SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 Commission File Number: 0-3676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-0649263
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2550 Huntington Avenue
Alexandria, Virginia 22303-1499
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.05 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing require-
ments for the past 90 days. Yes [x] No [ ]
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of March 1, 1999, was approximately $21 Million.
Number of shares of Common Stock outstanding as of March 1, 1999: 2,114,905.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's 1998 Annual Report for the year ended
December 31, 1998, are incorporated into Parts I and II of this report.
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders expected to be held on May 6, 1999, are incorporated by reference
into Part III of this report.
PAGE
PART I
ITEM 1. Business
Refer to the discussions captioned "Letter to Stockholders", "VSE
Operations" and "Description of Business" in VSE Corporation's ("VSE" or the
"Registrant") 1998 Annual Report which is incorporated herein by reference.
ITEM 2. Properties
Refer to the discussion captioned "Description of Business" in VSE's 1998
Annual Report which is incorporated herein by reference.
ITEM 3. Legal Proceedings
Refer to Note 9 (Commitments and Contingencies - Litigation) of the "Notes
to Consolidated Financial Statements" in VSE's 1998 Annual Report which is
incorporated herein by reference.
ITEM 4. Submission of Matters to a Vote of Stockholders
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters
Refer to discussion captioned "VSE Common Stock" in VSE's 1998 Annual
Report which is incorporated herein by reference.
ITEM 6. Selected Financial Data
Refer to table captioned "Financial Highlights" in VSE's 1998 Annual Report
which is incorporated herein by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Refer to discussion captioned "Management Discussion and Analysis" in VSE's
1998 Annual Report which is incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Refer to discussion captioned "Management Discussion and Analysis" in VSE's
1998 Annual Report which is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data
Refer to sections captioned "Consolidated Financial Statements" and "Notes
to Consolidated Financial Statements" in VSE's 1998 Annual Report which is
incorporated herein by reference.
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PAGE
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information with respect to VSE Directors is incorporated by reference to
VSE's definitive proxy statement for its annual meeting of stockholders to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after December 31, 1998. The
executive officers are chosen annually at the board of directors meeting next
following the annual meeting of stockholders and serve until their successors
have been duly elected and qualified, or until resignation or removal. Also
refer to section captioned "Executive Officers" in VSE's 1998 Annual Report
which is incorporated herein by reference.
ITEM 11. Executive Compensation
Information with respect to this item is incorporated by reference from the
Proxy Statement discussions captioned "Certain Relationships and Related Trans-
actions," "Compensation Committee Report," "Summary Compensation Table," "Option
Grants in Last Fiscal Year," and "Aggregate Options Exercised in Last Fiscal
Year and Fiscal Year-End Option Values."
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to this item is incorporated by reference to the
discussion captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
Information with respect to this item is incorporated by reference to the
discussion captioned "Certain Relationships and Related Transactions" in Item
No. 1 (Election of Directors) in the Proxy Statement.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial statements from VSE's 1998 Annual Report
which is incorporated herein by reference:
Report of Independent Public Accountants
In section captioned "Consolidated Financial Statements":
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Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Stockholders' Investment for the
Years Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
2. Financial Statement schedules required to be filed by Item 8 of this
Form:
None.
3. Exhibits:
Information with respect to exhibits is contained at page E-1
Exhibit Index.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VSE CORPORATION
Date: March 18, 1999 By: /s/ C. S. Weber
__________________________________
C. S. Weber, Senior Vice President
and Corporate Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 17, 1999, by the following persons on
behalf of the Registrant and in the capacities indicated.
(a) Principal Executive Officers:
/s/ D. M. Ervine
_______________________________________________________________
D. M. Ervine, Chairman of the Board and Chief Executive Officer
/s/ J. M. Knowlton
_______________________________________________________________
J.M. Knowlton, President and Chief Operating Officer
(b) Principal Financial Officer: (c) Principal Accounting Officer:
/s/ T.J. Corridon /s/ T. R. Loftus
_____________________________________ ______________________________
T.J. Corridon, Senior Vice T. R. Loftus, Vice President
President and Chief Financial Officer and Comptroller
(d) Directors:
/s/ D. M. Ervine /s/ J. M . Marchello
_______________________ _______________________
D. M. Ervine J. M. Marchello
/s/ R. J. Kelly /s/ D. M. Osnos
_______________________ _______________________
R. J. Kelly D. M. Osnos
/s/ C. S. Koonce /s/ J. D. Ross
_______________________ _______________________
C. S. Koonce J. D. Ross
/s/ J. M. Knowlton /s/ B. K. Wachtel
_______________________ _______________________
J. M. Knowlton B. K. Wachtel
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PAGE
EXHIBIT INDEX
Reference No. Exhibit No.
per Item 601 of in this
Regulation S-K Description of Exhibit Form 10-K
- -----------------------------------------------------------------------------
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession
Exchange Agreement dated as of March 25, 1992,
amended as of September 1, 1992, by and between VSE
Corporation and JBT Holding Corp., et al. (Exhibit A
to Exhibit 1, Proxy Statement, filed on
Form 8-K on November 2, 1992) *
3 Articles of incorporation and by-laws
Restated Certificate of Incorporation of VSE
Corporation dated as of February 6, 1996 *
By-Laws of VSE Corporation as amended through
July 14, 1998 Exhibit V
4 Instruments defining the rights of security holders,
including indentures
Specimen Stock Certificate as of May 19, 1983
(Exhibit 4 to Registration Statement No. 2-83255
dated April 22, 1983 on Form S-2) *
9 Voting trust agreement Not Applicable
10 Material contracts
Employment Agreement entered into as of October 21,
1998, by and between VSE Corporation and
Donald M. Ervine Exhibit VI
Employment Agreement entered into as of January 15,
1999, by and between VSE Corporation and
Energetics, Incorporated and Robert J. Kelly Exhibit VII
Employment Agreement entered into as of January 15,
1997, by and between VSE Corporation and
James M. Knowlton Exhibit VIII
VSE Corporation Deferred Supplemental Compensation
Plan effective January 1, 1994 (Exhibit III to
Form 10-K dated March 23, 1995) *
Stock Purchase Agreement dated August 29, 1995 by
and between VSE Corporation and the shareholders
of Energetics Incorporated (Exhibit 2 to Form 8-K
dated September 13, 1995 and Amendment 1 on Form
8-K/A dated November 9, 1995) *
VSE Corporation 1996 Stock Option Plan (Appendix A to
Registrant's definitive proxy statement dated
April 3, 1996)
VSE Corporation 1998 Stock Option Plan (Appendix A to
Registrant's definitive proxy statement for the Annual
Meeting of Stockholders held on May 6, 1998)
VSE Corporation 1998 Non-employee Directors Stock Plan
(Appendix B to Registrant's definitive proxy statement
for the Annual Meeting of Stockholders held on May 6, 1998)
12 Statements re computation of ratios Not Applicable
13 Annual report to security holders, Form 10-Q
or quarterly report to security holders Exhibit II
E-1
PAGE
EXHIBIT INDEX
Reference No. Exhibit No.
per Item 601 of in this
Regulation S-K Description of Exhibit Form 10-K
- ------------------------------------------------------------------------------
16 Letter re change in certifying accountant Not Applicable
18 Letter re change in accounting principles Not Applicable
21 Subsidiaries of the registrant Exhibit I
22 Published report regarding matters submitted
to vote of security holders Not Applicable
23 Consents of experts and counsel Exhibit IV
24 Power of attorney Not Applicable
27 Financial Data Schedule Exhibit III
99 Additional exhibits Not Applicable
*Document has been filed as indicated and is incorporated by reference herein.
E-2
PAGE
EXHIBIT I
SUBSIDIARIES OF THE REGISTRANT
The following is a listing of the subsidiaries of the Registrant:
Jurisdiction of
Organization
_______________
CMstat Corporation Delaware
Energetics Incorporated Maryland
Human Resource Systems, Inc. Delaware
Ship Remediation and Recycling, Inc. Delaware
E-3
PAGE
Exhibit II
QUALITY SOLUTIONS FOR THE 21st CENTURY
1998 Annual Report
"VSE - Our systems
help people succeed"
PAGE
Corporate Profile
VSE Corporation is a professional services company established in 1959. VSE
provides diversified engineering, development, testing, maintenance and manage-
ment services and products to maintain and modernize equipment and systems,
principally to agencies of the U.S. Government and to other prime contractors.
The company's subsidiaries and divisions include BAV, CMstat Corporation,
Energetics Incorporated, Human Resource Systems, Inc., Ordnance, Ship
Remediation and Recycling, Inc. (formerly VSE Services Corporation), Value
Systems Services (VSS), and from July 1990 through February 6, 1996, Schmoldt
Engineering Services Company. The company provides products and services to
customers from more than 20 locations across the United States.
Annual Meeting of Stockholders
VSE's Annual Meeting of Stockholders is expected to be held on May 6, 1999, at
10:00 a.m., at the Hilton Alexandria Hotel at Mark Center, 5000 Seminary Road,
Alexandria, Virginia 22311.
Contents
Financial Highlights 1
Letter to Stockholders 2
VSE Operations 5
Description of Business 14
Management Discussion and Analysis 21
Executive Officers 31
VSE Common Stock 31
Report of Independent Public Accountants 32
Consolidated Financial Statements 33
Notes to Consolidated Financial Statements 37
Selected Quarterly Data 50
Form 10-K 51
Form 10-K Cross-Reference Index 52
Officers and Directors 54
ISO 9001 VSE's Quality Policy
VSE's policy is to provide products and services of the highest quality to meet
the needs, expectations, and requirements of its customers, on time, and at a
fair price. VSE's management is committed to the pursuit of quality
performance in all its enterprises. This commitment is reflected in the
Company's mission statement and is our quality objectives.
VSE's Mission Statement
"VSE..Our systems help people succeed."
VSE Corporation helps organizations succeed through the effective use of people,
systems, and technology. In helping others succeed, we increase shareholder
value by capturing new work, delighting our customers, increasing our technical
competence, and building great industry teammates. Our reputation for success,
and our quality management system, are based on honesty and integrity in every-
thing we do; on communications, on teamwork and leadership; and on an enduring
commitment to help our customers, employees, and teaming partners succeed with
cost effective solutions, continuous learning, and process improvement.
PAGE
Financial Highlights
_______________________________________________________________________________
Selected Financial Data
(In thousands, except per share data)
Per share amounts have been adjusted to reflect stock splits in 1996 and 1997.
This consolidated summary of selected financial data should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this Annual Report.
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Letter to Stockholders
Fellow Stockholders:
VSE achieved impressive levels of growth in 1998, our 40th year. Record
revenues, a return to profitability, important contract wins, an increase in
bidding opportunities, and a strong emphasis on providing a solid foundation for
future growth have VSE positioned well for the future.
For the year, consolidated annual revenues increased by $24 million or 15% to
$180 million. Consolidated net income was approximately $1.6 million or $.75 per
share. Led by BAV, the engineering, logistics, management and technical services
segment revenues increased by $25 million or 16% to $177 million and this
segment's net income increased by $0.5 million or 17% to $3.0 million or $1.42
a share. All of our other companies or business units comprising this segment
increased their revenue from last year. Annual revenues for the software
products and services segment decreased by $200 thousand or 6%. We made
substantial progress in reducing the net losses of this segment from $4.0
million to $1.4 million in 1998. While this is positive, we are still committed
to eliminating the losses incurred by our software products and services
segment. We have restructured the management of the company and we have reduced
its size wherever we can while still retaining quality product and service
capability. We continue to keep all of our options open and continue our efforts
to return CMstat to profitability.
Building and Strengthening VSE
When I look back on 1998, I think it will best be remembered as a pivotal time
of building and strengthening VSE. Some of the accomplishments of 1998 are
critical toward positioning VSE for continued success and competition in the
federal government marketplace for many years to come. While measured in annual
increments in this annual report, these changes are fundamental and I am hopeful
they will provide a continued return on our investment for many years to come.
VSE distinguished itself among professional engineering service providers by
achieving ISO 9001 registration. This investment will be a discriminator in all
of our proposals that few competitors can offer. I also firmly believe that
this framework will instill the discipline to focus VSE on quality products
and customer satisfaction. I expect the quality system we put in place in 1998
will enhance our financial results in 1999 and future years.
Our other major emphasis in 1998 was to upgrade our Information Technology
infrastructure to enable us to take advantage of the state-of-the-art tools
that are available for companies like ours. I am a firm believer that through
automation, we can provide increased levels of services at lower overall costs
and thereby keep VSE cost competitive in the eyes of our customers. In 1998,
we established a wide area network connecting the principal offices of our Sea
Warfare, Land Warfare and Air Warfare divisions as well as all o f our
administrative functions. We updated our entire
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PAGE
Letter to Stockholders
telephone, voice, and data systems, and we installed a video conferencing
facility in our Alexandria, Virginia location. We added similar capabilities
in several other VSE offices to minimize travel between our facilities.
Additionally, we installed a new training facility equipped with the latest in
computer hardware and software.
Strengthening our people has been a further initiative in 1998. We established
a training office, a training facility, and formal training plans as part of our
ISO 9001 process. We are investing in our people. The response from our
employees has been tremendous. We believe that continued training is a win-win-
win for VSE, our employees, and our customers.
Business Development
The government marketplace, which VSE serves, continues to be very large. We
have experienced an upturn in bidding opportunities, and we had some key wins
in 1998 that fit in well with our strategic objectives. We wanted to offer our
professional services to more federal government customers, and the award of a
GSA Federal Supply Contract to VSE and subsidiaries for information technology
services in February of 1999 enables us to do this. This contract makes it fast
and easy for customers to get to us, and I am optimistic that we will see
increased revenues in this market. We have initiatives underway for two
additional GSA contracts.
Another strategic VSE objective is to capitalize on a DOD budget trend of
spending more dollars on information technology programs. We are providing
higher technical services in areas such as military systems integration,
upgrading circuitry in fielded Army devices, inventing new power generation
solutions for fielded communications systems, and integrating advanced tech-
nology insertion on military vehicles and ships to modernize and extend their
service lives. We continue to see opportunities to offer services that help our
customers achieve better solutions at lower costs.
Personnel Resources
VSE is, above all, a services company. The strength of our management and the
quality of our services depend on the experience, education, training, and
motivation of VSE employees and managers, beginning with our Board of Directors.
Several important milestones for VSE directors were reached in 1998 and early
1999.
In September 1998, we celebrated David Osnos' 30 years of service on VSE's Board
of Directors. In February 1999, VSE's Board appointed Jim Knowlton as VSE
President and Chief Operating Officer, and a member of the Board, replacing
Dick McFarland who retired after ten years of valuable service to VSE during his
"second career."
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Letter to Stockholders
1999 and Beyond
In the business description which follows you will see how VSE is responding
to a changing business environment. You will see the building and strengthening
in each VSE business unit. You will read about our continued progress toward
providing high tech solutions. We believe in our mission statement: "Our
systems help people succeed," and we are executing on every level. You will see
in our management discussion and analysis our approach to the Year 2000 issue.
We have a focused effort, and all indications are that we as a company will be
ready to do business as usual in the year 2000. Our goals are the same as they
have always been, to continue to grow the company and to increase shareholder
value. We remain committed to doing just that.
In our 40th Anniversary Annual Report, we've emphasized "innovation through
experience," which is our way of saying that VSE brings its customers the proven
experience to perform and the talent and energy to innovate solutions that work
better and cost less.
As I like to do every year, I acknowledge the very valuable support and
contribution made by our industry teaming partners, suppliers, bankers,
directors, and stockholders. VSE needs the effort of everyone to succeed.
Your support is very important, and I welcome your comments and suggestions
for improvement at any time.
D. M. Ervine
Chairman and CEO
March 17, 1999
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V S E O P E R A T I O N S
Engineering, Logistics, Management and Technical Services Segment
VSE Land Warfare Group
Throughout 1998, VSE's Land Warfare Group demonstrated the versatility of its
engineering support solutions for Army, Marine Corps, and Defense Logistics
Agency customers. After redesigning and successfully fabricating three prototype
Direction Finding Systems last year, the group produced 135 units this year to
replace initial production models in Army organizations worldwide. The success
of these initial production models resulted in a production contract for 95
units. Soldiers continually give high marks to the operational effectiveness and
readiness of the redesigned models. The redesigned systems effort has been
identified as the only success story in the Army's Modernization to Spares
Program, a program designed to encourage cost reduction through engineering
solutions.
The group remains an integral part of the Army Reserves' dynamic "out of the
box" approach to modernize, sustain, and improve aging combat service support
systems. The Glider Kit pilot program is an excellent example of VSE's
partnering efforts with the Army Reserve. VSE provides technical expertise,
research and development, and analyses of equipment and systems resulting in
cost avoidance and improved reliability and durability. The Glider Kit conver-
sion process uses the engine and rear tandem axles from an existing Army vehicle
and combines them with an upgraded cab with air conditioning, electronics,
automatic transmission, and new chassis, front axles, and tires. Additional
advancements include an anti-lock brake system (ABS) and the capability to
accept the next generation global positioning systems (GPS). VSE, through the
Office of the Chief, Army Reserve, maintained both an engineering and logistics
presence, throughout the program, moving it continuously from its infancy to
full-scale production and fielding. The conversion transforms an aging, un-
reliable, maintenance-intensive vehicle into a technologically proven, mission-
ready asset. The result is essentially a new vehicle closely resembling the
existing newer version of the vehicle but costing approximately 50 percent less.
The culmination of VSE's efforts over three years was witnessed at the initial
fielding ceremony for the M915A4 Glider at Fort McCoy, Wisconsin, on October 10,
1998.
Since October 1998, members of the VSE Team have supported the integrated
logistics support management assessment for the 7th Army Reserve Command in
Germany. We are developing strategies that will improve equipment maintenance
through implementation of proven business and operational practices, achieving
mission efficiency and combat readiness. In addition, plans are in development
to export these methods to the 9th Regional Support Command in Hawaii. We will
continue to maintain and build on our outstanding relationship with the Army
Reserve as partners in innovation.
Our talented and dedicated employees continue to investigate cost avoidance
measures that will be valuable to our Army, Marine Corps, and Defense Logistics
Agency customers. We have submitted several large proposals that could result in
expanded business opportunities - opportunities to further demonstrate our cost-
effective advantage to our clients in 1999 and beyond.
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VSE Sea Warfare Group
During 1998, VSE's Sea Warfare Group continued to provide single-source
engineering solutions to the U.S. Navy, other defense customers, and with our
industry partners such as commercial shipyards. Sea Warfare Group customers
include the Naval Facilities Engineering Service Center, Naval Sea Shipbuilding
Support Office, and the Naval Air Command, and the Supervisor of Shipbuilding at
Portsmouth, Virginia. The group was awarded another subcontract to support the
Fleet Technical Support Center Atlantic, adding combat systems assessment to the
list of services that we provide to our customers.
Our reputation for fleet maintenance and modernization support has enabled us to
put together teams with other industry leaders to respond to even larger and
more complex government fleet support acquisitions. Our personnel continue to
provide high quality "turn-key" support, including scheduling, project manage-
ment, material identification, procurement and control, shipping and expediting,
installation, repair and maintenance, testing, system assessment, documentation,
provisioning, and training. Major contracts in 1998 included installation of
new, complex radar systems and air traffic control on seven aircraft carriers on
the East and West Coasts, and at the land based test site at Wallops Island,
Virginia. Our marine engineering personnel also accomplished the first
installation of the upgraded combined engagement capability systems onboard the
aircraft carrier USS KENNEDY and the first complete IT-21 compliant installation
of the integrated ships information system, which was installed onboard the
aircraft carrier USS THEODORE ROOSEVELT.
Our Ocean Systems personnel continued providing engineering and construction
support for the Naval Facilities Engineering Service Center. In 1998, major
projects included the installation of heavy weather hurricane and typhoon ship
moorings in Hawaii, Texas and Puerto Rico. Ocean Systems personnel also provided
facility design support for the new Navy Inactive Ship Facility in Newport,
Rhode Island which included pier fendering, fire, water, electrical and
communications systems. The project included design and modifications to the
inactive aircraft carriers Saratoga and Forrestal, and the battleship Iowa.
It also included the supervision of berthing operations for these vessels.
Significant pier overhaul and refurbishment was accomplished in Port Hadlock,
Washington. Our Ocean Systems personnel managed the cutting, removal, and
replacement of sixteen 110-foot long octagonal concrete support piles, which
was successfully accomplished without disruption to ongoing pier activities.
Postal Service Program Center
For over 22 years, VSE has expanded its capabilities and commitment to meet the
strategic technology objectives of the U.S. Postal Service ("USPS"). VSE
employees are proud of their contributions to the success of USPS initiatives
and innovations.
VSE's Postal Service Program Center continued to build its professional services
operations and partnering capabilities in 1998 by supporting USPS Engineering,
Merrifield, Virginia. In 1998, we strengthened our technical engineering staff
with focus on unique customer requirements, team building, and commitment to
excellence.
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PAGE
Our professional staff offers diverse technical engineering services to design,
modernize, test and logistically support automated electro-mechanical mail
processing and delivery equipment and systems. VSE also provides services to
support new automated processes and solutions for USPS configuration management,
inventory control, and equipment maintenance programs utilizing CMstat systems.
VSE professionals support significant USPS programs to develop state-of-the-art
stamp manufacturing standards and materials qualifications with growing emphasis
on environmentally benign stamp products.
VSE engineers and technicians sustain many important U. S. Postal Service
programs involving next generation automation enhancements to meet USPS
business, customer service and organizational productivity goals. Working with
evolving technologies, reengineering processes, and equipment to achieve a fully
automated mail processing and material handling environment, VSE engineers
support the integration of current systems with technology advancements for
development of the integrated processing facility initiative, deployments
of tray management and robotics equipment systems, as well as implementation
of mail equipment transport projects. VSE employees also support USPS innova-
tions such as the development of state-of-the-art printed circuit boards,
delivery confirmation initiatives, alternative fuel utilization for USPS vehicle
programs, web site development, and database integration for research and
marketing programs.
As our USPS customers advance in the development and implementation of new
systems and technology, the VSE Postal Service Program Center team of
professionals will continue providing technical excellence to ensure best value
for the USPS.
VSE Air Warfare Group
During 1998 VSE consolidated all of its Aviation Engineering and Logistics
Services into the Air Warfare Group (AWG), thereby establishing a corporate
competency to serve the Aviation Business Sector. The main operational unit of
the AWG is the Value Systems Services (VSS) Division.
VSS continues to serve our Navy customers through the Naval Air Systems Command
(NAVAIR) Logistics Support Omnibus contract.
In 1998, VSS completed the move to Patuxent River, Maryland, to accommodate
NAVAIR's relocation. In our new Southern Maryland facility, VSS employs over
100 engineers and logisticians who assist the supportability requirements of
most aircraft and missile system programs.
Additionally, in 1998 VSS was awarded a contract with the Navy's Outsourcing
Support Office. Via this contract, VSS provides analytical and cost estimation
services in support of the Navy's A-76 outsourcing initiatives. VSS has
completed the management studies for both the Naval Shipyard in Portsmouth,
Virginia, and the Navy Surface Warfare Center, Indian Head Division in Indian
Head, Maryland. This contract has the potential for revenue growth as the Navy
increases its outsourcing efforts in support of decreased budgetary outlays.
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PAGE
VSS continues to support the U.S. Special Operations Command in Tampa, Florida,
via a subcontract with an industry partner. Under this contract, VSS provides
technical and logistics services to the Air Force component of the Joint
Command.
Another of Air Warfare Group's Air Force customers is the Warner Robins Air
Logistics Center in Georgia. We provide engineering, logistics, and computer-
based support to the airborne weapons programs at Warner Robins.
VSS has made significant progress in meeting our corporate objective of
providing innovative solutions to our customers. During 1998, VSS was awarded
tasking in support of the Continuous Acquisition Life Cycle Support (CALS) and
the Automated Maintenance Environment (AME) initiatives. These initiatives
consist of the deployment of an advanced maintenance schedule and diagnostic
system that will significantly improve the cost effectiveness of the F/A-18
Aircraft Logistics Support. In connection with the CALS/AME initiatives VSS
has entered into a partnership with the Maryland Department of Economic
Development to train engineering personnel in advanced software and network
systems.
VSS is also supporting the Naval Supply Systems Command by providing baseline
development of a Serial Number Tracking (SNT) integrated system. SNT
incorporates Automatic Information Technology and Contact Memory Buttons into
an object oriented tracking system. SNT will be the 21st century replacement
for bar-coding and component related paper documentation.
VSS is proud to be a member of the Joint Strike Fighter (JSF) team. JSF is a
joint services, future replacement multi-role fighter. As part of this tasking,
VSS provides supportability and affordability analysis and makes recommendations
for improvement of system reliability and maintainability.
