SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
[ X ] Annual Report Pursuant to Section 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 27, 2003
OR
[ ] Transition Report Pursuant to Section 15(d) of the Securities
Exchange Act of 1934
A. Full title of the plan and the address of the plan, if different from that
of the issuer named below:
VSE CORPORATION
EMPLOYEE ESOP/401(k) PLAN
B. Name of issuer of the securities held pursuant to the plan and the address
of its principal executive office:
VSE Corporation
2550 Huntington Avenue
Alexandria, Virginia 22303
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
trustees have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VSE CORPORATION
EMPLOYEE ESOP/401(k)
PLAN
By:
---------------
C. S. Weber
Executive Vice President and
Chief Administrative Officer
VSE Corporation Employee ESOP/401(k) Plan
Financial Statements and Supplemental Schedule
Year ended December 27, 2003 with Report of Independent Registered Public
Accounting Firm
VSE Corporation Employee ESOP/401(k) Plan
Financial Statements and Supplemental Schedule
Year ended December 27, 2003
Contents
Report of Independent Registered Public Accounting Firm . . . . . . . . 1
Audited Financial Statements
Statements of Net Assets Available for Benefits. . . . . . . . . . . . . 2
Statement of Changes in Net Assets Available for Benefits. . . . . . . . 3
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . 4
Supplemental Schedule
Schedule H, Line 4i Schedule of Assets (Held At End of Year) . . . . . . 12
Report of Independent Registered Public Accounting Firm
Board of Trustees
VSE Corporation Employee ESOP/401(k) Plan
We have audited the accompanying statements of net assets available for
benefits of VSE Corporation Employee ESOP/401(k) Plan (the "Plan") as of
December 27, 2003 and 2002, and the related statement of changes in net assets
available for benefits for the year ended December 27, 2003. These financial
statements are the responsibility of the Plan's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 net assets available for benefits of the Plan at
December 27, 2003 and 2002, and the changes in its net assets available for
benefits for the year ended December 27, 2003, in conformity with U.S.
generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the
financial statements taken as a whole. The accompanying supplemental schedule
of assets (held at end of year) as of December 27, 2003, is presented for
purposes of additional analysis and is not a required part of the financial
statements but is supplementary information required by the Department of
Labor's Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974. This supplemental schedule is the
responsibility of the Plan's management. The supplemental schedule has been
subjected to the auditing procedures applied in our audits of the financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the financial statements taken as a whole.
/s/ Ernst & Young LLP
McLean, Virginia
June 14, 2004
1
VSE Corporation Employee ESOP/401(k) Plan
Statements of Net Assets Available for Benefits
December 27,
2003 2002
-------------------------
Assets
Cash, principally in interest-bearing accounts $ 278,053 $ 220,640
Assets held for investment purposes:
Investments at fair value 18,287,374 14,977,068
Participant loans 181,170 147,886
Cash surrender value of life insurance policies - 1,854
----------- -----------
Total assets held for investment purposes 18,468,544 15,126,808
Receivables 195 2,165
----------- -----------
Net assets available for benefits $18,746,792 $15,349,613
=========== ===========
See accompanying notes.
2
VSE Corporation Employee ESOP/401(k) Plan
Statement of Changes in Net Assets Available for Benefits
Year ended December 27, 2003
Additions
Contributions:
Employee $ 1,600,780
Employer 417,453
Employee rollovers 20,193
Interest and dividends 351,642
Net realized/unrealized appreciation in
fair value of investments 2,738,822
-----------
Total additions 5,128,890
-----------
Deductions
Distributions to participants 1,729,936
Decrease in cash surrender value of life
insurance policies 1,775
-----------
Total deductions 1,731,711
-----------
Net increase 3,397,179
Net assets available for benefits at:
Beginning of period 15,349,613
-----------
End of period $18,746,792
===========
See accompanying notes.
3
VSE Corporation Employee ESOP/401(k) Plan
Notes to Financial Statements
December 27, 2003
1. Description of the Plan
General Description
The VSE Corporation Employee ESOP/401(k) Plan (the Plan) was adopted by the
Board of Directors of VSE Corporation (the Company or Plan Sponsor) in 1984.
The Plan is a defined contribution plan with an Employee Stock Ownership Plan
(ESOP) component covering all full-time and part-time employees of the Company
and a 401(k) component covering all full-time and part-time employees of the
Company and its wholly owned subsidiaries. The Plan is subject to the
applicable provisions of the Employee Retirement Income Security Act of 1974
(ERISA), as amended. The above description of the Plan provides only general
information. Participants should refer to Plan documents for a more complete
description of Plan provisions.
