptable to the Board regarding withholding taxes due upon exercise of an
option. With the Board's approval, the optionee may make such payments in whole
or in part by surrendering Stock.
Section 16
Approval of the 2004 Plan by the stockholders will exempt the acquisition
pursuant to the 2004 Plan of a stock option by a VSE director or officer from
the provisions of Section 16(b). Section 16(b) provides, among other things,
that a director or officer who, within a six-month period, purchases and sells
(or sells and purchases) the stock of a corporation which employs him or her is
liable to the corporation for the difference between the purchase price and the
sale price. Exchange Act Rule 16b-3 provides that the acquisition of a stock
option by a director or officer of a corporation pursuant to a stock option plan
which meets certain requirements (one of which is stockholder approval of the
plan) is not subject to Section 16(b).
New Plan Benefits
As discussed above, under the 2004 Plan, each non-employee director will
receive nondiscretionary options covering 1,000 shares of Stock on January 1 of
each year, commencing as of January 1, 2005. VSE has not made any determination
regarding the executive officers and key employees eligible to receive
discretionary options under the 2004 Plan, or the size or term of such awards.
The following table sets forth certain information regarding awards made under
the 1998 Plan during the fiscal year ended December 31, 2003.
Number of
Securities
Underlying
Options
Name and Position Granted
--------------------------------------------------------------------------
Donald M. Ervine, Chairman of the Board, President,
Chief Executive Officer and Chief Operating Officer 12,000
Thomas G. Dacus, Senior Vice President and Director,
Federal Group 9,000
James M. Knowlton, Executive Vice President and
Director, International Group 9,000
Thomas R. Loftus, Senior Vice President and Chief
Financial Officer 7,000
Craig S. Weber, Executive Vice President, Chief
Administrative Officer and Secretary 7,000
Executive Group (composed of six persons) 44,000
Non-Executive Director Group (six non-employee
directors) 4,500
Non-Executive Officer Employee Group (eight persons) 17,000
The Board recommends a vote FOR the proposal to adopt the 2004 Plan, and
your proxy will be so voted unless you specify otherwise.
Item No. 4
----------
VSE CORPORATION 2004 NON-EMPLOYEE DIRECTORS STOCK PLAN
The stockholders are asked to consider and vote on a proposal to approve
the adoption of the VSE Corporation 2004 Non-employee Directors Stock Plan (the
"Directors Stock Plan") to replace the 1998 Directors Stock Plan which expired
on December 31, 2003. The Board believes it is desirable that individuals who
serve as directors, but who are not employees, of VSE ("non-employee directors")
have a financial interest in VSE's performance. In this regard, the Board had
previously adopted the 1996 and 1998 Stock Option Plans described above (see
discussion contained in "Item No. 3" above). The Board believes that, based on
VSE's current stage of progress, the non-employee directors should be encouraged
to have a greater portion of their compensation from VSE subject to its
financial performance. As a result, on October 7, 2003, the Board adopted the
Directors Stock Plan, subject to approval of the stockholders.
Effective January 1, 2004, each non-employee director is compensated at an
annual rate of $20,000, and the Chairman of the Audit Committee is additionally
compensated at an annual rate of $5,000, with payment of all such fees prorated
in the event of a partial year of service. If, however, the Directors Stock Plan
is approved by the stockholders, each non-employee director will be permitted to
elect to receive all or a portion of his or her annual compensation in VSE
Stock.
The following summary of the Directors Stock Plan is qualified in its
entirety by reference to the complete text of Directors Stock Plan which is
attached to this Proxy Statement as Appendix C and is hereby incorporated by
reference.
Administration. The Directors Stock Plan is to be administered by the
Board. The Board, however, will only have the authority to determine terms and
conditions of the VSE Stock issuances to non-employee directors under the
Directors Stock Plan to the extent such terms and conditions are not otherwise
stated in the Directors Stock Plan.
Effective Date. If it is approved by the stockholders, the Directors Stock
Plan shall become effective as of January 1, 2004.
Eligibility. All non-employee directors will be eligible to participate in
the Directors Stock Plan.
Stock Subject to Directors Stock Plan. The aggregate amount of Stock
subject to the Directors Stock Plan will not exceed 50,000 shares. If any change
is made to the VSE Stock subject to the Directors Stock Plan, whether by reason
of recapitalization, stock split or reverse, combination or exchange of shares,
or other capital change affecting the VSE Stock, the Board is authorized to make
appropriate adjustments to the maximum number of shares subject to the Directors
Stock Plan.
