VSE CORPORATION
2550 Huntington Avenue, Alexandria, Virginia 22303-1499
Notice of 2002
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 Thursday, May 2, 2002, commencing at
10:00 a.m., Washington, D.C. time, at the Hilton Alexandria at Mark Center,
5000 Seminary Road, Alexandria, Virginia 22311. 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 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 Hilton Alexandria at Mark
Center is located at 5000 Seminary Road, Alexandria, Virginia 22311, just off
Interstate 395.
Very truly yours,
VSE CORPORATION
D. M. Ervine
Chairman, President, and CEO/COO
April 2, 2002
VSE CORPORATION
2550 Huntington Avenue, Alexandria, Virginia 22303-1499
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 2, 2002
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
Thursday, May 2, 2002, commencing at 10:00 a.m., Washington, D.C. time, at the
Hilton Alexandria at Mark Center, 5000 Seminary Road, Alexandria, Virginia
22311, for the following purposes:
1. To elect seven directors to serve until the next annual
meeting of stockholders and until their successors are duly
elected and qualified, and
2. 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 18, 2002, will be entitled to notice of, and to vote at, the annual
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 2001 Annual Report to Stockholders, which contains
consolidated financial statements and other information of interest to
stockholders, accompanies this proxy material.
Whether or not 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 envelope, which requires no postage if mailed within the United
States of America. 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
C. S. Weber
Secretary
April 2, 2002
VSE CORPORATION
PROXY STATEMENT
Annual Meeting of Stockholders
to be held on May 2, 2002
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 the board of directors of VSE (the "Board") for use
at VSE's annual meeting of stockholders to be held on Thursday, May 2, 2002,
commencing at 10:00 a.m., Washington, D.C. time, at the Hilton Alexandria at
Mark Center, 5000 Seminary Road, Alexandria, Virginia 22311, and at any
adjournments thereof (the "Meeting") for the purposes specified in the
accompanying notice of 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 provided to the holders of VSE common stock, par
value $.05 per share (the "stockholders"), on or about April 2, 2002.
The close of business on March 18, 2002, is the record date for the
determination of stockholders entitled to notice of, and to vote at, the
Meeting. Holders of a majority of the outstanding VSE common stock, par value
$.05 per share (the "Stock" or "VSE Stock"), as of March 18, 2002, must be
present at the Meeting, either in person or represented by proxy, to
constitute a quorum for the transaction of business. As of the close of
business on March 18, 2002, there were 2,150,540 shares of Stock outstanding
and approximately 297 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 18, 2002, 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 for the election as VSE
directors of the seven nominees listed below under "Election of Directors" as
discussed below.
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 discre-
tionary authority as to certain Stock to vote on a particular matter, such
shares will not be considered as present and entitled to vote 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 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 18, 2002. The voting and investment powers of
the Stock listed below are held solely by the reported owner unless otherwise
indicated.
Shares beneficially Percent of
Name of Beneficial Owner owned class
- ------------------------ ------------------- ----------
Certain Beneficial Owners
- -------------------------
VSE Corporation Employee
ESOP/401(k) Plan (a) 429,526 20.0%
Non-employee Directors
- ----------------------
Clifford M. Kendall (b) 24,621 1.1%
Calvin S. Koonce (b) (c) 464,346 21.6%
David M. Osnos (b) 4,625 *
Jimmy D. Ross (b) 7,257 *
Bonnie K. Wachtel (b) 30,125 1.4%
Named Executive Officers and Other Directors
- --------------------------------------------
Donald M. Ervine (b) 82,390 3.8%
Robert J. Kelly (b) 5,000 *
James M. Knowlton (b) 47,156 2.2%
Thomas R. Loftus (b) 13,326 *
James M. Todd (b) (d) 13,300 *
Craig S. Weber (b) 68,920 3.2%
Group
- -----
Directors, Nominees, and
Executive Officers as a group
(15 persons) (b) (e) 893,631 39.2%
* Represents less than 1% of outstanding Stock.
(a) These shares are held in trust for the benefit of Plan participants.
Three VSE officers serve as Plan trustees. The Plan participants have voting
power over 339,384 shares allocated to their respective ESOP accounts, while
the Plan trustees share voting and investment power over the remaining 90,142
shares. The mailing address for the Plan is 2550 Huntington Avenue,
Alexandria, Virginia 22303-1499.