Plan Administration
Certain officers or employees of the Company serve as Trustees of the Plan
(Plan Trustees). Effective November 1, 2003, the VSE Corporation Employee
ESOP/401(k) Plan changed the 401(k) Plan administrator and record keeper
from Putnam Investments to Merrill Lynch. Merrill Lynch serves as third party
plan administrator. Merrill Lynch provides an open architecture of fund
investments and provides daily record-keeping services for the Plan. The ESOP
portion of the Plan is administered in-house by the Company.
Eligibility
An eligible employee, as defined in the Plan document, becomes eligible to
participate in the Plan on the first day of the month following the date of
hire. If the eligible employee's first day of employment falls on the first
calendar day of the month (or on the first regular working day of the month),
the eligible employee will immediately be eligible to participate in the Plan.
4
VSE Corporation Employee ESOP/401(k) Plan
Notes to Financial Statements (continued)
1. Description of the Plan (continued)
Contributions
Each participant who has had VSE Corporation Common Stock (par value $.05 per
share) (VSE Stock) allocated to his or her participant Payroll-Based Stock
Ownership Plan (PAYSOP) or ESOP account is entitled to exercise voting rights
attributable to such VSE Stock and is provided with proxy soliciting material
by the Plan Administrator prior to the time that such rights are to be
exercised. If participants fail to exercise their VSE Stock voting rights, the
Plan Trustees vote the stock. The Plan Trustees also vote all of the VSE Stock
held by the Plan's VSE Stock Fund as well as all unallocated VSE Stock held by
the Plan. No contributions have been made to the PAYSOP since 1986, and no
contributions have been made to the ESOP since March 31, 1999.
The Company currently contributes 50 cents for each dollar of salary that a
company employee participant defers on the first 6% of salary. The Company's
matching contribution is discretionary. The Company makes a cash contribution
for the match, and the cash contribution is allocated to each eligible
participant's account on a pay period (semimonthly) basis.
ESOP and Company matching 401(k) contributions (but not PAYSOP allocations)
are subject to a graded vesting schedule. The vesting schedule is 25% after
one year of service, 50% after two years of service, and 100% after three
years of service. To earn a "year of service," a participant must work 1,000
hours or more in a calendar year. Forfeitures of participant nonvested account
balances are first available to reinstate previously forfeited account
balances of former participants, if applicable, and then applied to reduce the
Company's contribution in the following year. Total forfeitures applied as a
reduction of the Company's contribution for 2003 and 2002 were $34,488 and
$64,022, respectively, and unused forfeitures at December 27, 2003 and 2002,
were approximately $5,398 and $16,800, respectively.
Participants are allowed to elect to defer up to 100% of their salary into the
Plan each pay period pursuant to Section 401(k) of the Internal Revenue Code
(IRC), subject to the maximum salary deferral limit for 2003 and 2002 of
$12,000 and $11,000, respectively. The deferral amounts are also subject to
limitations based on Plan provisions and participation deferral percentages.
Participant contributions are invested at the discretion of the participant in
any of 30 separately managed funds currently offered under the Plan. Dividends
received on VSE Stock held in participant accounts and nonparticipant directed
investments are allocated pro rata to such
5
VSE Corporation Employee ESOP/401(k) Plan
Notes to Financial Statements (continued)
participant and nonparticipant accounts. Beginning in 2002, the Plan allowed
the voluntary catch-up contribution.
Distributions
Participants (or their beneficiaries) are eligible to receive Plan benefits on
retirement, disability, termination of employment, or death. Benefits are
usually distributed in a lump sum. Distributions of Merrill Lynch funds are
typically made in cash from liquidation of the participant's account.
Distributions of VSE Stock are typically made in shares of VSE Stock.
Fractional shares of VSE Stock and distributions fewer than 100 shares are
paid in cash.
Participants may also apply, in certain limited situations, to withdraw funds
from their 401(k) accounts due to a qualifying financial hardship in
accordance with IRS regulations.
Ownership Rights (Vesting)
Participants are 100% vested in their 401(k) salary deferral contributions
and any PAYSOP contributions. All contributions to the ESOP, which began in
1987, and the Company 401(k) match, which began in 1999, are subject to a
graded vesting schedule as described in the "Contributions" subsection above.
Plan Termination
In the event of Plan termination, each participant will be fully vested in
amounts held within the Plan for the participant's benefit. The Company
expects to continue the Plan indefinitely, but reserves the right to change,
modify, or discontinue it in whole or in part at any time, subject to the
provisions of ERISA. No such action will divest a participant of the vested
rights and benefits provided by contributions allocated to the participant's
account.
6
VSE Corporation Employee ESOP/401(k) Plan
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies
Basis of Accounting
The accompanying financial statements are prepared on the accrual basis of
accounting.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles, requires management to make estimates that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Administrative Expenses
The administrative expenses of the Plan for the Plan year ended December 27,
2003, were paid by the Company.