Section 16(b). Stockholder approval of the Directors Stock Plan will exempt
the acquisition of shares pursuant to the Directors Stock Plan by a VSE non-
employee director from the provisions of Section 16(b). Section 16(b) provides,
among other things, that a director who, within a six-month period, purchases
and sells (or sells and purchases) the stock of a corporation which employs him
or her is liable to the corporation for the difference between the purchase
price and the sale price.
Amendments and Termination. The Board may from time to time alter, amend,
suspend, or discontinue the Directors Stock Plan. Unless terminated earlier by
the Board, the Directors Stock Plan will terminate on December 31, 2013.
Federal Income Tax Consequences. The following is a brief summary of
certain federal income tax consequences relating to Stock issued under the
Directors Stock Plan. The summary does not purport to be complete, is solely for
general information and does not make any specific representations to any
participant. The tax treatment under foreign, state or local law is not covered
in this summary. In addition, tax laws are subject to change at any time.
Therefore, each participant is urged to consult with his or her own tax adviser
for counseling regarding federal, state, local and foreign tax consequences
relating to participation in the Directors Stock Plan.
Under the current provisions of the Code, a non-employee director will
realize taxable compensation equal to the value of any cash received plus the
value of the Stock delivered in payment of his or her annual retainer. The tax
basis for such Stock will equal the number of the shares received multiplied by
the fair market value of the Stock on the date of the allocation. If such Stock
is subsequently sold, the non-employee director will realize a capital gain (or
loss) equal to an amount which the proceeds of the sale exceed (or are less
than) the basis for such Stock. The following table sets forth certain
information regarding the number of shares of Stock received under the 1998
Directors Stock Plan for services rendered during the fiscal year ended
December 31, 2003.
Number of
Securities
Name and Position Received
--------------------------------------------------------------------------
Donald M. Ervine, Chairman of the Board, President,
Chief Executive Officer and Chief Operating Officer 0
Thomas G. Dacus, Senior Vice President and Director,
Federal Group 0
James M. Knowlton, Executive Vice President and
Director, International Group 0
Thomas R. Loftus, Senior Vice President and Chief
Financial Officer 0
Craig S. Weber, Executive Vice President, Chief
Administrative Officer and Secretary 0
Executive Group (composed of six persons) 0
Non-Executive Director Group (six non-employee
directors) 3,501
Non-Executive Officer Employee Group (eight persons) 0
VSE will generally be entitled to a tax deduction in the amount of the
taxable compensation realized by the non-employee director.
The Board recommends a vote FOR the proposal to adopt the Directors Stock
Plan, and your proxy will be so voted unless you specify otherwise.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information about VSE Stock that may
be issued upon exercise of options, warrants and rights under the 1998 Plan
(being VSE's only equity compensation plan as of December 31, 2003).
Plan Category Number of Shares to Weighted Average Number of Shares
be Issued upon Exercise Price of Remaining
Exercise of Outstanding Options Available for
Outstanding Options (b) Future Issuance
(a) (1) Under Equity
Compensation
Plans(excluding
shares reflected in
column (a)) (c) (2)
---------------------------------------------------------------------------------
Equity 277,000 $9.17 7,500
compensation
plans approved
by stockholders
---------------------------------------------------------------------------------
Equity 750 $6.50 -0-
compensation
plan not
approved by
stockholders
---------------------------------------------------------------------------------
Total 277,750 $9.16 7,500
---------------------------------------------------------------------------------
(1) Includes options covering 65,500 shares of VSE Stock granted as of January
1, 2004.
(2) Excludes 310,448 shares of outstanding VSE Stock held by the VSE
Corporation Employee ESOP/401(k) Plan, which shares may be transferred to
Plan participants on retirement or termination of VSE employment or
pursuant to ESOP diversification.
AUDIT COMMITTEE REPORT
The Audit Committee (the "Committee") is composed of five non-employee
directors (Messrs. Lafond, Kendall and Koonce, and General Ross and
Ms. Wachtel), each of whom is considered an "independent" director for the
purposes of the applicable rules of NASDAQ and the SEC. Mr. Koonce, however, by
virtue of his beneficial ownership of VSE Stock is considered an "affiliated
person" of VSE and is not considered an independent member of the Audit
Committee within the meaning of Exchange Act Section 10A-3(b)(1)(ii). Effective
as of the Meeting, Mr. Koonce will no longer be a Committee member. The
Committee's responsibilities are set forth in its charter, which is set forth
as Appendix A to this Proxy Statement. The Board and the Committee believe that
the Committee members are and were at the time of the actions described in this
report "independent" directors as independence is defined by NASDAQ Rule
4200(a)(15).