(b) Includes the following number of shares of stock which the non-employee
directors, named executive officers, other directors, and all directors,
nominees, and executive officers as a group (15 persons) have the right to
purchase pursuant to the exercise of stock options which are exercisable
within the next 60 days: Clifford M. Kendall 562, each of Calvin S. Koonce,
David M. Osnos, Jimmy D. Ross, and Bonnie K. Wachtel 2,625,
Thomas R. Loftus 7,625, Donald M. Ervine 35,250, Robert J. Kelly 5,000,
James M. Knowlton 22,000, James M. Todd 12,500, Craig S. Weber 11,125, and all
directors, nominees, and executive officers as a group (15 persons) 128,312.
(c) Mr. Koonce's mailing address is 6550 Rock Spring Drive, Suite 600,
Bethesda, Maryland 20817. Includes 2,500 shares held in a brokerage account
for which Mr. Koonce has discretionary authority.
(d) Mr. Todd resigned on February 15, 2002.
(e) The group consists of 15 persons. The 893,631 shares beneficially owned
include 90,142 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 Securities and Exchange Commission ("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 the reports on a timely basis.
ELECTION OF DIRECTORS
Nominees
At the Meeting, stockholders will elect, by a plurality of the votes
cast, seven VSE directors, who will constitute the entire Board. Each nominee
listed below is currently serving as a VSE director and was elected by the
stockholders at the last annual meeting of stockholders. Each nominee elected
as a director will serve until the next annual meeting of stockholders and
until his or her successor is elected and qualified. If any nominee should
become unable to serve for any reason, the proxies will be voted for such
substitute nominee as shall be designated by the Board.
James M. Todd, who served as a VSE director in 2001 and 2002, resigned
from the Board as of February 15, 2002, and accordingly, is not seeking
reelection.
The seven nominees for election as VSE directors and certain information
regarding them are as follows:
Name and Principal Occupation Age Director Since
- ----------------------------- --- --------------
David M. Osnos 70 1968
Senior member of Arent Fox Kintner Plotkin & Kahn, PLLC,
attorneys-at-law (for more than the past five years);
also a director of EastGroup Properties and Washington
Real Estate Investment Trust.
Donald M. Ervine 65 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 46 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 64 1992
Chairman, Koonce Securities, Inc., a securities
broker/dealer firm (for more than the past five years).
Jimmy D. Ross 65 1994
General, U.S. Army (Ret.), formerly Commanding General,
U.S. Army Materiel Command. General Ross has served as
an executive officer of Cypress International, Inc., a
marketing consulting firm, since January 2000. From
1994 to 1999, he served as Senior Vice President,
Biomedical Services, of the American Red Cross.
Robert J. Kelly 64 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 was
appointed President of Energetics in March 1999.
Clifford M. Kendall 70 2001
Chairman of the Board, On-Site Sourcing, Inc. He is
also a director of Affiliated Computer Services, Inc.
("ACS") and Washington Real Estate Investment Trust.
Mr. Kendall was one of the founders of Computer Data
Systems, Inc. ("CDSI") in 1968, and he served as its
Chairman and Chief Executive Officer from 1970 to 1991
and as Chairman until December 1997. CDSI was acquired
by ACS in 1997.
Committees of the Board
Audit Committee. The audit committee met four times during 2001 and
consists solely of non-employee directors, including Mr. Koonce, who chairs
the committee, General Ross, and Ms. Wachtel. The audit committee is
primarily concerned with the effectiveness of VSE accounting policies and
practices, financial reporting, and internal controls. The committee
recommends to the Board the firm to be appointed as VSE's independent
certified public accountants and reviews the scope of the annual exam-
ination of VSE's books and records. The committee also reviews the audit
findings and recommendations of the independent public accountants,
considers the organization and work of VSE's internal audit function, and
monitors the extent to which the findings and recommendations of these
groups have been implemented.
Compensation Committee. The compensation committee met two times during
2001 and consists solely of non-employee directors, including General Ross,
Chairman, Mr. Kendall, Mr. Koonce, and Ms. Wachtel. The committee is
primarily concerned with corporate compensation policies, including
incentive compensation, and with the compensation of the chief executive
officer and certain other executive officers and employees.