We are confident that our current involvement in these "Information Age"
initiatives will provide opportunities for continued growth in the years ahead.
BAV Division
The BAV Division continued to expand its business base and generated record
revenues in 1998 exceeding $93 million. During the year, BAV and its team of
subcontractors facilitated the reactivation and transfer of eight inactive ex-
U.S. Navy ships to the navies of Egypt, Thailand, and Turkey. In addition,
follow-on technical support and logistic services were provided to Taiwan,
Egypt, Thailand, Greece, Germany, Saudi Arabia, and Italy. BAV has
institutionalized all its processes under the ISO 9001 quality standard and
continues to provide engineering services on a competitive "Best Value" basis.
We have been zealous about providing services that exceed the expectations of
our foreign customers and the BAV team's reputation has grown.
BAV has sought and executed a number of strategic partnerships that have
supported new business opportunities. We have developed alliances with both
national and international companies. These partnering relationships have
enabled us to provide engineering services such as support of the Turkish Navy
to retrofit five ex-U.S. Navy FFG 7 Class ships with the Aircraft Integrated
Secure and Traverse (ASIST) system, a state-of-the-art helicopter recovery and
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handling system. We are also pursuing a long-term business relationship with
the U.S. Coast Guard ("USCG") to facilitate USCG foreign military sales ship
transfers. The USCG has recognized the benefits and value of the BAV Team
methodology for their FMS program support.
BAV has sought to build a common marketing approach with the entire range of
U.S. Navy Security Assistance Organizations and is also exploring the require-
ments for Direct Commercial Sales opportunities. BAV is continuing to increase
its international presence and participated in industry trade shows and
expositions in 1998 that included EURONAVAL (Paris, France), EXPONAVAL
(Valparaiso, Chile), and DEFENDORY (Athens, Greece). Our Washington, D.C.
location helps to keep local embassies informed of BAV's broad array of services
and lifecycle support.
Human Resource Systems, Inc.
Human Resource Systems, Inc. (HRSI), a subsidiary of VSE, provides professional
employer services to Government clients in a variety of technical disciplines,
including engineering, architecture, real estate, information technology, and
health care. Most HRSI employees work at customer facilities nationwide under
contractual arrangements lasting up to five years.
With HRSI's continued growth during 1998, HRSI took a number of strategic steps
to strengthen the organization and reinforce the quality of service delivery.
HRSI expanded nationwide support of its technical services division by
establishing a program management office in Louisville, Kentucky, in addition
to corporate offices in Alexandria and Chesapeake, Virginia. HRSI has been
engaged in an on-going process to update its policies and procedures in keeping
with the needs of our clients. HRSI completed a number of strategic staff
additions to keep pace with corporate growth and business expansion. HRSI
increased its Internet capabilities to augment recruitment, communications, and
new business development. Operating in tandem with VSE, HRSI plans to deploy
many of its practices via the Internet during 1999 to strengthen our presence
with customers and employees.
HRSI's growth and reputation are predicated on delivering exceptional client
service, helping clients succeed and answer new challenges appropriately and
efficiently. For example, during 1998 HRSI was selected by the U.S. Navy to
provide special emergency health care staffing services at the National Naval
Medical Center in Bethesda, Maryland, to replace critical military staff
deployed to a hospital ship. HRSI also continued to expand its range of
technical services offered and the locations where services are provided to meet
client technical needs and budgetary requirements.
In keeping with the HRSI's strategic plan, HRSI has vigorously pursued new work
within our dominant business lines. HRSI has several bids outstanding and in
process. Toward this end, HRSI has expanded its role as a business partner
with other leading firms that share HRSI's commitment to quality and
professionalism. HRSI's strategic alliances should lead to increased growth
in the years ahead.
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Energetics Incorporated
Energetics Incorporated ("Energetics"), a VSE subsidiary, is a full-service
consulting company specializing in energy and environmental issues. Founded
in 1979, Energetics provides technical and managerial support to the U.S.
Department of Energy (DOE) as well as other clients in the public and private
sectors. Projects have ranged across the energy and environmental spectrums,
from management support to analyses of advanced technological research and
development. As a testament to the quality of work, many of Energetics' clients
have contracted continuously with Energetics for over a decade because of key
Energetics people. Energetics' experienced staff of more than 100 engineers and
other professionals concentrate on three areas vital to the future well-being of
the nation and world:
* Energy Supply
* Energy Conservation
* Environmental Management
Energy Supply
Energetics assists the government and utility companies in planning and
implementing innovative programs to improve the production and delivery of
electricity to consumers. Several of the staff are recognized internationally
for their knowledge of battery energy-storage technologies, hydrogen systems,
clean coal technologies, superconductivity, electromagnetic fields, and utility
deregulation.
Energy Conservation
Energetics provides advanced technical solutions to reduce energy use, prevent
pollution, and save costs. In addition to conducting numerous technical,
economic, and policy studies, the staff helps clients identify energy-efficient
technologies and alternative fuels for use in buildings, industries, and trans-
portation systems, including emerging technologies that offer state-of-the-art
options and performance.
Environmental Management
Energetics assists clients with regulatory analysis, environmental regulatory
compliance, and restoration support. The environmental staff has comprehensive
knowledge and understanding of all applicable statutes and regulations. With
the recent interest in global climate change, Energetics has significantly
increased its support to associated activities at DOE. Recent focus is on
reducing greenhouse-gas emissions from industrial operations. Energetics has
studied and analyzed the most energy-intensive industries, and recently
completed an evaluation of carbon dioxide emissions from eight industrial
sectors. This effort directly supports the DOE's role on the President's
Climate Change Task Force.
Energetics moved into newly renovated office spaces in the latter part of 1998.
In addition, a state-of-the-art telephone system and local area network were
installed. These improvements assure greater connectivity with clients and make
the working environment much more efficient and hospitable.
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The future for energy and environmental work is bright and Energetics has
charted a course for long term growth, involving
- - improved marketing strategy to provide additional services to existing clients
and to expand into other markets;
- - continued training of the workforce;
- - continuous improvement of quality in services and products.
Software Products and Services Segment
CMstat
CMstat provides "best in class" systems and software solutions which enable
clients to manage technically complex, rapidly changing products and processes
that have become increasingly central to the current economy.
CMstat strengthened its business in 1998 with the development of re-usable
methods to integrate the Configuration Management ("CM") system with other
critical applications used in the engineering and product management arena.
In addition, CMstat introduced a new web-based product that provides large
numbers of users across the enterprise with easy, cost-effective access to
detailed product data captured and managed within the CM process. These
developments allow customers to maintain control of product content and
documentation across their entire enterprise, as well as among their suppliers
and customers, and at every stage of the product life cycle.
CMstat continues to develop object-based and web-based technologies. CMstat is
building new applications that support complex manufacturing and technical asset
management and the integration of product design, manufacturing, and maintenance
tasks and applications. Quickly deployed, easily learned applications, that
control the flow of current product specification and design data across the
entire supply chain, will become essential as all facets of the product cycle
are distributed among various enterprises and locations. CMstat is building
these applications now, working in partnership with customers who are "pushing
the envelope" in managing the supply and support chain for complex products.
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VSE Quality Strategy - ISO 9001 Registration
VSE has achieved another milestone in its commitment to deliver to its customers
products and services of superior quality: Registration of its quality manage-
ment system to ISO 9001 by an internationally recognized third party registrar,
Lloyd's Register Quality Assurance. Completing a rigorous company-wide internal
process improvement effort, the attainment of ISO 9001 registration is an
acknowledgement of VSE's continuing commitment to quality and to our dedication
to continuous improvement of our business processes.
Quentin Conroy, VSE's Director of Quality and ISO 9001 Management
Representative, reported the achievement of ISO 9001 registration is certainly
a mark of accomplishment setting VSE apart from many other engineering services
companies doing business with the U.S. Government. "Don Ervine, VSE's Chairman
and CEO, initiated our first formal quality program in 1988," said Mr. Conroy.
"At that time, we focused principally on the Department of Defense TQM (Total
Quality Management) initiative. We have worked to incorporate continuous
process improvement into our procedures throughout the company. With the
ISO 9001 system of requirements, we have an even stronger set of standards,
and we have a structure that automatically integrates quality into everything
we do. We have prepared ourselves to move forward into the 21st century with
emphasis on quality."
"The importance of implementing a quality system like ISO 9001 cannot be
overemphasized," said Jim Knowlton, VSE's President and COO. "Throughout the
company, we work in teams to improve quality and increase operating efficiency.
An effective quality management system begins and ends with a heightened aware-
ness of our customers' needs, expectations, and requirements. Our job is to
satisfy the customer, and delivering value and quality products and services to
the customer is our goal. ISO 9001 is an important tool in helping us guide
these efforts."
VSE Quality Strategy II - Information Technology
In 1998, VSE continued the process of strengthening its computer and information
technology capabilities by focusing on and drawing together the vital tools
needed to compete in the 21st century. Concurrently, we implemented a plan to
re-engineer and update our core equipment, including telecommunications, by
installing new local area network (LAN), wide area network (WAN), and video
teleconferencing to improve rapid internal and external communications. These
advancements benefit all VSE and allow us to offer these advanced technology
capabilities to our customers. We have developed a dynamic, proactive program
for keeping current with the advancements in computer technology and refreshing
our capabilities and expertise on an evolving basis, maintaining a competitive
advantage in the future.
Our efforts over the past year have involved the development and implementation
of new and updated systems taking advantage of innovations in desktop,
relational database, Internet, telecommunication, network, and programming
technologies. Our systems have contributed appreciably to the success of our
customers by providing IT solutions and tools that have enabled them to enhance
the management of information associated with business, finance, and technical
issues. We have actively pursued the resolution of
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Year 2000 (Y2K) challenges, both for internal and external operations,
leveraging the information gained into the basis for our IT asset management
program. This gives our customers confidence that their systems that work today
will work well beyond the year 2000.
Along with updating our information technology capabilities, we have embarked
upon enterprise-wide business development efforts. Our efforts include
receiving a General Services Administration Information Technology contract that
will allow us to provide information technology services and software to many
federal government agencies. We regard this opportunity as a business area that
can provide significant growth opportunities as we capitalize on our investments
in updated computer and information technology. Areas of new business
opportunities include Y2K solutions, LAN/WAN implementations, desktop support,
networking and telecommunications, web-page design, and systems planning,
architecture, design, and implementations. We will build upon our existing
broad capabilities and expertise in providing professional information
technology products and services for VSE and our clients to meet the challenges
that will face us in this important growth area into the 21st century.
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Description of Business
Introduction
VSE Corporation ("VSE") is a Delaware corporation established in 1959.
During 1998, VSE and its subsidiaries and divisions operated in two segments:
the engineering, logistics, management and technical services segment and the
software products and services segment. The term "VSE" or "company" means VSE
and its subsidiaries and divisions unless the context indicates operations of
the parent company only.
Since incorporation, VSE has provided diversified engineering,
technical, and management services, principally to agencies of the United States
Government (the "government") and to other government prime contractors.
* Engineering, logistics, management and technical services
including information technology services are provided by VSE and by each of
its subsidiaries and divisions including BAV Division, Energetics Incorporated,
Human Resource Systems, Inc., Ordnance Division, Value Systems Services
Division, and Ship Remediation and Recycling, Inc.
* Software products and services are the primary business of VSE's
subsidiary, CMstat Corporation ("CMstat").
The engineering, logistics, management and technical services segment
accounted for 98.3%, 97.9%, 96.3%, and the software products and services
segment accounted for 1.7%, 2.1%, 3.7% of VSE's consolidated revenues from
continuing operations in 1998, 1997, and 1996, respectively.
Services and Products
Engineering, Logistics, Management and Technical Services Segment
VSE engineering, technical, management and information technology
services include a broad array of capabilities and resources used in program
planning; design and engineering, including prototype development; ship
reactivation and transfer support; logistics management; ship maintenance,
repair, overhaul planning, and follow-on technical support; office automation
systems and support; training; technology research, development, and demonstra-
tion programs involving energy conservation and efficiency, advanced technology
transfers, and feasibility, assessment, and development programs.
Typical engineering and technical services projects include sustaining
engineering support for military vehicles, combat trailers, bridging systems,
and amphibious transport; ocean engineering and mooring systems; depot repair
operations; logistics management support for military aircraft; machinery
condition analysis; specification preparation for ship alterations and repairs;
ships force crew training; energy conservation and advanced technology
demonstration projects; and technical data package preparation.
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Description of Business
VSE information technology services and products include cross-platform
technical data, product data, and configuration management (CM/PDM) support,
bar coding and inventory applications, database management and control, and
union grievance system software.
Software Products and Services Segment
Through its subsidiary, CMstat, VSE markets a series of proprietary
products (the CMstat System) used in configuration, workflow, and change
management applications across a variety of functions including design and
engineering, prototype, manufacturing, purchasing, and support and maintenance.
Marketing
VSE marketing activities are conducted by its professional staff of
engineers, analysts, program managers, contract administrators, and other
personnel. Information concerning new programs and requirements becomes
available in the course of contract performance, through formal and informal
briefings, from participation in professional organizations, and from literature
published by the government, trade associations, professional organizations, and
commercial entities.
Contracts
VSE seeks to provide its customers with competitive, cost effective
solutions to specific problems. These problems generally require a detailed
technical knowledge of materials, processes, functional characteristics,
information systems, technology and products, and an in-depth understanding of
the basic requirements for effective systems and equipment. Billing for services
is generally accomplished by billing customers for a specified level-of-effort
incurred in performing a project or providing a service or for installed
products, systems, and maintenance charges.
Depending on solicitation requirements and other factors, VSE offers its
professional and technical services and products through various competitive
contract arrangements and business units which are responsive to customer
requirements and which may also provide an opportunity for diversification.
Such arrangements include prime contracts, subcontracts, cooperative arrange-
ments, joint ventures, dedicated ventures, dedicated cost centers, separate
profit centers (divisions), and subsidiaries.
During 1998, VSE's six largest contracts accounted for approximately
80% of total revenues, and one such contract with the U.S. Navy accounted for
more than 52% of such revenues. The contract was awarded in 1995 and included
a base year and nine option year periods which expire in July 2005. See
"Results of Operations - Revenues" in "Management Discussion and Analysis" for
further discussion of this contract.
The following table shows the revenues of VSE and its subsidiaries and
divisions by customer or agency:
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Description of Business
VSE Revenues by Customer or Agency
(Dollars in thousands)
1998 1997 1996
Group or Agency Revenues % Revenues % Revenues %
- --------------- -------- ----- -------- ----- -------- -----
U.S. Navy $131,911 73.2% $108,416 69.5% $ 75,232 62.6%
U.S. Army 19,577 10.9 19,423 12.5 18,880 15.7
All other government 27,991 15.5 25,804 16.6 23,836 19.8
Commercial 754 0.4 2,220 1.4 2,139 1.4
-------- ----- -------- ----- -------- -----
Total $180,233 100.0% $155,863 100.0% $120,087 100.0%
======== ===== ======== ===== ======== =====
During 1998, VSE provided services to the government and other prime
contractors under approximately 235 contracts, some of which are of an
indefinite delivery/indefinite quantity ("ID/IQ") ordering nature. ID/IQ
contracts permit the contracting agency to issue delivery orders or task orders
in an expeditious manner to satisfy relatively short-term requirements for
engineering and technical services. The services ordered pursuant to ID/IQ
arrangements are normally performed and completed within a one year period.
During 1998, VSE provided services under approximately 1,220 such delivery
orders or task orders.
VSE has expanded its engineering services customer base to non-defense
clients, such as the U.S. Postal Service and the U.S. Department of Energy.
Human Resource Systems, Inc. ("HRSI") competes for certain technical and
consulting service work. Through this subsidiary, VSE provides technical
personnel and health care professionals and technicians to work on-site at
customer facilities at the direction of customer management. In 1996, an HRSI
joint venture was awarded a five-year, $60 million contract to provide nursing
and allied services for a regional naval medical center.
Value Systems Services was awarded a contract in 1994 to provide
logistic support services for Naval aircraft, helicopters, and airborne weapons
systems. This contract has the potential to generate revenues to VSE of about
$77 million over a five-year period ending in 1999.
In 1991, VSE formed VSE Services Corporation ("VSES") as a subsidiary to
compete for certain contracts. VSES has been inactive since 1992. In 1999,
VSES changed its name to Ship Remediation and Recycling, Inc.
In 1995, VSE made two acquisitions to expand and diversify its business
base:
* In May 1995, VSE acquired CMstat Corporation, an information
technology company located in San Diego, California. CMstat is a leading
supplier of commercial (off-the-shelf) software products and technology to
manage engineering, product, and configuration management data.
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Description of Business
* In August 1995, VSE acquired Energetics Incorporated, an energy
management and environmental technology company located in Columbia, Maryland.
Energetics provides technical and management services for advanced technology
programs, primarily for the Department of Energy and other government and
commercial clients.
In 1995, VSE formed the BAV Division to compete for an engineering,
technical and support services contract for U.S. Navy ships to be sold, leased,
or otherwise transferred to foreign governments. BAV was awarded this contract
in August 1995. This contract accounted for 52% of VSE's revenues in 1998 and
has the potential to generate total revenues of over $1 billion depending on
delivery order requirements and option periods exercised through the year 2005.
In 1996, a VSE joint venture was awarded an approximately $12 million
fixed-price production contract to produce more than 100 common bridge
transporter systems for the U.S. Army. VSE is expected to receive approximately
one-half of the total program value. This contract is expected to be
substantially completed in 1999.
In 1998, VSE formed the Ordnance Division to provide engineering support
services in the field of energy and associated systems support.
Schmoldt Engineering Services Company, which was acquired by VSE in
1990, was divested in February 1996.
VSE Corona, Inc., which was formed by VSE to perform on a specific
contract awarded in 1987, was dissolved in 1997.
Personnel
VSE services are provided by a staff of professional, scientific,
medical, and technical personnel having high levels of education, experience,
training, and skills. As of February 1999, VSE employed approximately 1,300
employees, including approximately 300 part-time personnel.
Principal categories of VSE personnel include (a) engineers, scientists,
and technicians in mechanical, electrical, electronic, chemical, industrial,
energy and environmental services, marine, and ocean engineering disciplines,
(b) information technology professionals in computer systems, applications, and
product, configuration, change, and data management disciplines, (c) technical
editors and writers, (d) graphic designers and technicians, and (e) health care
service personnel. The expertise required by VSE customers also frequently
includes knowledge of government administrative procedures. Many VSE employees
have had experience as government employees or have served in the U.S. armed
forces. The company considers its relationships with employees to be excellent.
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Description of Business
Facilities
VSE's principal executive and administrative offices are located in a
five story building in Alexandria, Virginia, leased by VSE through the year
2003. This building contains approximately 108,000 square feet of engineering,
shop, and administrative space. VSE also provides services and products from
approximately 20 U.S. branch offices located at or near customer sites to
facilitate communications and enhance project performance. Branch offices are
generally occupied under short term leases and currently include an aggregate
of approximately 195,000 square feet of office and warehouse space. VSE
employees often provide services at customer facilities, limiting VSE's
requirement for additional space. BAV provides services from several locations
outside of the United States (generally at foreign shipyards); these services
are often of short duration based on "tiger team" or "as-ordered" requirements.
VSE owns and operates an engineering test center in Ladysmith, Virginia,
consisting of approximately 44 acres of land and an improved storage and vehicle
maintenance facility. This facility has been used by VSE to test military and
commercial equipment for which VSE provides system technical support or other
engineering services and to supplement Alexandria, Virginia, shop facilities.
Current engineering test center projects include the construction of certain
ocean engineering contract deliverable items such as ship camels, pier fenders,
and plate anchor drive followers.
Backlog
As of December 31, 1998, VSE had proposals pending for engineering
services contracts covering approximately $239 million in services for the
Department of Defense or other government agencies or prime contractors. If
these contracts are awarded to VSE, resulting ordering periods could extend
through 2004. However, there is no assurance that VSE will be the successful
bidder for any of these contracts. Moreover, there can be no assurance that
contract awards, if any, will all result in revenues to VSE because (a) contract
awards may be rescinded as a result of the government's bid protest procedures,
(b) contracts may not be funded at the nominal amounts cited in competitive bid
announcements, and (c) contracts when funded may be terminated at the
convenience of the government.
During 1998 and 1997, VSE was awarded contracts having potential ceiling
values of approximately $124 million and $120 million, respectively.
VSE's funded backlog of work as of December 31, 1998, 1997, and 1996
was approximately $122 million, $110 million and $120 million, respectively.
"Funded" backlog is defined as orders for services that have not been fully
rendered and for which funding has been provided either at the time of award or
thereafter. Substantially all of the funded backlog is expected to be
completed within one year.
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Description of Business
The excess of unfulfilled contract estimates over the incremental
funding authorized represents an "unfunded" backlog. Based on the total
estimated value of contracts actually awarded, the potential revenues for work
remaining to be performed under existing contracts (both funded and unfunded
backlog) was approximately $1 billion, $1.2 billion, and $1.3 billion, as of
December 31, 1998, 1997 and 1996, respectively. VSE has no reasonable basis
on which to determine when or if such unfunded backlog may be funded. Because
of uncertainties associated with changing program requirements and the ultimate
availability of funds, VSE believes that measurements of unfunded backlog are of
limited use in evaluating future workload.
Competition and Risks
Competition. The professional and technical services industry in which
VSE is engaged is very competitive. There are a substantial number of other
organizations, including large, diversified firms with greater financial
resources and larger technical staffs, which are capable of rendering
essentially the same services as those offered by VSE. Such companies may be
publicly owned or privately held and may be divisions of much larger organiza-
tions including large manufacturing corporations.
The government's own "in-house" capabilities are also, in effect,
competitors of VSE (including the government's own nonprofit federally funded
research and development centers) because government employees often perform
many of the services that might otherwise be performed by VSE.
It is not possible to predict the extent and range of competition which
VSE will encounter as a result of changing economic or competitive conditions,
customer requirements, or technological developments. Competition in the
government contract business has intensified since 1987 due to declining
government budgets, and such markets are often dominated by one or a few "niche"
companies. VSE believes the principal competitive factors for the professional
and technical services business in which it is engaged are technical and
financial qualifications, quality and innovation of services and products, past
performance and low price.
Since 1993, the government has initiated a series of changes designed to
improve and streamline its acquisition policies and procedures. Such changes
include an emphasis on very large contracts, which may reduce the potential
number of qualified bidders; past performance, which may be used to exclude
entrance into new government markets; multiple-award schedules, which may result
in unequal contract awards between successful contractors ; and best value
contract awards, which reduce the advantages of price competition. The net
effect of all such changes on future VSE revenues is unknown.
Risks. Sales of key business process or enterprise-wide computer
software, such as the software sold by CMstat, are subject to a lengthy sales
cycle which may exceed one year in some instances. The length of the sales
cycle increases marketing costs, increases the risk of product obsolescence,
makes it difficult to predict the timing and amount of revenues, and may result
in large negative cash flows and operating losses pending the final
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Description of Business
results of such sales efforts. The company's engineering and technical services
are typically provided under cost-plus-fee, time and materials or fixed-price
contracts. Under cost-plus-fee contracts, the customer reimburses VSE for its
allowable costs permitted by regulations and pays a fee based on negotiated
terms. Under time and materials contracts, the customer pays VSE at fixed
hourly rates for direct labor costs and the related overhead and profit, and
reimburses VSE for the cost of materials without profit. Under fixed-price
contracts, the customer pays an agreed price for services or products. Under
fixed-price contracts and time-and-materials contracts, VSE bears the risk that
increased or unexpected costs may reduce its profit or cause it to sustain a
loss. To the extent VSE incurs actual costs below anticipated costs on these
contracts, VSE realizes greater profit margins.
Government agencies have placed an increased emphasis on awarding
contracts of the types performed by VSE on a competitive basis as opposed to a
non-competitive basis. All significant contracts currently being performed by
VSE were either initially awarded on a competitive basis or have been renewed
at least once on a competitive basis. Countering this trend are contracts
awarded by the General Services Administration which provide a schedule of
services at fixed prices which may be ordered by potential customers essentially
outside of the solicitation process. In some cases, these contracting methods
may pose substantial risks to traditional VSE business development efforts.
While VSE has been awarded a GSA schedule contract in 1999, there is no
assurance that VSE will be successful in obtaining work under this contract
arrangement.
VSE's business with the government is subject to the risk that one or
more of its potential contracts or extensions of existing contracts may be
awarded by the contracting agency to a competitor, including "small and
disadvantaged" or minority-owned businesses pursuant to "set-aside" programs
administered by the Small Business Administration or may be "bundled" into
omnibus contracts for very large businesses. In addition, VSE's business is
subject to funding delays, extensions, and moratoriums caused by political and
administrative disagreements such as occurred during the 1996 U.S. Government
budget negotiations. To date, the effect of such negotiations and disagreements
on VSE has not been material; however, no assurances can be given about such
risks with respect to future years.
