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
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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
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VSE CORPORATION
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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
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Certain Beneficial Owners
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VSE Corporation Employee
ESOP/401(k) Plan (a) 310,448 14.0%
Non-employee Directors
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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
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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
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Directors, Nominees, and
Executive Officers as a group
(12 persons) (b) (d) 866,686 36.9%
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* 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.
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
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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.
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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.
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.
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
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The Board recommends a vote FOR the proposal to adopt the 2004 Plan, and your proxy will be so voted unless you specify otherwise.
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.
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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
APPENDIX A
AUDIT COMMITTEE CHARTER
(as adopted by the Board of Directors of VSE Corporation on March 9, 2004)
1. Role. The role of the Audit Committee (the "Committee") is to:
(a) oversee the Corporation's accounting and financial reporting processes
and the audits of the Corporation's financial statements; (b) monitor and
make recommendations to the Corporation's Board of Directors (the "Board")
regarding the auditing and integrity of the Corporation's consolidated
financial statements; (c) be directly responsible for the qualification,
selection, retention, independence, performance and compensation of the
Corporation's independent auditors ("Auditors"), including resolution of
disagreements between management and the Auditors regarding financial
reporting, for the purpose of preparing or issuing an audit report or
performing other audit, review or attest services for the Corporation, and
have the Auditors report directly to the Committee; (d) provide oversight
in respect of the Corporation's internal audit and accounting and
financial reporting processes; and (e) perform such other duties as are
enumerated in and consistent with this Charter.
2. Membership. The Committee's membership will consist of three or more directors, each of whom shall be independent, as such term is defined in the applicable rules of the Securities and Exchange Commission ("SEC") and The Nasdaq Stock Market, Inc. ("Nasdaq"), and the Board shall affirmatively determine that each Committee member has such independence and no relationship that, in the Board's opinion, would interfere with his or her independent judgment. Each Committee member shall, at the time of his or her appointment to the Committee, be able to read and understand fundamental financial statements, including the balance sheet, income statement, and cash flow statement. At least one Committee member shall be an "audit committee financial expert" as such term is defined by applicable SEC requirements and, as required by applicable Nasdaq rules, have past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual's financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. The Board shall appoint the chairperson.
3. Operations. The Committee will meet at least four times a year. Additional meetings may occur as the Committee or its chair deem advisable. The Committee will keep minutes of its proceedings and will report its actions to its next meeting. The Committee will be governed by the same rules regarding meetings (including meetings by conference telephone or similar communications equipment), action without meetings, notice, waiver of notice, and quorum and voting requirements as are applicable to the Board. The Committee is authorized and empowered to adopt its own rules of procedure not inconsistent with (a) any provision hereof, (b) any provision of the Corporation's certificate of incorporation or bylaws, or (c) the laws of the State of Delaware.
4. Authority.
a) The Committee will have the resources and authority necessary to
discharge its duties and responsibilities, including the authority
to retain outside counsel or other experts or consultants, as it
deems appropriate. Any communications between the Committee and
legal counsel in the course of obtaining legal advice will be
considered privileged communications of the Corporation, and the
Committee will take all necessary or appropriate action to preserve
the privileged nature of those communications.
b) Except as may otherwise be specifically authorized herein or required by the federal securities laws or Nasdaq rules, the Committee is not authorized to bind the Board or VSE without the Board's prior approval set forth in a duly adopted resolution approved by a majority of the Board members who are independent as defined by Nasdaq Rule 4200(a)(15) as currently in effect.
5. Responsibilities. The Committee's principal responsibilities and
functions are to review and provide guidance to the Board and management
in respect of the principal financial reporting and audit policies of the
Corporation, including:
a) Direct responsibility for the qualification, selection, retention,
independence, performance and compensation of the Auditor;
b) Direct responsibility for the adoption of an Auditor non-audit
services policy and approval of audit and non-audit services;
c) Direct responsibility for discussion and recommendation of audited
financial statements, review of financial reporting issues, review
of earnings news releases and preparation of the Committee report
included in the Corporation's annual proxy statement;
d) Obtaining from the Auditors a formal written statement delineating
all relationships between the Auditors and the Corporation,
consistent with Independence Standards Board Standard 1, and
actively engage in a dialogue with the Auditors with respect to any
disclosed relationships or services that may impact the objectivity
and independence of the Auditors and taking, or recommending that
the full Board take, appropriate action to oversee the independence
of the Auditors;
e) Providing oversight in respect of Securities Exchange Act Section
10A(b) discovery of illegal acts, conflicts of interest and ethical
conduct review;
f) Establishing procedures for: (i) the receipt, retention and
treatment of complaints received by the Corporation regarding
accounting, internal accounting controls or auditing matters; and
(ii) the confidential, anonymous submission by employees of the
Corporation or its subsidiaries of concerns regarding questionable
accounting or auditing matters;
g) Reviewing and reassessing the adequacy of this Charter on an annual
basis; and
h) Reviewing other financial reporting or audit issues that the Board
or management desires to have reviewed by the Committee.