Nominating and Corporate Ethics Committee. The nominating and corporate
ethics committee met once during 2001 and consists of Admiral Kelly,
Chairman, and Mr. Osnos. The committee is primarily concerned with making
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. 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 generally by February 15th, but in any event 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.
Planning Committee. The planning committee met four times during 2001.
The committee consists of Mr. Todd, Chairman (not standing for reelection),
Admiral Kelly, Mr. Koonce, and General Ross. The committee is primarily
concerned with making recommendations to the Board with respect to business
development opportunities, including acquisitions.
Finance Committee. The finance committee met three times during 2001.
The committee consists of Mr. Osnos, Chairman, Mr. Ervine, Mr. Koonce, and
Ms. Wachtel. The committee is primarily concerned with making
recommendations to the Board with respect to VSE's capitalization and long-term
funding requirements.
VSE's Chairman and Chief Executive Officer (Mr. Ervine) is an ex officio
member of all standing committees of the Board. Mr. Ervine does not participate
in meetings or discussions of the compensation committee concerned with
establishing his salary or bonus.
Board Meetings
During 2001 the Board held six regular meetings, one special meeting,
and acted one time by unanimous written consent. No director attended fewer
than 75% of the aggregate of (a) the total number of Board regular and
special meetings held (during the period during which he or she has been a
director) and (b) the total number of meetings held by all committees of
the Board on which he or she served.
Compensation of Directors
Each non-employee director is compensated at an annual rate of $17,200,
prorated in the event of a partial year of service. Directors who are
employees of VSE 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 or divisions,
unless authorized as a special assignment by the Board. No such
authorization was requested for or on behalf of any director in 2001. The
foregoing procedures do not restrict reimbursement for expenses incurred by
a director for attending meetings of the Board or its authorized
committees.
Each VSE director who is not an employee of the Corporation, 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 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 either or both of the VSE Corporation 1996 and 1998 Stock
Option Plans). Each option is vested 25% immediately on the date of the grant
and 25% on each successive anniversary date after the 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 their annual compensation for
service as a VSE director (currently $17,200 per year) be paid in VSE Stock
at fair market value determined in accordance with Section 7(a) of the
Directors Stock Plan. For 2001, Mr. Kendall, Mr. Koonce, and General Ross
elected to have sixty percent ($10,320) of their annual compensation paid
in VSE stock.
Certain Relationships and Related Transactions
Pursuant to an agreement dated as of October 21, 1998, Donald M. Ervine
serves as the Chief Executive Officer of VSE at a base salary of $254,000
per annum. Mr. Ervine is employed for a term ending on January 1, 2003,
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 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. In the
event of a change of control of VSE, as defined, if, without his consent,
Mr. Ervine is assigned duties materially inconsistent with his position and
status with VSE, 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. The October 21, 1998, agreement
described above replaced and superseded on substantially the same terms and
conditions a prior employment agreement with Mr. Ervine dated as of January
1, 1996.
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, 2003, subject to
automatic extensions for successive one-year periods unless notice to
terminate is given by either Admiral Kelly or Energetics 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 except that
(a) Admiral Kelly is employed at a minimum base salary of $166,000 per an-
num, and (b) Admiral Kelly will be nominated to serve as a director of VSE
and a director of Energetics during the term of the agreement.
Pursuant to an agreement dated as of November 1, 2000, James M. Todd
served as the President and Chief Operating Officer of VSE. Mr. Todd was
employed for a term ending on December 31, 2003, at a base annual salary of
$170,040. On February 15, 2002, Mr. Todd resigned as President and Chief
Operating Officer of VSE and entered into a Separation Agreement providing
for, among other things, the termination of his employment with VSE effective
April 15, 2002. VSE has engaged Mr. Todd as a consultant for a period
of one year, commencing April 16, 2002, at a monthly fee of approximately
$14,170 per month, not to exceed $170,040 for the entire term of the agreement.
The Consulting Agreement may be terminated by either party on 30 days
written notice. In the event of such termination, the unpaid balance of the
$170,040 fee is payable within ten days of the date of termination.