The Committee has reviewed and discussed with management VSE's audited
consolidated financial statements as of and for the year ended December 31,
2003, and has discussed with VSE's independent auditors the matters required to
be discussed by Statement on Auditing Standards No. 61, Communication with Audit
Committees, as amended, issued by the Auditing Standards Board of the American
Institute of Certified Public Accountants.
The Committee has received and reviewed the written disclosures and the
letter from the independent auditors required by Independence Standard No. 1,
Independence Discussions with Audit Committees, as amended, issued by the
Independence Standards Board, and has discussed with the auditors the auditors'
independence and considered whether the provision of non-audit services by the
auditors is compatible with maintaining their independence.
Based on the foregoing reviews and discussions, the Committee recommended
to the Board that the above referenced consolidated financial statements be
included in VSE's Annual Report on Form 10-K for the year ended December 31,
2003 for filing with the SEC.
Audit Committee: James F. Lafond (Chairman), Clifford M. Kendall,
Calvin S. Koonce, Jimmy D. Ross, and Bonnie K. Wachtel
COMPENSATION COMMITTEE REPORT
The Board has established a Compensation Committee (the "Committee") to
(a) review corporate compensation policies, including incentive compensation,
(b) recommend to the Board for its determination the compensation of the Chief
Executive Officer (the "CEO"), and (c) review the compensation of other
executive officers and employees. The Committee is composed entirely of non-
employee directors (see "Board of Directors, Committees and Corporate
Governance" above).
Compensation Philosophy
VSE's overall compensation philosophy is based on aligning executive
compensation with industry standards and with financial performance objectives
established by the Board. Under the Committee's supervision, VSE has established
compensation policies designed to attract and retain qualified executives and to
link total compensation to corporate goals. The key elements of VSE executive
compensation are base salary, a performance bonus incentive plan, and a long-
term incentive plan.
Base Salary
The base salaries for executive officers and other corporate officers are
established primarily on the basis of comparability to the range of compensation
paid by companies of similar size and industry, as determined by commercially
available wage and salary surveys. Size is determined primarily by reference to
annual revenues and number of employees. VSE's industry group is engineering and
technical services (formerly SIC Code 8711). National and geographic differences
in compensation are considered based on the executive's primary area of
operations and responsibility. VSE targets a competitive salary for executive
officers with performance incentives as indicated by such surveys.
Performance Bonus
During 2002 and 2001, VSE's performance bonus plan was based on achieving
corporate and business unit goals, weighted approximately as follows: 20% on
achieving corporate revenue and profit targets and 80% on achieving specified
performance objectives within the business unit, such as revenue and profit
targets, proposals submitted and won, new business development, and budget,
cost, and total quality management.
During 2003 the Committee approved a revised performance bonus plan based
on achieving financial results in excess of certain financial thresholds or
goals specified at the beginning of the year. Such goals consist principally of
revenue goals and pretax income for operating units, pretax income for staff
support personnel, and return on equity for corporate executives. Annual bonus
amounts are paid in February after establishing the financial results for the
prior calendar year.
For 2003 aggregate performance bonuses of about $778,000 were earned and
paid to employees under the performance bonus plan, including about $73,000 paid
to executives under the plan.
VSE's wholly owned subsidiary Energetics Incorporated ("Energetics")
maintains a performance bonus plan for its employees, including Admiral Kelly.
Amounts contributed to the plan are determined by Energetics based on its
ability to utilize direct labor, contain costs, maintain competitive burden
rates, and achieve pretax profitability. Bonus amounts accrued are distributed
on the basis of individual and group contribution to meeting corporate goals for
revenue, profit, marketing, and new and repeat business. Annual bonus amounts
are paid in February after establishing the financial results for the prior
calendar year. Admiral Kelly's bonus under the plan is approved by the
Energetics Board of Directors.