VSE's business is subject to the risks arising from global economic
conditions associated with potential foreign customers served through VSE's
contracts with the U.S. Government. For example, the reported economic slowdown
of certain countries located in Southeast Asia could potentially affect BAV
sales.
Government contracts are subject to termination at the government's
convenience, which means that the government may terminate the contract at any
time, without cause. However, during VSE's 40-year history the aggregate amount
of such government terminations for convenience has not been material. If a
government contract is terminated for convenience, generally VSE is reimbursed
for its allowable costs to the date of termination and is paid a proportionate
amount of the stipulated profit or fee for the work actually performed.
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Management Discussion and Analysis
The discussion and analysis which follows is intended to assist in
understanding and evaluating the results of operations, financial condition, and
certain other matters of VSE Corporation and its wholly owned subsidiaries
("VSE" or the "company"), including CMstat Corporation ("CMstat"), Energetics
Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"), Ship
Remediation and Recycling, Inc. ("SRR") (formerly VSE Services Corporation,
("VSES")), and Value Systems Services ("VSS"), BAV and Ordnance, unincorporated
divisions of VSE. The company is engaged principally in providing engineering,
software development, testing, and management services to the U.S. Government
(the "government"). SRR has generally been inactive since 1992. Intercompany
sales are principally at cost and have been eliminated from the consolidated
financial statements.
Results of Operations
Revenues
The following table shows the revenues from continuing operations of VSE and
subsidiaries and such revenues as a percent of total revenues:
Revenues from Continuing Operations
(dollars in thousands)
Engineering, Logistics, Management and Technical Services Segment
The largest customer for the engineering, logistics, management and
technical services rendered by the company is the U.S. Department of Defense
("Defense"), including agencies of the U.S. Army, Navy, and Air Force. VSE's
engineering services revenues have historically been subject to year to year
fluctuations resulting from changes in the level of Defense spending. Defense
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Management Discussion and Analysis
spending has been reduced in recent years, and there can be no assurance that
future reductions in Defense spending will not have a material adverse impact
on the company's results of operations or financial position.
Substantially all of the company's revenues from this segment depend on
the award of new contracts, on current contracts not being terminated for the
convenience of the government, and on the exercise of option periods and the
satisfaction of incremental funding requirements on current contracts. In 1998,
1997 and 1996, the company did not experience any termination of contracts for
the convenience of the government nor any non-exercise of option periods on
current contracts which were material to the company's results of operations
or financial position. The increases in revenues between periods is driven
primarily by the increased level of activity on the BAV contract.
BAV Contract In August 1995, VSE's BAV Division was awarded a contract
with the U.S. Navy to provide engineering, technical and logistical support
services associated with the sale, lease, or transfer of Navy ships to foreign
governments. BAV began work on the contract in September 1995. This contract
has the potential, if all options are exercised, to generate revenues in excess
of one billion dollars over a ten year period from 1995 through 2005. The
contract accounted for approximately 52% and 48% of consolidated revenues from
continuing operations during 1998 and 1997, respectively. The level of revenues
generated by this contract will vary depending on a number of factors including
the timing of ship transfers and associated support services ordered by foreign
governments and economic conditions of potential customers worldwide. The
company experienced significant quarterly revenue fluctuations in 1998 and
anticipates that future quarterly revenues will be subject to significant
variations primarily due to this contract.
Software Products and Services Segment
Revenues from the software products and services segment decreased
approximately 6% to $3 million in 1998 compared to 1997, and approximately 28%
to $3.2 million in 1997 compared to 1996. The revenues of this segment depend
upon a number of factors including the demand for its products, the size and
timing of specific sales, the delay or deferral of customer implementations,
the level of product and price competition that it encounters, the length of
its sales cycles, and the timing of new product introductions and product
enhancements by CMstat and its competitors.
The profitability of this segment is dependent upon CMstat's sales.
While management believes that CMstat will generate sufficient revenues to keep
pace with its cost structure in 1999, failure to do so could adversely affect
the company's results of operations.
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Management Discussion and Analysis
Income from Continuing Operations Before Income Taxes
The following table shows consolidated revenues and income from continuing
operations before income taxes of VSE segments, other items of income and
expense, and such amounts as a percent of segment revenues. Engineering,
logistics, management and technical services segment revenues were 98.3%, 97.9%
and 96.3% of total revenues for 1998, 1997 and 1996, respectively. Software
products and services segment revenues made up the remaining revenues.
Income (Loss) from Continuing Operations Before Income Taxes
(dollars in thousands)
Engineering, Logistics, Management and Technical Services Segment
Costs and expenses of operations, as a percentage of segment revenues, increased
by approximately 0.1% in 1998 as compared to 1997. Costs and expenses of
operations, as a percentage of segment revenues, were unchanged during 1997
as compared to 1996. The percentage differences between 1998,
- 23 -
PAGE
Management Discussion and Analysis
1997 and 1996 are due to a combination of factors, some of which are offsetting,
including (a) differences between costs incurred and costs billable (whether
they may be billed based on contract provisions), (b) the effects of increases
or decreases in facility and equipment lease renewals, fringe benefit programs,
and similar period expenses, (c) costs associated with contract start-up and
termination phases, (d) narrower profit margins on new work due to increased
competition, (e) increased labor costs reflecting a more competitive marketplace
for attracting and retaining our employees, (f) the establishment and reversal
of reserves for potential contract disallowances due to the timing of government
audits on costs incurred, (g) the amount of work performed on certain contracts
as a percentage of total revenues, (h) the timing of contract award fees, and
(i) effective project and cost management.
Selling, general and administrative expenses as a percentage of segment
revenues decreased slightly, 0.1%, in 1998 as compared to 1997 primarily due to
the increased revenue base. Selling, general and administrative expenses as a
percentage of segment revenues remained constant in 1997 as compared to 1996.
Interest expense as a percentage of segment revenues decreased
approximately 0.1% in 1998 as compared to 1997 and approximately 0.2% in 1997
as compared to 1996 due primarily to the application of earnings to reduce the
bank debt of this segment and to the improved cash collection cycles on
government contracts.
Software Products and Services Segment
Costs and expenses of operations, as a percentage of segment revenues,
decreased approximately 125% for 1998 as compared to 1997 due primarily to cost
reduction efforts implemented by company management to bring costs to a level
consistent with anticipated revenues.
Costs and expenses of operations, as a percentage of segment revenues,
increased approximately 185% for 1997 as compared to 1996 due to the failure to
consummate several large contracts, higher operating costs incurred in
anticipation of such prospective contracts, the writedown of approximately $725
thousand in leasehold improvements associated with the sublease of CMstat's
former headquarters space, and the amortization of approximately $1.4 million
of previously capitalized software development costs.
CMstat's business continues to consist of large contracts with long
sales cycles. Cost reduction efforts have been implemented to reduce CMstat's
operating cost levels and management believes that future CMstat sales will
return to a level commensurate with operating expenses.
Selling, general and administrative expenses, as a percentage of segment
revenues, decreased approximately 1.3% during 1998 as compared to 1997. This
decrease is primarily due to cost reduction efforts implemented by company
management.
- 24 -
PAGE
Management Discussion and Analysis
Selling, general and administrative expenses, as a percentage of segment
revenues, increased approximately 3.5% during 1997 as compared to 1996. This
increase was primarily due to increased marketing expenses.
Interest expense, as a percentage of segment revenues, increased
approximately 4.7% in 1998 as compared to 1997 and approximately 8.3% in 1997
as compared to 1996 due primarily to the cost of financing the CMstat operating
loss.
The company expects that this segment will experience significant
fluctuations in quarterly operating results due largely to the nature of
CMstat's business. CMstat's future operating results will depend upon a number
of factors, including the demand for its products, the size and timing of
specific sales, the delay or deferral of customer implementations, the level
of product and price competition that it encounters, the length of its sales
cycles, the timing of new product introductions and product enhancements by
CMstat and its competitors, the mix of products and services sold, the
activities of and acquisitions by its competitors, and its ability to develop
and market new products and control costs. CMstat's operating results could
also be affected by general economic conditions. In addition, the decision
to license and implement an enterprise-level business software system is
usually discretionary, involves a significant commitment of customer resources
and is subject to delays, budget cycles and to the internal authorization
procedures of CMstat's customers. The loss or delay of individual orders could
have a significant impact on CMstat's operating results, particularly on a
quarterly basis. Furthermore, while CMstat's revenue from license fees is
difficult to predict because of the length and variability of CMstat's sales
cycles, CMstat's operating expenses are based on anticipated revenue trends.
Because a high percentage of these expenses are relatively fixed, a delay in
the recognition of revenue from a limited number of license transactions could
cause significant variations in operating results from quarter to quarter. To
the extent such expenses precede, or are not subsequently followed by,
anticipated revenue, the company's operating results could be materially and
adversely affected.
CMstat derives substantially greater profit margins from license fees
than from service revenues or from sales of third-party equipment and software.
The mix of revenues among these three components can fluctuate materially from
quarter to quarter, and such fluctuations can have a significant effect on
margins. Should lower margin service revenues or revenues from sales of third-
party equipment and software increase in the future as a percentage of the
company's total revenues, CMstat's margins and income from operations could
be adversely affected.
As a result of these and other factors, the company's operating results
for any quarter are subject to significant variation, and the company believes
that period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
The company's 1998 quarterly operating results are not a good indicator of
future quarterly results.
- 25 -
PAGE
Management Discussion and Analysis
Acquisitions and Divestitures
On February 7, 1996, VSE sold its wholly owned subsidiary Schmoldt
Engineering. Under the terms of the transaction, VSE sold all of the out-
standing capital stock of Schmoldt Engineering to certain officers of Schmoldt
Engineering in exchange for cash and a promissory note for which principal is
payable in installments from January 1, 1997 through September 1, 2001. The
transaction resulted in a pretax loss of approximately $300 thousand.
Liquidity and Capital Resources
Cash Flows
A net increase in cash and cash equivalents of approximately $30
thousand during 1998 resulted from approximately $3.4 million provided by
operations, approximately $1.8 million used in financing activities, and
approximately $1.6 million used in investing activities. Significant
financing activities included a decrease in bank loan borrowings of
approximately $1.7 million net of commitments for checks outstanding at year
end of approximately $3.9 million. Significant investing activities included
approximately $1.6 million associated primarily with the purchase of computer
equipment. Cash flows provided by operating activities decreased in 1998 as
compared to 1997 due primarily to an increase in the level of accounts
receivable in 1998 that was commensurate with the increased revenues in 1998
as compared with a significant decrease in accounts receivable in 1997 due to
collections of accounts receivable on the BAV contract. The decrease in cash
flows provided by operating activities due to changes in the level of accounts
receivable was offset slightly by cash provided by the increase in net income
and the increase in accounts payable.
A net decrease in cash and cash equivalents of approximately $440
thousand during 1997 resulted from approximately $8.1 million provided by
operations, approximately $2.7 million used in investing activities, and
approximately $5.8 million used in financing activities. Significant investing
activities included approximately $2.2 million associated with the purchase of
property and equipment. Significant financing activities included a decrease
in bank loan borrowings of $5.5 million, net of commitments for checks
outstanding at year end of approximately $3.0 million. Cash flows provided by
operating activities increased in 1997 as compared to 1996 due primarily to
decreases in accounts receivable by reason of collections of accounts receivable
on the BAV contract.
A net decrease in cash and cash equivalents of approximately $150
thousand during 1996 resulted from approximately $7 million provided by
financing activities, approximately $4.4 million used in operating activities,
and approximately $2.7 million used in investing activities. Significant
financing activities included increased borrowing on the company's revolving
term loan, including commitments for checks outstanding at year end, of
- 26 -
PAGE
Management Discussion and Analysis
approximately $7.7 million. Significant investing activities included
approximately $3.3 million associated with the purchase of property and
equipment, including the new office facilities and equipment for CMstat and
the capitalization of software development costs by CMstat.
The company's principal requirements for cash are to finance the costs of
operations pending the collection of accounts receivable, to acquire capital
assets including leaseholds for office and computer support, to pay cash
dividends, and to finance internal research and development, primarily software
development. Performance of work under the BAV contract has the potential to
cause substantial requirements for cash; however, management believes that the
cash flows from future operations and the bank term loan and revolving loan
commitments are adequate to meet current operating cash requirements.
Working Capital
VSE's requirements for working capital are affected significantly by its
revenues and accounts receivable, which are primarily derived from billings made
by the company to the government or other government prime contractors for
services rendered. Such accounts receivable generally do not present liquidity
or collection problems. Working capital is also affected by (a) contract
retainages, (b) start-up and termination costs associated with new or completed
contracts, (c) capital equipment requirements, (d) differences between the
provisional billing rates authorized by the government compared to the costs
actually incurred by the company, and (e) profitability.
Government contracts generally require VSE to pay for material and
subcontract costs included in VSE's contract billings prior to receiving payment
for such costs from the government. However, such contracts generally provide
for progress payments on a monthly or semimonthly basis, thereby reducing
requirements for working capital.
Dividends
Cash dividends were declared at the rate of $.144 per share during 1998,
$.144 per share during 1997, and $.138 per share during 1996. Pursuant to its
bank loan agreement (see Note 4 of "Notes to Consolidated Financial
Statements"), the payment of cash dividends by VSE is subject to annual rate
restrictions. VSE has paid cash dividends each year since 1973.
- 27 -
PAGE
Management Discussion and Analysis
ESOP Advances
During 1998, 1997 and 1996, the company advanced the ESOP trust $112
thousand, $330 thousand and $350 thousand, respectively, in connection with
distributions made to terminated participants. In December 1998, the company and
the ESOP entered into an agreement in which the ESOP repaid the advances.
Under the terms of the agreement, the company purchased 72,000 shares of VSE
stock from the ESOP at market price and the ESOP simultaneously returned the
proceeds of $792,000 from the stock sale to the company as repayment of the
advances.
Inflation and Pricing
Most of the contracts performed by VSE provide for estimates of future
labor costs to be escalated for any option periods provided by the contracts,
while the non-labor costs included in such contracts are normally considered
reimbursable at cost. VSE property and equipment consists principally of
computer systems equipment and furniture and fixtures. The overall impact of
inflation on replacement costs of such property and equipment is expected to
be insignificant.
Global Economic Conditions
VSE's business is subject to the risks arising from global economic
conditions associated with potential foreign customers served through VSE's
contracts with the U.S. Government. For example, the reported economic slowdown
of certain countries located in Southeast Asia could potentially affect BAV
sales. Management is unable to predict what, if any, impact such conditions
may have on the company's financial position or results of operations.
Year 2000
Overview. The "Year 2000" problem, or the inability of many computerized
systems to properly recognize a date in the year 2000, could potentially affect
the company's ability to perform many common business functions. The company
recognizes the impact that this could have on its operating and financial
results and has implemented a Year 2000 Action Plan ("Y2K Plan") to address
the issue. The Y2K Plan includes: 1) Assignment of compliance responsibilities
to operating managers, staff directors, information technology staff, contract
administration and procurement staff, and the Comptroller. Additionally, the
company has assigned a Senior Vice President to serve as the Y2K Coordinator,
with responsibility for ensuring development and implementation of the Y2K Plan;
2) Development of a Y2K Communications System to ensure proper information
dissemination and reporting with regard to Year 2000 compliance efforts; and
3) Development and implementation of a Year 2000 Compliance Program ("Y2K
Program").
- 28 -
PAGE
Management Discussion and Analysis
State of Readiness. Ongoing assessments of the impact of the Year 2000
issue on systems and operations have been formalized into the Y2K Program. The
Y2K Program includes phases for awareness, inventory and assessment, correction
and renovation (including validation and testing and implementation), and
contingency planning.
Awareness. Managers have been informed about the nature of the Year 2000
problem and what the company is doing to address it. This includes: distribution
of reference materials and lists of vendor certified Year 2000 compliant
hardware, equipment, and software; selection of contact points for each location
and organization for Year 2000 compliance issues; and assignment of
responsibility for ensuring that operations are not disrupted or are only
minimally affected. At this time, all of the company's initially identified
efforts associated with the awareness phase have been completed. Additional
awareness efforts, if any, will be made as they become known.
Inventory and Assessment. Identification is made of all "Mission
Critical" actions or functions and of all hardware, equipment, software, and
embedded systems used to conduct the "Mission Critical" actions or functions.
"Mission Critical" is defined as an action or function that must happen in
order to serve a customer or line of business comprising more than 10% of the
revenue base or pre-tax profit of an organization within the company. This phase
includes: 1) Developing inventory listings of all hardware, equipment, software,
embedded systems, operating systems, custom user applications, and contract
obligations having a Year 2000 impact; 2) Analyzing and developing corrective
actions for each of the items on the inventory listings; 3) Procuring programs
and tools to provide compliance for the items on the inventory listings; and
4) Surveying manufacturers and vendors to obtain certification of their products
as Year 2000 compliant. The inventory and assessment phase is approximately 80%
complete. Analysis of the items on the inventory listing has been done
primarily using internally administered programs supplied by independent outside
sources. Approximately 90% of the items on the inventory listing have been
found to be Year 2000 compliant.
Correction and Renovation. The items identified in the inventory and
assessment phase are redesigned, repaired, converted, or replaced, as necessary,
to ensure Year 2000 compliance. Corrections and renovations are documented and
this documentation is distributed to the affected managers and staff. Testing
plans are developed and validation and testing occurs. Risk analysis is
conducted and contingency planning issues are identified. The correction and
renovation phase is in process and is expected to be completed prior to December
of 1999.
Costs. Costs incurred to date for Year 2000 compliance efforts have been
minimal and are included as part of the company's ongoing administrative costs
and have not been separately identified. The company continues to upgrade and
improve its information technology systems as part of its normal effort to
maintain a competitive edge. As these upgrades and improvements are made, the
company is ensuring that all are Year 2000 compliant. Therefore, the majority
of costs incurred for computer systems that ensure Year 2000 compliance are
- 29 -
PAGE
Management Discussion and Analysis
expenditures that are made in the normal course of business. Total property and
equipment expenditures for 1998, including expenditures for computers and
computer systems, were approximately $1.6 million. Expenditures for 1999 are
expected to remain at about the same level. Accordingly, management believes
that the incremental costs of addressing the Year 2000 compliance issue will
not materially affect the company's consolidated financial position, liquidity,
or results of operations through December 31, 1999.
Risks. The full range of potential risks associated with the Year 2000
issue is under review. Potential risks include obligations related to contract
performance on current and past contracts, the reliance on infrastructure
services to conduct the company's business operations, and the possibility of
liquidity issues caused by payment problems with VSE's banks or government
customers. Although management believes that the risks associated with internal
issues regarding the Year 2000 problem will be minimal, the risks associated
with external issues are difficult to predict. If these external issues cause
massive failures to systems upon which the company is reliant, the results
could materially affect the company's consolidated financial position,
liquidity, or results of operations.
Contingency Plans. The Y2K Plan calls for the development of contingency
plans. VSE currently has extra borrowing capacity under its bank loan agreement
and intends to maintain this extra borrowing capacity beyond the year 2000 to
provide funding in the event of government customer payment problems.
Contingency plans related to contract performance obligations and to business
operation infrastructure services will be developed prior to December of 1999.
Market Risk
The Company does not use derivative instruments to alter the interest
characteristics of its debt instruments. The aggregate fair value of the
company's financial instruments approximates the carrying value at December 31,
1998.
- 30 -
PAGE
Executive Officers
William R. Albertolli, 56
Senior Vice President and
President, VSS Division
Byron S. Bartholomew, 71
Executive Vice President,
Business Development
Thomas J. Corridon, 41
Senior Vice President,
Chief Financial Officer and
Treasurer
Donald M. Ervine, 62
Chairman and
Chief Executive Officer
James M. Knowlton, 56
President and
Chief Operating Officer,
President and General Manager,
BAV Division
Thomas L. Prather, Jr., 58
Senior Vice President and
General Manager,
Land Warfare Group
Mark A. Robin, 45
Senior Vice President,
Human Resources and President,
Human Resource Systems, Inc.
Jayne M. Tuohig, 52
Senior Vice President and
General Manager,
Postal Service Program Center
Paul A. Vander Myde, 62
Senior Vice President,
Corporate Affairs
Craig S. Weber, 54
Senior Vice President and
Corporate Secretary
VSE COMMOM STOCK
- ----------------
VSE common stock (par value $.05 per
share) is traded in the Nasdaq National
Market System, trading symbol: VSEC
Newspaper listing: VSE.
The following table sets forth the
range of high and low sales price
information on VSE common stock for
each quarter and annually during the
last two years based on information
reported by the Nasdaq National
Market System and adjusted for the
five-for-four stock split in 1997.
Quarter High Low Dividends
- ------- ------ ------ ---------
1997:
March 31 . . . $13.80 $11.60 $.036
June 30 . . . 11.80 8.00 .036
September 30 . 10.70 9.60 .036
December 31 . 10.20 9.60 .036
For the year $13.80 $ 8.00 $.144
1998:
March 31 . . . $ 9.70 $ 8.125 $.036
June 30 . . . 10.50 8.00 .036
September 30 . 9.50 7.75 .036
December 31 . 13.00 5.75 .036
For the year $13.00 $ 5.75 $.144
There were approximately 1,400
stockholders of VSE common stock as of
March 1, 1999, consisting of about 300
stockholders of record plus the number
of beneficial owner proxy sets provided
in connection with VSE's 1998 Annual
Meeting of Stockholders to (a) brokers,
banks, and nominees and (b) participants
in the VSE Corporation Employee ESOP/401(k)
Plan.
VSE has a loan agreement with a bank
which permits, subject to absence of any
event of default, the payment of cash
dividends subject to annual rate restrictions.
See Note 4 (Debt) of "Notes to Consolidated
Financial Statements" included elsewhere in
this Annual Report.