Pursuant to separate agreements entered into in December 1997 and expiring
on January 1, 2003, 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,
three executive officers of VSE (Mrs. Tuohig and Messrs. Knowlton and Weber)
have agreements with VSE to continue to serve in the executive officer's current
or comparable capacity. The terms and conditions the executive officer agree-
ments are similar to those of Mr. Ervine's 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 or her 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 Kintner Plotkin & Kahn, PLLC, of which Mr. Osnos
is a senior member, has represented and is expected to continue to represent
VSE on various legal matters.
VSE and the trustees of its employee benefit plans effect certain of their
transactions in VSE stock and employee benefit plan investments, respectively,
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 occurred with Koonce Securities, Inc. in 2001.
Cypress International, Inc., a consulting services firm of which General
Ross is Executive Vice President, provided consulting services to VSE
during 2001, including services on Defense-related marketing strategy and
long-range business development plans. The consulting services arrangement
expired on February 15, 2002, and was not renewed.
On June 28, 2001, VSE entered into a Subscription Agreement with
Mr. Kendall providing for the sale of 20,000 shares of VSE Stock to Mr. Kendall
at fair market value, defined as the closing price for VSE Stock as of the
proposed date of sale. The closing price for VSE Stock on June 28, 2001,
was $6.92 per share, and the aggregate purchase price paid to VSE for the
20,000 shares pursuant to the Subscription Agreement was $138,400.
The Board recommends a vote FOR the proposal to elect each of the seven
persons nominated to serve as a director of VSE for the ensuing year, and
your proxy will be so voted unless you specify otherwise.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Arthur Andersen LLP served as VSE's independent certified public
accountants for the year ended December 31, 2001. In 2001 Arthur Andersen
LLP services included an examination of VSE's consolidated financial
statements and the financial statements of certain subsidiaries and benefit
plans, reviews of the consolidated financial statements included in VSE's
Forms 10-Q for fiscal year 2001, and tax consulting.
Arthur Andersen LLP billed VSE for professional services rendered for
the year ended December 31, 2001, as follows:
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . .$ 151,800 (1)
Financial information systems design and implementation . . .$ -0-
All other fees . . . . . . . . . . . . . . . . . . . . . . .$ 14,400 (2)
(1) Includes fees for reviews of consolidated financial statements included
in VSE's Form 10-Qs for fiscal year 2001.
(2) Includes tax consulting and employee benefit plan audits.
A representative of Arthur Andersen LLP is expected to attend the Meeting,
will have an opportunity to make a statement, and will be available to respond
to appropriate questions.
As recommended by the Audit Committee, the Board has appointed Arthur
Andersen LLP as VSE's independent public accountants for 2002.
AUDIT COMMITTEE REPORT
The Audit Committee (the "Committee") of the Board of Directors is
comprised of three non-employee directors, each of whom is considered
"independent" pursuant to the Nasdaq Stock Market listing standards. The
Committee's responsibilities are set forth in its Charter, the latest
revision of which was filed as Appendix A to VSE's Proxy Statement dated
April 2, 2001.
The Committee has reviewed and discussed with management VSE's audited
consolidated financial statements as of and for the year ended
December 31, 2001, 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 of Directors that the consolidated financial
statements referred to above be included in VSE's Annual Report on Form 10-K
for the year ended December 31, 2001.
Audit Committee: Calvin S. Koonce (Chair), Jimmy D. Ross,
Bonnie K. Wachtel
COMPENSATION COMMITTEE REPORT
The Board has established a compensation committee to (a) review
corporate compensation policies, including incentive compensation, (b) set
the compensation of the chief executive officer (the "CEO"), and (c) review
the compensation of certain other executive officers and employees. The
committee is composed entirely of non-employee directors (see "Committees
of the Board" above).
Compensation Philosophy
VSE's overall compensation philosophy is based on aligning employee
compensation with industry standards and with financial performance
objectives established by the Board. Under the committee's supervision, VSE
has established compensation policies designed (a) to attract and retain
qualified executive and corporate officers and (b) to link total executive
compensation to corporate goals and specific individual goals appropriate
for each executive and corporate officer. The key elements of VSE
executive compensation are base salary, a performance bonus, and a long-term
incentive plan.