Long-term Compensation
During 1998 the Board recommended and the stockholders approved the
adoption of the VSE Corporation 1998 Stock Option Plan (the "1998 Plan"), which
replaced a substantially similar 1996 Plan. Under the 1998 Plan (as amended in
2003), an aggregate of 419,250 shares of VSE Stock may be purchased pursuant to
the grant of options.
The purpose of the 1998 Plan is to provide non-employee directors,
executive officers, and key personnel with long-term performance incentives and
an identity of interests with the stockholders. VSE operates in a highly
specialized field in which success is substantially dependent on the expertise
of qualified and highly motivated key personnel. Management believes that the
Plans have been of material assistance in recruiting, motivating, and retaining
key personnel.
Discretionary stock options granted under the 1998 Plan are approved by the
Committee after considering recommendations submitted by management based on the
perceived long-term contribution of key personnel. The Committee independently
determines the number of stock options to be awarded to the Chairman and CEO and
to the President and COO. Awards of discretionary stock option grants approved
by the Committee are subject to ratification by the Board.
In 2003 the Board adopted the VSE Corporation 2004 Stock Option Plan to
replace the 1998 Plan, subject to stockholder approval. See "Item No. 3. VSE
Corporation 2004 Stock Option Plan" above for a discussion of VSE stock option
plans.
All Other Compensation
All VSE officers are entitled to participate in company fringe benefit
programs, including the VSE Employee ESOP/401(k) Plan, which is an IRS qualified
plan available to all eligible employees. Effective April 1, 1999, employer
contributions to the ESOP portion of the plan were discontinued and replaced by
employer contributions to the 401(k) portion of the plan based on employee
401(k) deferrals. The employer 401(k) contribution is equal to 50% of the first
6% (5% in 2001) of employee pay deferred into the employee's 401(k) account.
Amounts contributed to the VSE ESOP/401(k) plan on behalf of the named executive
officers are included in the "Summary Compensation Table."
VSE has a non-qualified Deferred Supplemental Compensation Plan (the "DSC
Plan") for all VSE officers. The DSC Plan provides, at the Board's discretion,
for an annual contribution not to exceed 12% of VSE's consolidated net income
for the year. Each officer's allocation from the annual contribution bears the
same percentage to the annual contribution as that officer's salary bears to
total annual officer salaries. Pursuant to the DSC Plan, an annual contribution
of approximately $40,000 was authorized for 2003. Benefits under the DSC Plan
are payable to the participant on retirement or resignation, subject to a
vesting schedule, non-competition agreement, and other plan provisions, or in
the event of a change of control of VSE. Amounts contributed to the DSC Plan on
behalf of the named executive officers are included in the Summary Compensation
Table.
Energetics maintains a profit sharing plan (the Energetics Incorporated
Profit Sharing Plan and Trust) for its employees, including Admiral Kelly. All
Energetics employees who have completed two years of service are members of the
profit sharing plan. At the discretion of its Board of Directors, Energetics
makes contributions to the plan approximately equal to 10% of eligible employee
compensation. Eligible employee compensation under the plan is capped at
$200,000 per year.
Chief Executive Officer Compensation
During 2003, 2002, and 2001, VSE's Chairman and Chief Executive Officer
("CEO") (Mr. Ervine) was compensated in accordance with an employment agreement
negotiated and approved by the Committee in 1999. The agreement with Mr. Ervine
extends through January 1, 2005, and is subject thereafter to automatic
extensions for successive one-year periods unless notice to terminate is given
at least 90 days prior to the expiration of the term or any such one-year
extension of the term. The agreement provides for a minimum base salary, with
other terms and conditions substantially similar to a predecessor January 1,
1996, employment agreement (see "Certain Relationships and Related Transactions"
above for a description of the current employment agreement). On February 15,
2002, Mr Ervine assumed additional duties as VSE President and Chief Operating
Officer. During 2003 Mr. Ervine was paid a base salary of $264,000 and served as
VSE Chairman, CEO, President and Chief Operating Officer. The Committee approved
an increase in Mr. Ervine's base salary to $270,000 in February 2004.
The CEO's performance bonus for 2003 was determined on the basis of
achieving significantly improved financial results in 2003 as compared to 2002,
including increases in net income ($2.0 million versus $652 thousand) and return
on equity (11.9% versus 4.0%). For 2002 VSE net income and return on equity
declined compared to 2001, and the Committee did not recommend a bonus for 2002.
