VSE CORPORATION
2550 Huntington Avenue, Alexandria, Virginia 22303-1499
Notice of 1999
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 6, 1999,
commencing at 10:00 a.m., Washington, D.C. time, at the Hilton Alexandria
(formerly Radisson Plaza Hotel) 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.
In addition, at the meeting we will 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 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 of the Board
and Chief Executive Officer
VSE CORPORATION
2550 Huntington Avenue, Alexandria, Virginia 22303-1499
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 6, 1999
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 6, 1999, 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 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 Arthur Andersen LLP as VSE's
independent certified public accountants for the year
ending December 31, 1999; and
3. To transact such other business as may properly come
before the meeting or any adjournment thereof.
Only record holders of VSE common stock as of the close of
business on March 22, 1999, 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 1998 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,
/s/ C. S. Weber
C. S. Weber
Secretary
April 6, 1999
VSE CORPORATION
PROXY STATEMENT
Annual Meeting of Stockholders
to be held on May 6, 1999
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 6,
1999, 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 6, 1999.
The close of business on March 22, 1999, 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 22, 1999, 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 22, 1999, there were 2,114,905
shares of Stock outstanding and approximately 308 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 22, 1999, 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 (a) the election as
VSE directors of the eight nominees listed below under "Election of Directors,"
and (b) the ratification of the appointment of Arthur Andersen LLP as VSE's
independent certified public accountants for the year ending December 31, 1999,
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
discretionary 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 22, 1999. 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) 688,522 32.6%
Non-employee Directors
- -------------------------
Calvin S. Koonce (b) (c) 405,423 19.2 %
Joseph M. Marchello (b) 15,968 *
David M. Osnos (b) 6,943 *
Jimmy D. Ross (b) 6,943 *
Bonnie K. Wachtel (b) 34,443 1.6%
Named Executive Officers and Other Directors
- --------------------------------------------
Byron S. Bartholomew (b) (d) 42,031 2.0%
Donald M. Ervine (b) 88,859 4.2%
Robert J. Kelly (b) 9,193 *
James M. Knowlton (b) 41,748 2.0%
Richard B. McFarland (b) 44,499 2.1%
Mark A. Robin (b) (d) 29,661 1.4%
Group
- -----
Directors, Nominees, and
Executive Officers as a group
(17 persons) (b) (e) 919,325 43.5%
* Represents less than 1% of outstanding Stock.
(a) These shares are held in trust for the benefit of the participants of the
Plan. Three VSE officers serve as trustees of the Plan. The participants of
the Plan have voting power over 627,363 shares allocated to their respective
ESOP accounts, while the Plan trustees share voting and investment power over
the remaining 61,159 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 (17 persons) have the right to
purchase pursuant to the exercise of stock options which are or may become
exercisable within the next 60 days: each of Calvin S. Koonce,
Joseph M. Marchello, David M. Osnos, Jimmy D. Ross, and Bonnie K. Wachtel
- - 6,943; Byron S. Bartholomew - 21,725, Donald M. Ervine - 50,412, Robert
J. Kelly - 9,193, James M. Knowlton - 19,635, Richard B. McFarland - 26,085,
Mark A. Robin - 18,010, and all directors, nominees, and executive officers
as a group (17 persons) - 238,295.
(c) Mr. Koonce's mailing address is 6550 Rock Spring Drive, Suite 600,
Bethesda, Maryland 20817.
(d) Excludes 61,363 shares beneficially owned or controlled as a trustee of
the ESOP/401(k) Plan.
(e) The group, including the trustees of the ESOP/401(k) Plan, consists of
17 persons. The 919,029 shares beneficially owned include 61,363 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's 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.
Item No. 1
ELECTION OF DIRECTORS
Nominees
At the Meeting, stockholders will elect, by a plurality of the votes
cast, eight VSE directors, who will constitute the entire Board. Each nominee
listed below is currently serving as a VSE director and was elected by the
stockholders at the last annual meeting of stockholders, except for James M.
Knowlton who was appointed by the Board on February 3, 1999, to fill the
vacancy occasioned by the retirement of Richard B. McFarland. Each nominee
elected as a director will serve until the next annual meeting of stockholders
and until his or her successor is elected and qualified. If any nominee should
become unable to serve for any reason, the proxies will be voted for such
substitute nominee as shall be designated by the Board.
The eight nominees for election as VSE directors and certain
information regarding them are as follows:
Name and Principal Occupation Age Director since
- --------------------------------------------------------------------------------
David M. Osnos 67 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 62 1987
VSE Chairman of the Board and Chief Executive Officer
since 1992, VSE President and Chief Operating Officer
from 1988 to 1992, and prior thereto, VSE senior
program manager, vice president, senior vice president,
and executive vice president since 1983.