- 31 -
PAGE
Report of Independent Public Accountants
To the Stockholders of VSE Corporation:
We have audited the accompanying consolidated balance sheets of VSE
Corporation (a Delaware corporation) as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' investment and cash
flows for the years ended December 31, 1998, 1997, and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of VSE Corporation as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years ended December 31, 1998, 1997 and 1996, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Washington, D.C.,
March 5, 1999
- 32 -
PAGE
Consolidated Financial Statements
- ------------------------------------------------------------------------------
Consolidated Balance Sheets As of December 31,
- ------------------------------------------------------------------------------
(in thousands, except share amounts)
See accompanying notes
- 33 -
PAGE
Consolidated Financial Statements
- ------------------------------------------------------------------------------
Consolidated Statements of Income For the years ended December 31,
- ------------------------------------------------------------------------------
(in thousands, except share amounts)
1998 1997 1996
--------- --------- ---------
Revenues, principally from contracts . . . . $ 180,233 $ 155,863 $ 120,087
Costs and expenses of contracts . . . . . . 176,236 156,590 115,990
--------- --------- ---------
Gross profit (loss) . . . . . . . . . . . . 3,997 (727) 4,097
Selling, general and administrative expenses 770 850 672
Interest expense . . . . . . . . . . . . . . 541 506 463
--------- --------- ---------
Income (loss) from continuing operations
before income taxes . . . . . . . . . . . 2,686 (2,083) 2,962
Provision (benefit) for income taxes . . . . 1,091 (636) 1,016
--------- --------- ---------
Income (loss) from continuing operations . . 1,595 (1,447) 1,946
Discontinued operations, net of tax:
Loss from operations (net of tax
benefit of $14). . . . . . . . . . . . . 0 0 (25)
Loss on disposal (net of tax benefit
of $118) . . . . . . . . . . . . . . . . 0 0 (179)
--------- --------- ---------
Net income (loss) . . . . . . . . . . . . . $ 1,595 $ (1,447) $ 1,742
========= ========= =========
Basic earnings per share:
Income (loss) from continuing operations . $ 0.75 $ (0.68) $ 0.89
Loss from discontinued operations . . . . 0.00 0.00 (0.09)
--------- --------- ---------
Net income (loss) . . . . . . . . . . . . . $ 0.75 $ (0.68) $ 0.80
========= ========= =========
Diluted earnings per share:
Income (loss) from continuing operations . $ 0.75 $ (0.68) $ 0.88
Loss from discontinued operations . . . . 0.00 0.00 (0.09)
--------- --------- ---------
Net income (loss) . . . . . . . . . . . . . $ 0.75 $ (0.68) $ 0.79
========= ========= =========
Basic weighted average shares outstanding 2,126,151 2,123,544 2,164,505
========= ========= =========
See accompanying notes
- 34 -
PAGE
Consolidated Financial Statements
- --------------------------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Investment
- --------------------------------------------------------------------------------------------------
(in thousands)
Unrealized
Loss on
Common Stock Paid-In Retained Treasury ESOP Available-for-
Shares Amount Surplus Earnings Stock Obligation Sale Securities
------ ------ ------- -------- -------- ---------- ---------------
Balance at
December 31, 1995 1,954 $ 98 $ 8,338 $ 21,402 $(16,285) $ 0 $ 0
Net income for
the year -- -- -- 1,742 -- -- --
ESOP obligation -- -- -- -- -- (350) --
Stock split
effected in the
form of a 2-for-1
stock dividend 1,954 97 (97) -- -- -- --
Unrealized loss
on marketable
securities -- -- -- -- -- -- (46)
Dividends
declared ($.138) -- -- -- (304) -- -- --
------ ----- ------- ------- -------- -----
Balance at
December 31, 1996 3,908 195 8,241 22,840 (16,285) (350) (46)
Net loss for
the year -- -- -- (1,447) -- -- --
Purchase of Treasury
Stock -- -- -- -- (70) -- --
ESOP Obligation -- -- -- -- -- (330) --
Realized loss on
marketable
securities -- -- -- -- -- -- 46
Retirement of
Treasury Stock (2,176) (109) (4,588) (11,658) 16,355 -- --
Stock split
effected in the
form of a 5-for-4
stock dividend 433 22 (22) -- -- -- --
Dividends
declared ($.144) -- -- -- (313) -- -- --
------ ----- ------- ------- -------- -----
Balance at
December 31, 1997 2,165 108 3,631 9,422 -- (680) --
Net income for
the year -- -- -- 1,595 -- -- --
ESOP Obligation -- -- -- -- -- (112) --
Purchase of Treasury
Stock -- -- -- -- (792) 792 --
Issuance of stock 22 1 201 -- -- -- --
Dividends
declared ($.144) -- -- -- (316) -- -- --
------ ----- ------- ------- -------- -----
Balance at
December 31, 1998 2,187 $ 109 $ 3,832 $ 10,701 $ (792) $ 0 $ 0
====== ===== ======= ======== ======== ======
See accompanying notes
- 35 -
PAGE
Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows For the years ended December 31,
- ---------------------------------------------------------------------------------------------
(in thousands)
1998 1997 1996
------- ------- -------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 1,595 $(1,447) $ 1,742
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 1,853 2,667 1,344
Amortization of capitalized software development costs . . 0 1,420 147
Discontinued operations . . . . . . . . . . . . . . . . . . 0 0 204
Loss on sale of property and equipment . . . . . . . . . . 5 47 13
Deferred compensation plan expense . . . . . . . . . . . . 140 6 141
Change in assets and liabilities, net of
discontinued operations
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . . (2,924) 9,057 (17,634)
Other current assets and noncurrent assets . . . . . . (350) 157 (1,255)
Deferred taxes . . . . . . . . . . . . . . . . . . . . 337 (1,327) 518
Increase (decrease) in:
Current portion of long-term debt . . . . . . . . . . . 778 555 0
Accounts payable and other current liabilities . . . . 1,715 (3,324) 10,271
Accrued expenses . . . . . . . . . . . . . . . . . . . 236 311 157
Net cash provided by (used in)
continuing operating activities . . . . . . . . . . . . 3,385 8,122 (4,352)
Net cash used in discontinued
operating activities . . . . . . . . . . . . . . . . . 0 0 (25)
------- ------- -------
Net cash provided by (used in)
operating activities 3,385 8,122 (4,377)
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of proceeds from dispositions) . . . . . . . . . . . . (1,576) (2,229) (2,465)
Capitalized software development costs . . . . . . . . . . . . 0 (491) (795)
Net proceeds from sale of Schmoldt Engineering . . . . . . . . 0 0 100
Change in net assets of discontinued operations. . . . . . . . 0 0 _ 440
------- ------- -------
Net cash used in investing activities (1,576) (2,720) (2,720)
------- ------- -------
Cash flows from financing activities:
Net (payments of) proceeds from bank loan . . . . . . . . . . (1,738) (5,543) 7,659
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . (315) (313) (300)
Net proceeds from (payments of) deferred compensation . . . . 188 370 (14)
Advance to ESOP . . . . . . . . . . . . . . . . . . . . . . . 680 (330) (350)
Purchase of Treasury stock . . . . . . . . . . . . . . . . . (792) (70) 0
Realized (unrealized) loss on marketable securities . . . . . 0 46 (46)
Issuance of common stock . . . . . . . . . . . . . . . . . . 202 0 0
------- ------- -------
Net cash (used in) provided by financing activities (1,775) (5,840) 6,949
------- ------- -------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . 34 (438) (148)
Cash and cash equivalents at beginning of year. . . . . . . . 15 453 601
------- ------- -------
Cash and cash equivalents at end of year. . . . . . . . . . . $ 49 $ 15 $ 453
======== ======= =======
See accompanying notes
- 36 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include two segments: the engineering,
logistics, management, and technical services segment and the software products
and services segment. The engineering, logistics, management, and technical
services segment is comprised of VSE Corporation and its wholly-owned
subsidiaries ("VSE" or the "company"), Energetics Incorporated ("Energetics"),
and Human Resource Systems, Inc. ("HRSI"), and the unincorporated divisions of
VSE, Value Systems Services ("VSS"), BAV and Ordnance. This segment is engaged
principally in providing engineering, testing, management and information
technology services to the U. S. Government (the "government"). The Ship
Remediation and Recycling, Inc. ("SRR") subsidiary (formerly VSE Services
Corporation ("VSES")), has generally been inactive after 1992. The software
products and services segment is comprised of VSE's wholly-owned subsidiary
CMstat and is engaged principally in software development and sales of software
products and services to primarily government prime contractors. Intercompany
sales are principally at cost. All significant intercompany transactions have
been eliminated in consolidation. Certain prior year balances have been
reclassified for comparative purposes.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires a
public company to report financial and descriptive information about its
reportable operating segments. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The company adopted the provisions of the standard in its 1997
annual report.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 requires a company to report comprehensive
income and its components in financial statements. The company adopted the
provisions of the standard during the first quarter of 1998. There were no
differences between comprehensive income and historical net income reported by
the company.
- 37 -
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Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128")
which supersedes Accounting Principles Board Opinion No. 15. SFAS No. 128
specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common stock. The
objective of SFAS No. 128 is to make the U.S. standard for computing EPS more
compatible with international EPS computations. SFAS No. 128 has been adopted
in these financial statements. Refer to "Stockholders' Investment and Earnings
Per Share" below for the discussion of EPS.
Stockholders' Investment and Earnings Per Share
On December 10, 1997, VSE announced a five-for-four stock split in the form of a
stock dividend payable to stockholders of record as of the close of business on
December 31, 1997. The stock dividend was distributed on January 7, 1998. All
share and per share amounts have been adjusted to give retroactive effect to the
increased number of common shares outstanding due to the stock split.
At December 31, 1998, options to purchase 149,023 shares, 38,250 shares and
47,000 shares of common stock at $10.91, $13.04, and $9.42 per share,
respectively, were outstanding. There was no dilutive impact on reported
earnings per share for 1998 and 1997. The computation for earnings per share
from continuing operations for the year ended December 31, 1996 is as follows:
Net
Income
from Weighted
Continuing Average Per-Share
Operations Shares Amount
------------ --------- ------
(in thousands)
Basic EPS $1,946 2,164,504 $ 0.89
Assumed Exercise of Options 0 33,747 0.00
------ --------- ------
Diluted EPS $1,946 2,198,251 $ 0.88
====== ========= ======
Discontinued Operations
On February 7, 1996, VSE sold its wholly owned subsidiary Schmoldt Engineering
Services Company ("Schmoldt Engineering"). Under the terms of the transaction,
VSE sold all of the outstanding capital stock of Schmoldt Engineering to certain
officers of Schmoldt Engineering in exchange for $100 thousand in cash and a
$300 thousand promissory note for which principal is payable in monthly
installments from January 1, 1997 through September 1, 2001. The transaction
resulted in a pretax loss of approximately $300 thousand to VSE which was
recorded in the first quarter of 1996.
The company's consolidated financial statements for 1996 report separately the
net assets and operating results of Schmoldt Engineering as discontinued
operations pursuant to the provisions of Accounting Principles Board Opinion
- 38 -
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Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
("APB") No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Schmoldt Engineering operated in the oil
and gas pipeline services business, providing its services to commercial
customers. The net losses of these operations from January 1, 1996 to
February 7, 1996, are included in the consolidated statements of income under
"Discontinued operations, net of tax: Losses from operations." Revenue from
such operations was $66 thousand for the period ended February 7, 1996.
Cash and Cash Equivalents
The company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
The company has classified all debt and equity securities as available-for-sale.
Available-for-sale securities are carried at fair value with unrealized gains
and losses, net of tax, reported as a component of stockholders' investment.
Realized gains and losses are included in other income. Available-for-sale debt
securities as of December 31, 1998 and December 31, 1997 consisted of overnight
money market accounts of $3.3 million and $3.5 million, respectively, secured
by U.S. Government agency securities. The estimated fair value of these
securities approximated cost, and the amount of gross unrealized gains and
losses was not significant. Additionally, the company held available-for-sale
marketable securities as of December 31, 1996 with a fair value of $20 thousand
consisting of publicly traded stock. The unrealized loss on these securities as
of December 31, 1996 of $46 thousand is presented as a separate component of
stockholders' investment. These securities were sold in December 1997 at a
realized loss of $53 thousand.
Concentration of Credit Risk/Fair Value of Financial Instruments
Financial instruments that potentially subject the company to concentration of
credit risk consist primarily of cash, cash equivalents and trade accounts
receivable. The company believes that concentrations of credit risk with
respect to trade accounts receivable are limited as they are primarily U.S.
Government receivables. The company believes that the fair market value of all
financial instruments approximates book value.
- 39 -
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Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Supplemental disclosures of cash flow information for the three years ended
December 31, are presented below (in thousands):
Contract Revenues
Substantially all of the company's revenues result from contract services
performed for the U.S. Government or for contractors engaged in work for the
U.S. Government under a variety of contracts. Revenues on cost-type contracts
are recorded on the basis of recoverable costs incurred and fees earned.
Revenues on fixed price contracts are recorded as services are performed, using
the percentage-of-completion method of accounting, primarily based on contract
costs incurred to date compared with total estimated costs at completion.
Revenues on time and material contracts are recorded on the basis of hours
delivered plus other allowable direct costs as incurred.
Potential revenue related to work performed at risk is not recognized either as
income or as an offset against a potential loss until it can be reliably
estimated and its realization is probable. The company provides for anticipated
losses on contracts by a charge to income during the period in which losses are
first identified.
A substantial portion of the contract and administrative costs is subject to
audit by the Defense Contract Audit Agency. In 1996, the company's indirect
cost rates were audited and approved for years 1995, 1994, and 1993 with no
material changes. This resulted in a reduction of previously established
reserves of $1,044 thousand for contract and audit disallowances related to
those years. All audit years prior to 1996 have now been approved. In the
opinion of management, the audits of the indirect cost rates for 1998, 1997,
and 1996 will not result in material adjustments, if any, to the company's
results of operations or financial position.
The company's software revenues result from sales of software licenses and post
contract customer support. Revenue from the sale of licenses is recognized
upon delivery of the software. Revenue from the support is recognized ratably
over the period to which the support agreement relates.
- 40 -
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Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Property and Equipment
Property and equipment (valued at cost) consisted of the following (in
thousands):
Depreciation and amortization expense for property and equipment was
approximately $1.5 million for 1998, $2.3 million for 1997 and $1.3 million for
1996. Depreciation of computer systems equipment is provided principally by
the double-declining method over periods of four to six years. Depreciation of
furniture and fixtures is provided principally by the straight-line method over
approximately nine years. Depreciation of all other property and equipment is
provided principally by the double-declining method over periods of three to
twenty years. Depreciation of buildings and land improvements is provided
principally by the straight-line method over approximately thirty years.
In March of 1998, the company entered into a sublease agreement for
approximately 20,000 square feet formerly occupied by CMstat. Leasehold
improvements of approximately $725 thousand, which will not be recovered by
future sublease payments, were fully written down in 1997.
Capitalized Software Development Costs
The company capitalizes certain computer software development costs, primarily
associated with CMstat, upon the establishment of technological feasibility.
Costs capitalized include labor and associated fringe benefits. These costs
are amortized utilizing the straight-line method generally over a period of
two years. Accumulated amortization was approximately $1.5 million as of
December 31, 1998 and 1997. Amortization expense for 1998, 1997, and 1996 was
approximately $0, $1.4 million and $147 thousand, respectively.
The company performs a quarterly review of the recoverability of such
capitalized software costs. At the time a determination is made that
capitalized amounts are not recoverable based on the estimated cash flows to be
generated from the applicable software, any remaining capitalized amounts are
written off. In 1997, approximately $890 thousand of previously capitalized
software development costs were written down completely. No additional software
development costs were capitalized in 1998.
- 41 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Nonoperating Net Income
Nonoperating net income included in selling, general and administrative
expenses, primarily interest income, was approximately $39 thousand, $46
thousand, and $32 thousand for the years ended December 31, 1998, 1997, and
1996, respectively.
Deferred Compensation Plans
Deferred compensation plan expense for the years ended December 31, 1998, 1997,
and 1996 was approximately $140 thousand, $6 thousand and $141 thousand,
respectively.
Included in other assets are assets of the deferred compensation plans which
include equity securities recorded at fair value. The fair value of these
securities was approximately $1,775 thousand and $1,564 thousand as of
December 31, 1998 and 1997, respectively. Because plan participants are at risk
for market value changes in these assets, the liability to plan participants
fluctuates with the asset values.
(2) Acquisitions
On May 31, 1995 the company acquired all of the outstanding stock of CMstat, a
leading developer and supplier of commercial off-the-shelf configuration and
product data management solutions, for approximately $970 thousand in cash.
The acquisition was accounted for by the purchase method of accounting. The
results of CMstat's operations since May 31, 1995 are included in these
consolidated financial statements. The company recorded approximately $1.2
million of identifiable intangible assets, $800 thousand of deferred taxes
related to the identifiable intangible assets and $400 thousand of goodwill.
Goodwill related to this transaction and identifiable intangible assets are
being amortized by the straight-line method generally over a period of ten
years.
On August 29, 1995 the company acquired all of the outstanding stock of
Energetics for approximately $3.7 million. Energetics assists government and
industry in conducting effective technology programs, primarily in the fields
of energy use and the environment. The acquisition was accounted for by the
purchase method of accounting. The results of Energetics' operations since
August 29, 1995 are included in these consolidated financial statements. The
company has recorded approximately $1.5 million of goodwill and $100 thousand
of identifiable intangible assets in connection with this acquisition. Goodwill
is being amortized by the straight-line method over fifteen years. Identifiable
intangible assets were amortized over one year.
- 42 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(3) Accounts Receivable
The components of accounts receivable as of December 31, 1998 and 1997, were
as follows (in thousands):
The "Unbilled: Other" included in accounts receivable are reported net of an
allowance for contract disallowances of approximately $333 thousand as of
December 31, 1998 and approximately $279 thousand as of December 31, 1997.
"Unbilled: Other" also includes certain costs which are not reimbursable under
current contracts, but which the company believes will be reimbursable on
execution of contract documentation or amendments increasing funding. Amounts
not presently reimbursable included in "Unbilled: Other" were approximately $485
thousand and $102 thousand as of December 31, 1998, and 1997, respectively.
Contracts with the U.S. Government, primarily with the U.S. Department of
Defense, accounted for more than 95% of revenues in all years presented. These
contracts were performed primarily in the engineering services industry. A
contract awarded in 1995 with the U.S. Navy accounted for approximately 52% and
48% of such revenues in 1998 and 1997, respectively.
The company generally expects to collect all accounts receivable other than
retainages within one year.
(4) Debt
Long-term debt as of December 31, 1998 and 1997 was as follows (in thousands):
1998 1997
------- -------
Bank loan borrowings and commitments . . . . . . . $ 6,703 $ 7,663
Less portion due within one year . . . . . . . . . (1,333) (555)
------- -------
$ 5,370 $ 7,108
======= =======
VSE has a loan agreement with a syndicate of banks that includes a revolving
loan and a term loan and contains certain financial covenants. Under the
revolving loan portion of the agreement, VSE can borrow up to $30 million,
subject to a borrowing formula based on billed receivables. Interest is charged
at a prime-based rate or an optional LIBOR-based rate. Commitment fees are
charged on the unused portion of the revolving loan commitment. The termination
date of the revolving loan is May 31, 2000. The original principal amount of
the term loan was $4 million and the term of the loan was four
- 43 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
years. There were no principal payments due during the first 12 months of the
loan. Monthly principal payments of approximately $111 thousand are due in 36
installments beginning August 1998 through July 2001. Interest on the term loan
is charged at a LIBOR-based rate 1% higher than the LIBOR-based rate charged on
the revolving loan. The loan agreement contains collateral requirements by which
company assets secure amounts outstanding, restrictive covenants that include
minimum tangible net worth and cash flow coverage ratio requirements, a limit
on annual dividends, and limits on investments and loans to certain affiliates.
Due to losses incurred by VSE's CMstat subsidiary, the company was not in
compliance with certain original loan covenants during 1998 and 1997. The loan
agreement was amended in July 1997 and again in September 1998 to restate
certain terms and conditions of the loan, including the covenants with which the
company was not compliant. The company was in compliance during 1998 and 1997
with all covenants of the loan agreement as amended through September 1998.
Included in long-term debt at December 31, 1998 and December 31, 1997 are bank
loan principal amounts of approximately $2.8 million and $4 million,
respectively, and commitments for checks outstanding of approximately $3.9 and
$3.7 million, respectively.
(5) Accrued Expenses
The components of accrued expenses as of December 31, 1998 and 1997, were as
follows (in thousands):
(6) ESOP/401(k) Plan and Profit Sharing Plan
VSE established an ESOP/401(k) plan in 1984. Under the provisions of the ESOP,
the company and certain of its subsidiaries make contributions into a trust
which purchases VSE stock on behalf of employees who meet certain age and
service requirements and are employed at the end of the plan year.
Contributions at the rate of up to 2% of eligible employee compensation may be
made at the discretion of the board of directors. Contributions are allocated,
subject to a vesting schedule, pro rata based on eligible employee compensation.
The plan expense for VSE and certain of its subsidiaries for 1998, 1997, and
1996, was approximately $359 thousand, $236 thousand, and $328 thousand,
respectively.
- 44 -
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Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
The ESOP/401(k) plan held 688,522 shares and 816,211 shares of VSE stock as of
December 31, 1998 and 1997, respectively, which receive dividend payments and
are included in the weighted average shares for earnings per share calculations.
During 1998, 1997 and 1996, the company advanced the ESOP trust $112 thousand,
$330 thousand, and $350 thousand, respectively, in connection with distributions
made to terminated participants. The advances were payable to the company when
the funds became available. On December 31, 1998 the ESOP trust sold shares to
the Company and repaid the advances. The unallocated shares of the company's
common stock related to these transactions are not included in the weighted
average shares for earnings per share calculations.
Energetics maintains a profit sharing plan for employees. All employees who
have completed two years of service are members of the profit sharing plan.
At its discretion, Energetics may make contributions to the plan. The plan
expense for 1998, 1997, and 1996 was approximately $443 thousand, $420 thousand,
and $460 thousand, respectively.
(7) Stock Option Plans
1996 Stock Option Plan
The company accounts for the VSE Corporation 1996 Stock Option Plan (the "1996
Plan") pursuant to APB Opinion No. 25, "Accounting for Stock Issued to
Employees," under which no compensation cost has been recognized because the
exercise price of the stock options equals the market price of the underlying
stock on the date of grant. Had compensation cost for the 1996 Plan been
determined based on SFAS No. 123, "Accounting for Stock-Based Compensation,"
the company's net income and earnings per share would have been as follows (in
thousands, except per share amounts):
1998 1997 1996
------- ------- ------
Net income (loss): As reported $ 1,595 $(1,447) $1,742
======= ======= ======
Pro forma 1,542 (1,569) 1,643
======= ======= ======
Earnings per share: As reported $ 0.75 $ (0.68) $ 0.79
======= ======= ======
Pro forma 0.73 (0.74) 0.75
======= ======= ======
Under the 1996 Plan, the company may grant options for and sell up to an
aggregate of 273,698 shares of the common stock of the company. Through
December 31, 1998 the company has granted options for 267,725 shares of common
stock priced at 100% of the fair value of the stock at the time of the grant of
the option. The maximum term of the options granted is five years. The vesting
period is three years and allows for 25% vesting immediately upon date of the
grant and an additional 25% on each successive anniversary date
- 45 -
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Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
thereafter. Vesting may be accelerated for shares granted to certain
individuals as determined by the Board of Directors. The 1996 Plan will
terminate on the earliest of January 1, 2007, or the date on which all options
under the 1996 plan have been exercised or terminated.
Information with respect to stock options is as follows:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1998 Price 1997 Price 1996 Price
------- ----- ------- ----- ------- -----
Number of shares under
stock options:
Outstanding at beginning
of year 205,283 $11.38 160,707 $10.91 0 $ 0
Granted 47,000 9.42 56,500 13.04 164,225 10.91
Forfeited (18,010) 11.80 (11,924) 12.83 (3,518) 10.91
------- ----- ------- ----- ------- -----
Outstanding at end
of year 234,273 $10.95 205,283 $11.38 160,707 $10.91
======= ====== ======= ====== ======= ======
Exercisable at end
of year 142,642 $11.07 91,203 $11.18 41,056 $10.91
======= ====== ======= ====== ======= ======
Weighted average fair
value of options granted $2.14 $3.05 $2.43
======= ======= =======
The fair value of the options is estimated on the date of grant using the Black-
Scholes option pricing model. The following assumptions were used in the
pricing calculation for 1998, 1997 and 1996:
1998 1997 1996
----- ----- -----
Risk free interest rate 5.47% 6.03% 5.14%
Dividend yield 2.00% 2.00% 2.00%
Expected life 3 years 3 years 3 years
Expected volatility 29.00% 29.00% 29.00%
1998 Stock Option Plan
In May of 1998, the VSE shareholders approved the VSE Corporation 1998 Stock
Option Plan (the "1998 Plan"). Under the 1998 Plan, the company may grant
options for and sell up to an aggregate of 343,750 shares of common stock. Of
the shares available for grant, 15,625 shares may be granted to non-employee
directors of VSE, and 328,125 shares may be granted to executive officers and
key employees. Each option granted under the 1998 Plan will be granted at the
fair market value of VSE's stock on the date of grant. The vesting period is
three years and allows for 25% vesting immediately upon date of the grant and
an additional 25% on each successive anniversary date thereafter. No grant of
options was made under the 1998 Plan in 1998. On January 1, 1999, the company
granted options for 66,000 shares of common stock. The 1998 Plan will
- 46 -
PAGE
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
terminate on the earliest of May 6, 2008, or the date on which all options
under the 1998 Plan have been exercised or terminated.
(8) Income Taxes
The company files consolidated federal income tax returns with all of its
subsidiaries. The components of the provision (benefit) for income taxes for
the years ended December 31, 1998, 1997, and 1996 are as follows (in thousands):
The differences between the amount of tax computed at the federal statutory rate
of 34% and the provision for income taxes for 1998, 1997, and 1996 are as
follows (in thousands):
1998 1997 1996
------ ------ ------
Tax at statutory federal income tax rate . . . $ 913 $ (708) $1,007
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit . . 179 39 124
Permanent differences for tax . . . . . . . 38 33 3
Other, net . . . . . . . . . . . . . . . . (39) 0 (118)
------ ------ ------
Provision (benefit) for income taxes $1,091 $ (636) $1,016
====== ====== ======
The company's deferred tax assets (liabilities) as of December 31, 1998 and
1997, which represent the tax effects of temporary differences between tax and
financial accounting bases of assets and liabilities and are measured using
presently enacted tax rates, are as follows (in thousands):
- 47 -
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Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The company has
established such a valuation allowance for the deferred tax asset associated
with certain real property because of the uncertainty that the deferred tax
asset will be fully realized.
The tax effect of temporary differences representing deferred tax assets and
liabilities as of December 31, 1998 and 1997, are as follows (in thousands):
(9) Commitments and Contingencies
Leases
The principal facilities of the company and its subsidiaries are generally
rented under noncancelable operating leases for periods of one to ten years.