Base Salary
The base salaries for executive officers and other corporate officers
are established primarily on 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 salary range generally between the 25th and
the 50th percentile indicated by such surveys.
During 1993 the committee approved a compensation plan whereby salary
ranges and ceilings were set for each of six specified executive and
corporate officer pay grades. The intent of this policy was to enhance
corporate competitiveness by (a) holding base salaries within a fixed
salary range and (b) emphasizing the incentive compensation provided by the
performance bonus and long-term incentive bonus program.
Performance Bonus
Consistent with the emphasis placed on competitiveness by holding salary
increases in check, the committee approved a performance bonus plan in 1993
based on achieving corporate and business unit goals. This plan provides
for the payment of a performance bonus, generally not to exceed 30% of base
salary, on meeting certain specified performance criteria. A performance
bonus in excess of 30% of base salary may be authorized when required to
comply with incentives established pursuant to a written acquisition or
employment agreement and as authorized by the Board.
The performance criteria or factors used to administer the incentive
bonus program are established with the executive officer or manager at the
beginning of each year. The performance factors are 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.
Except for the 20% weighting factor assigned for corporate revenue and
profit goals, the factors and weightings used to measure the performance of
an individual executive or corporate officer depend on the conditions and
corporate objectives with respect to the business unit or administrative
function to which the executive or corporate officer is assigned.
Long-term Compensation
During 1996 and 1998, the Board recommended and the stockholders
approved the adoption of VSE Corporation Stock Option Plans. Under the 1996
and 1998 Plans, up to 617,447 shares of VSE stock may be purchased pursuant
to stock option grants. Approximately 20% of the shares covered by the
Plans are reserved for nondiscretionary grants to non-employee directors of
VSE, with the remaining 80% of the shares available for discretionary
grants to officers and key employees. As of January 2, 2002, grants issued
under the Plans covered a total of approximately 289,625 shares of VSE
stock, subject to vesting and other Plan requirements.
The purpose of the 1996 and 1998 Stock Option Plans is to provide non-
employee directors, officers, and key employees with long-term performance
incentives and with a shared interest with the stockholders in the
performance of VSE Stock. VSE operates in a specialized field in which
success is substantially dependent on the experience, knowledge, and
motivation of qualified personnel. Management believes that the Plans have
been of material assistance in recruiting, motivating, and retaining key
personnel.
The discretionary stock options granted under the Plans are approved by
VSE's compensation committee. Awards are based on recommendations submitted
by management based on the expected long-term contribution of key
personnel. The compensation committee independently determines the number
of stock options to be awarded to the Chairman and CEO. All awards
authorized by the compensation committee are subject to ratification by the
Board.
All Other Compensation
All VSE officers are entitled to participate in company fringe benefit
programs, including the VSE Employee ESOP/401(k) Plan, which is an IRS
qualified plan available to all eligible employees. Effective April 1,
1999, employer contributions to the ESOP portion of the plan were
discontinued and replaced by employer contributions to the 401(k) portion
of the plan based on employee 401(k) deferrals. The employer 401(k)
contribution is equal to 50% of the first 5% of employee pay deferred into
the employee's 401(k) account (50% of the first 6% after January 1, 2002).
Amounts contributed to the VSE ESOP/401(k) plan on behalf of the named ex-
ecutive officers are included in the "Summary Compensation Table."
VSE has a non-qualified Deferred Supplemental Compensation Plan (the
"DSC Plan") for all VSE officers to replace the former deferred
compensation plan (the"DCU Plan"). The DSC Plan provides, at the Board's
discretion, for an annual bonus pool not to exceed 12% of VSE's
consolidated net income for the year. The annual bonus pool is allocated to
the participant accounts of corporate officers in proportion to the ratio
of the officer's performance bonus for the year (see "Performance Bonus"
above) to total officer performance bonuses for the year. Pursuant to the
DSC Plan, a bonus pool of approximately $75,000 was authorized for 2001 for
allocation to about 18 participant officer accounts. Benefits under the
DSC Plan and predecessor DCU 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 con-
trol of VSE. Amounts contributed to the DSC Plan on behalf of the named
executive officers are included in the Summary Compensation Table.