During 2001 the CEO's performance bonus was determined by the Committee on the
basis of five factors of approximately equal weight: revenue growth, return on
equity, return on sales, leadership, and long-term stockholder goals. The first
three factors were measured based on interim consolidated financial statements
or management reports which were subject to adjustment based on annual audited
financial statements. The last two factors were subjective measures evaluated by
the Committee in executive session.
Pursuant to the 1998 Plan the Committee recommended that the CEO be awarded
a discretionary stock option covering 12,000 shares of VSE Stock, effective
January 1, 2004.
Compensation Committee: Jimmy D. Ross (Chairman), Clifford M. Kendall,
Calvin S. Koonce, and Bonnie K. Wachtel
Compensation Committee Interlocks and Insider Participation
No executive officer of VSE serves or has served as a member of the
Compensation Committee of another entity, one of whose executive officers serves
on VSE's Compensation Committee. No executive officer of VSE serves or has
served as a director of another entity, one of whose executive officers serves
on VSE's Compensation Committee.
Mr. Koonce is a major stockholder of VSE. See "Security Ownership of
Certain Beneficial Owners and Management."
VSE and the trustees of its employee benefit plans have in the past
effected certain of their transactions in VSE Stock through Wachtel & Co., Inc.,
of which Ms. Wachtel is a director, officer and shareholder, and through Koonce
Securities, Inc., which is wholly owned by Mr. Koonce. No transactions in VSE
Stock occurred with Wachtel & Co., Inc. or Koonce Securities, Inc. in 2003.
Mr. Osnos is of counsel at the law firm of Arent Fox PLLC, which has
represented and is expected to continue to represent VSE on various legal
matters. See "Certain Relationships and Related Transactions."
Summary Compensation Table
The following table reports the compensation paid for the past three years
for each of the five most highly compensated VSE executive officers, including
the Chief Executive Officer.
Long-term All
Annual Compensation Other
Compensation Awards Compensation
-------------- ------------ ------------
Fiscal Salary Bonus Options
Name and Principal Position Year ($) ($) (#) ($)(1)
--------------------------- ---- ------- ------- ------- -------
Thomas G. Dacus (2) 2003 150,200 60,000 9,000 7,253
Senior Vice President and 2002 140,000 8,000 2,000 7,243
Director, Federal Group 2001 5,689 0 0 0
Donald M. Ervine 2003 264,000 35,000 12,000 105,739
Chairman of the Board, 2002 254,000 0 12,000 5,174
President and CEO/COO 2001 254,000 25,000 12,000 13,451
Robert J. Kelly 2003 183,500 68,000 0 20,000
President, Energetics Incor- 2002 178,200 68,000 5,000 20,000
porated, and Director, Energy 2001 173,500 56,000 0 17,000
and Environment Group
James M. Knowlton 2003 183,200 50,000 9,000 8,223
Executive Vice President and 2002 170,000 20,000 6,000 11,349
Director, International Group 2001 170,000 10,000 1,500 6,095
Craig S. Weber 2003 156,800 20,800 7,000 17,264
Executive Vice President, 2002 148,500 0 6,000 4,425
Chief Administrative Officer, 2001 140,400 14,000 6,000 8,582
and Secretary
_________________
(1) The column headed "All Other Compensation" includes (a) for executive
officers other than Admiral Kelly, contributions made by VSE to two
defined contribution employee benefit plans: the VSE Employee ESOP/401(k)
Plan, which is generally available to all VSE employees, and the DSC Plan,
(b) contributions made for Admiral Kelly to the Energetics Profit Sharing
Plan and Trust (see descriptions of the VSE and Energetics plans under the
subheading "All Other Compensation" in the "Compensation Committee
Report"), and (c) in 2003 $95,197 paid to Mr. Ervine for cashed-in unused
accrued vacation and $10,000 paid to Mr. Weber per VSE's employee spot
bonus program.
(2) The amount reported for Mr. Dacus for 2001 represents salary for the
period November 30, 2001, when he recommenced employment with VSE, through
December 31, 2001. Mr. Dacus previously served as an officer of VSE from
1984 to 1991.
Option Grants in Last Fiscal Year
The following table reports the options granted in fiscal year 2003 for
each of the five most highly compensated VSE executive officers, including the
chief executive officer.