The company and its subsidiaries also lease furniture and equipment generally
under noncancelable operating leases for periods of one to five years. Rent
expense for 1998, 1997, and 1996 was approximately $2.4 million, $3.2 million,
and $2.9 million, respectively, which was net of sublease income of
approximately $464 thousand, $318 thousand, and $425 thousand, respectively. The
future minimum annual rental required under leases having remaining
noncancelable lease terms in excess of one year, net of noncancelable sublease
income, will approximate $2 million in 1999, $1.9 million in 2000, $1.6 million
in 2001, $1 million in 2002, $598 thousand in 2003 and $2.4 million thereafter.
Litigation
The company and its subsidiaries have, in the normal course of business, certain
claims against them and against other parties. The company is not aware of any
present claims which would have a material adverse effect on the company's
results of operations or financial position.
- 48 -
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Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(10) Segment Information
VSE has two reportable segments: the engineering, logistics, management, and
technical services segment which provides diversified engineering, technical,
and management services ("ELMTS"), principally to agencies of the United States
Government and to other government prime contractors; and the software products
and services segment, which provides application software and services ("SPS")
related to the installation of the software to primarily commercial customers.
The accounting policies are the same as those described in the summary of
significant accounting policies for each segment. VSE's reportable segments are
strategic business units that offer different products and services. They are
managed separately because each business requires different technology and
marketing strategies. The software products and services segment was acquired
as a unit, and the management has been maintained separately since the
acquisition.
The following table presents revenues and other financial information by
business segment for the years 1998, 1997, and 1996, in thousands:
1998 ELMTS SPS Eliminations Consolidated
- ------------------------------------------------------------------------------
Revenues from unaffiliated
customers $177,191 $3,042 $ $180,233
Interest expense 45 496 541
Depreciation and amortization 1,602 251 1,853
Operating income (loss) 4,949 (2,263) 2,686
Assets 63,278 2,345 (24,886) 40,737
Expenditures for capital assets 1,538 55 1,593
1997
- ------------------------------------------------------------------------------
Revenues from unaffiliated
customers $152,636 $3,227 $ $155,863
Interest expense 130 376 506
Depreciation and amortization 1,622 2,465 4,087
Operating income (loss) 4,240 (6,323) (2,083)
Assets 53,917 2,498 (18,367) 38,048
Expenditures for capital assets 1,826 974 2,800
1996
- ------------------------------------------------------------------------------
Revenues from unaffiliated
customers $115,616 $4,471 $ $120,087
Interest expense 314 149 463
Depreciation and amortization 1,261 230 1,491
Operating income 2,943 19 2,962
Assets 51,141 4,421 (7,221) 48,341
Expenditures for capital assets 1,101 2,166 3,267
- 49 -
PAGE
Selected Quarterly Data
- -----------------------------------------------------------------------------
Selected Quarterly Data (Unaudited)
(in thousands, except earnings per share)
- 50 -
PAGE
Form 10-K
- -----------------------------------------------------------------------------
Securities and Exchange Commission
Washington, D. C. 20509
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Fiscal Year Ended December 31, 1998
Commission File No. 0-3676
Registrant: VSE Corporation
Incorporated in the State of Delaware
IRS Employer Identification No. 54-0649263
Address: 2550 Huntington Avenue Alexandria, Virginia 22303-1499
Telephone: (703) 960-4600
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
par value $.05 per share.
VSE Corporation has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
and has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in definitive proxy statements incorporated by reference in Part
III of this Form 10-K.
The aggregate market value (average of high and low sales prices) of VSE
Corporation voting stock held by non-affiliates as of March 1, 1999, was
approximately $21 million.
As of March 1, 1999, 2,114,905 shares of VSE Corporation Common Stock were
outstanding.
Portions of the Registrant's 1998 Annual Report for the year
ended December 31, 1998, are incorporated by reference into Part I and II of
this report.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders expected to be held on May 6, 1999, are incorporated by
reference in Part III of the Form 10-K.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
VSE Corporation
Registrant
C. S. Weber, Senior Vice President and Corporate Secretary
March 18, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 17, 1999, by the following persons in the
capacities indicated:
D. M. Ervine
Chairman and Chief Executive Officer
J. M. Knowlton
President and Chief Operating Officer
T. J. Corridon
Senior Vice President and Principal Financial Officer
T. R. Loftus
Vice President and Principal Accounting Officer
A majority of the Directors of the Registrant whose names appear on page 54.
- 51 -
PAGE
Form 10K Cross-Reference Index
- ------------------------------------------------------------------------------
Part Item Page(s)
- ------------------------------------------------------------------------------
I. 1. Business 14-20
2. Properties 5-13
3. Legal Proceedings 48
4. Submission of Matters to a Vote of Security Holders None
- Executive Officers of the Registrant 31
II. 5. Market for Registrant's Common Stock and Related
Stockholder Matters 31
6. Selected Financial Data 1
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21-30
8. Financial Statements and Supplementary Data 33-49
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure None
III. 10. Directors and Executive Officers of the Registrant *
11. Executive Compensation *
12. Security Ownership of Certain Beneficial Owners
and Management *
13. Certain Relationships and Related Transactions *
IV. 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) (1) Financial Statements:
Report of Independent Public Accountants 32
Consolidated Balance Sheets 33
Consolidated Statements of Income 34
Consolidated Statements of Stockholder's
Investments 35
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial Statements 37-49
(a) (2) Financial Statement Schedules: None
(a) (3) Exhibits:
Exhibits Filed with the Report:
Subsidiaries of the Registrant +
Employment Agreement entered into as of
October 21, 1998, by and between VSE
Corporation and Donald M. Ervine +
Employment Agreement entered into as of
January 15, 1999, by and between VSE
Corporation and Energetics, Incorporated
and Robert J. Kelly +
Employment Agreement entered into as of
December 10, 1997, by and between VSE
Corporation and James M. Knowlton +
Restated Certificate of Incorporation +
Amended By-Laws +
Exhibits Incorporated by Reference:
Specimen Stock Certificate +
Exchange Agreement dated as of March 25,
1992, amended as of September 1, 1992,
by and between VSE Corporation and JBT
Holding Corp., et al. +
Deferred Supplemental Compensation Plan +
- 52 -
PAGE
Form 10K Cross-Reference Index
- ------------------------------------------------------------------------------
Part Item Pages(s)
- ------------------------------------------------------------------------------
Stock Purchase Agreement dated August 19,1995
by and between VSE Corporation and the -
shareholders of Energetics Incorporated +
(b) Reports on Form 8-K: None
*The information required by Part III, Items 10 through 13, is incorporated by
reference from portions of the VSE Corporation Notice of 1998 Annual Meeting
and Proxy Statement.
+Copies of financial statement schedules and exhibits are available on request.
- 53 -
PAGE
Officers and Directors
Officers
Chairman of the Board
and Chief Executive Officer
Donald M. Ervine
President and
Chief Operating Officer
James M. Knowlton
Executive Vice President,
Business Development
Byron S. Bartholomew
Senior Vice President and
Corporate Secretary
Craig S. Weber
Senior Vice President,
Chief Financial Officer
and Treasurer
Thomas J. Corridon
Senior Vice Presidents
William R. Albertolli
Thomas L. Prather, Jr.
Mark A. Robin
Jayne M. Tuohig
Paul A. Vander Myde
Vice Presidents
Sushil K. Baluja
Peter J. Desrosiers
John S. Gilroy
Michael E. Hamerly
H. Eugene Hosier
Thomas R. Loftus
Jeffrey H. McCurdy
George M. Musick, III
John J. Werbowski
Assistant Vice Presidents
Bryan E. Adams
Stephen W. Austin
Deborah R. Blakeman
Laura K. Forest
Richard A. Hannah
John P. Morse
M. Darleen Stein
Board of Directors
Donald M. Ervine
Chairman of the Board, VSE
Corporation
Robert J. Kelly
Admiral, U.S. Navy (Ret.);
Chairman of the Board and
President,
Energetics Incorporated.
James M. Knowlton
President, VSE Corporation
Calvin S. Koonce, Ph.D.
President, Koonce Securities,
Inc.
Joseph M. Marchello, P.E., Ph.D.
Professor, Old Dominion
University; formerly Chancellor
of the University of Missouri
Rolla
David M. Osnos
Senior Member,
Arent Fox Kintner Plotkin &
Kahn, PLLC, Attorneys-at-Law
Jimmy D. Ross
General, U.S. Army (Ret.);
Senior Vice President,
Biomedical Services, American
Red Cross
Bonnie K. Wachtel
Vice President and General
Counsel, Wachtel & Co., Inc.
Brokers and Underwriters
Director Emeritus
Harold P. Weinberg
formerly Senior
Vice President and Director
(1961-1996), VSE Corporation
- 54 -
PAGE
Corporate Address
VSE's principal executive offices are located at 2550 Huntington Avenue,
Alexandria, Virginia 22303-1499. The telephone number is (703) 960-4600. The
telecopier number is (703) 960-2688. The Company's Internet address is
http://www.vsecorp.com.
Stockholder Inquiries
Inquiries concerning stock ownership, dividends, and stockholder changes of
address may be directed to Registrar and Transfer Company, 10 Commerce Drive,
Cranford, New Jersey 07016, (1-800-346-6084) or to the company at 2550
Huntington Avenue, Alexandria, Virginia 22303-1499, Attention: Corporate
Secretary.
This Annual Report contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All forward looking statements involve risks
and uncertainties. The forward looking statements in this document are
intended to be subject to the safe harbor protection provided by Sections 27A
and 21E. For a discussion identifying some important factors that could cause
actual VSE results to differ materially from those anticipated in the forward
looking statements, please see VSE's Securities and Exchange Commission filings,
including but not limited to the discussions captioned "Letter to Stockholders"
on pages 2 through 4 and "Description of Business" including the discussion on
"competition and risks" contained on pages 14 through 20 of VSE's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998 ("SEC Form 10-K");
"Management Discussion and Analysis" on pages 21 through 30 of this Annual
Report; and "Note 1 -- Summary of Significant Accounting Policies" and "Note 9
- -- Commitments and Contingencies" included in the Notes to Consolidated
Financial Statements included on pages 37 through 49 of this Annual Report and
incorporated by reference into the SEC Form 10-K.
- 55 -
PAGE
EXHIBIT III
EXHIBIT IV
VSE CORPORATION
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports incorporated by reference in this Form 10-K, into
the Company's previously filed Registration Statement File Numbers 333-15307,
333-15309, and 333-15311.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Washington, D.C.,
March 19, 1999
EXHIBIT V
BY-LAWS OF VSE CORPORATION
(As Amended Through July 14, 1998)
ARTICLE I
OFFICES
Section 1. The registered office of the corporation shall
be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such
other places both within and without the State of Delaware as the
board of directors may from time to time determine or the
business of the corporation may require.
ARTICLE II
MEETING OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the
election of directors shall be held in the Washington, D.C.,
metropolitan area, at such place as may be fixed from time to
time by the board of directors, or at such other place as shall
be designated from time to time by the board of directors and
stated in the notice of the meeting. Meetings of stockholders
for any other purpose may be held at such time and place, within
or without the State of Delaware, as shall be stated in the
notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. Annual meetings of stockholders, commencing with
the year 1986, shall be held in the month of May each year at a
date and at a time to be fixed by the board of directors and
stated in the notice of meeting, at which time they shall elect
by a plurality vote a board of directors, and transact such other
business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the
place, date and hour of the meeting shall be given to each
stockholder entitled to vote thereat at least ten days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger
of the corporation shall prepare and make, at least ten days
before every meeting of stockholders, a complete list of the
stockholders entitled to vote at said meeting, arranged in
alphabetical order, showing the address of and the number of
shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any
purpose germane to the meeting, during ordinary business hours,
for a period of at least ten days prior to the meeting, either at
a place within the city, town or village where the meeting is to
be held and which place shall be specified in the notice of the
meeting, or, if not specified, at the place where said meeting is
to be held. The list shall also be produced and kept at the time
and place of the meeting during the whole time thereof, and may
be inspected by any stockholder who is present.
Section 5. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by
the certificate of incorporation, may be called by the chairman
and chief executive officer and shall be called by the chairman
and chief executive officer or secretary at the request in
writing of a majority of the board of directors, or at the re-
quest in writing of stockholders owning twenty-five percent (25%)
in amount of the entire capital stock of the corporation issued
and outstanding and entitled to vote. Such request shall state
the purpose or purposes of the proposed meeting.
Section 6. Written notice of a special meeting of
stockholders, stating the place, date and hour of the meeting and
the purpose or purposes for which the meeting is called, shall be
given to each stockholder entitled to vote thereat, at least five
days before the date fixed for the meeting.
Section 7. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the
notice.
Section 8. The holders of a majority of the stock issued
and outstanding and entitled to vote thereat, present in person
or represented by proxy, shall constitute a quorum at all
meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any
business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for
more than thirty days, or if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the
vote of the holders of a majority of the stock having voting
power present in person or represented by proxy shall decide any
question brought before such meeting, unless the question is one
upon which by express provision of the statutes or of the
certificate of incorporation, a different vote is required in
which case such express provision shall govern and control the
decision of such question.
Section 10. Unless otherwise provided in the certificate of
incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for
each share of the capital stock having voting power held by such
stockholder, but no proxy shall be voted on after three years
from its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the certificate of
incorporation, any action required to be taken at any annual or
special meeting of stockholders of the corporation, or any action
which may be taken at any annual or special meeting of such
stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at
a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in
writing.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute
the whole board shall be a minimum of six directors and a maximum
of ten directors. Within the limits above specified, the number
of directors shall be determined by resolution of the board of
directors or by the stockholders at the annual meeting. The
directors shall be elected at the annual meeting of the stock-
holders, except as provided in Section 2 of this Article, and
each director elected shall hold office until his successor is
elected and qualified; however, no person who is not serving as a
director of the corporation as of January 1, 1993, who has
attained 65 years of age or more, shall be nominated, elected or
qualified to serve as a director of the corporation. Directors
need not be stockholders.
Section 2. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office,
though less than a quorum, or by a sole remaining director, and
the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no directors in
office, then an election of directors may be held in the manner
provided by statute. If, at the time of filling any vacancy or
any newly created directorship, the directors then in office
shall constitute less than a majority of the whole board (as
constituted immediately prior to such increase), the Court of
Chancery may, upon application of any stockholder or stockholders
holding at least ten percent of the total number of the shares at
the time outstanding having a right to vote for such directors,
summarily order an election to be held to fill any such vacancies
or newly created directorships, or to replace the directors
chosen by the directors then in office.
Section 3. The business of the corporation shall be managed
by or shall be under the direction of its board of directors
which may exercise all such powers of the corporation and do all
such lawful acts and things as are not by statute or by the
certificate of incorporation or by these by-laws directed or
required to be exercised or done by the stockholders.
Section 4. Stockholders of the corporation may recommend
persons to be nominated for election as directors of the
corporation at the annual meeting of stockholders. To be
considered for nomination, such recommendation must be received
in writing by the secretary of the corporation no later than
ninety (90) days before the date which corresponds to the date on
which the annual meeting of stockholders was held during the
immediate prior year. Such recommendation shall be accompanied
by the name of the stockholder proposing the candidate, evidence
that stockholder is a beneficial owner of the outstanding stock
of the corporation as of the record date established for the
determination of stockholders entitled to notice of and to vote
at the annual meeting of stockholders, the name of candidate
being proposed for nomination, and the candidate's biographical
data and qualifications.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The board of directors of the corporation may
hold meetings, both regular and special, either within or
without the State of Delaware.
Section 5. The first meeting of each newly elected board of
directors shall be held at such time and place as shall be fixed
by the vote of the stockholders at the annual meeting and no
notice of such meeting shall be necessary to the newly elected
directors in order legally to constitute the meeting, provided a
quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of
the newly elected board of directors, or in the event such
meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as
shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors, or as shall be
specified in a written waiver signed by all of the directors.
Section 6. Regular meetings of the board of directors may
be held on two days' written notice at such time and at such
place as shall from time to time be determined by the board.
Section 7. Special meetings of the board may be called by
the chairman and chief executive officer on two days' notice to
each director; special meetings shall be called by the chairman
and chief executive officer or secretary in like manner and on
like notice on the written request of two directors unless the
board consists of only one director; in which case special
meetings shall be called by the chairman or secretary in like
manner and on like notice on the written request of the sole
director.
Section 8. At all meetings of the board a majority of the
directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the
board of directors, except as may be otherwise specifically
provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the board of
directors the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate
of incorporation or these by-laws, any action required or
permitted to be taken at any meeting of the board of directors or
of any committee thereof may be taken without a meeting, if a
written consent thereto is signed by all members of the board or
of such committee as the case may be, and such written consent is
filed with the minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate
of incorporation or these by-laws, members of the board of
directors, or any committee designated by the board of directors,
may participate in a meeting of the board of directors, or any
committee, by means of conference telephone or similar
communications equipment by means of which all persons
participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at
the meeting.
COMMITTEES OF DIRECTORS
Section 11. The board of directors may, by resolution
passed by a majority of the whole board, designate one or more
committees, each committee to consist of one or more of the
directors of the corporation; however, no committee shall be
empowered by the board to initiate or take any action without
prior ratification of such proposed action by the majority of the
board of directors then in office.
No such committee or committees of the board of directors
shall have the power or authority
(a) to amend the certificate of incorporation (except that committee
may,to the extent authorized in the resolution or resolutions providing
for the issuance of shares of stock adopted by the board of directors as
provided in Section 151(a), fix any of the preferences or rights of
such shares relating to dividends, redemption, distribution of assets of
the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the
same or any other class or classes of stock of the corporation),
(b) to adopt an agreement of merger or consolidation,
(c) to recommend to the stockholders the sale, lease or
exchange of all or substantially all of the
corporation's property and assets,
(d) to recommend to the stockholders a dissolution of the
corporation or a revocation of a dissolution, or
(e) to amend the by-laws of the corporation;
and, unless the resolution or certificate of
incorporation expressly so provide, no such committee
shall have the power or authority
(f) to declare a dividend or to authorize the issuance of
stock or to adopt a certificate of ownership and merger.
Such committee or committees shall have such name or
names as may be determined from time to time by
resolution adopted by the board of directors.
The standing committees of the board of directors shall have
authority to make recommendations to the board, as follows:
* the Audit Committee shall have authority to make
recommendations to the board with respect to the appointment of
an independent public accounting firm to review the corporation's
books and records, to review the corporation's internal and
external audit programs, and to receive the audited opinion and
"management report" of the independent accounting firm
appointed by the corporation;
* the Compensation Committee shall have the authority to
review and recommend to the board the compensation of the
Chief Executive Officer and to review the compensation of
other officers of the corporation;
* the Finance Committee shall have the authority to make
recommendations to the board with respect to the
corporation's capitalization and long-term funding
alternatives;
* the Nominating and Corporate Ethics Committee shall have the
authority, from time to time,
(a) to recommend to the Board
i. nominees for election to the Board and, in the event of
vacancies on the Board, nominees for appointment to the Board,
ii. corporate policies regarding, among other things,
business conduct and securities trading, including
compliance with law and related policies,
iii. corporate policies regarding indemnification of VSE
directors and officers, and
iv. corporate policies regarding conflicts of interests
involving VSE directors, officers, and employees;
(b) to provide, as the Committee deems advisable or
appropriate, review and oversight in respect of the
implementation of and compliance with any of the above-
mentioned policies adopted by the Board, including the
provision of administrative and interpretative advice and
directives to VSE's Insider Trading Compliance Officer and
to other VSE directors and officers and, in respect of the
previously-described corporate policies, sales of VSE
securities by VSE's Employee Stock Ownership Plan that may
directly or indirectly benefit VSE; and
(c) in connection with the foregoing matters set forth in
clauses (a) and (b), to consult with and obtain the advice
of VSE's legal, accounting, financial and other advisors;
* the Planning Committee shall have the authority to review
and to make recommendations to the board with respect to business development
and capitalization.
Further, each of the aforesaid standing committees shall have and
may exercise a general oversight responsibility respecting the
management of the business and affairs of the corporation as
related to the specified powers of the committee, as aforesaid,
and as related to such other matters as may be referred thereto
by resolution of the board.
Section 12. Each committee shall keep regular minutes of
its meetings and report the same to the board of directors when
required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate
of incorporation or these by-laws, the board of directors shall
have the authority to fix the compensation of directors. The
directors may be paid their expenses, if any, of attendance at
each meeting of the board of directors and may be paid a fixed
sum for attendance at each meeting of the board of directors or a
stated salary as director. No such payment shall preclude any
director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate
of incorporation or by law, any director or the entire board of
directors may be removed, with or without cause, by the holders
of a majority of shares entitled to vote at an election of
directors.
DIRECTORS EMERITUS
Section 15. Unless otherwise restricted by the
corporation's certificate of incorporation or by law, the
corporation may have and appoint such directors emeritus as shall
seem advisable to the board of directors. To qualify for
appointment as a director emeritus, the nominee shall be a re-
tired director of the corporation. The term "director emeritus"
is an honorary title entitling the holder thereof to all of the
rights and privileges thereunto pertaining. No compensation
shall be paid by the corporation to a director emeritus for
service as such; however, the board of directors shall have the
authority to award honoraria or to reimburse expenses, if any,
under specified conditions set forth in a resolution of the
board. The holder of the title "director emeritus" shall not act
as and shall not be considered a director, officer or otherwise
as an employee or agent of the corporation.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes
or of the certificate of incorporation or of these by-laws,
notice is required to be given to any director or stockholder, it
shall given in writing, by mail, addressed to such director or
stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may
also be given by telegram or telecopy.
Section 2. Whenever any notice is required to be given
under the provisions of the statutes or of the certificate of
incorporation or of these by-laws, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether
before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The offices of the corporation shall be a
chairman and chief executive officer, a president and chief
operating officer, one or more vice-presidents, a chief financial
officer, a secretary, a treasurer, and a comptroller, and such
other offices as shall seem advisable to the board. Two or more
offices may be held by the same person, unless the certificate of
incorporation or these by-laws otherwise provide.
Section 2. The board of directors at its first meeting
after each annual meeting of stockholders shall choose a chairman
and chief executive officer from among the directors, and shall
choose a president and chief operating officer, one or more vice-
presidents, a chief financial officer, a secretary, a treasurer,
and a comptroller, none of whom need be a member of the board.
The board may also choose such additional vice-presidents and
assistant secretaries, treasurers, and comptrollers as shall seem
advisable to the board.
Section 3. The board of directors may appoint such other
officers and agents as it shall deem necessary who shall hold
their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by
the board.
Section 4. The salary of the Chairman and Chief Executive
Officer shall be reviewed by the Compensation Committee. The
Chairman of the Compensation Committee will present the
recommendations of the Compensation Committee on the salary of
the Chairman and Chief Executive Officer to the board of direc-
tors for ratification and approval. The salaries of all officers
of the corporation (other than the Chairman and Chief Executive
Officer) shall be reviewed by the Compensation Committee and
fixed by the Chairman and Chief Executive Officer.
Section 5. The officers of the corporation shall hold
office until their successors are chosen and qualify. Any
officer elected or appointed by the board of directors may be
removed at any time by the affirmative vote of a majority of the
board of directors. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Section 6. The chairman and chief executive officer of the
corporation shall be ex officio a member of all standing
committees, shall have general and active management of the
business of the corporation, shall see that all orders and
resolutions of the board of directors are carried into effect,
and, unless otherwise provided by the board of directors, shall
preside at all meetings of the stockholders and the board of
directors.
Section 7. He shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the corporation,
except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof
shall be expressly delegated by the board of directors to some
other officer or agent of the corporation.
Section 8. He shall, as chairman and chief executive
officer, be vested with authority to perform, singly or together
with other officers of the corporation, all of the duties given
or imposed by these by-laws or the board of directors of the
other officers or employees of the corporation.
THE PRESIDENT AND CHIEF OPERATING OFFICER
Section 9. The president shall be the chief operating and
administrative officer of the corporation and shall have such
other powers as may be prescribed by the board of directors or
chairman and chief executive officer, under whose supervision he
shall be.
Section 10. In the absence or disability of the chairman
and chief executive officer, or in the event of his inability or
refusal to act, the president and chief operating officer shall
perform the duties of the chairman and chief executive officer,
and when so acting, shall have all the powers of and be subject
to all the restrictions upon the chairman and chief executive
officer.
In the absence or disability of the president and chief
operating officer, the chairman and chief executive officer shall
select and recommend to the board of directors for ratification a
candidate to fill the office of president and chief operating
officer. Candidates may be selected from the board of directors,
officers or employees of the corporation or from sources outside
of the corporation. The chairman and chief executive officer
will perform the duties of the president and chief operating
officer until a candidate is chosen and ratified by the board of
directors and has qualified to perform the duties of the office
of president and chief operating officer.