Chief Executive Officer Compensation
During each of the three years ended December 31, 2001, Mr. Ervine,
VSE's chairman and chief executive officer ("CEO"), was compensated in
accordance with an employment agreement negotiated and approved by VSE's
compensation committee in 1999. Pursuant to the employment agreement, Mr.
Ervine served as Chief Executive Officer of VSE and was paid a base salary
of $254,000 during 2001, 2000 and 1999. The January 1, 1999, employment
agreement with Mr. Ervine extends through January 1, 2003, and is 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. The January 1, 1999, employment
agreement provides for a minimum base salary of $254,000, with other terms
and conditions substantially similar to the predecessor January 1, 1996,
employment agreement (see "Certain Relationships and Related Transactions"
above for a description of the employment agreements).
The CEO's performance bonus for each of the years presented 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 are
measured based on interim consolidated financial statements or management
reports which are subject to adjustment based on annual audited financial
statements. The last two factors are subjective measures evaluated by the
committee in executive session. For 2001, the Compensation Committee
recommended a bonus of $25,000 for the CEO. The Compensation Committee, at
the request of the CEO, made no change in the CEO's base salary for 2002 of
$254,000. For 2000 and 1999 the CEO received performance bonuses of $25,000
and $55,000, respectively, based on the five factor analysis described
above.
Pursuant to the 1998 Plan, the committee recommended that the CEO be
awarded a discretionary stock option covering 12,000 shares of VSE Stock,
effective January 1, 2002.
Compensation Committee: Jimmy D. Ross (Chair), Clifford M. Kendall,
Calvin S. Koonce, Bonnie K. Wachtel
Compensation Committee Interlocks and Insider Participation
General Ross is Executive Vice President of Cypress International, Inc.,
a consulting services firm which provided consulting services to VSE in
2001. See "Certain Relationships and Related Transactions."
Mr. Koonce is a major stockholder of VSE. See "Security Ownership of
Certain Beneficial Owners and Management."
The trustees of VSE's employee benefit plans effect certain of their
transactions through Koonce Securities, Inc., which is wholly owned by Mr.
Koonce, and through Wachtel & Co., Inc., of which Ms. Wachtel is a
director, officer, and shareholder. No transactions occurred with Koonce
Securities, Inc., in 2001.
Mr. Osnos is a senior member of the law firm of Arent Fox Kintner
Plotkin & Kahn, PLLC, which has represented and is expected to continue to
represent VSE on various legal matters. See "Certain Relationships and
Related Transactions."
VSE's Chairman and Chief Executive Officer (Mr. Ervine) is an ex officio
member of all Board committees, including the compensation committee. Mr.
Ervine does not participate in meetings or discussions of the compensation
committee concerned with establishing his salary or bonus.
Summary Compensation Table
The following table reports the compensation paid for the past three
years for each of the five most highly compensated VSE executive officers,
including the Chief Executive Officer.
Long-term All
Annual Compensation Other
Compensation Awards Compensation
------------- ------------ ------------
Fiscal Salary Bonus Options
Name and Principal Position Year ($) ($) (#) ($)(1)
- --------------------------- ---- ------ ----- ------- --------
Donald M. Ervine (2) 2001 254,000 25,000 12,000 13,451
Chairman of the Board and 2000 254,000 55,000 20,000 12,456
Chief Executive Officer 1999 254,000 25,000 15,000 16,713
James M. Todd (3) 2001 170,000 40,000 10,000 46,996
President and 2000 21,255 10,000 20,000 53,731
Chief Operating Officer
James M. Knowlton (4) 2001 170,000 10,000 1,500 6,095
Executive Vice President and 2000 170,000 24,000 10,000 93,795
Director, International Group 1999 154,900 50,000 6,000 15,797
Craig S. Weber (5) 2001 140,400 14,000 6,000 8,582
Executive Vice President, 2000 140,400 20,000 8,000 16,801
Chief Financial Officer, 1999 135,200 10,000 1,500 5,087
and Secretary
Thomas R. Loftus (5) 2001 110,000 15,400 2,500 8,329
Senior Vice President and 2000 110,000 15,000 4,000 9,106
Comptroller 1999 98,200 11,000 4,000 5,354
(1) The column headed "All Other Compensation" includes (a) 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 (see plan description in the "Compensation
Committee Report"); (b) housing expenses of $28,252 for Mr. Todd in 2001;
and (c) a $50,000 hiring bonus paid to Mr. Todd in 2000.