While the matters set forth in clauses 5(a), (b) and (c) above shall be
the exclusive responsibility of the Committee, the Committee should
periodically consult with the Board in respect of such matters.
6. Funding. The Corporation shall provide for appropriate funding, as
determined by the Committee, in its capacity as a Board committee, for
payment of:
a) Compensation to any advisers employed by the Committee under section
4(a) above; and
b) Ordinary administrative expenses of the Committee that are necessary
or appropriate in carrying out its duties.
APPENDIX B
VSE CORPORATION 2004 STOCK OPTION PLAN
Section 1 Purpose. The purpose of the VSE Corporation 2004 Stock Option Plan (the "Plan") is to promote the interests of VSE Corporation, a Delaware corporation ("VSE"), its Subsidiaries (VSE and its Subsidiaries, collectively, the "Company"), and its stockholders by (a) providing incentives for executives and other key employees of the Company, and non-employee Directors of VSE, (b) encouraging stock ownership by such individuals by providing them with a means to acquire a proprietary interest in the Company, and (c) aiding in attracting and retaining individuals of the caliber necessary for the Company's continued growth and profitability.
Section 2 Definitions. For purposes of the Plan, the following terms shall have the meanings set forth below:
(a) "Award" or "Awards" means an award or grant of Nonqualified Stock Options made to a Participant under Section 4 of the Plan.
(b) "Board" means VSE's Board of Directors.
(c) A "Change-of-Control" shall be deemed to have occurred if (i) VSE shall be merged or consolidated with another corporation and, as a result of such merger or consolidation, less than 75% of the outstanding voting securities of the surviving or resulting corporation shall be owned directly or indirectly in the aggregate by the former VSE stockholders as the same shall have existed immediately prior to such merger or consolidation, (ii) VSE shall sell all or substantially all of its assets to another corporation or other entity which is not a wholly owned Subsidiary or an affiliate of VSE, or (iii) a person, within the meaning in Section 3(a)(9) or of Section 13(d)(3) of the Exchange Act (as in effect on the date hereof), shall acquire 50% or more of VSE's outstanding voting securities (whether directly, indirectly, beneficially or on record). For purposes hereof, ownership of voting securities shall take into account and shall include ownership as determined by applying the provision of Exchange Act Rule 13d-3(d)(1)(i) (as in effect on the date hereof).
(d) "Code" means the Internal Revenue Code of 1986, as in effect from time to time or any successor thereto, together with rules, regulations and interpretations promulgated thereunder.
(e) "Committee" means the compensation committee of the Board.
(f) "Common Stock" means the common stock of VSE, par value $.05 per share, or any equity security of VSE issued in substitution, exchange, or in lieu thereof.
(g) "Disability" means disability as determined by the Board in accordance with standards and procedures similar to those under the Company's long-term disability plan.
(h) "Discretionary Option" means a Nonqualified Stock Option to purchase Common Stock that is granted hereunder to a Participant who is not an Outside Director.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended and in effect from time to time, or any successor statute.
(j) "Fair Market Value" means on any given date, the closing price of the Common Stock as reported on the Nasdaq National Market System ("Nasdaq") for the date in question. If no sales of Common Stock were made on Nasdaq on that date, the closing price of a share of Common Stock as reported on Nasdaq for the preceding day on which sales of Common Stock were made on Nasdaq shall be substituted.
(k) "Insider" means a Participant who is subject to the reporting requirements of Exchange Section 16 with respect to VSE.
(l) "Nondiscretionary Option" means a Nonqualified Stock Option to purchase Common Stock that is granted to Outside Directors pursuant to Section 7 hereof.