THE VICE-PRESIDENTS
Section 11. The vice-president, or if there shall be more
than one, the vice presidents in the order determined by the
board of directors (such as executive vice president, senior vice
president, vice president, and assistant vice president, or in
the absence of any determination, then in the order of their
election), shall perform such duties and have such powers as
prescribed by the Chairman and Chief Executive Officer under
whose supervision they will be.
CHIEF FINANCIAL OFFICER
Section 12. The chief financial officer of the corporation
shall have the financial management of the business and shall
perform such other duties as may be prescribed by the board of
directors or chief executive officer, under whose supervision he
shall be.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 13. The secretary shall attend all meetings of the
board of directors and all meetings of the stockholders and
record all the proceedings of the meetings of the corporation and
of the board of directors in a book to be kept for that purpose
and shall perform like duties for the standing committees when
required. He shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the board of
directors, and shall perform such other duties as may be
prescribed by the board of directors or chairman and chief
executive officer, under whose supervision he shall be. He shall
keep in safe custody the seal of the corporation and he, or an
assistant secretary, shall have authority to affix the same to
any instrument requiring it and, when so affixed, it may be
attested by his signature or by the signature of such assistant
secretary. The board of directors may give general authority to
any other officer to affix the seal of the corporation and to
attest the affixing by his signature.
Section 14. The assistant secretary, or if there be more
than one, the assistant secretaries in the order determined by
the board of directors (or if there be no such determination,
then in the order of their election), shall, in the absence of
the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and
shall perform such other duties and have such other powers as the
board of directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 15. The treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the
corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the corporation in such
depositories as may be designated by the board of directors.
Section 16. He shall disburse the funds of the corporation
as may be ordered by the board of directors, taking proper
vouchers for such disbursements, and shall render to the chairman
and chief executive officer and the board of directors, at its
regular meetings, or when the board of directors so requires, an
account of all his transactions as treasurer and of the financial
condition of the corporation.
Section 17. The assistant treasurer, or if there shall be
more than one, the assistant treasurers in the order determined
by the board of directors (or if there be no such determination,
then in the order of their election) shall, in the absence of the
treasurer or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the treasurer and
shall perform such other duties and have such other powers as the
board of directors may from time to time prescribe.
THE COMPTROLLER AND ASSISTANT COMPTROLLERS
Section 18. The comptroller of the corporation shall be the
chief accounting officer of the corporation and shall perform
such other duties as may be prescribed by the board of directors
or chief executive officer, under whose supervision he shall be.
Section 19. The assistant comptroller, or if there be more
than one, the assistant comptrollers in the order determined by
the board of directors (or if there be no such determination,
then in the order of their election), shall, in the absence of
the comptroller or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the
comptroller and shall perform such other duties and have such
other powers as the board of directors may from time to time
prescribe.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Every holder of stock in the corporation shall
be entitled to have a certificate, signed by, or in the name of
the corporation by, the chairman and chief executive officer, the
president, or a vice-president, and by the treasurer or an
assistant treasurer or the secretary or an assistant secretary of
the corporation, bearing the corporate seal or a facsimile
thereof certifying the number of shares owned by him in the
corporation.
Section 2. Where a certificate is signed (1) by a transfer
agent or an assistant transfer agent or (2) by a transfer clerk
acting on behalf of the corporation and a registrar, the
signature of any such chairman and chief executive officer,
president, vice-president, treasurer, assistant treasurer,
secretary, or assistant secretary may be facsimile. In case any
officer or officers who have signed, or whose facsimile signature
or signatures have been used on, any such certificate or
certificates shall cease to be such officer or officers of the
corporation, whether because of death, resignation or otherwise,
before such certificate or certificates have been delivered by
the corporation, such certificate or certificates may
nevertheless be adopted by the corporation and be issued and
delivered as though the person or persons who signed such
certificate or certificates or whose facsimile signature or
signatures have been used thereon had not ceased to be such
officer or officers of the corporation.
LOST CERTIFICATES
Section 3. The Secretary or Treasurer who has charge of the
transfer and issuance of stock of the corporation shall issue a
new certificate or certificates in place of any certificate or
certificates theretofore issued by the corporation allegedly lost, upon
the submission by the owner of such lost or destroyed
certificate, or his legal representative, to the corporation of a
bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the
certificate alleged to have been lost or destroyed.
TRANSFERS OF STOCK
Section 4. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction
upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of
stockholders or and adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the board of directors may
fix, in advance, a record date, which shall not be more than
sixty nor less than ten days before the date of such meeting, nor
more than sixty days prior to any other action; except that the
record date for the determination of stockholders entitled to
notice of and to vote at the annual meeting of stockholders shall
be forty-five days prior to the date of said annual meeting of
stockholders, or if the forty-fifth day shall not be a business
day, then on the first business day next following the forty-
fifth day prior to the date of said annual meeting of
stockholders. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the
board of directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner,
and to hold liable for calls and assessments a person registered
on its books as the owner of shares, and shall not be bound to
recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the
corporation, subject to the provisions of the certificate of
incorporation, if any, may be declared by the board of directors
at any regular or special meeting, pursuant to law. Dividends
may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of
incorporation.
Section 2. Before payment of any dividend, there may be set
aside out of any funds of the corporation available for dividends
such sum or sums as the directors from time to time, in their
absolute discretion, think proper as a reserve or reserves to
meet contingencies, or for equalizing dividends, or for repairing
or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of
the corporation, and the directors may modify or abolish any such
reserve in the manner in which it was created.
ANNUAL STATEMENT
Section 3. The board of directors shall present at each
annual meeting, and at any special meeting of the stockholders
when called for by vote of the stockholders, a full and clear
statement of the business and condition of the corporation.
CHECKS
Section 4. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such
other person or persons as the board of directors may from time
to time designate.
FISCAL YEAR
Section 5. The fiscal year of the corporation shall be
fixed by resolution of the board of directors.
SEAL
Section 6. The corporate seal shall have inscribed thereon
the name of the corporation, the year of its organization and the
words "Corporate Seal, Delaware". The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
INDEMNIFICATION
Section 7. The corporation shall indemnify its officers,
directors, employees and agents to the extent permitted by the
General Corporation Law of Delaware.
ARTICLE VIII
AMENDMENTS
Section 1. These by-laws may be altered, amended or
repealed or new by-laws may be adopted by the stockholders or by
the board of directors, when such power is conferred upon the
board of directors by the certificate of incorporation at any
regular meeting of the stockholders or of the board of directors
or at any special meeting of the stockholders or of the board of
directors if notice of such alteration, amendment, repeal or
adoption be contained in the notice of such special meeting. If
the power to adopt, amend or repeal by-laws is conferred upon the
board of directors by the certificate of incorporation it shall
not divest or limit the power of the stockholders to adopt, amend
or repeal by-laws.
EXHIBIT VIII
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into as of
December 10, 1997, by and between VSE Corporation, a
Delaware corporation ("Employer"), and James M. Knowlton
("Employee");
WHEREAS, Employee currently is employed by Employer as a
senior corporate officer;
WHEREAS, Employee has rendered good and valuable service
to the Employer and has contributed greatly to Employer's
growth and success;
WHEREAS, Employer wishes to induce Employee to remain in
Employer's employ to prevent the significant loss which
Employer would incur if Employee were to leave and to enter
the employment of a competitor;
WHEREAS, in the current business climate of takeovers and
acquisitions, Employee may be concerned about the continuation
of employment and status and responsibilities if a Change in
Control (as defined below) occurs, and Employer is concerned
that Employee may be approached by others with employment
opportunities;
WHEREAS, Employer desires to ensure that, if a Change in
Control appears possible, Employee will be in a secure
position from which to objectively engage in any potential
deliberations or negotiations respecting such Change in
Control without fear of any direct or implied threat to
employment, status and responsibilities; and
WHEREAS, Employee desires to have the foregoing
assurances;
NOW, THEREFORE, in consideration of the mutual promises
contained herein, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged,
Employer and Employee, each intending to be legally bound,
agree as follows:
1. Term. The term of Employee's employment hereunder
shall commence on the date hereof and shall continue
until January 1, 1999, except as otherwise provided
in Section 7. If the term of Employee's employment
hereunder shall have continued until January 1, 1999,
thereafter, such term of Employee's employment
hereunder shall be deemed to be renewed
automatically, on the same terms and conditions
contained herein, for successive periods of one year
each, unless and until Employee, at least 90 days
prior to the expiration of the original term or any
such extended term, shall give written notice to the
other of intent not to renew the term of Employee s
employment hereunder. All references herein to the
Term refer to the original term of Employee s
employment hereunder and all extensions thereof.
2. Duties
(a) Offices
During the Term, Employee shall serve in
Employee's current or comparable capacity, and
the Board shall renominate Employee, and
Employee shall perform duties as assigned.
Employer agrees that Employee will be assigned
only duties of the type, nature and dignity
normally assigned to someone in a comparable
position at a corporation of the size, stature
and nature of Employer. During the Term,
Employee shall have, at a minimum, the same
perquisites of office as on the date hereof, and
shall report directly to the Employer's Chief
Operating Officer.
(b) Full-Time Basis
During the Term, Employee shall devote, on a
full-time basis, Employee's services, skills and
abilities to employment hereunder, excepting
periods of vacation, illness or Disability (as
defined below), and excepting any pursuits which
do not materially interfere with duties
hereunder or present a conflict of interest with
the interests of Employer or of any subsidiary
thereof ("Subsidiary").
3. Compensation
(a) Salary
During the Term, as compensation for services
rendered by Employee hereunder, Employer shall
pay to Employee a base salary at the rate of not
less than Employee's current rate per annum,
payable in installments in accordance with
Employer's policy governing salary payments to
senior officers generally ("Base Salary"). In
February of every year during the Term,
Employee's compensation, including Base Salary,
will be subject to review, provided that, the
Base Salary shall not be less than the current
rate.
(b) Performance Bonus
Except as otherwise provided in Section 7, in
addition to the Base Salary, Employee shall be
eligible for an annual performance bonus as
determined in accordance with Company policy
("Performance Bonus"). Any Performance Bonus
payable pursuant to this Section 3(b) shall be
paid within 30 days after the end of the fiscal
period to which such Performance Bonus relates.
(c) Other Compensation Plans or Arrangements
During the Term, Employee shall also be eligible
to participate in all other currently existing
or subsequently implemented compensation or
benefit plans or arrangements available
generally to other officers or senior officers
of Employer, including Employer's Deferred
Supplemental Compensation Plan, ESOP/401(k),
and any stock option, stock purchase or similar
stock plans or arrangements.
(d) Tax Withholdings
Employer shall withhold from Employee s
compensation hereunder and pay over to the
appropriate governmental agencies all payroll
taxes, including income, social security, and
unemployment compensation taxes, required by the
federal, state and local governments with
jurisdiction over Employer.
4. Benefits. During the Term, Employee shall be
entitled to such comparable fringe benefits and
perquisites as may be provided to any or all of
Employer's senior officers pursuant to policies
established from time to time. These fringe benefits
and perquisites shall include holidays, group health
insurance, disability insurance, and life insurance.
5. Expenses and Other Perquisites. Employer shall
reimburse Employee for all reasonable and proper
business expenses incurred in the performance during
the Term of duties hereunder, in accordance with
Employer's customary practices for senior officers,
and provided such business expenses are reasonably
documented.
6. Exclusive Services, Confidential Information,
Business Opportunities and Non-Solicitation
(a) Exclusive Services
(i) During the Term, Employee shall at all
times devote full-time attention,
energies, efforts and skills to
Employer's business and shall not,
directly or indirectly, engage in any
other business activity, whether or not
for profit, gain or other pecuniary
advantages, without the written consent
of the Chief Executive Officer or Chief
Operating Officer, provided that such
prior consent shall not be required with
respect to (1) business interests that
neither compete with Employer or any
Subsidiaries nor interfere with
Employee's duties and obligations
hereunder, and (2) Employee's charitable,
eleemosynary, philanthropic or
professional association activities.
(ii) During the Term, Employee shall not,
without the prior written consent of the
Chief Executive Officer or Chief
Operating Officer, directly or
indirectly, either as an officer,
director, employee, agent, advisor,
consultant, principal, stockholder,
partner, owner or in any other capacity,
on Employee's own behalf or otherwise, in
any way engage in, represent, be
connected with or have a financial
interest in, any business which is, or to
Employee's knowledge, is about to become,
engaged in the business of providing
engineering, management, energy or
environmental services to the United
States Government or any department,
agency, or instrumentality thereof or any
state or local govern-mental agency or to
any person, corporation or other entity
(collectively a Person") with which
Employer or any Subsidiary is currently
or has previously done business or any
subsequent line of business developed by
Employee or any Subsidiary during the
Term. Notwithstanding the foregoing,
Employee shall be permitted to own
passive investments in publicly held
companies provided that such investments
do not exceed five percent of any such
company's outstanding equity.
(b) Confidential Information
During the Term and for the first 24
consecutive months after the termination of
the Term, Employee shall not disclose or use,
directly or indirectly, any Confidential
Information (as defined below). For the
purposes of this Agreement, Confidential
Information shall mean all information
disclosed to Employee, or known by Emplyee as
a consequence of or through employment with
Employer or any Subsidiary, where such
information is not generally known in the
trade or industry or was regarded or treated
as confidential by Employer or any Subsidiary,
and where such information refers or relates
in any manner whatsoever to the business
activities, processes, services or products of
Employer or its Subsidiaries. Confidential
Information shall include business and
development plans (whether contemplated,
initiated or completed), information with
respect to the development of technical and
management services, business contacts,
methods of operation, results of analysis,
business forecasts, financial data, costs,
revenues, and similar information. Upon
termination of Term, Employee shall
immediately return to Employer all of property
of Employer or any Subsidiary and Confidential
Information which is in tangible form, and all
copies thereof.
(c) Business Opportunities
(i) During the Term, Employee shall promptly
disclose to Employer each business
opportunity of a type which, based upon
its prospects and relationship to the
existing businesses of Employer or any
Subsidiary, Employer or any Subsidiary
might reasonably consider pursuing. Upon
termination of the Term, regardless of
the circum-stances thereof, Employer
shall have the exclusive right to
participate in or undertake any such
opportunity on its own behalf without any
involvement of Employee.
(ii) During the Term, Employee shall refrain
from engaging in any activity, practice
or act which conflicts with, or has the
potential to conflict with, the interests
of Employer or its Subsidiaries, and
shall avoid any acts or omissions which
are disloyal to, or competitive with
Employer or its Subsidiaries.
(d) Non-Solicitation of Employees
During the Term and for the first 24
consecutive months after termination of the
Term, Employee shall not, except in the course
of duties hereunder, directly or indirectly,
induce or attempt to induce or otherwise
counsel, advise, ask or encourage any person
to leave the employ of Employer or any
Subsidiary, or solicit or offer employment to
any person who was employed by Employer or any
Subsidiary at any time during the twelve-month
period preceding the solicitation or offer.
(e) Covenant Not To Compete
(i) If Employee voluntarily terminates the
Term, or if Employer terminates the Term
for Cause (as defined below), Employee
shall not, during the first 24
consecutive months following such
termina-tion, engage in competition with
Employer or any Subsidiary, or solicit,
from any person or entity who purchased
any then existing product or service from
Employer or any Subsidiary during
employment hereunder, the purchase of any
then existing product or service in
competition with then existing products
or services of Employer or any
Subsidiary.
(ii) For purposes of this Agreement, Employee
shall be deemed to engage in competition
with Employer if Employee shall directly
or indirectly, either individually or as
a stockholder, director, officer,
partner, consultant, owner, employee,
agent, or in any other capacity, consult
with or otherwise assist any person or
entity engaged in providing technical and
management services to any person or
entity which Employer or any Subsidiary,
during the Term, has developed or is
working to develop. Notwithstanding
anything herein to the contrary, if
Employer is in material breach of this
Agreement, the provisions of this
Section 6 shall not apply.
(f) Employee Acknowledgment
Employee hereby agrees and acknowledges that
the restrictions imposed upon by the
provisions of this Section 6 are fair and
reasonable considering the nature of
Employer's business, and are reasonably
required for Employer's protection.
(g) Invalidity
If a court of competent jurisdiction or an
arbitrator shall declare any provision or
restriction contained in this Section 6 as
unenforceable or void, the provisions of this
Section 6 shall remain in full force and
effect to the extent not so declared to be
unenforceable or void, and the court may
modify the invalid provision to make it
enforceable to the maximum extent permitted by
law.
(h) Specific Performance
Employee agrees that if Employee breaches any
of the provisions of this Section 6, the
remedies available at law to Employer would be
inadequate and in lieu thereof, or in addition
thereto, Employer shall be entitled to
appropriate equitable remedies, including
specific performance and injunctive relief.
Employee agrees not to enter into any
agreement, either written or oral, which may
conflict with this Agreement, and Employee
authorizes Employer to make known the terms of
Sections 6 and 7 hereof to any Person,
including future employers of Employee.
7. Termination
(a) By Employer
(i) Termination for Cause
Employer may for Cause (as defined below)
terminate the Term at any time by written
notice to Employee. For purposes of this
Agreement, the term Cause shall mean
any one or more of the following: (1)
conduct by Employee which is materially
illegal or fraudulent or a material
breach of Company policy; (2) the breach
or violation by Employee of any of the
material provisions of this Agreement,
provided that Employee must first be
given notice by the Board of the alleged
breach or violation and 30 days to cure
said alleged breach or violation; (3)
Employee's use of illegal drugs or abuse
of alcohol or authorized drugs which
impairs Employee's ability to perform
duties hereunder, provided that Employee
must be given notice by the Board of such
impairment and 60 days to cure the
impairment; (4) Employee's knowing and
willful neglect of duties or negligence
in the performance of duties which
materially affects Employer's or any
Subsidiary's business, provided that
Employee must first be given notice by
the Board of such alleged neglect or
negligence and 30 days to cure said
alleged neglect or negligence. If a
termination occurs pursuant to clause (1)
above, the date on which the Term is
terminated (the "Termination Date") shall
be the date Employee receives notice of
termination and, if a termination occurs
pursuant to clauses (2), (3) or (4)
above, the Termination Date shall be the
date on which the specified cure period
expires. In any event, as of the
Termination Date (in the absence of
satisfying the alleged breach or
violation within the applicable cure
period), Employee shall be relieved of
all duties hereunder and Employee shall
not be entitled to the accrual or
provision of any compensation or benefit,
after the Termination Date but Employee
shall be entitled to the provision of all
compensation and other benefits that
shall have accrued as of the Termination
Date, including Base Salary, Performance
Bonuses, paid leave benefits, Deferred
Compensation Units, Deferred Supplemental
Compensation to the extent permitted by
the plans, and reimbursement of incurred
business expenses.
(ii) Termination Without Cause
Employer may, in its sole discretion,
without Cause, terminate the Term at any
time by providing Employee with (a) 60
days prior notice thereof and (b) on or
prior to the Termination Date, a lump sum
severance compensation payment equal to
the total amount of Employee's Base
Salary payable for one (1) year
hereunder, based upon the amount in
effect as of the effective Termination
Date. If Employee has less than five
years of service with the Employer as of
the Termination Date, the lump sum
severance compensation payment shall
equal 6 months pay rather than one year
of pay. Employee shall not be entitled
to the accrual or provision of any other
compensation or benefit after the
Termination Date other than (a) the
medical and hospitalization benefits
after the Termination Date, in accordance
with COBRA or other Company policy if
covered by a Company-sponsored plan, (b)
the provision of all compensation and
other benefits that shall have accrued as
of the Termination Date, including Base
Salary, Performance Bonus, paid leave
benefits, Deferred Compensation Units,
Deferred Supple-mental Compensation and
reimbursements of incurred expenses; and
(c) all stock options or similar rights
to acquire capital stock granted by
Employer to Employee shall automatically
become vested and exercisable in whole or
in part.
(b) Death or Disability
The Term shall be terminated immediately and
automatically upon Employee's death or
Disability. The term Disability shall mean
Employee's inability to perform all of the
essential functions of Employee's position
hereunder for a period of 26 consecutive weeks
or for an aggregate of 150 work days during
any 12-month period by reason of illness,
accident or any other physical or mental
incapacity, as may be permitted by applicable
law. Employee's capability to continue
performance of Employee's duties hereunder
shall be determined by a panel composed of two
independent medical doctors appointed by the
Board and one appointed by the Employee or
designated representative. If the panel is
unable to reach a decision the matter will be
referred to arbitration in accordance with
Section 8. In the event of Employee's death or
Disability for any period of six consecutive
months, Employee (or designated beneficiary)
will be paid Base Salary then in effect for
one full year following the date of death or
disability (6 months pay rather than one year
of pay if Employee has less than five years of
service with Employer as of the final day
worked).
(c) By Employee
(i) Employee may, in Employee's sole
discretion, without cause, terminate the
Term at any time upon 60 days written
notice to Employer. If Employee exercises
such termination right, Employer may, at
its option, at any time after receiving
such notice from Employee, relieve
Employee of all duties and terminate the
Term at any time prior to the expiration
of said notice period. If the Term is
terminated by Employee or Employer
pursuant to this Section 7(c)(i),
Employee shall not be entitled to any
further Base Salary or the accrual or
provision of any compensation or benefits
after the Termination Date, except
medical and hospitalization benefits to
the extent permitted by COBRA or other
Company policy.
(ii) If, during the Term, a Change of Control
(as defined below) occurs, Employee may,
in Employee's sole discretion, terminate
the Term upon 30 days notice of
Employer. If Employee exercises such
termination right, Employer may, at its
option, at any time after receiving such
notice from Employee, relieve Employee of
all duties hereunder and terminate the
Term at any time prior to the expiration
of said notice period. If this Agreement
is terminated by Employee or Employer
pursuant to this Section 7(c)(ii),
Employee shall be entitled:
(a) to receive on or prior to the
Termination Date a lump sum
severance compensation payment equal
to two (2) times the total amount of
Employee's Base Salary payable
hereunder, based on the amount in
effect as of the Termination Date.
If Employee has less than five years
of service with the Employer as of
the date of Employee's notice to
Employer, the lump sum severance
compensation payment shall be equal
to one (1) times the total amount of
the Employee's Base Salary rather
than two (2) times the total amount;
(b) the medical and hospitalization
benefits and all compensation and
other benefits that shall have
accrued as of the Termination Date,
as described in Section 7(a)(ii)(1);
and
(c) to the automatic vesting and
exercisability in whole or in part
of all stock options or similar
rights to acquire capital stock
granted by Employer to Employee;
provided that Employee shall not be
entitled, after the Termination Date
to the accrual or provision of any
other compensation payable
hereunder, including the Performance
Bonus, but shall be permitted to
continue medical and hospitalization
benefits to the extent permitted by
COBRA or other Company policy.
(d) Change of Control
For purposes of this Section 7, a Change of
Control shall be deemed to have occurred upon
the happening of any of the following events:
(i) any person, including a group, as
such terms as defined in Sections 13(d)
and 14(d) of the Securities Exchange Act
of 1934, as amended, and the rules
promulgated thereunder (collectively the
Exchange Act"), other than a trustee or
other fiduciary holding voting securities
of Employer ("Voting Securities") under
any Employer-sponsored benefit plan,
becomes the beneficial owner, as defined
under the Exchange Act, directly or
indirectly, whether by purchase or
acquisition or agreement to act in
concert or otherwise, of 30% or more of
the outstanding Voting Securities;
(ii) a cash tender or exchange offer is
completed for such amount of Voting
Securities which, together with the
Voting Securities then beneficially
owned, directly or indirectly, by the
offeror (and affiliates thereof)
constitutes 40% or more of the
outstanding Voting Securities;
(iii) except in the case of a merger or
consolidation in which (a) Employer is
the surviving corporation and (b) the
holders of Voting Securities immediately
prior to such merger or consolidation
beneficially own, directly or indirectly,
more than 50% of the outstanding Voting
Securities immediately after such merger
or consolidation (there being excluded
from the number of Voting Securities held
by such holders, but not from the
outstanding Voting Securities, any Voting
Securities received by affiliates of the
other constituent corporation(s) in the
merger or consolidation in ex-change for
stock of such other corporation),
Employer's share-holders approve an
agreement to merge, consolidate,
liquidate, or sell all or substantially
all of Employer's assets; or
(iv) two or more directors are elected to the
Board without having previously been
nominated and approved by the members of
the Board incumbent on the day
immediately preceding such election. For
purposes of this Section 7, affiliate
of a person or another entity shall mean
a person or other entity that directly or
indirectly controls, is controlled by, or
is under common control with the person
or other entity specified.
(e) No Duty to Mitigate
If Employee is entitled to the compensation
and other benefits provided under Sections
7(a)(ii) or (c)(ii), Employee shall have no
obligation to seek employment to mitigate
damages hereunder.