Name and Principal Occupation Age Director since
- ----------------------------- --- --------------
Joseph M. Marchello 65 1990
Professor at Old Dominion University in Norfolk,
Virginia, chemical engineering; Chancellor of the
University of Missouri-Rolla from 1976 to 1985 and
President of Old Dominion University from 1985 to
1988.
Bonnie K. Wachtel 43 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 61 1992
President, Koonce Securities, Inc., a securities
broker/dealer firm (for more than the past five
years).
Jimmy D. Ross 62 1994
General, U. S. Army (Ret.), formerly Commanding
General, U.S. Army Materiel Command. Since
retiring in 1994, General Ross has served as
Senior Vice President, Biomedical Services,
for the American Red Cross.
Robert J. Kelly 61 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. From 1994 to 1998,
he served as Executive Vice President and Director
of International Operations for The Wing Group,
a developer of large-scale energy projects.
James M. Knowlton 56 1999
VSE President and Chief Operating Officer since
February 1999, and Executive Vice President and
Deputy Chief Operating Officer from 1997 to 1999.
Mr. Knowlton has also served as General Manager
of VSE's largest business operation, the BAV
Division, since 1995. Prior to joining VSE in
1985, Mr. Knowlton completed a 23-year career with
the U. S. Navy.
Committees of the Board
Audit Committee. The audit committee met two times during 1998 and
consists solely of non-employee directors, including Ms. Wachtel, who chairs
the committee, and Mr. Osnos. 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,
subject to ratification by the stockholders, and reviews the scope of the
annual examination 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 1998 and consists solely of non-employee directors, including General
Ross, Chairman, Mr. Koonce, Mr. Marchello, 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 twice during 1998 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 twice during 1998
and consists of Mr. Ervine (acting), Chairman, Mr. Koonce, Mr. Marchello,
General Ross, and Ms. Wachtel. 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 twice in 1998 and
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 1998 the Board held six regular meetings. No director attended
fewer than 75% of the aggregate of (a) the total number of Board 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 1998. The foregoing procedures do not restrict
reimbursement for expenses incurred by a director for attending meetings of the
Board or its authorized committees.
Pursuant to the VSE Corporation 1996 Stock Option Plan (the
"1996 Plan"), each non-employee VSE director, including each of the
non-employee directors named in the foregoing table, is granted an annual
nondiscretionary, five-year option to purchase 750 shares of VSE Stock
commencing January 1, 1997. Each nondiscretionary option is vested 25%
immediately on date of grant and 25% on each successive anniversary date
after the grant (100% vested after three years). Each nondiscretionary
option price per share 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 Stock Option Plan (the
"1998 Plan"), each non-employee VSE director may be granted an additional
annual nondiscretionary, five-year stock option to purchase VSE Stock,
commencing on January 1, 1999. Each nondiscretionary option is vested 25%
immediately on date of grant and 25% on each successive anniversary date
after the grant (100% vested after three years). Each nondiscretionary
option price per share is not less than the fair market value of VSE Stock as
of the date the option is awarded. The aggregate number of shares covered by
annual nondiscretionary options granted to each outside director pursuant to
the 1996 Plan and the 1998 Plan may not exceed 750 shares per year.
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
(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.
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,
2001, 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 1, 1996, Richard B.
McFarland served as the President and Chief Operating Officer of VSE until
his resignation, effective as of February 5, 1999.
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, 2002,
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 1999 agreement except that (a) Admiral Kelly
is employed at a minimum base salary of $166,000 per annum, 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 separate agreements entered into in December 1997 and
expiring on January 1, 1999, 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, each
executive officer of VSE (nine persons, including Mr.Knowlton, but not including
Mr. Ervine) entered into an agreement with VSE to continue to serve in the
executive officer's current or comparable capacity. The terms and conditions
the executive officer agreements 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 renominated 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.
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,
and your proxy will be so voted unless you specify otherwise.
Item No. 2
APPOINTMENT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
Based on the recommendation of its audit committee, the Board has
appointed the firm of Arthur Andersen LLP to be VSE's independent certified
public accountants for the year ending December 31, 1999, 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 approval of this appointment by stockholders. 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 1998 Arthur
Andersen LLP services included an examination of VSE's consolidated financial
statements, the financial statements of certain subsidiaries and benefit
plans, and tax consulting.