(m) "Nonqualified Stock Option" means an option to purchase Common Stock during such specified time as the Committee may determine, not to exceed five years, that is granted pursuant to Section 4 hereof, that does not meet the requirements of Code Section 422, or if meeting those requirements, is not intended to be an incentive stock option under Code Section 422.
(n) "Outside Directors" means any Board member who, on the date of the granting of an option to such member hereunder, is not an officer or employee of the Company. Outside Directors shall not be eligible to receive Discretionary Options.
(o) "Participant" means any person who is employed by the Company or is an Outside Director and who is granted an Award under the Plan.
(p) "Retirement" means retirement from active employment with the Company or as a Board member on or after the normal retirement date specified in the Company's retirement plan or such earlier retirement date as approved by the Committee for purposes of this Plan.
(q) "Subsidiary" shall mean a subsidiary of VSE, whether now or hereafter existing, and whether direct or indirect, as defined in Code Section 424(f).
(r) "Termination-for-Cause" means termination of the Participant's
employment by the Company by written notice to the Participant,
specifying the event relied upon for such termination, due to
(i) the Participant's willful misconduct in respect of his or her
duties for the Company, (ii) conviction for a felony or
perpetration of a common law fraud, (iii) failure to comply with
applicable laws or corporate policies with respect to the execution
of the Company's business operations, (iv) theft, fraud,
embezzlement, dishonesty or other conduct which has resulted or is
likely to result in economic damage to the Company, or (v) the
failure by the Participant to substantially perform the
Participant's duties and obligations as determined by his or her
supervisor, other than any such failure resulting from the
Participant's incapacity due to physical or mental illness.
(s) "Vesting" or "vest" means the ability to exercise the stock option at one time or in such installments over the balance of the vesting period as may be provided in the stock option agreement.
(t) "Voluntary Termination" means the voluntary termination of a Participant who chooses to cease employment with the Company.
Section 3 Administration. The portion of the Plan which relates to the grant of Discretionary Options shall be administered by the Board, provided that a majority of the Board members and a majority of the Board members acting on the matter are Outside Directors. Alternatively, if the Board shall not satisfy the foregoing provisions or if the Board shall otherwise so specify, the portion of the Plan which relates to the grant of Discretionary Options shall be administered by a committee of at least three directors, all of whom must be Outside Directors. In any event, the portion of the Plan which relates to the grant of Nondiscretionary Options shall be administered by the Board. To administer the Plan, the Board may consider, but is not required to consider, the recommendations of the Committee.
(a) The Board is authorized, subject to the provisions of the Plan, to construe and interpret the Plan, to promulgate, amend and rescind rules and regulations relating to the implementation of the Plan, and to make all other determinations necessary or advisable for all the administration of the Plan. The Board may designate persons other than Board members to carry out its responsibilities under such conditions and limitations as it may prescribe, except that the Board may not delegate its authority with regard to selection for participation of and the granting of Discretionary Options to persons subject to Exchange Act Section 16(a) and 16(b), except as specified herein. Any determination, decision or action of the Board in connection with the construction, interpretation, administration, or application of the Plan shall be final, conclusive and binding upon all Participants. The Company shall effect the granting of Awards under the Plan in accordance with the determinations made by the Board, by execution of instruments in writing in such form as approved by the Board ("stock option agreement").
(b) The granting of Nondiscretionary Options under the Plan and the amount, price, vesting and timing of Nondiscretionary Options shall be automatic, as described in Section 7 hereof. All questions of interpretation of the Plan with respect to Nondiscretionary Options will be determined by the Board.
Section 4 Grants. Grants under the Plan are in the form of Nonqualified Stock Options to purchase Common Stock. Nonqualified Stock Options are herein called "stock options."
(a) Stock options may be granted from time to time under the Plan for up to 350,000 shares in the aggregate of Common Stock. Shares which are forfeited back to the Company under the Plan may be reissued under the Plan. Of these aggregate shares, 30,000 shares are reserved for Nondiscretionary Options and 320,000 shares are reserved for Discretionary Options. Either authorized but unissued shares or reacquired shares may be used for grants. The Company may purchase shares required for this purpose. In no event will the determination of the number of shares available be calculated in a manner inconsistent with applicable laws and regulations as in effect from time to time.
(b) In no event shall a Discretionary Grant be made under the Plan if the total number of shares of Common Stock underlying unexercised outstanding options granted under the Plan and under the Company's 1998 Stock Option Plan (the "Prior Plan") exceeds fifteen percent (15%) of the total outstanding Common Stock or would exceed fifteen percent (15%) of the total outstanding Common Stock if such grant was made.