(f) Other Policies
This Agreement supersedes and replaces
applicable provisions of General Policy
Memorandum (GPM) No. 31 and GPM 31-1
concerning Executive Severance Program for
Corporate Officers.
8. Arbitration. Whenever a dispute arises between the
parties concerning this Agreement or any of the
obligations hereunder, or Employee's employment
generally, Employer and Employee shall use their
best efforts to resolve the dispute by mutual
agreement. If any dispute cannot be resolved by
Employer and Employee, it shall be submitted to
arbitration to the exclusion of all other avenues
of relief and adjudicated pursuant to the American
Arbitration Association's Rules for Employment
Dispute Resolution then in effect. The decision of
the arbitrator must be in writing and shall be
final and binding on the parties, and judgment may
be entered on the arbitrator's award in any court
having jurisdiction thereof. The arbitrator s
authority in granting relief to Employee shall be
limited to an award of compensation, benefits and
unreimbursed expenses as described in Sections 3,
4, and 5 above, and to the release of Employee from
the provisions of Section 6 and the arbitrator
shall have no authority to award other types of
damages or relief to Employee, including
consequential or punitive damages. The arbitrator
shall also have no authority to award consequential
or punitive damages to Employer for violations of
this Agreement by Employee. The expenses of the
arbitration shall be borne by the losing party to
the arbitration and the prevailing party shall be
entitled to recover from the losing party all of
its own costs and attorneys fees with respect to
the arbitration. Nothing in this Section 8 shall be
construed to derogate Employer's rights to seek
legal and equitable relief in a court of competent
jurisdiction as contemplated by Section 6(h).
9. Non-Waiver. It is understood and agreed that one
party's failure at any time to require the
performance by the other party of any of the terms,
provisions, covenants or conditions hereof shall in
no way affect the first party's right thereafter to
enforce the same, nor shall the waiver by either
party of the breach of any term, provision,
covenant or condition hereof be taken or held to be
a waiver of any succeeding breach.
10. Severability. If any provision of this Agreement
conflicts with the law under which this Agreement
is to be construed, or if any such provision is
held invalid or unenforceable by a court of
competent jurisdiction or any arbitrator, such
provision shall be deleted from this Agreement and
the Agreement shall be construed to give full
effect to the remaining provision thereof.
11. Survivability. Unless otherwise provided herein,
upon termination of the Term, the provisions of
Sections 6(b), (d) and (e) shall nevertheless
remain in full force and effect.
12. Governing Law. This Agreement shall be
interpreted, construed and governed according to
the laws of the Commonwealth of Virginia, without
regard to the conflict of law provisions thereof.
13. Construction. The paragraph headings and captions
contained in this Agreement are for convenience
only and shall not be construed to define, limit or
affect the scope or meaning of the provisions
hereof. All references herein to Sections shall be
deemed to refer to Sections of this Agreement.
14. Entire Agreement. This Agreement contains and
represents the entire agreement of Employer and
Employee and supersedes all prior agreements,
representations or understandings, oral or written,
express or implied with respect to the subject
matter hereof. This Agreement may not be modified
or amended in any way unless in a writing signed by
each of Employer and Employee. No representation,
promise or inducement has been made by either
Employer or Employee that is not embodied in this
Agreement, and neither Employer nor Employee shall
be bound by or liable for any alleged
representation, promise or inducement not
specifically set forth herein.
15. Assignability. Neither this Agreement nor any
rights or obligations of Employer or Employee
hereunder may be assigned by Employer or Employee
without the other party's prior written consent.
Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of Employer
and Employee and their heirs, successors and
assigns.
16. Notices. All notices required or permitted
hereunder shall be in writing and shall be deemed
properly given if delivered personally or sent by
certified or registered mail, postage prepaid,
return receipt requested, or sent by telegram,
telelex, telecopy or similar form of
telecommunication, and shall be deemed to have been
given when received. Any such notice or
communication shall be addressed: (a) if to
Employer, to President, 2550 Huntington Avenue,
Alexandria, Virginia 22303-1499 or (b) if to
Employee, to the last known home address on file
with Employer, or to such other address as Employer
or Employee shall have furnished to the other in
writing.
IN WITNESS WHEREOF, the parties hereto have duly executed
this Agreement, to be effective as of the day and year first
above written.
VSE CORPORATION
a Delaware corporation
Date: December 10, 1997 By: /s/ R. B. McFarland
______________________
R. B. McFarland
President and
Chief Operating Officer
Date: December 10, 1997 /s/ J. M. Knowlton
_______________________
J. M. Knowlton
Employee
EXHIBIT VIII
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into as of
December 10, 1997, by and between VSE Corporation, a
Delaware corporation ("Employer"), and James M. Knowlton
("Employee");
WHEREAS, Employee currently is employed by Employer as a
senior corporate officer;
WHEREAS, Employee has rendered good and valuable service
to the Employer and has contributed greatly to Employer's
growth and success;
WHEREAS, Employer wishes to induce Employee to remain in
Employer's employ to prevent the significant loss which
Employer would incur if Employee were to leave and to enter
the employment of a competitor;
WHEREAS, in the current business climate of takeovers and
acquisitions, Employee may be concerned about the continuation
of employment and status and responsibilities if a Change in
Control (as defined below) occurs, and Employer is concerned
that Employee may be approached by others with employment
opportunities;
WHEREAS, Employer desires to ensure that, if a Change in
Control appears possible, Employee will be in a secure
position from which to objectively engage in any potential
deliberations or negotiations respecting such Change in
Control without fear of any direct or implied threat to
employment, status and responsibilities; and
WHEREAS, Employee desires to have the foregoing
assurances;
NOW, THEREFORE, in consideration of the mutual promises
contained herein, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged,
Employer and Employee, each intending to be legally bound,
agree as follows:
1. Term. The term of Employee's employment hereunder
shall commence on the date hereof and shall continue
until January 1, 1999, except as otherwise provided
in Section 7. If the term of Employee's employment
hereunder shall have continued until January 1, 1999,
thereafter, such term of Employee's employment
hereunder shall be deemed to be renewed
automatically, on the same terms and conditions
contained herein, for successive periods of one year
each, unless and until Employee, at least 90 days
prior to the expiration of the original term or any
such extended term, shall give written notice to the
other of intent not to renew the term of Employee s
employment hereunder. All references herein to the
Term refer to the original term of Employee s
employment hereunder and all extensions thereof.
2. Duties
(a) Offices
During the Term, Employee shall serve in
Employee's current or comparable capacity, and
the Board shall renominate Employee, and
Employee shall perform duties as assigned.
Employer agrees that Employee will be assigned
only duties of the type, nature and dignity
normally assigned to someone in a comparable
position at a corporation of the size, stature
and nature of Employer. During the Term,
Employee shall have, at a minimum, the same
perquisites of office as on the date hereof, and
shall report directly to the Employer's Chief
Operating Officer.
(b) Full-Time Basis
During the Term, Employee shall devote, on a
full-time basis, Employee's services, skills and
abilities to employment hereunder, excepting
periods of vacation, illness or Disability (as
defined below), and excepting any pursuits which
do not materially interfere with duties
hereunder or present a conflict of interest with
the interests of Employer or of any subsidiary
thereof ("Subsidiary").
3. Compensation
(a) Salary
During the Term, as compensation for services
rendered by Employee hereunder, Employer shall
pay to Employee a base salary at the rate of not
less than Employee's current rate per annum,
payable in installments in accordance with
Employer's policy governing salary payments to
senior officers generally ("Base Salary"). In
February of every year during the Term,
Employee's compensation, including Base Salary,
will be subject to review, provided that, the
Base Salary shall not be less than the current
rate.
(b) Performance Bonus
Except as otherwise provided in Section 7, in
addition to the Base Salary, Employee shall be
eligible for an annual performance bonus as
determined in accordance with Company policy
("Performance Bonus"). Any Performance Bonus
payable pursuant to this Section 3(b) shall be
paid within 30 days after the end of the fiscal
period to which such Performance Bonus relates.
(c) Other Compensation Plans or Arrangements
During the Term, Employee shall also be eligible
to participate in all other currently existing
or subsequently implemented compensation or
benefit plans or arrangements available
generally to other officers or senior officers
of Employer, including Employer's Deferred
Supplemental Compensation Plan, ESOP/401(k),
and any stock option, stock purchase or similar
stock plans or arrangements.
(d) Tax Withholdings
Employer shall withhold from Employee s
compensation hereunder and pay over to the
appropriate governmental agencies all payroll
taxes, including income, social security, and
unemployment compensation taxes, required by the
federal, state and local governments with
jurisdiction over Employer.
4. Benefits. During the Term, Employee shall be
entitled to such comparable fringe benefits and
perquisites as may be provided to any or all of
Employer's senior officers pursuant to policies
established from time to time. These fringe benefits
and perquisites shall include holidays, group health
insurance, disability insurance, and life insurance.
5. Expenses and Other Perquisites. Employer shall
reimburse Employee for all reasonable and proper
business expenses incurred in the performance during
the Term of duties hereunder, in accordance with
Employer's customary practices for senior officers,
and provided such business expenses are reasonably
documented.
6. Exclusive Services, Confidential Information,
Business Opportunities and Non-Solicitation
(a) Exclusive Services
(i) During the Term, Employee shall at all
times devote full-time attention,
energies, efforts and skills to
Employer's business and shall not,
directly or indirectly, engage in any
other business activity, whether or not
for profit, gain or other pecuniary
advantages, without the written consent
of the Chief Executive Officer or Chief
Operating Officer, provided that such
prior consent shall not be required with
respect to (1) business interests that
neither compete with Employer or any
Subsidiaries nor interfere with
Employee's duties and obligations
hereunder, and (2) Employee's charitable,
eleemosynary, philanthropic or
professional association activities.
(ii) During the Term, Employee shall not,
without the prior written consent of the
Chief Executive Officer or Chief
Operating Officer, directly or
indirectly, either as an officer,
director, employee, agent, advisor,
consultant, principal, stockholder,
partner, owner or in any other capacity,
on Employee's own behalf or otherwise, in
any way engage in, represent, be
connected with or have a financial
interest in, any business which is, or to
Employee's knowledge, is about to become,
engaged in the business of providing
engineering, management, energy or
environmental services to the United
States Government or any department,
agency, or instrumentality thereof or any
state or local govern-mental agency or to
any person, corporation or other entity
(collectively a Person") with which
Employer or any Subsidiary is currently
or has previously done business or any
subsequent line of business developed by
Employee or any Subsidiary during the
Term. Notwithstanding the foregoing,
Employee shall be permitted to own
passive investments in publicly held
companies provided that such investments
do not exceed five percent of any such
company's outstanding equity.
(b) Confidential Information
During the Term and for the first 24
consecutive months after the termination of
the Term, Employee shall not disclose or use,
directly or indirectly, any Confidential
Information (as defined below). For the
purposes of this Agreement, Confidential
Information shall mean all information
disclosed to Employee, or known by Emplyee as
a consequence of or through employment with
Employer or any Subsidiary, where such
information is not generally known in the
trade or industry or was regarded or treated
as confidential by Employer or any Subsidiary,
and where such information refers or relates
in any manner whatsoever to the business
activities, processes, services or products of
Employer or its Subsidiaries. Confidential
Information shall include business and
development plans (whether contemplated,
initiated or completed), information with
respect to the development of technical and
management services, business contacts,
methods of operation, results of analysis,
business forecasts, financial data, costs,
revenues, and similar information. Upon
termination of Term, Employee shall
immediately return to Employer all of property
of Employer or any Subsidiary and Confidential
Information which is in tangible form, and all
copies thereof.
(c) Business Opportunities
(i) During the Term, Employee shall promptly
disclose to Employer each business
opportunity of a type which, based upon
its prospects and relationship to the
existing businesses of Employer or any
Subsidiary, Employer or any Subsidiary
might reasonably consider pursuing. Upon
termination of the Term, regardless of
the circum-stances thereof, Employer
shall have the exclusive right to
participate in or undertake any such
opportunity on its own behalf without any
involvement of Employee.
(ii) During the Term, Employee shall refrain
from engaging in any activity, practice
or act which conflicts with, or has the
potential to conflict with, the interests
of Employer or its Subsidiaries, and
shall avoid any acts or omissions which
are disloyal to, or competitive with
Employer or its Subsidiaries.
(d) Non-Solicitation of Employees
During the Term and for the first 24
consecutive months after termination of the
Term, Employee shall not, except in the course
of duties hereunder, directly or indirectly,
induce or attempt to induce or otherwise
counsel, advise, ask or encourage any person
to leave the employ of Employer or any
Subsidiary, or solicit or offer employment to
any person who was employed by Employer or any
Subsidiary at any time during the twelve-month
period preceding the solicitation or offer.
(e) Covenant Not To Compete
(i) If Employee voluntarily terminates the
Term, or if Employer terminates the Term
for Cause (as defined below), Employee
shall not, during the first 24
consecutive months following such
termina-tion, engage in competition with
Employer or any Subsidiary, or solicit,
from any person or entity who purchased
any then existing product or service from
Employer or any Subsidiary during
employment hereunder, the purchase of any
then existing product or service in
competition with then existing products
or services of Employer or any
Subsidiary.
(ii) For purposes of this Agreement, Employee
shall be deemed to engage in competition
with Employer if Employee shall directly
or indirectly, either individually or as
a stockholder, director, officer,
partner, consultant, owner, employee,
agent, or in any other capacity, consult
with or otherwise assist any person or
entity engaged in providing technical and
management services to any person or
entity which Employer or any Subsidiary,
during the Term, has developed or is
working to develop. Notwithstanding
anything herein to the contrary, if
Employer is in material breach of this
Agreement, the provisions of this
Section 6 shall not apply.
(f) Employee Acknowledgment
Employee hereby agrees and acknowledges that
the restrictions imposed upon by the
provisions of this Section 6 are fair and
reasonable considering the nature of
Employer's business, and are reasonably
required for Employer's protection.
(g) Invalidity
If a court of competent jurisdiction or an
arbitrator shall declare any provision or
restriction contained in this Section 6 as
unenforceable or void, the provisions of this
Section 6 shall remain in full force and
effect to the extent not so declared to be
unenforceable or void, and the court may
modify the invalid provision to make it
enforceable to the maximum extent permitted by
law.
(h) Specific Performance
Employee agrees that if Employee breaches any
of the provisions of this Section 6, the
remedies available at law to Employer would be
inadequate and in lieu thereof, or in addition
thereto, Employer shall be entitled to
appropriate equitable remedies, including
specific performance and injunctive relief.
Employee agrees not to enter into any
agreement, either written or oral, which may
conflict with this Agreement, and Employee
authorizes Employer to make known the terms of
Sections 6 and 7 hereof to any Person,
including future employers of Employee.
7. Termination
(a) By Employer
(i) Termination for Cause
Employer may for Cause (as defined below)
terminate the Term at any time by written
notice to Employee. For purposes of this
Agreement, the term Cause shall mean
any one or more of the following: (1)
conduct by Employee which is materially
illegal or fraudulent or a material
breach of Company policy; (2) the breach
or violation by Employee of any of the
material provisions of this Agreement,
provided that Employee must first be
given notice by the Board of the alleged
breach or violation and 30 days to cure
said alleged breach or violation; (3)
Employee's use of illegal drugs or abuse
of alcohol or authorized drugs which
impairs Employee's ability to perform
duties hereunder, provided that Employee
must be given notice by the Board of such
impairment and 60 days to cure the
impairment; (4) Employee's knowing and
willful neglect of duties or negligence
in the performance of duties which
materially affects Employer's or any
Subsidiary's business, provided that
Employee must first be given notice by
the Board of such alleged neglect or
negligence and 30 days to cure said
alleged neglect or negligence. If a
termination occurs pursuant to clause (1)
above, the date on which the Term is
terminated (the "Termination Date") shall
be the date Employee receives notice of
termination and, if a termination occurs
pursuant to clauses (2), (3) or (4)
above, the Termination Date shall be the
date on which the specified cure period
expires. In any event, as of the
Termination Date (in the absence of
satisfying the alleged breach or
violation within the applicable cure
period), Employee shall be relieved of
all duties hereunder and Employee shall
not be entitled to the accrual or
provision of any compensation or benefit,
after the Termination Date but Employee
shall be entitled to the provision of all
compensation and other benefits that
shall have accrued as of the Termination
Date, including Base Salary, Performance
Bonuses, paid leave benefits, Deferred
Compensation Units, Deferred Supplemental
Compensation to the extent permitted by
the plans, and reimbursement of incurred
business expenses.
(ii) Termination Without Cause
Employer may, in its sole discretion,
without Cause, terminate the Term at any
time by providing Employee with (a) 60
days prior notice thereof and (b) on or
prior to the Termination Date, a lump sum
severance compensation payment equal to
the total amount of Employee's Base
Salary payable for one (1) year
hereunder, based upon the amount in
effect as of the effective Termination
Date. If Employee has less than five
years of service with the Employer as of
the Termination Date, the lump sum
severance compensation payment shall
equal 6 months pay rather than one year
of pay. Employee shall not be entitled
to the accrual or provision of any other
compensation or benefit after the
Termination Date other than (a) the
medical and hospitalization benefits
after the Termination Date, in accordance
with COBRA or other Company policy if
covered by a Company-sponsored plan, (b)
the provision of all compensation and
other benefits that shall have accrued as
of the Termination Date, including Base
Salary, Performance Bonus, paid leave
benefits, Deferred Compensation Units,
Deferred Supple-mental Compensation and
reimbursements of incurred expenses; and
(c) all stock options or similar rights
to acquire capital stock granted by
Employer to Employee shall automatically
become vested and exercisable in whole or
in part.
(b) Death or Disability
The Term shall be terminated immediately and
automatically upon Employee's death or
Disability. The term Disability shall mean
Employee's inability to perform all of the
essential functions of Employee's position
hereunder for a period of 26 consecutive weeks
or for an aggregate of 150 work days during
any 12-month period by reason of illness,
accident or any other physical or mental
incapacity, as may be permitted by applicable
law. Employee's capability to continue
performance of Employee's duties hereunder
shall be determined by a panel composed of two
independent medical doctors appointed by the
Board and one appointed by the Employee or
designated representative. If the panel is
unable to reach a decision the matter will be
referred to arbitration in accordance with
Section 8. In the event of Employee's death or
Disability for any period of six consecutive
months, Employee (or designated beneficiary)
will be paid Base Salary then in effect for
one full year following the date of death or
disability (6 months pay rather than one year
of pay if Employee has less than five years of
service with Employer as of the final day
worked).
(c) By Employee
(i) Employee may, in Employee's sole
discretion, without cause, terminate the
Term at any time upon 60 days written
notice to Employer. If Employee exercises
such termination right, Employer may, at
its option, at any time after receiving
such notice from Employee, relieve
Employee of all duties and terminate the
Term at any time prior to the expiration
of said notice period. If the Term is
terminated by Employee or Employer
pursuant to this Section 7(c)(i),
Employee shall not be entitled to any
further Base Salary or the accrual or
provision of any compensation or benefits
after the Termination Date, except
medical and hospitalization benefits to
the extent permitted by COBRA or other
Company policy.
(ii) If, during the Term, a Change of Control
(as defined below) occurs, Employee may,
in Employee's sole discretion, terminate
the Term upon 30 days notice of
Employer. If Employee exercises such
termination right, Employer may, at its
option, at any time after receiving such
notice from Employee, relieve Employee of
all duties hereunder and terminate the
Term at any time prior to the expiration
of said notice period. If this Agreement
is terminated by Employee or Employer
pursuant to this Section 7(c)(ii),
Employee shall be entitled:
(a) to receive on or prior to the
Termination Date a lump sum
severance compensation payment equal
to two (2) times the total amount of
Employee's Base Salary payable
hereunder, based on the amount in
effect as of the Termination Date.
If Employee has less than five years
of service with the Employer as of
the date of Employee's notice to
Employer, the lump sum severance
compensation payment shall be equal
to one (1) times the total amount of
the Employee's Base Salary rather
than two (2) times the total amount;
(b) the medical and hospitalization
benefits and all compensation and
other benefits that shall have
accrued as of the Termination Date,
as described in Section 7(a)(ii)(1);
and
(c) to the automatic vesting and
exercisability in whole or in part
of all stock options or similar
rights to acquire capital stock
granted by Employer to Employee;
provided that Employee shall not be
entitled, after the Termination Date
to the accrual or provision of any
other compensation payable
hereunder, including the Performance
Bonus, but shall be permitted to
continue medical and hospitalization
benefits to the extent permitted by
COBRA or other Company policy.
(d) Change of Control
For purposes of this Section 7, a Change of
Control shall be deemed to have occurred upon
the happening of any of the following events:
(i) any person, including a group, as
such terms as defined in Sections 13(d)
and 14(d) of the Securities Exchange Act
of 1934, as amended, and the rules
promulgated thereunder (collectively the
Exchange Act"), other than a trustee or
other fiduciary holding voting securities
of Employer ("Voting Securities") under
any Employer-sponsored benefit plan,
becomes the beneficial owner, as defined
under the Exchange Act, directly or
indirectly, whether by purchase or
acquisition or agreement to act in
concert or otherwise, of 30% or more of
the outstanding Voting Securities;
(ii) a cash tender or exchange offer is
completed for such amount of Voting
Securities which, together with the
Voting Securities then beneficially
owned, directly or indirectly, by the
offeror (and affiliates thereof)
constitutes 40% or more of the
outstanding Voting Securities;
(iii) except in the case of a merger or
consolidation in which (a) Employer is
the surviving corporation and (b) the
holders of Voting Securities immediately
prior to such merger or consolidation
beneficially own, directly or indirectly,
more than 50% of the outstanding Voting
Securities immediately after such merger
or consolidation (there being excluded
from the number of Voting Securities held
by such holders, but not from the
outstanding Voting Securities, any Voting
Securities received by affiliates of the
other constituent corporation(s) in the
merger or consolidation in ex-change for
stock of such other corporation),
Employer's share-holders approve an
agreement to merge, consolidate,
liquidate, or sell all or substantially
all of Employer's assets; or
(iv) two or more directors are elected to the
Board without having previously been
nominated and approved by the members of
the Board incumbent on the day
immediately preceding such election. For
purposes of this Section 7, affiliate
of a person or another entity shall mean
a person or other entity that directly or
indirectly controls, is controlled by, or
is under common control with the person
or other entity specified.
(e) No Duty to Mitigate
If Employee is entitled to the compensation
and other benefits provided under Sections
7(a)(ii) or (c)(ii), Employee shall have no
obligation to seek employment to mitigate
damages hereunder.
(f) Other Policies
This Agreement supersedes and replaces
applicable provisions of General Policy
Memorandum (GPM) No. 31 and GPM 31-1
concerning Executive Severance Program for
Corporate Officers.
8. Arbitration. Whenever a dispute arises between the
parties concerning this Agreement or any of the
obligations hereunder, or Employee's employment
generally, Employer and Employee shall use their
best efforts to resolve the dispute by mutual
agreement. If any dispute cannot be resolved by
Employer and Employee, it shall be submitted to
arbitration to the exclusion of all other avenues
of relief and adjudicated pursuant to the American
Arbitration Association's Rules for Employment
Dispute Resolution then in effect. The decision of
the arbitrator must be in writing and shall be
final and binding on the parties, and judgment may
be entered on the arbitrator's award in any court
having jurisdiction thereof. The arbitrator s
authority in granting relief to Employee shall be
limited to an award of compensation, benefits and
unreimbursed expenses as described in Sections 3,
4, and 5 above, and to the release of Employee from
the provisions of Section 6 and the arbitrator
shall have no authority to award other types of
damages or relief to Employee, including
consequential or punitive damages. The arbitrator
shall also have no authority to award consequential
or punitive damages to Employer for violations of
this Agreement by Employee. The expenses of the
arbitration shall be borne by the losing party to
the arbitration and the prevailing party shall be
entitled to recover from the losing party all of
its own costs and attorneys fees with respect to
the arbitration. Nothing in this Section 8 shall be
construed to derogate Employer's rights to seek
legal and equitable relief in a court of competent
jurisdiction as contemplated by Section 6(h).
9. Non-Waiver. It is understood and agreed that one
party's failure at any time to require the
performance by the other party of any of the terms,
provisions, covenants or conditions hereof shall in
no way affect the first party's right thereafter to
enforce the same, nor shall the waiver by either
party of the breach of any term, provision,
covenant or condition hereof be taken or held to be
a waiver of any succeeding breach.
10. Severability. If any provision of this Agreement
conflicts with the law under which this Agreement
is to be construed, or if any such provision is
held invalid or unenforceable by a court of
competent jurisdiction or any arbitrator, such
provision shall be deleted from this Agreement and
the Agreement shall be construed to give full
effect to the remaining provision thereof.
