VSE CORPORATION
2550 Huntington Avenue, Alexandria, Virginia 22303-1499
Notice of 2005
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 Tuesday, May 3, 2005, 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 1, 2005
VSE CORPORATION
2550 Huntington Avenue, Alexandria, Virginia 22303-1499
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 3, 2005
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 Tuesday, May 3,
2005, 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 seven 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 fiscal year ending December 31,
2005; and
3. 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 21, 2005, 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 2004 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 1, 2005
VSE CORPORATION
__________________________________
PROXY STATEMENT
Annual Meeting of Stockholders
to be held on May 3, 2005
__________________________________
INTRODUCTION
General
This proxy statement is being furnished to the stockholders of
VSE Corporation, a Delaware corporation ("VSE" or the "Company"), 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 Tuesday, May 3, 2005,
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 1, 2005.
The close of business on March 21, 2005, 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 21, 2005, 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 21, 2005, there were 2,279,625 shares of Stock outstanding
and approximately 268 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 21, 2005, 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 (a) for the election as VSE directors of the seven nominees listed
below under "Election of Directors," and (b) for the ratification of the
appointment of Ernst & Young LLP as VSE's independent certified public
accountants for the fiscal year ending December 31, 2005.
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.
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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 21, 2005, 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) 281,371 12.3%
Non-Employee Directors
----------------------
Clifford M. Kendall (b) 26,014 1.1%
Calvin S. Koonce (b) (c) 524,177 23.0%
James F. Lafond (b) 894 *
David M. Osnos (b) 6,188 *
Jimmy D. Ross (b) 10,105 *
Bonnie K. Wachtel (b) 30,188 1.3%
Executive Officers and Other Director
-------------------------------------
Thomas G. Dacus (b) 8,345 *
Donald M. Ervine (b) 105,597 4.5%
Robert J. Kelly (b) 1,250 *
James M. Knowlton (b) 52,596 2.3%
Thomas R. Loftus (b) 23,190 1.0%
Craig S. Weber (b) 62,922 2.7%
Group
-----
Directors, Nominees, and
Executive Officers as a group
(12 persons) (b) (d) 851,466 35.3%
* Represents less than one percent.
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(a) These shares are held in trust for the benefit of the ESOP/401(k) Plan
participants. Three VSE officers serve as Plan trustees. The Plan
participants have voting power over 221,871 shares allocated to their
respective ESOP accounts, while the Plan trustees share voting and
investment power over the remaining 59,500 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-250,
James F. Lafond-625, each of Calvin S. Koonce, David M. Osnos,
Jimmy D. Ross, and Bonnie K. Wachtel-2,688, Thomas G. Dacus-8,250,
Donald M. Ervine-50,750, Robert J. Kelly-1,250, James M. Knowlton-
23,000, Thomas R. Loftus-15,250, Craig S. Weber-23,500, and all
directors, nominees, and executive officers as a group (12 persons)-
133,627.
(c) Mr. Koonce's mailing address is 6550 Rock Spring Drive, Suite 600,
Bethesda, Maryland 20817. Includes 58,250 shares held in brokerage
accounts for which Mr. Koonce has discretionary authority.
(d) The group consists of 12 persons. The 851,466 shares beneficially owned
do not include the 59,500 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 in fiscal year 2004.
Proposal No. 1
--------------
ELECTION OF DIRECTORS
Nominees
At the Meeting, stockholders will elect, by a plurality of the votes
cast, seven 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. 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.
Admiral Robert J. Kelly, USN (Retired), who became a VSE director on
January 1, 1996, has indicated his intention to retire from the Board and from
his office as Chairman and President of VSE's wholly owned subsidiary Energetics
Incorporated, and accordingly, he has not been nominated as a VSE director for
the year 2005-2006.
The seven nominees for election as VSE directors and certain information
regarding them are as follows:
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Name and Principal Occupation Age Director since
_____________________________ ___ ______________
Donald M. Ervine 68 1987
VSE Chairman of the Board and Chief Executive Officer
since 1992. Also appointed President and Chief Operating
Officer in March 2002.
James F. Lafond 62 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 also a director of WGL
Holdings, Inc.
Clifford M. Kendall 73 2001
Private Investor. Mr. Kendall is Chairman of the Board
of Regents of the University System of Maryland, and he
is 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.
Calvin S. Koonce 67 1992
Chairman, Koonce Securities, Inc., a securities
broker/dealer firm (for more than the past five years).
David M. Osnos 73 1968
Of counsel (previously senior partner) at Arent Fox
PLLC, attorneys-at-law (for more than the past five
years). He is also a director of EastGroup Properties,
Inc., and Washington Real Estate Investment Trust.