A representative of Arthur Andersen 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 Arthur Andersen LLP to serve as VSE's independent certified
public accountants for the year 1999, and your proxy will be so voted unless
you specify otherwise.
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 (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, 20% on achieving
business unit revenue and profit targets, 15% on achieving budgeted efficiency
ratios or cost reduction targets within a business unit, and 45% on achieving
specified performance objectives within the business unit, such as proposals
submitted and won, new business development, 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 in which the executive or corporate officer works.
Long-term Compensation
During 1997 and 1998 the Board recommended and the stockholders
approved the adoption of the VSE Corporation 1998 Stock Option Plan (the "1998
Plan" ). Under the 1998 Plan, an aggregate of 343,750 shares of VSE stock
may be purchased pursuant to the grant of options. Approximately 15,625 of
the shares covered by the 1998 Plan are available for nondiscretionary grants
to non-employee directors of VSE, and approximately 328,125 of the shares are
available for discretionary grants to executive officers and key employees.
During 1996 the Board recommended and the stockholders approved the
adoption of the VSE Corporation 1996 Stock Option Plan (the "1996 Plan" ).
Under the 1996 Plan, an aggregate of 273,697 shares of VSE stock may be
purchased pursuant to the grant of options. Approximately 20% of the shares
covered by the 1996 Plan are available for nondiscretionary grants to non-
employee directors of VSE, and approximately 80% of the shares are available
for discretionary grants to executive officers and key employees.
The purpose of the 1998 Plan and 1996 Plan (collectively, the
"Plans") 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.
Prior to adoption of the 1996 Plan, VSE had no long-term compensation plan.
Discretionary stock options granted under the Plans are approved by
VSE's compensation committee based on recommendations submitted by management
based on the perceived long-term contribution of key personnel. The
compensation 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 compensation committee are
subject to ratification by the Board.
All Other Compensation
All VSE officers are entitled to participate in all company fringe
benefit programs, including the VSE ESOP/401(k) plan, which is an IRS qualified
plan available to all eligible employees. Amounts contributed to the VSE
ESOP/401(k) 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 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
$144,000 was authorized for 1998 for allocation to about 22 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 control 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 1998, 1997 and 1996, 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 1995 and
dated as of January 1, 1996. Pursuant to the 1996 employment agreement,
Mr. Ervine served as the Chief Executive Officer of VSE and was paid a minimum
base salary of $225,000 per annum for a term ending on January 1, 1999, subject
to extension. Effective January 1, 1999, VSE entered into a new employment
agreement with Mr. Ervine extending through January 1, 2002, and 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 1998, the Compensation Committee recommended a bonus of $175,000
for the CEO, based on VSE's return to profitability and other efforts to
increase stockholder value. The Compensation Committee also set the CEO's
base salary for 1999 at $254,000, a 4% increase over the 1998 rate. For 1997
the CEO did not receive a performance bonus due to reported losses by the
company on a consolidated basis, whereas a bonus of $125,000 was recommended
for 1996 based on the five factor analysis described above.
Pursuant to the 1998 Plan, the committee recommended that the CEO be
awarded a discretionary stock option covering 7,000 shares of VSE Stock,
effective January 1, 1998.
The 1998 base salary, performance bonus, and discretionary stock
option grant recommended for Mr. McFarland, VSE's former President and Chief
Operating Officer, were based on similar reviews and criteria as for the CEO.
Compensation Committee: Jimmy D. Ross (Chair), Calvin S. Koonce,
Joseph M. Marchello, Bonnie K. Wachtel
Compensation Committee Interlocks and Insider Participation
Mr. Koonce is a major stockholder of VSE. See "Security Ownership of
Certain Beneficial Owners and Management." The trustees of VSE's employee
benefit plans effect certain of their transactions through Koonce Securities,
Inc., which is wholly owned by Mr. Koonce, and through Wachtel & Co., Inc., of
which Ms. Wachtel is a director, officer, and shareholder.
Mr. Osnos is a senior member of the law firm of Arent Fox Kintner
Plotkin & Kahn, PLLC, which has represented and is expected to continue to
represent VSE on various legal matters. See "Certain Relationships and
Related Transactions."
VSE's chairman and chief executive officer (Mr. Ervine) is an ex
officio member of all Board committees, including the compensation committee.
Mr. Ervine does not participate in meetings or discussions of the compensation
committee concerned with establishing his salary or bonus.
Summary Compensation Table
The following table reports the compensation paid for the past three
years for each of the five most highly compensated VSE executive officers,
including the chief executive officer.