Section 5 Participation. Employees eligible for Discretionary Options shall be selected by the Board from time to time from among those executives and other key employees of the Company who, in the Board's judgment, are in a position to contribute materially to the Company's success. Participants who are Outside Directors shall only be eligible to receive Nondiscretionary Options under the Plan.
(a) No Participant shall have any rights as a stockholder with respect to any Common Stock subject to his or her stock options prior to the date as of which he or she is actually recorded as the holder of the Common Stock covered by such stock options upon VSE's stock records.
(b) Nothing in the Plan or any stock option granted hereunder shall confer upon any employee any right to continue in the employ of the Company or interfere in any way with the right of the Company to terminate his or her employment at any time.
Section 6 Conditions of Discretionary Options.
(a) Discretionary Options shall be evidenced by stock option agreements, which shall be subject to the applicable provisions of the Plan and contain such other provisions as the Board shall determine from time to time, such as a defined vesting period with respect to the initial exercisability of the Discretionary Option. A Discretionary Option may be exercised at one time or in installments over the balance of the vesting period as may be provided in the stock option agreement.
(b) The Discretionary Option price per share shall be not less than the Fair Market Value of the Common Stock as of the date each Discretionary Option is granted.
(c) The Board may permit the voluntary surrender of all or a portion of any Discretionary Option to be conditioned upon the granting of a new stock option.
(d) In the event of a Change-of-Control, then notwithstanding any provision of this section or of any provisions of any option agreements to the contrary, all Awards which have not terminated and which are then held by any Participant shall, as of such Change-of-Control, become immediately vested and exercisable without regard to the exercise period specified in any relevant stock option agreement.
(e) VSE's obligation to issue, transfer or deliver Common Stock under the Plan shall be subject to (i) the effectiveness of a registration statement under the Securities Act of 1933, as amended, with respect to such issue, transfer or delivery, if deemed necessary or appropriate, (ii) the condition that the Common Stock reserved for issuance, if any, shall have been listed (or authorized for listing upon official notice of issuance) upon each stock exchange on which outstanding shares of the same class may then be listed, and (iii) all other applicable laws, regulations, rules and orders which shall then be in effect.
(f) If the Board determines that a Participant is incapacitated and unable to exercise the Discretionary Options granted under the Plan and has not designated a legal representative, the Board, in its discretion, may authorize the assignment of the power to exercise such stock options to a fiduciary, legal guardian or other individual whom the Board deems appropriate based on the applicable facts and circumstances. Due consideration shall be given to any such assignment provided by the Participant prior to the incapacity.
(g) The Company will withhold applicable taxes related to the exercise of Options hereunder. A Participant may satisfy the withholding obligation by (i) paying the amount of any taxes in cash, (ii) with the approval of the Board at the time applicable taxes are due or as provided in the stock option agreement, shares of Common Stock may be deducted from the payment to satisfy the obligation in full or in part, or (iii) with the Board's approval at the time applicable withholding taxes are due, deliver already owned Common Stock to satisfy the obligation in full or in part. The amount of the withholding and the number of shares to be deducted shall be determined by the with reference to the Fair Market Value of the Common Stock as of the date when the withholding is required to be made. Any use of Common Stock by an Insider for payment of applicable withholding taxes shall be subject to the provisions of Exchange Act Rule 16b-3 as to the manner and timing of the election.
(h) Captions preceding the sections hereof are inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provisions hereof.
Section 7 Conditions of Nondiscretionary Options.
(a) Grant of Options. Each then serving Outside Director shall receive a Nondiscretionary Option on January 1 of each year to purchase up to 1,000 shares of Common Stock, which total shall include the options granted pursuant to Section 7(a) of this Plan and the Prior Plan, and each newly appointed or elected director shall receive on the first calendar day of the month next following his or her appointment or election as a director a Nondiscretionary Option to purchase up to 1,000 shares of Common Stock. Notwithstanding the foregoing, if a sufficient number of shares is unavailable in any year to provide for the total Nondiscretionary Option awards, the number of shares in such year shall be prorated accordingly. The foregoing number of shares shall be adjusted in accordance with the principles of Section 10 hereof in the event of the occurrence of an event described therein.