Jimmy D. Ross 68 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.
Bonnie K. Wachtel 49 1991
Vice President and General Counsel, Wachtel & Co.,
Inc., Brokers and Underwriters (for more than the past
five years). She is also a director of Integral Systems,
Inc., and Information Analysis Incorporated.
Board of Directors, Committees and Corporate Governance
There are currently eight members of our Board, and after the Meeting our
Board will have seven members. Except for Mr. Ervine, who serves as VSE's
Chairman, President, Chief Executive Officer and Chief Operating Officer, and
Admiral Kelly, who is retiring from the Board, all of our current directors are
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"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 five 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
four 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.
During the past fiscal year, the Audit Committee was composed of
Mr. Lafond (Chairman), Mr. Kendall and Ms. Wachtel. All of the Audit Committee
members during the past fiscal year are independent in accordance with
applicable rules of the SEC and NASDAQ. 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 2004, the Audit Committee met five 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
and Mr. Koonce. Each of the committee members is independent in accordance with
applicable NASDAQ rules. During 2004, the Compensation Committee met five 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 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 2004, the Nominating and
Corporate Governance Committee met two 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. During the past fiscal year the Committee was
composed of Mr. Osnos (Chairman), Mr. Koonce and Ms. Wachtel. During 2004, the
Finance Committee met two times.
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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. Lafond, Mr. Koonce, General Ross and Ms. Wachtel.
During 2004, the Planning Committee met one time.
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 annual meeting was held during the
immediate prior year. (Nominations for the year 2006-2007 should be received by
the secretary no later than February 2, 2006.) 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.
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Lead Independent Director
The Board has established the position of Lead Independent Director. The
Lead Independent Director will assist the Chairman and the other Board members
in assuring effective corporate governance. Mr. Kendall, who serves 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 the
VSE Board at board@vsecorp.com. All directors have access to this e-mail
address. Communications that are intended specifically for non-employee
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 Conduct and Ethics 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 2004 each non-employee director was compensated at an annual rate
of $20,000, and the Chairman of the Audit Committee was compensated in addition
at an annual rate of $5,000, with payment of all such fees 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 2004. The
foregoing procedures do not restrict reimbursement for expenses incurred by a
director for attending meetings of the Board or its authorized committees.
Pursuant to the VSE Corporation 2004 Stock Option Plan, each non-employee
director (currently Messrs. Kendall, Koonce, Lafond, Osnos, General Ross, and
Ms. Wachtel), is 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
vests 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.
Pursuant to the VSE Corporation 2004 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 ($20,000 per year) be paid in VSE Stock at fair
- 7 -
market value determined in accordance with the Directors Stock Plan. For 2004
General Ross elected to have 50% of his annual compensation paid in VSE Stock.
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 $300,000 per
annum. Mr. Ervine is employed for a term ending on January 1, 2006, 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,
2006, 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. Admiral Kelly has indicated his intention to
retire from the Board and from his office as Chairman and President of VSE's
wholly owned subsidiary Energetics Incorporated, and accordingly, he has not
been nominated as a VSE director for the year 2005-2006.
Pursuant to separate agreements entered into in 1997 and expiring on
January 1, 2006, Mr. Knowlton and Mr. Weber each have agreements with VSE to
continue to serve in the executive officer's current or comparable capacity,
subject to automatic extensions for successive one-year periods unless notice
to terminate is given by the officer at least 90 days prior to the expiration
of the term or any such one-year extension of the term. 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.
- 8 -
Pursuant to separate agreements entered into in 2004 and expiring on
December 31, 2006, Mr. Dacus and Mr. Loftus each have agreements with VSE to
continue to serve in the executive officer's current or comparable capacity,
subject to automatic extensions for successive one-year periods unless notice
to terminate is given by either VSE or the officer at least 90 days prior to the
expiration of the term or any such one-year extension of the term. 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 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
2004.
The Board recommends a vote FOR the proposal to elect each of the seven
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.
Proposal 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, 2005, 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 2004 and 2003 Ernst & Young LLP services included an examination of
VSE's consolidated financial statements, the financial statements of certain
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, 2004 and December 31, 2003, as follows:
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2004 2003
---- ----
Audit fees (1) $168,028 $151,500
Audit-related fees (2) 27,500 15,493
Tax fees - -
All other fees - -
_______________
(1) Includes fees and expenses related to the fiscal year audit and to
interim reviews and related accounting consultation.
(2) Includes fees and expenses for the audit of the employee benefit
plan and consultation regarding internal control reporting.