Long-term
Annual Compensation Other
Compensation Awards Compensation
-------------- ------------ ------------
Fiscal Salary Bonus Options
Name and Principal Position Year ($) ($) (#) ($)(*)
- --------------------------- ---- ------- ------- ------- -------
Donald M. Ervine 1998 246,100 175,000 7,000 108,912
Chairman of the Board and 1997 234,000 -0- 4,000 3,000
Chief Executive Officer 1996 225,000 125,100 39,412 31,042
Richard B. McFarland 1998 193,500 85,000 -0- 94,400
President and 1997 182,000 30,000 3,750 21,000
Chief Operating Officer 1996 175,000 100,000 22,335 43,433
(retired February 1999)
Byron S. Bartholomew 1998 158,000 34,600 2,000 55,417
Executive Vice President 1997 150,800 25,000 3,125 8,608
and Marketing Director 1996 139,400 12,700 17,080 31,100
James M. Knowlton 1998 139,900 45,000 6,000 41,700
President and 1997 130,000 25,000 3,125 3,000
Chief Operating Officer** 1996 130,000 50,000 10,510 14,217
(effective February 1999)
Mark A. Robin 1998 139,100 45,000 5,000 40,700
Senior Vice President, Human 1997 106,080 40,000 2,500 18,459
Resources, and President, 1996 93,600 20,000 10,510 16,640
Human Resource Systems, Inc.
(*) 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) cash paid for unused accumulated personal leave; (c) an imputed, taxable
housing benefit of $18,000 for Mr. McFarland for 1998 through 1996 for
occupancy of a VSE condominium in Alexandria, Virginia, and (d) the fair
market value of VSE Stock grants paid in 1998 as follows: Mr. Ervine - 4,000
shares, Mr. McFarland - 3,750 shares, Mr. Bartholomew - 3,125 shares,
Mr. Knowlton - 3,125 shares, and Mr. Robin - 2,500 shares.
(**) Mr. Knowlton has served as VSE's President and Chief Operating Officer
since February 1999. Prior to February 1999, he served as VSE's Executive
Vice President and Deputy Chief Operating Officer (since 1997) and as General
Manager of VSE's BAV Division since (since 1995).
Option Grants in Last Fiscal Year
The following table reports the options granted in fiscal year 1999
for each of the five most highly compensated VSE executive officers, including
the chief executive officer.
Potential realizable value
------------Individual Grants---------- at assumed annual rates
of stock appreciation
for option term
------------------------------------------------------------------
% of Total Hypothetical Hypothetical
Options value value
Granted to realized at realized at
Options Employees Exercise 5% stock 10% stock
Granted in Fiscal Price Expiration appreciation appreciation
Name (#)* Year ($/share) Date ($) ($)
- -------------------------------------------------------------------------------------------
Donald M. Ervine 7,000 10.6% 10.93 12/31/03 21,130 46,710
Richard B. McFarland -0- -- -- -- -- --
Byron S. Bartholomew 2,000 3.0% 10.93 12/31/03 6,040 13,346
James M. Knowlton 6,000 9.1% 10.93 12/31/03 18,119 40,037
Mark A. Robin 5,000 7.6% 10.93 12/31/03 15,099 33,364
* Non-qualified stock options which became 25% exercisable on award date
(1/1/99) and 25% exercisable on each of the first three anniversary dates
thereafter (1/1/00, 1/1/01, and 1/1/02), 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 1998 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*
options at 12/31/98(#) options at 12/31/98($)
------------------------- -------------------------
Shares acquired Value
Name on exercise(#) realized($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- --------------- ----------- ----------- ------------- ----------- -------------
Donald M. Ervine -- -- 31,559 11,853 21,549 9,962
Richard B. McFarland -- -- 18,626 7,459 13,757 7,191
Byron S. Bartholomew -- -- 14,372 5,833 10,789 5,767
James M. Knowlton -- -- 9,445 4,190 7,891 4,801
Mark A. Robin -- -- 9,132 3,878 7,240 4,150
* Based on a closing VSE stock price of $11.50 per share on December 31, 1998
(Nasdaq).
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, 1993, in VSE Stock, the Nasdaq Index, and the
Industry Index.
Performance Graph Table
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
VSE Stock 100 125 243 292 225 272
Nasdaq Index 100 105 136 169 207 292
Industry Index 100 70 88 104 126 118
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at VSE's 1999
annual meeting of stockholders must be received by VSE's secretary at its
principal executive offices, 2550 Huntington Avenue, Alexandria, Virginia
22303-1499, by no later than the close of business on December 7, 1999, 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,
/s/ C. S. Weber
C. S. Weber, Secretary
April 6, 1999