(b) Nondiscretionary Options shall be evidenced by stock option
agreements, which shall be subject to the applicable provisions of
the Plan. Each Nondiscretionary Option shall be vested as follows:
25% immediately upon date of grant, and 25% on each of the first
three successive anniversary dates after the date of grant (100%
vested after three years). The Nondiscretionary Option shall be
exercised only to purchase whole shares, and in no case may a
fraction of a share be purchased. The right of the Participant to
purchase shares with respect to which this option has become
exercisable as herein provided may be exercised in whole or in part
at any time, prior to the fifth anniversary of the date of grant.
(c) The Nondiscretionary Option price per share shall be not less than the Fair Market Value of the Common Stock as of the date each Nondiscretionary Option is granted.
(d) The Board may permit the voluntary surrender of all or a portion of any Nondiscretionary Option to be conditioned upon the granting of a new stock option.
(e) In the event of a Change-of-Control, then notwithstanding any provision of this section or of any provisions of any stock option agreements to the contrary, all Awards which have not terminated and which are then held by any Participant shall, as of such Change-of-Control, become immediately vested and exercisable without regard to the exercise period specified in any relevant stock option agreement.
(f) VSE's obligation to issue, transfer or deliver Common Stock under the Plan shall be subject to (i) the effectiveness of a registration statement under the Securities Act of 1933, as amended, with respect to such issue, transfer or delivery, if deemed necessary or appropriate, (ii) the condition that the Common Stock reserved for issuance, if any, shall have been listed (or authorized for listing upon official notice of issuance) upon each stock exchange on which outstanding shares of the same class may then be listed, and (iii) all other applicable laws, regulations, rules and orders which shall then be in effect.
(g) If the Board determines that a Participant is incapacitated and unable to exercise the Nondiscretionary Options granted under the Plan and has not designated a legal representative, the Board, in its discretion, may authorize the assignment of the power to exercise such stock options to a fiduciary, legal guardian or other individual whom the Board deems appropriate based on the applicable facts and circumstances. Due consideration shall be given to any such assignment provided by the Participant prior to the incapacity.
(h) The Company will withhold applicable taxes related to the exercise of Options hereunder. A Participant may satisfy the withholding obligation by (i) paying the amount of any taxes in cash, (ii) with the approval of the Board at the time applicable taxes are due or as provided in the stock option agreement, shares of Common Stock may be deducted from the payment to satisfy the obligation in full or in part, or (iii) with the approval of the Board at the time applicable withholding taxes are due, deliver already owned Common Stock to satisfy the obligation in full or in part. The amount of the withholding and the number of shares to be deducted shall be determined by the Board with reference to the Fair Market Value of the Common Stock on that date when the withholding is required to be made. Any use of Common Stock by an Insider for payment of applicable withholding taxes shall be subject to the provisions of Exchange Act Rule 16b-3 as to the manner and timing of the election.
(i) Captions preceding the sections hereof are inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provisions hereof.
Section 8 Exercise of Awards.
(a) Subject to Sections 6 and 7, each stock option will be exercisable in whole or in part from time to time, prior to its cancellation or termination, by written notice to VSE specifying the number of shares, with respect to which it is being exercised. If any stock option is being exercised, such notice shall be accompanied by payment in full of the purchase price by cash or check or in other form acceptable to the Board, including shares of Common Stock or partly in cash or check and partly in such shares, except that the Board may, from time to time, impose limits and conditions on the use of such shares for payment. The Board may alternatively permit, under such terms and conditions as it may establish from time to time, payment methods for option exercises which will enable a Participant (other than a Participant who, at the time of exercise, is subject to Exchange Act Section 16(b)) to pay the exercise price of a stock option, and any applicable withholding taxes, from the proceeds of the sale of shares received as a result of the exercise of such stock option, through the delivery of a properly executed exercise notice together with such other documentation as the Board and the broker, if applicable, shall require to effect an exercise of the stock option and delivery to the Company of the amount of sale or loan proceeds required to pay the exercise price. Certificates for shares to be received upon the exercise of stock options will be delivered in regular course. All fractional shares are payable in cash.
(b) Except as provided in Section 9, a stock option may be exercised during the lifetime of the Participant only by the Participant, and after his or her death by the persons to whom the stock option has been transferred by will or by laws of descent and distribution. Stock options are not otherwise transferable.