The Audit Committee approves in advance 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. The Audit Committee approved in advance all of the
audit and non-audit services provided by the independent auditors in fiscal
2004.
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, 2005, and your proxy will be so voted
unless you specify otherwise.
AUDIT COMMITTEE REPORT
The Audit Committee (the "Committee") is composed of three non-employee
directors (Messrs. Lafond and Kendall and Ms. Wachtel), each of whom is
considered an "independent" director for the purposes of the applicable rules
of NASDAQ and the SEC. The Committee's responsibilities are set forth in its
charter, a copy of which is available on VSE's Internet site, www.vsecorp.com.
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,
2004, 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.
- 10 -
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,
2004 for filing with the SEC.
Audit Committee: James F. Lafond (Chairman), Clifford M. Kendall,
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 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 2004 aggregate performance bonuses of about $1,474,000 were earned
and paid to VSE employees under the performance bonus plan, including about
$501,000 paid to executive officers under the plan.
- 11 -
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 and VSE Board of Directors.
Long-term Compensation
During 2004 the Board recommended and the stockholders approved the
adoption of the VSE Corporation 2004 Stock Option Plan (the "2004 Plan"), which
replaced a substantially similar 1998 Plan. Under the 2004 Plan, an aggregate of
350,000 shares of VSE Stock may be purchased pursuant to the grant of options.
The purpose of the 2004 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 2004 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 President and COO. Awards of discretionary stock option
grants approved by the Committee are subject to ratification by the Board.
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% 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 $205,000 was authorized for 2004. 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
- 12 -
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 2004, 2003, and 2002, 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, 2006, and is subject thereafter 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. 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 2004 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 $300,000 in
January 2005.
The CEO's performance bonus for 2004 was determined on the basis of
achieving significantly improved financial results in 2004 as compared to 2003,
including increases in revenues, net income, and return on equity.
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 $652 thousand) and return
on equity (11.9% versus 4.0%).
For 2002 VSE net income and return on equity declined compared to 2001,
and the Committee did not recommend a bonus for 2002.
Pursuant to the 2004 Plan, the Committee recommended that the CEO be
awarded a discretionary stock option covering 15,000 shares of VSE Stock,
effective January 1, 2005.
Compensation Committee: Jimmy D. Ross (Chairman), Clifford M. Kendall,
and Calvin S. Koonce
Compensation Committee Interlocks and Insider Participation
No executive officer of VSE serves or has served as a member of the
Compensation Committee of another entity, one of whose executive officers serves
on VSE's Compensation Committee. No executive officer of VSE serves or has
served as a director of another entity, one of whose executive officers serves
on VSE's Compensation Committee.
Mr. Koonce is a major stockholder of VSE. See "Security Ownership of
Certain Beneficial Owners and Management."
VSE and the trustees of its employee benefit plans have in the past
effected certain of their transactions in VSE Stock through Wachtel & Co., Inc.,
of which Ms. Wachtel is a director, officer and shareholder, and through Koonce
Securities, Inc., which is wholly owned by Mr. Koonce. No transactions in VSE
Stock occurred with Wachtel & Co., Inc. or Koonce Securities, Inc. in 2004.
Mr. Osnos is of counsel at the law firm of Arent Fox PLLC, which has
represented and is expected to continue to represent VSE on various legal
matters. See "Certain Relationships and Related Transactions."
- 13 -
Summary Compensation Table
The following table reports the compensation paid for the past three
years for each of the five most highly compensated VSE executive officers,
including the Chief Executive Officer.
Long-term All
Annual Compensation Other
Compensation Awards Compensation
---------------- ------- ------------
Fiscal Salary Bonus Options
Name and Principal Position Year ($) ($) (#) ($)(1)
--------------------------- ---- ------- ------- ------- -------
Thomas G. Dacus 2004 155,000 85,000 9,000 18,064
Senior Vice President and 2003 150,200 60,000 9,000 7,253
Director, Federal Group 2002 140,000 8,000 2,000 7,243
Donald M. Ervine 2004 264,000 119,000 15,000 28,814
Chairman of the Board, 2003 264,000 35,000 12,000 105,739
President and CEO/COO 2002 254,000 0 12,000 5,174
Robert J. Kelly 2004 189,000 60,000 0 20,500
President, Energetics Incor- 2003 183,500 68,000 0 20,000
porated, and Director, Energy 2002 178,200 68,000 5,000 20,000
and Environment Group
James M. Knowlton 2004 184,400 92,000 10,000 20,810
Executive Vice President and 2003 183,200 50,000 9,000 8,223
Director, International Group 2002 170,000 20,000 6,000 11,349
Craig S. Weber 2004 161,000 70,900 6,000 18,636
Executive Vice President, 2003 156,800 20,800 7,000 17,264
Chief Administrative Officer, 2002 148,500 0 6,000 4,425
and Secretary
(1) The column headed "All Other Compensation" includes (a) for each of the
named 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 $10,000 paid to Mr. Weber per VSE's
employee spot bonus program.