3. Investments
Investments
Merrill Lynch offers 12 Core Investment Options and 13 Mutual Fund Window
Investment Options. In addition, 5 Goal Manager Portfolio Models are offered
through the Plan. Each Goal Model portfolio model is composed of investment
options determined by a participant's investment style and risk level.
Investment of a participant's 401(k) account is directed by the participant
among options available under the Plan as described in the "Contributions"
subsection above. Investments in mutual funds and common/collective trusts are
valued at quoted market prices. Participant loans are valued at their unpaid
balance. Purchases and sales of securities are recorded on a trade-date
basis. Interest income is recorded on an accrual basis. Dividends are recorded
on the ex-dividend date. VSE Stock is purchased in the over-the-counter market
or from stockholders. Dividends on VSE Stock are reinvested quarterly at fair
market value.
Life insurance offered under the Plan builds cash value as determined by the
insurance carrier. In accordance with Federal regulations, no more than 25% of
a participant's contributions for the Plan year may be invested in life
insurance. Life insurance is no longer offered by the Plan.
7
VSE Corporation Employee ESOP/401(k) Plan
Notes to Financial Statements (continued)
3. Investments (continued)
Investments (continued)
The fair value of individual investments that represent 5% or more of the
Plan's net assets available for benefits are as follows:
December 27
2003 2002
-----------------------
VSE Stock $4,152,449 $3,697,176
MFS Massachusetts Investors GR Stk (A) 2,999,797 -
American Funds Washington Mutual Investors
Fund 1,866,208 -
MFS Total Return Fund 1,655,799 -
Templeton Foreign Fund 1,311,034 -
Putnam Voyager Fund - 2,641,672
The Putnam Fund for Growth and Income - 1,406,591
The George Putnam Fund of Boston - 1,349,160
Putnam Global Equity Fund - 851,236
The Plan's investment in VSE Stock at December 27, 2003 and 2002, is presented
in the following table:
Number of shares 317,223 352,112
Cost $1,510,438 $1,904,991
Market $4,152,449 $3,697,176
Nonparticipant-Directed Investments
Nonparticipant-directed investments, held in the Plan as of December 27, 2003
and 2002, consisted entirely of VSE Stock. These net assets, and changes are
as follows:
Net assets 2003 2002
--------------------------------------------------------------------------
VSE Stock $4,152,449 $3,697,176
8
VSE Corporation Employee ESOP/401(k) Plan
Notes to Financial Statements (continued)
3. Investments (continued)
Nonparticipant-Directed Investments (continued)
Year ended
December 27
2003
------------
Changes in net assets:
Net realized and unrealized gain on VSE Stock $ 795,712
Dividends 54,114
Distributions to participants (394,553)
----------
$ 455,273
==========
During 2003, the Plan's investments (including gains and losses on investments
bought and sold, as well as investments held during the year) appreciated in
value as a result of net changes in the market values of the investments held
(principally stock mutual funds) by $2,738,822 as follows:
Mutual funds $1,943,110
VSE Stock 795,712
----------
$2,738,822
==========
4. Differences Between Financial Statements and Form 5500
In accordance with U.S. generally accepted accounting principles, amounts
allocated to withdrawing participants' accounts are not reported as
liabilities on the Statements of Net Assets Available for Benefits. The
following is a reconciliation of net assets available for benefits per the
financial statements to IRS Form 5500 (Annual Return/Report of Employee
Benefit Plan):
December 27
2003 2002
------------------------
Net assets available for benefits per the
financial statements $18,746,792 $15,349,613
Amounts allocated to withdrawing participants (361) (643)
----------- -----------
Net assets available for benefits per Form 5500 $18,746,431 $15,348,970
=========== ===========
9
VSE Corporation Employee ESOP/401(k) Plan
Notes to Financial Statements (continued)
4. Differences Between Financial Statements and Form 5500 (continued)
The following is a reconciliation of benefits paid to participants per the
financial statements to IRS Form 5500:
Benefits paid to participants per the financial statements $ 1,729,936
Add amounts allocated to withdrawing participants at
December 27, 2003 361
Less amounts allocated to withdrawing participants at
December 27, 2002 (643)
-----------
Benefits paid to participants per Form 5500 $ 1,729,654
===========
5. Participant Loans
Participants may be granted loans from this plan not to exceed the lesser of
$50,000 or 50% of the participant's vested account balance. The minimum loan
amount is $1,000. Participant loans bear interest at the prime rate of
interest plus 1% determined at the time the loan is requested. Loans are
secured by the participant's account, having a maximum term of five years.
Loan payments are made through payroll on a pay period basis.