(2) Mr. Ervine also assumed the duties of VSE President and Chief
Operating Officer as of February 15, 2002.
(3) Until his resignation on February 15, 2002. The amount reported for
Mr. Todd for the year 2000 represents salary and bonus for the period
November 1, 2000, when he commenced employment with VSE, through December
31, 2000. Please refer to "Certain Relationships and Related Transactions"
above for a description of Mr. Todd's Separation Agreement with VSE.
(4) Mr. Knowlton is also President of two VSE subsidiaries, Ship
Remediation and Recycling, Inc., and VSE Services International, Inc.
Mr. Knowlton served as VSE's President and Chief Operating Officer from
February 5, 1999, to November 5, 2000. Prior to February 5, 1999, he served
as VSE's Executive Vice President and Deputy Chief Operating Officer (since
1997) and as General Manager of VSE's BAV Division (since 1995).
(5) Effective March 7, 2002, Mr Weber was appointed Chief Administrative
Officer and Mr. Loftus was appointed Chief Financial Officer.
Option Grants in Last Fiscal Year
The following table reports the options granted in fiscal year 2001 for
each of the five most highly compensated VSE executive officers, including
the chief executive officer.
Potential realizable value
------------Individual Grants---------- at assumed annual rates
of stock appreciation
for option term (1)
------------------------------------------------------------------
% of Total Hypothetical Hypothetical
Options value value
Granted to realized at realized at
Options Employees Exercise 5% stock 10% stock
Granted in Fiscal Price Expiration appreciation appreciation
Name (#)(2) Year ($/share) Date ($) ($)
- -------------------------------------------------------------------------------------------
Donald M. Ervine 12,000 18.2% 6.62 12/31/06 21,935 48,469
James M. Todd (3) 10,000 15.2% 6.62 12/31/06 18,279 40,391
James M. Knowlton 1,500 2.3% 6.62 12/31/06 2,742 6,059
Craig S. Weber 6,000 9.1% 6.62 12/31/06 10,967 24,235
Thomas R. Loftus 2,500 3.8% 6.62 12/31/06 4,570 10,098
(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 the 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 (1/1/02) and 25% exercisable on each of the first three anniversary
dates thereafter (1/1/03, 1/1/04, and 1/1/05), except in the event of a
change in control of VSE, in which case such options become immediately
exercisable.
(3) Mr. Todd resigned on February 15, 2002.
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 2001 for each of the five
most highly compensated VSE executive officers, including the chief
executive officer.
Value of unexercised
Number of unexercised in-the-money(1)
options at 12/31/01(#) options at 12/31/01($)
------------------------- -------------------------
Shares acquired Value
Name on exercise(#) realized($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- --------------- ----------- ----------- ------------- ----------- -------------
Donald M. Ervine -- -- 32,250 13,750 16,280 16,280
James M. Todd (2) -- -- 10,000 10,000 10,440 10,440
James M. Knowlton -- -- 21,625 7,500 8,140 8,140
Craig S. Weber -- -- 9,625 4,375 6,512 6,512
Thomas R. Loftus -- -- 7,000 3,000 3,256 3,256
(1) Based on a closing VSE stock price of $7.40 per share on December 31,
2001 (Nasdaq NMS).
(2) Mr. Todd resigned on February 15, 2002.
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 Stock Market, and VSE's 4-digit industry SIC Code is 8711,
Engineering Services. Accordingly, the performance graph compares the
cumulative total return for VSE Stock with (a) an index for the Nasdaq
Stock Market (U.S. companies) ("Nasdaq Index") and (b) a published industry
index for SIC Code 8711 ("Industry Index").
[insert graph]
* Total return assumes reinvestment of dividends and assumes $100
invested on December 31, 1996, in VSE Stock, the Nasdaq Index, and the
Industry Index.
Performance Graph Table
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
VSE Stock 100 77 93 64 46 64
Nasdaq Index 100 122 173 304 191 152
Industry Index 100 121 114 126 222 244
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at VSE's 2003 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 Tuesday,
December 10, 2002, 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