Option Grants in Last Fiscal Year
The following table reports the options granted in fiscal year 2004 for
each of the five most highly compensated VSE executive officers, including the
chief executive officer.
- 14 -
Potential realizable value
----------------Individual Grants---------- at assumed annual rates
of stock appreciation
for option term (1)
----------------------------------------------------------------------
Number of % of Total Hypothetical Hypothetical
Securities Options value value
Underlying Granted to realized at realized at
Options Employees Exercise 5% stock 10% stock
Granted in Fiscal Price Expiration appreciation appreciation
Name (2) Year ($/share) Date ($) ($)
-------------------------------------------------------------------------------------------
Thomas G. Dacus 9,000 12.9% 25.17 12/31/09 62,586 138,299
Donald M. Ervine 15,000 21.4% 25.17 12/31/09 104,310 230,498
Robert J. Kelly 0 -- -- -- -- --
James M. Knowlton 10,000 14.3% 25.17 12/31/09 69,540 153,665
Craig S. Weber 6,000 8.6% 25.17 12/31/09 41,724 92,199
(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
(1/1/05) 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 2004 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 12/31/04 at 12/31/04 ($)(2)
------------------------- --------------------------
Shares acquired Value($)
Name on exercise realized(1) Exercisable Unexercisable Exercisable Unexercisable
-------------------- --------------- ----------- ----------- ------------- ----------- --------------
Thomas G. Dacus -- -- 3,250 7,750 42,218 97,793
Donald M. Ervine 15,000 340,731 38,000 18,000 678,580 253,380
Robert J. Kelly -- -- 2,188 1,563 35,428 23,834
James M. Knowlton 10,000 231,189 16,375 10,125 285,946 133,609
Craig S. Weber 1,500 27,930 17,250 9,750 303,578 135,953
- 15 -
(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 is determined by subtracting the exercise price from the fair
market value of the Stock as of December 31, 2004 ($25.17 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").
[insert graph]
* Total return assumes reinvestment of dividends and assumes $100 invested
on December 31, 1999, in VSE Stock, the NASDAQ Index, and the Industry Index.
- 16 -
Performance Graph Table
1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ----
VSE Stock 100 72 100 148 185 356
NASDAQ Index 100 62 50 34 52 56
Industry Index 100 176 193 125 237 290
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at VSE's 2006 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 2,
2006, 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
- 17 -
Form of Proxy
________________________________________________________________________________
VSE Corporation PROXY This Proxy is solicited on behalf of the
2550 Huntington Avenue Board of Directors
Alexandria, Virginia 22303-1499 The undersigned hereby appoints D. M. Ervine
and C. S. Weber as Proxies, each with the
power to appoint his substitute, and hereby
authorizes them to vote as designated below,
all the shares of Common Stock of
VSE Corporation held of record by the
undersigned on March 21, 2005, at the annual
meeting of stockholders scheduled to be held
on May 3, 2005, and at any adjournment
thereof.
1. ELECTION OF DIRECTORS
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) ___ to vote for all nominees
listed below ___
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Donald M. Ervine, Clifford M. Kendall, Calvin S. Koonce, James F, Lafond,
David M. Osnos, Jimmy D. Ross, and Bonnie K. Wachtel
2. PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP as the independent
auditor of VSE Corporation.
___ FOR ___ AGAINST ___ ABSTAIN
3. In their discretion, the Proxies are authorized to vote on such other
business as may properly come before this meeting.
(to be signed on the other side)
________________________________________________________________________________
________________________________________________________________________________
(continued from the other side)
This proxy when properly executed will be voted in the manner directed herein by
the undersigned stockholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1 AND 2.
Please sign exactly as it appears printed hereon. When
shares are held by joint tenants, both should sign. When
signing as an attorney, executor, administrator, trustee,
SAMPLE CARD or guardian, please give full title as such. If signing as
a corporation, please sign full corporate name by President
or other authorized officer. If signing as a partnership,
please sign in partnership name by authorized person.
Dated: _______________, 2005 ___________________________
Please vote, sign, date, and, Signature
return the Proxy Card using
the enclosed envelope. ___________________________
Signature if held jointly
________________________________________________________________________________