6. Party-in-interest Transactions
Effective November 1, 2003, the VSE Corporation Employee ESOP/401(k) Plan
changed the 401(k) Plan administrator and record keeper from Putnam
Investments to Merrill Lynch. Merrill Lynch serves as third party plan
administrator as defined by the Plan; therefore, these transactions qualify
as party-in-interest transactions. There were no sales commissions on the
purchase or sale of Putnam mutual funds.
7. Income Tax Status
The Plan has received a determination letter from the Internal Revenue Service
dated April 25, 2003 stating that the Plan is qualified under Section 401(a)
of the IRC and, therefore, the related trust is exempt from taxation. Once
qualified, the Plan is required to operate in conformity with the IRC to
maintain its qualification. The Plan Sponsor believes that the Plan is being
operated in compliance with the applicable requirements of the IRC and,
therefore, believes that the Plan, as amended, is qualified and the related
trust is tax-exempt.
10
VSE Corporation Employee ESOP/401(k) Plan
Notes to Financial Statements (continued)
8. Employer Securities
Section 407(b) of ERISA permits the Plan to hold an investment in VSE Stock
in excess of 10% of the fair market value of the Plan's assets.
9. Diversification
Participants who are age 55 and have 10 years of participation in the Plan
are eligible to diversify up to 25% of the VSE Stock held in their PAYSOP and
ESOP accounts.
11
Supplemental Schedules
VSE Corporation Employee ESOP/401(k) Plan
Schedule H, Line 4i Schedule of Assets (Held At End of Year)
EIN: 54 0649263 Plan Number: 002
December 27, 2003
Description of
Identity of Issue Investment Cost Fair Value
-----------------------------------------------------------------------------------------------
MFS Massachusetts Investors Gr Stk (A) Mutual Fund shares *** $ 2,999,797
American Funds Washington Mutual Investors
Fund (R-3) Mutual Fund shares *** 1,866,208
MFS Total Return Fund Mutual Fund shares *** 1,655,799
Templeton Foreign Fund Mutual Fund shares *** 1,311,034
Alger MidCap Growth Institutional Portfolio Mutual Fund shares *** 771,120
Merrill Lynch Basic Value Fund, Inc. (A) Mutual Fund shares *** 752,369
PIMCO Total Return Fund (A) Mutual Fund shares *** 602,917
Merrill Lynch Healthcare Fund, Inc. (A) Mutual Fund shares *** 440,170
One Group Government Bond Fund (A) Mutual Fund shares *** 323,167
PIMCO Total Return Fund (A) GM Mutual Fund shares *** 55,199
One Group Government Bond Fund (A) GM Mutual Fund shares *** 47,207
Goldman Sachs Mid Cap Value (A) Mutual Fund shares *** 37,461
American Funds Washington Mutual Investors
Fund (R-3) GM Mutual Fund shares *** 35,219
Merrill Lynch Basic Value Fund, Inc. (A) GM Mutual Fund shares *** 32,858
Victory Diversified Stock Fund (A) Mutual Fund shares *** 27,947
Hotchkis & Wiley Small Cap Value Fund GM Mutual Fund shares *** 26,186
Pioneer High Yield Fund Class A Mutual Fund shares *** 22,524
Merrill Lynch Global Allocation Fund,
Inc. (A) Mutual Fund shares *** 17,474
Alger MidCap Growth Institutional Portfolio Mutual Fund shares *** 16,484
Fidelity Advisor Diversified International
Fund (T) Mutual Fund shares *** 14,302
Phoenix-Duff & Phelps Real Estate Securities
Fund (A) Mutual Fund shares *** 13,929
Ariel Fund Mutual Fund shares *** 11,957
Hotchkis & Wiley Small Cap Value Fund Mutual Fund shares *** 11,910
Eaton Vance Utilities (A) Mutual Fund shares *** 9,393
Merrill Lynch S&P 500 Index Fund (I) Mutual Fund shares *** 8,419
Seligman Communications & Information (A) Mutual Fund shares *** 3,462
State Street Research Global Resources
Fund (A) Mutual Fund shares *** 1,923
USB U.S. Small Cap Growth Fund (A) Mutual Fund shares *** 1,249
Franklin Mutual Financial Services Fund (A) Mutual Fund shares *** 224
ML Ret Preservation Trust Common/Collective Trust *** 3,016,867
Merrill Lynch Pending Settlement Fund Mutual Fund shares *** 150
VSE Stock * ** Common Stock shares $1,510,438 4,152,449
Participant Loans (interest rates varied
from 5% to 10.5% during 2003) Participant loans *** 181,170
-----------
Total assets held for investment purposes $18,468,544
===========
* Represents a party-in-interest (see Note 6)
** Represents nonparticipant-directed investments (VSE Stock)
*** Historical cost not required to be presented as investments are participant directed.
12