Section 9 Termination of Stock Options. Each stock option will terminate upon the earliest of the following:
(a) The date fixed by the Board when the stock option is granted as set forth in the relevant stock option agreement, not to exceed five years from date of grant.
(b) Three months after voluntary termination of employment (not to exceed the stock option termination date), after which the Participant shall forfeit all rights and Awards for unexercised and nonvested shares under the Plan, except as follows:
(i) If the Participant dies while an employee, vested shares may be exercised by Participant's legal representative within one year from death of Participant, not to exceed the stock option termination date.
(ii) Upon the Participant's Retirement vested shares may be exercised within three years after the date of such Retirement, not to exceed the stock option termination date.
(iii) If the Participant's employment is terminated for Disability or due to a lay-off by the Company, vested shares may be exercised within one year after termination of employment not to exceed the stock option termination date.
(iv) If the Board determines that the stock option may be exercised (whether or not it was fully exercisable) for a longer period of time.
(v) If a Change-of-Control occurs, all stock option shares shall vest immediately, and may be exercised within one year after termination of employment, not to exceed the stock option termination date.
(c) Notwithstanding anything hereinabove to the contrary, if a Participant's employment is terminated by reason of Termination-for- Cause, his or her ability to exercise any stock option shall terminate on the date of such termination of employment. For this purpose, the determination of the Board as to whether a Participant's employment was terminated for reason of Termination-for- Cause is final, conclusive and binding on the Participant and all other respective parties.
Section 10 Adjustments. In the event of any change in the Common Stock, through the declaration of stock dividends, through recapitalization resulting in stock split-ups or combinations of shares, or as the result of similar events, pro rata adjustment shall be automatically made in the number of shares available for issuance pursuant to the exercise of Options under the Plan, in the number of shares and price per share of all shares subject to outstanding stock options.
Section 11 Amendment and Termination. The Board may alter, suspend or terminate the Plan. Except as provided in Sections 6, 7, and 10, the Board may not, however, increase the maximum number of shares which may be issued under the Plan in the aggregate, materially increase or decrease the benefits accruing to Participants under the Plan or materially modify the requirements regarding eligibility for participation in the Plan or, without the written consent of the holder thereof, alter or impair any stock option previously granted under the Plan. No stock option may be granted after the termination of the Plan, but stock options previously granted may vest and be exercised in accordance with their terms.
Section 12 Term. The Plan shall be adopted by the Board effective as of May 3. 2004, subject to approval by the Company's stockholders. The Plan shall remain in effect until all Awards under the Plan have been exercised or terminated under the Plan or May 3, 2014, whichever occurs first.
APPENDIX C
VSE CORPORATION 2004 NON-EMPLOYEE DIRECTORS STOCK PLAN
1. Purpose. The purpose of the VSE Corporation 2004 Non-Employee Directors Stock Plan (the "Plan") is to provide a means for non-employee directors of VSE Corporation, a Delaware corporation (the "Company"), to increase their proprietary interest in the Company's growth and success as the owners of additional common stock of the Company ("Company Stock").
2. Administration. The Company's board of directors (the "Board") shall administer the Plan. All questions of interpretation and application of the terms and conditions of the Plan are subject to the Board's sole discretion, which shall be binding on all Participants.
3. Eligibility. All non-employee members of the Board are covered by this Plan ("Participants").
Company Stock.
a. Company Stock allocated under the Plan may be either authorized but
unissued or issued and held in the treasury.
b. A maximum of 50,000 shares of Company Stock may be allocated and issued
under the Plan, subject to adjustment as provided in Section 4(c) below.
c. Appropriate adjustment will be made for any stock dividend, stock
split, combination of Company Stock or other change in the capitalization of the
Company.
5. Participation. Every non-employee director of the Company shall automatically participate in the Plan until the earlier of his or her retirement, resignation, nonreelection, disability or death.
6. Contributions. Commencing as of January 1, 2004, from and after the date of participation, each Participant may elect in respect of each year that all or a specified portion of his or her annual retainer fee shall be allocated to and paid in Company Stock under the Plan ("Stock Portion"), with the balance of such annual retainer, if any, being payable in cash ("Cash Portion"). Such election shall be made in writing and provided to the Corporate Secretary by November 1 of each year or such other date as the Board may determine, provided such date is at least 30 days prior to the date on which the fair market value of the Company Stock is determined pursuant to Section 7(a) of this Plan. If any Participant fails to provide the above-mentioned written election by the date referenced in the preceding sentence, such Participant's annual retainer fee shall be paid fully in cash for the particular year. If not enough Company Stock is available to satisfy one or more Participant's Stock Portion elections in respect of a year, such elections shall be automatically adjusted, on a pro rata basis, to match the amount of shares of Company Stock available hereunder, in proportion to the number of shares of Company Stock each Participant would have received in respect of his or her election as if sufficient Company Stock was available for all elections.