Potential realizable value
----------------Individual Grants---------- at assumed annual rates
of stock appreciation
for option term (1)
----------------------------------------------------------------------
Number of % of Total Hypothetical Hypothetical
Securities Options value value
Underlying Granted to realized at realized at
Options Employees Exercise 5% stock 10% stock
Granted in Fiscal Price Expiration appreciation appreciation
Name (2) Year ($/share) Date ($) ($)
-------------------------------------------------------------------------------------------
Thomas G. Dacus 9,000 14.8% 12.82 12/31/08 31,877 70,440
Donald M. Ervine 12,000 19.7% 12.82 12/31/08 42,503 93,920
Robert J. Kelly 0 -- -- -- -- --
James M. Knowlton 9,000 14.8% 12.82 12/31/08 31,877 70,440
Craig S. Weber 7,000 11.5% 12.82 12/31/08 24,793 54,787
(1) The dollar amounts reported under the potential realizable value columns
at assumed 5% and 10% annual rates of appreciation are not intended to
forecast actual future appreciation in the stock price. Actual gains, if
any, on stock option exercises depend on the future performance of VSE
Stock. There is no assurance the amounts reflected in this table will be
achieved. The assumed rates were compounded annually to the full five-year
term of the options.
(2) Non-qualified stock options which became 25% exercisable on award date
(1/1/04) and on each of the first three anniversary dates thereafter,
except in the event of a change in control of VSE, in which case such
options become immediately exercisable.
Aggregate Options Exercised in Last Fiscal Year and Fiscal Year-end
Option Values
The following table reports the options exercised, exercisable, and
unexercisable as of the end of VSE's fiscal year 2003 for each of the five most
highly compensated VSE executive officers, including the chief executive
officer.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 12/31/03 at 12/31/03 ($)(2)
------------------------- --------------------------
Shares acquired Value($)
Name on exercise realized(1) Exercisable Unexercisable Exercisable Unexercisable
-------------------- --------------- ----------- ----------- ------------- ----------- --------------
Thomas G. Dacus -- -- 500 1,500 1,260 3,780
Donald M. Ervine 7,000 10,346 39,000 20,000 237,840 99,860
Robert J. Kelly -- -- 3,750 6,250 19,725 26,025
James M. Knowlton 6,000 10,080 19,750 7,750 117,053 35,013
Craig S. Weber -- -- 12,000 9,500 76,380 46,190
____________________
(1) Value realized is determined by subtracting the exercise price from the
fair market value on the date the options were exercised and multiplying the
resulting number by the underlying shares of Stock.
(2) Value realized is determined by subtracting the exercise price from the
fair market value of the Stock as of December 31, 2003 ($13.25 a share) and
multiplying the resulting number if positive by the underlying Stock.
Performance Graph
Set forth below is a line graph comparing the cumulative total return of
VSE Stock with (a) a performance index for the broad market in which VSE Stock
is traded and (b) a published industry index. VSE Stock is traded on the NASDAQ
National Market System, and VSE's industry group is engineering and technical
services (formerly SIC Code 8711). Accordingly, the performance graph compares
the cumulative total return for VSE Stock with (a) an index for the NASDAQ
National Market System (U.S. companies) ("NASDAQ Index") and (b) a published
industry index for SIC Code 8711 ("Industry Index").
Performance Graph Table
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
VSE Stock 100 68 50 69 102 127
Nasdaq Index 100 111 195 214 139 263
Industry Index 100 176 111 88 62 93
[insert graph]
* Total return assumes reinvestment of dividends and assumes $100 invested
on December 31, 1998, in VSE Stock, the NASDAQ Index, and the Industry
Index.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at VSE's 2005 annual
meeting of stockholders must have been received by VSE's Secretary at VSE's
principal executive offices, 2550 Huntington Avenue, Alexandria, Virginia
22303-1499, by no later than the close of business on Wednesday, February 3,
2005, to be considered for inclusion in VSE's proxy material relating to such
meeting.
OTHER MATTERS
VSE will bear the costs of the solicitation of proxies for use at the
Meeting. In addition to the use of the mails, proxies may be solicited by
personal interview, telephone and telegram by directors, officers and employees
of VSE. Arrangements will also be made with brokerage houses and other
custodians, nominees, and fiduciaries, who are record holders of Stock, for
forwarding solicitation material to the beneficial owners of the Stock. VSE
will, on the request of such record holders, pay the reasonable expenses for
completing the mailing of such materials to the beneficial owners.
Please sign and promptly return your proxy in the enclosed envelope. Your
vote is important.
By Order of the Board of Directors
C. S. Weber, Secretary