11. Survivability. Unless otherwise provided herein,
upon termination of the Term, the provisions of
Sections 6(b), (d) and (e) shall nevertheless
remain in full force and effect.
12. Governing Law. This Agreement shall be
interpreted, construed and governed according to
the laws of the Commonwealth of Virginia, without
regard to the conflict of law provisions thereof.
13. Construction. The paragraph headings and captions
contained in this Agreement are for convenience
only and shall not be construed to define, limit or
affect the scope or meaning of the provisions
hereof. All references herein to Sections shall be
deemed to refer to Sections of this Agreement.
14. Entire Agreement. This Agreement contains and
represents the entire agreement of Employer and
Employee and supersedes all prior agreements,
representations or understandings, oral or written,
express or implied with respect to the subject
matter hereof. This Agreement may not be modified
or amended in any way unless in a writing signed by
each of Employer and Employee. No representation,
promise or inducement has been made by either
Employer or Employee that is not embodied in this
Agreement, and neither Employer nor Employee shall
be bound by or liable for any alleged
representation, promise or inducement not
specifically set forth herein.
15. Assignability. Neither this Agreement nor any
rights or obligations of Employer or Employee
hereunder may be assigned by Employer or Employee
without the other party's prior written consent.
Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of Employer
and Employee and their heirs, successors and
assigns.
16. Notices. All notices required or permitted
hereunder shall be in writing and shall be deemed
properly given if delivered personally or sent by
certified or registered mail, postage prepaid,
return receipt requested, or sent by telegram,
telelex, telecopy or similar form of
telecommunication, and shall be deemed to have been
given when received. Any such notice or
communication shall be addressed: (a) if to
Employer, to President, 2550 Huntington Avenue,
Alexandria, Virginia 22303-1499 or (b) if to
Employee, to the last known home address on file
with Employer, or to such other address as Employer
or Employee shall have furnished to the other in
writing.
IN WITNESS WHEREOF, the parties hereto have duly executed
this Agreement, to be effective as of the day and year first
above written.
VSE CORPORATION
a Delaware corporation
Date: December 10, 1997 By: /s/ R. B. McFarland
______________________
R. B. McFarland
President and
Chief Operating Officer
Date: December 10, 1997 /s/ J. M. Knowlton
_______________________
J. M. Knowlton
Employee
EXHIBIT VIII
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into as of
December 10, 1997, by and between VSE Corporation, a
Delaware corporation ("Employer"), and James M. Knowlton
("Employee");
WHEREAS, Employee currently is employed by Employer as a
senior corporate officer;
WHEREAS, Employee has rendered good and valuable service
to the Employer and has contributed greatly to Employer's
growth and success;
WHEREAS, Employer wishes to induce Employee to remain in
Employer's employ to prevent the significant loss which
Employer would incur if Employee were to leave and to enter
the employment of a competitor;
WHEREAS, in the current business climate of takeovers and
acquisitions, Employee may be concerned about the continuation
of employment and status and responsibilities if a Change in
Control (as defined below) occurs, and Employer is concerned
that Employee may be approached by others with employment
opportunities;
WHEREAS, Employer desires to ensure that, if a Change in
Control appears possible, Employee will be in a secure
position from which to objectively engage in any potential
deliberations or negotiations respecting such Change in
Control without fear of any direct or implied threat to
employment, status and responsibilities; and
WHEREAS, Employee desires to have the foregoing
assurances;
NOW, THEREFORE, in consideration of the mutual promises
contained herein, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged,
Employer and Employee, each intending to be legally bound,
agree as follows:
1. Term. The term of Employee's employment hereunder
shall commence on the date hereof and shall continue
until January 1, 1999, except as otherwise provided
in Section 7. If the term of Employee's employment
hereunder shall have continued until January 1, 1999,
thereafter, such term of Employee's employment
hereunder shall be deemed to be renewed
automatically, on the same terms and conditions
contained herein, for successive periods of one year
each, unless and until Employee, at least 90 days
prior to the expiration of the original term or any
such extended term, shall give written notice to the
other of intent not to renew the term of Employee s
employment hereunder. All references herein to the
Term refer to the original term of Employee s
employment hereunder and all extensions thereof.
2. Duties
(a) Offices
During the Term, Employee shall serve in
Employee's current or comparable capacity, and
the Board shall renominate Employee, and
Employee shall perform duties as assigned.
Employer agrees that Employee will be assigned
only duties of the type, nature and dignity
normally assigned to someone in a comparable
position at a corporation of the size, stature
and nature of Employer. During the Term,
Employee shall have, at a minimum, the same
perquisites of office as on the date hereof, and
shall report directly to the Employer's Chief
Operating Officer.
(b) Full-Time Basis
During the Term, Employee shall devote, on a
full-time basis, Employee's services, skills and
abilities to employment hereunder, excepting
periods of vacation, illness or Disability (as
defined below), and excepting any pursuits which
do not materially interfere with duties
hereunder or present a conflict of interest with
the interests of Employer or of any subsidiary
thereof ("Subsidiary").
3. Compensation
(a) Salary
During the Term, as compensation for services
rendered by Employee hereunder, Employer shall
pay to Employee a base salary at the rate of not
less than Employee's current rate per annum,
payable in installments in accordance with
Employer's policy governing salary payments to
senior officers generally ("Base Salary"). In
February of every year during the Term,
Employee's compensation, including Base Salary,
will be subject to review, provided that, the
Base Salary shall not be less than the current
rate.
(b) Performance Bonus
Except as otherwise provided in Section 7, in
addition to the Base Salary, Employee shall be
eligible for an annual performance bonus as
determined in accordance with Company policy
("Performance Bonus"). Any Performance Bonus
payable pursuant to this Section 3(b) shall be
paid within 30 days after the end of the fiscal
period to which such Performance Bonus relates.
(c) Other Compensation Plans or Arrangements
During the Term, Employee shall also be eligible
to participate in all other currently existing
or subsequently implemented compensation or
benefit plans or arrangements available
generally to other officers or senior officers
of Employer, including Employer's Deferred
Supplemental Compensation Plan, ESOP/401(k),
and any stock option, stock purchase or similar
stock plans or arrangements.
(d) Tax Withholdings
Employer shall withhold from Employee s
compensation hereunder and pay over to the
appropriate governmental agencies all payroll
taxes, including income, social security, and
unemployment compensation taxes, required by the
federal, state and local governments with
jurisdiction over Employer.
4. Benefits. During the Term, Employee shall be
entitled to such comparable fringe benefits and
perquisites as may be provided to any or all of
Employer's senior officers pursuant to policies
established from time to time. These fringe benefits
and perquisites shall include holidays, group health
insurance, disability insurance, and life insurance.
5. Expenses and Other Perquisites. Employer shall
reimburse Employee for all reasonable and proper
business expenses incurred in the performance during
the Term of duties hereunder, in accordance with
Employer's customary practices for senior officers,
and provided such business expenses are reasonably
documented.
6. Exclusive Services, Confidential Information,
Business Opportunities and Non-Solicitation
(a) Exclusive Services
(i) During the Term, Employee shall at all
times devote full-time attention,
energies, efforts and skills to
Employer's business and shall not,
directly or indirectly, engage in any
other business activity, whether or not
for profit, gain or other pecuniary
advantages, without the written consent
of the Chief Executive Officer or Chief
Operating Officer, provided that such
prior consent shall not be required with
respect to (1) business interests that
neither compete with Employer or any
Subsidiaries nor interfere with
Employee's duties and obligations
hereunder, and (2) Employee's charitable,
eleemosynary, philanthropic or
professional association activities.
(ii) During the Term, Employee shall not,
without the prior written consent of the
Chief Executive Officer or Chief
Operating Officer, directly or
indirectly, either as an officer,
director, employee, agent, advisor,
consultant, principal, stockholder,
partner, owner or in any other capacity,
on Employee's own behalf or otherwise, in
any way engage in, represent, be
connected with or have a financial
interest in, any business which is, or to
Employee's knowledge, is about to become,
engaged in the business of providing
engineering, management, energy or
environmental services to the United
States Government or any department,
agency, or instrumentality thereof or any
state or local govern-mental agency or to
any person, corporation or other entity
(collectively a Person") with which
Employer or any Subsidiary is currently
or has previously done business or any
subsequent line of business developed by
Employee or any Subsidiary during the
Term. Notwithstanding the foregoing,
Employee shall be permitted to own
passive investments in publicly held
companies provided that such investments
do not exceed five percent of any such
company's outstanding equity.
(b) Confidential Information
During the Term and for the first 24
consecutive months after the termination of
the Term, Employee shall not disclose or use,
directly or indirectly, any Confidential
Information (as defined below). For the
purposes of this Agreement, Confidential
Information shall mean all information
disclosed to Employee, or known by Emplyee as
a consequence of or through employment with
Employer or any Subsidiary, where such
information is not generally known in the
trade or industry or was regarded or treated
as confidential by Employer or any Subsidiary,
and where such information refers or relates
in any manner whatsoever to the business
activities, processes, services or products of
Employer or its Subsidiaries. Confidential
Information shall include business and
development plans (whether contemplated,
initiated or completed), information with
respect to the development of technical and
management services, business contacts,
methods of operation, results of analysis,
business forecasts, financial data, costs,
revenues, and similar information. Upon
termination of Term, Employee shall
immediately return to Employer all of property
of Employer or any Subsidiary and Confidential
Information which is in tangible form, and all
copies thereof.
(c) Business Opportunities
(i) During the Term, Employee shall promptly
disclose to Employer each business
opportunity of a type which, based upon
its prospects and relationship to the
existing businesses of Employer or any
Subsidiary, Employer or any Subsidiary
might reasonably consider pursuing. Upon
termination of the Term, regardless of
the circum-stances thereof, Employer
shall have the exclusive right to
participate in or undertake any such
opportunity on its own behalf without any
involvement of Employee.
(ii) During the Term, Employee shall refrain
from engaging in any activity, practice
or act which conflicts with, or has the
potential to conflict with, the interests
of Employer or its Subsidiaries, and
shall avoid any acts or omissions which
are disloyal to, or competitive with
Employer or its Subsidiaries.
(d) Non-Solicitation of Employees
During the Term and for the first 24
consecutive months after termination of the
Term, Employee shall not, except in the course
of duties hereunder, directly or indirectly,
induce or attempt to induce or otherwise
counsel, advise, ask or encourage any person
to leave the employ of Employer or any
Subsidiary, or solicit or offer employment to
any person who was employed by Employer or any
Subsidiary at any time during the twelve-month
period preceding the solicitation or offer.
(e) Covenant Not To Compete
(i) If Employee voluntarily terminates the
Term, or if Employer terminates the Term
for Cause (as defined below), Employee
shall not, during the first 24
consecutive months following such
termina-tion, engage in competition with
Employer or any Subsidiary, or solicit,
from any person or entity who purchased
any then existing product or service from
Employer or any Subsidiary during
employment hereunder, the purchase of any
then existing product or service in
competition with then existing products
or services of Employer or any
Subsidiary.
(ii) For purposes of this Agreement, Employee
shall be deemed to engage in competition
with Employer if Employee shall directly
or indirectly, either individually or as
a stockholder, director, officer,
partner, consultant, owner, employee,
agent, or in any other capacity, consult
with or otherwise assist any person or
entity engaged in providing technical and
management services to any person or
entity which Employer or any Subsidiary,
during the Term, has developed or is
working to develop. Notwithstanding
anything herein to the contrary, if
Employer is in material breach of this
Agreement, the provisions of this
Section 6 shall not apply.
(f) Employee Acknowledgment
Employee hereby agrees and acknowledges that
the restrictions imposed upon by the
provisions of this Section 6 are fair and
reasonable considering the nature of
Employer's business, and are reasonably
required for Employer's protection.
(g) Invalidity
If a court of competent jurisdiction or an
arbitrator shall declare any provision or
restriction contained in this Section 6 as
unenforceable or void, the provisions of this
Section 6 shall remain in full force and
effect to the extent not so declared to be
unenforceable or void, and the court may
modify the invalid provision to make it
enforceable to the maximum extent permitted by
law.
(h) Specific Performance
Employee agrees that if Employee breaches any
of the provisions of this Section 6, the
remedies available at law to Employer would be
inadequate and in lieu thereof, or in addition
thereto, Employer shall be entitled to
appropriate equitable remedies, including
specific performance and injunctive relief.
Employee agrees not to enter into any
agreement, either written or oral, which may
conflict with this Agreement, and Employee
authorizes Employer to make known the terms of
Sections 6 and 7 hereof to any Person,
including future employers of Employee.
7. Termination
(a) By Employer
(i) Termination for Cause
Employer may for Cause (as defined below)
terminate the Term at any time by written
notice to Employee. For purposes of this
Agreement, the term Cause shall mean
any one or more of the following: (1)
conduct by Employee which is materially
illegal or fraudulent or a material
breach of Company policy; (2) the breach
or violation by Employee of any of the
material provisions of this Agreement,
provided that Employee must first be
given notice by the Board of the alleged
breach or violation and 30 days to cure
said alleged breach or violation; (3)
Employee's use of illegal drugs or abuse
of alcohol or authorized drugs which
impairs Employee's ability to perform
duties hereunder, provided that Employee
must be given notice by the Board of such
impairment and 60 days to cure the
impairment; (4) Employee's knowing and
willful neglect of duties or negligence
in the performance of duties which
materially affects Employer's or any
Subsidiary's business, provided that
Employee must first be given notice by
the Board of such alleged neglect or
negligence and 30 days to cure said
alleged neglect or negligence. If a
termination occurs pursuant to clause (1)
above, the date on which the Term is
terminated (the "Termination Date") shall
be the date Employee receives notice of
termination and, if a termination occurs
pursuant to clauses (2), (3) or (4)
above, the Termination Date shall be the
date on which the specified cure period
expires. In any event, as of the
Termination Date (in the absence of
satisfying the alleged breach or
violation within the applicable cure
period), Employee shall be relieved of
all duties hereunder and Employee shall
not be entitled to the accrual or
provision of any compensation or benefit,
after the Termination Date but Employee
shall be entitled to the provision of all
compensation and other benefits that
shall have accrued as of the Termination
Date, including Base Salary, Performance
Bonuses, paid leave benefits, Deferred
Compensation Units, Deferred Supplemental
Compensation to the extent permitted by
the plans, and reimbursement of incurred
business expenses.
(ii) Termination Without Cause
Employer may, in its sole discretion,
without Cause, terminate the Term at any
time by providing Employee with (a) 60
days prior notice thereof and (b) on or
prior to the Termination Date, a lump sum
severance compensation payment equal to
the total amount of Employee's Base
Salary payable for one (1) year
hereunder, based upon the amount in
effect as of the effective Termination
Date. If Employee has less than five
years of service with the Employer as of
the Termination Date, the lump sum
severance compensation payment shall
equal 6 months pay rather than one year
of pay. Employee shall not be entitled
to the accrual or provision of any other
compensation or benefit after the
Termination Date other than (a) the
medical and hospitalization benefits
after the Termination Date, in accordance
with COBRA or other Company policy if
covered by a Company-sponsored plan, (b)
the provision of all compensation and
other benefits that shall have accrued as
of the Termination Date, including Base
Salary, Performance Bonus, paid leave
benefits, Deferred Compensation Units,
Deferred Supple-mental Compensation and
reimbursements of incurred expenses; and
(c) all stock options or similar rights
to acquire capital stock granted by
Employer to Employee shall automatically
become vested and exercisable in whole or
in part.
(b) Death or Disability
The Term shall be terminated immediately and
automatically upon Employee's death or
Disability. The term Disability shall mean
Employee's inability to perform all of the
essential functions of Employee's position
hereunder for a period of 26 consecutive weeks
or for an aggregate of 150 work days during
any 12-month period by reason of illness,
accident or any other physical or mental
incapacity, as may be permitted by applicable
law. Employee's capability to continue
performance of Employee's duties hereunder
shall be determined by a panel composed of two
independent medical doctors appointed by the
Board and one appointed by the Employee or
designated representative. If the panel is
unable to reach a decision the matter will be
referred to arbitration in accordance with
Section 8. In the event of Employee's death or
Disability for any period of six consecutive
months, Employee (or designated beneficiary)
will be paid Base Salary then in effect for
one full year following the date of death or
disability (6 months pay rather than one year
of pay if Employee has less than five years of
service with Employer as of the final day
worked).
(c) By Employee
(i) Employee may, in Employee's sole
discretion, without cause, terminate the
Term at any time upon 60 days written
notice to Employer. If Employee exercises
such termination right, Employer may, at
its option, at any time after receiving
such notice from Employee, relieve
Employee of all duties and terminate the
Term at any time prior to the expiration
of said notice period. If the Term is
terminated by Employee or Employer
pursuant to this Section 7(c)(i),
Employee shall not be entitled to any
further Base Salary or the accrual or
provision of any compensation or benefits
after the Termination Date, except
medical and hospitalization benefits to
the extent permitted by COBRA or other
Company policy.
(ii) If, during the Term, a Change of Control
(as defined below) occurs, Employee may,
in Employee's sole discretion, terminate
the Term upon 30 days notice of
Employer. If Employee exercises such
termination right, Employer may, at its
option, at any time after receiving such
notice from Employee, relieve Employee of
all duties hereunder and terminate the
Term at any time prior to the expiration
of said notice period. If this Agreement
is terminated by Employee or Employer
pursuant to this Section 7(c)(ii),
Employee shall be entitled:
(a) to receive on or prior to the
Termination Date a lump sum
severance compensation payment equal
to two (2) times the total amount of
Employee's Base Salary payable
hereunder, based on the amount in
effect as of the Termination Date.
If Employee has less than five years
of service with the Employer as of
the date of Employee's notice to
Employer, the lump sum severance
compensation payment shall be equal
to one (1) times the total amount of
the Employee's Base Salary rather
than two (2) times the total amount;
(b) the medical and hospitalization
benefits and all compensation and
other benefits that shall have
accrued as of the Termination Date,
as described in Section 7(a)(ii)(1);
and
(c) to the automatic vesting and
exercisability in whole or in part
of all stock options or similar
rights to acquire capital stock
granted by Employer to Employee;
provided that Employee shall not be
entitled, after the Termination Date
to the accrual or provision of any
other compensation payable
hereunder, including the Performance
Bonus, but shall be permitted to
continue medical and hospitalization
benefits to the extent permitted by
COBRA or other Company policy.
(d) Change of Control
For purposes of this Section 7, a Change of
Control shall be deemed to have occurred upon
the happening of any of the following events:
(i) any person, including a group, as
such terms as defined in Sections 13(d)
and 14(d) of the Securities Exchange Act
of 1934, as amended, and the rules
promulgated thereunder (collectively the
Exchange Act"), other than a trustee or
other fiduciary holding voting securities
of Employer ("Voting Securities") under
any Employer-sponsored benefit plan,
becomes the beneficial owner, as defined
under the Exchange Act, directly or
indirectly, whether by purchase or
acquisition or agreement to act in
concert or otherwise, of 30% or more of
the outstanding Voting Securities;
(ii) a cash tender or exchange offer is
completed for such amount of Voting
Securities which, together with the
Voting Securities then beneficially
owned, directly or indirectly, by the
offeror (and affiliates thereof)
constitutes 40% or more of the
outstanding Voting Securities;
(iii) except in the case of a merger or
consolidation in which (a) Employer is
the surviving corporation and (b) the
holders of Voting Securities immediately
prior to such merger or consolidation
beneficially own, directly or indirectly,
more than 50% of the outstanding Voting
Securities immediately after such merger
or consolidation (there being excluded
from the number of Voting Securities held
by such holders, but not from the
outstanding Voting Securities, any Voting
Securities received by affiliates of the
other constituent corporation(s) in the
merger or consolidation in ex-change for
stock of such other corporation),
Employer's share-holders approve an
agreement to merge, consolidate,
liquidate, or sell all or substantially
all of Employer's assets; or
(iv) two or more directors are elected to the
Board without having previously been
nominated and approved by the members of
the Board incumbent on the day
immediately preceding such election. For
purposes of this Section 7, affiliate
of a person or another entity shall mean
a person or other entity that directly or
indirectly controls, is controlled by, or
is under common control with the person
or other entity specified.
(e) No Duty to Mitigate
If Employee is entitled to the compensation
and other benefits provided under Sections
7(a)(ii) or (c)(ii), Employee shall have no
obligation to seek employment to mitigate
damages hereunder.
(f) Other Policies
This Agreement supersedes and replaces
applicable provisions of General Policy
Memorandum (GPM) No. 31 and GPM 31-1
concerning Executive Severance Program for
Corporate Officers.
8. Arbitration. Whenever a dispute arises between the
parties concerning this Agreement or any of the
obligations hereunder, or Employee's employment
generally, Employer and Employee shall use their
best efforts to resolve the dispute by mutual
agreement. If any dispute cannot be resolved by
Employer and Employee, it shall be submitted to
arbitration to the exclusion of all other avenues
of relief and adjudicated pursuant to the American
Arbitration Association's Rules for Employment
Dispute Resolution then in effect. The decision of
the arbitrator must be in writing and shall be
final and binding on the parties, and judgment may
be entered on the arbitrator's award in any court
having jurisdiction thereof. The arbitrator s
authority in granting relief to Employee shall be
limited to an award of compensation, benefits and
unreimbursed expenses as described in Sections 3,
4, and 5 above, and to the release of Employee from
the provisions of Section 6 and the arbitrator
shall have no authority to award other types of
damages or relief to Employee, including
consequential or punitive damages. The arbitrator
shall also have no authority to award consequential
or punitive damages to Employer for violations of
this Agreement by Employee. The expenses of the
arbitration shall be borne by the losing party to
the arbitration and the prevailing party shall be
entitled to recover from the losing party all of
its own costs and attorneys fees with respect to
the arbitration. Nothing in this Section 8 shall be
construed to derogate Employer's rights to seek
legal and equitable relief in a court of competent
jurisdiction as contemplated by Section 6(h).
9. Non-Waiver. It is understood and agreed that one
party's failure at any time to require the
performance by the other party of any of the terms,
provisions, covenants or conditions hereof shall in
no way affect the first party's right thereafter to
enforce the same, nor shall the waiver by either
party of the breach of any term, provision,
covenant or condition hereof be taken or held to be
a waiver of any succeeding breach.
10. Severability. If any provision of this Agreement
conflicts with the law under which this Agreement
is to be construed, or if any such provision is
held invalid or unenforceable by a court of
competent jurisdiction or any arbitrator, such
provision shall be deleted from this Agreement and
the Agreement shall be construed to give full
effect to the remaining provision thereof.
11. Survivability. Unless otherwise provided herein,
upon termination of the Term, the provisions of
Sections 6(b), (d) and (e) shall nevertheless
remain in full force and effect.
12. Governing Law. This Agreement shall be
interpreted, construed and governed according to
the laws of the Commonwealth of Virginia, without
regard to the conflict of law provisions thereof.
13. Construction. The paragraph headings and captions
contained in this Agreement are for convenience
only and shall not be construed to define, limit or
affect the scope or meaning of the provisions
hereof. All references herein to Sections shall be
deemed to refer to Sections of this Agreement.
14. Entire Agreement. This Agreement contains and
represents the entire agreement of Employer and
Employee and supersedes all prior agreements,
representations or understandings, oral or written,
express or implied with respect to the subject
matter hereof. This Agreement may not be modified
or amended in any way unless in a writing signed by
each of Employer and Employee. No representation,
promise or inducement has been made by either
Employer or Employee that is not embodied in this
Agreement, and neither Employer nor Employee shall
be bound by or liable for any alleged
representation, promise or inducement not
specifically set forth herein.
15. Assignability. Neither this Agreement nor any
rights or obligations of Employer or Employee
hereunder may be assigned by Employer or Employee
without the other party's prior written consent.
Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of Employer
and Employee and their heirs, successors and
assigns.
16. Notices. All notices required or permitted
hereunder shall be in writing and shall be deemed
properly given if delivered personally or sent by
certified or registered mail, postage prepaid,
return receipt requested, or sent by telegram,
telelex, telecopy or similar form of
telecommunication, and shall be deemed to have been
given when received. Any such notice or
communication shall be addressed: (a) if to
Employer, to President, 2550 Huntington Avenue,
Alexandria, Virginia 22303-1499 or (b) if to
Employee, to the last known home address on file
with Employer, or to such other address as Employer
or Employee shall have furnished to the other in
writing.
IN WITNESS WHEREOF, the parties hereto have duly executed
this Agreement, to be effective as of the day and year first
above written.
VSE CORPORATION
a Delaware corporation
Date: December 10, 1997 By: /s/ R. B. McFarland
______________________
R. B. McFarland
President and
Chief Operating Officer
Date: December 10, 1997 /s/ J. M. Knowlton
_______________________
J. M. Knowlton
Employee
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