7. Allocation.
a. Company Stock is allocated to Participants at its fair market value as
of the date of allocation. "Fair Market Value" means on any given date, the
closing price of the Common Stock as reported on the Nasdaq National Market
System ("Nasdaq") for the date in question. If no sales of Common Stock were
made on Nasdaq on that date, the closing price of a share of Common Stock as
reported on Nasdaq for the preceding day on which sales of Common Stock were
made on Nasdaq shall be substituted.
b. No fractional shares shall be allocated.
c. Any residual cash balance may be credited to Participants or
distributed along with the Cash Portion in the Board's sole discretion.
8. Taxes. The Cash Portion shall be paid to Participants to cover the estimated taxes associated with the issuance of Company Stock under this Plan. Notwithstanding the foregoing, each Participant is solely responsible for calculation and payment of his or her tax liability in respect of the Plan, irrespective of whether or not such Participant's Cash Portion is sufficient to cover the entire amount of actual taxes associated with the Participant's Stock Portion.
9. Distributions.
a. As soon as practicable, a stock certificate will be issued to each
Participant for the number of shares of Company Stock allocated to the
Participant under the Plan.
b. By executing a copy of this Plan, the Participant represents and
warrants to the Company that
i. he or she will acquire and hold all the Company Stock issued to
him or her hereunder for his or her own account for investment and not with the
view toward resale or distribution except in accordance with Federal and state
securities laws; and that
ii. he or she will not directly or indirectly distribute or
otherwise transfer any interest in Company Stock acquired under this Plan except
pursuant to (a) an effective and current registration statement under the
Securities Act of 1933, as amended (the "Act") covering the Company Stock, or
(b) a specific exemption from registration under the Act.
c. The Company may require Participant to furnish an opinion of counsel
reasonably acceptable to the Company that no registration under the Act is
required.
d. By executing a copy of this Plan each Participant also acknowledges
that (i) the Company Stock issued under the Plan will be issued pursuant to
exemption from the registration under the Act; (ii) such Company Stock must be
held indefinitely unless it is registered or an exemption from registration
becomes available under the Act and the applicable state laws; (iii) the Company
is under no obligation to facilitate resale of the Company Stock whether by
registration, Rule 144 under the Act, or otherwise; (iv) if Rule 144 under the
Act is available for resale of the Company Stock, such sales will or may be
subject to specific holding periods, volume restrictions, and other provisions;
and (v) the Participant will bear the economic risk of the investment in the
Company Stock for an indefinite period of time.
10. Amendment of the Plan. The Board may from time to time alter, amend, suspend, or discontinue the Plan.
11. Miscellaneous.
a. This Plan does not create any obligation of the Board to nominate any
director for re-election by the Company's stockholders.
b. Participants will have no stockholder rights with respect to the
Company Stock subject to the Plan until it is allocated and issued to
Participants.
c. None of the benefits under the Plan are subject to the claims of
creditors of Participants or their beneficiaries, nor are they subject to
attachment, garnishment or other legal process. Neither Participant nor
beneficiary may assign, sell, borrow on or otherwise encumber a beneficial
interest in the Plan nor shall any such benefits be in any manner subject to
the deeds, contracts, liabilities, engagements or torts of any Participant or
beneficiary.
d. Participant's latest beneficiary designation under the VSE Corporation
1996 or 1998 or subsequent Stock Option Plan adopted by the Board is deemed to
be the Participant's beneficiary designation under this Plan unless otherwise
directed in writing by the Participant to the Company's Secretary.
12. Effective Date, Stockholder Approval, and Termination. This Plan will be effective if approved by the holders of a majority of the outstanding Company Stock present and entitled to be voted at the stockholders meeting at which the Plan is considered and voted upon. Once so approved by stockholders, the Plan will be effective retroactively to January 1, 2004, and will be effective until December 31, 2013, unless terminated earlier by the Board.
13. Governing Law. Delaware law shall govern this Plan.