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 31, 2005
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: /s/ C. S. Weber
____________________________
C. S. Weber
Executive Vice President and
Chief Administrative Officer
VSE CORPORATION EMPLOYEE ESOP/401(K) PLAN
Financial Statements and Supplemental Schedules
Year ended December 31, 2005 with Report of Independent Registered Public
Accounting Firm
VSE Corporation Employee ESOP/401(k) Plan
Financial Statements and Supplemental Schedules
Year ended December 31, 2005
Contents
Report of Independent Registered Public Accounting Firm . . . . . . . . 3
Audited Financial Statements
Statements of Net Assets Available for Benefits . . . . . . . . . . . . 4
Statement of Changes in Net Assets Available for Benefits . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . 6
Supplemental Schedule
Schedule H, Line 4i-Schedule of Assets (Held At End of Year) . . . . . 15
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Report of Independent Registered 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 as of December 31, 2005 and
December 27, 2004, and the related statement of changes in net assets available
for benefits for the period ended December 31, 2005. 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 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. We were not engaged to
perform an audit of the Plan's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Plan's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
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 31, 2005 and December 27, 2004, and the changes in its net assets
available for benefits for the period ended December 31, 2005, 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 31, 2005, 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 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 16, 2006
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VSE Corporation Employee ESOP/401(k) Plan
Statements of Net Assets Available for Benefits
December 31, December 27,
2005 2004
------------ ------------
Assets
Cash $ 216,572 $ 233,358
Assets held for investment purposes:
Investments at fair value 29,797,844 23,145,925
Participant loans 176,355 192,093
----------- -----------
Total assets held for investment purposes 29,974,199 23,338,018
Receivables 14,327 -
Net assets available for benefits $30,205,098 $23,571,376
=========== ===========
See accompanying notes.
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VSE Corporation Employee ESOP/401(k) Plan
Statement of Changes in Net Assets Available for Benefits
Period from December 28, 2004 through December 31, 2005
Additions
Contributions:
Employee $ 2,324,864
Employer 584,115
Employee rollovers 228,801
Interest and dividends 988,580
Net realized/unrealized appreciation in fair value of investments 5,295,221
-----------
Total additions 9,421,581
-----------
Deductions
Distributions to participants 2,748,690
Other deductions 39,169
-----------
Total deductions 2,787,859
-----------
Net increase 6,633,722
Net assets available for benefits at
Beginning of period 23,571,376
-----------
End of period $30,205,098
===========
See accompanying notes.
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VSE Corporation Employee ESOP/401(k) Plan
Notes to Financial Statements
December 31, 2005
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.
On April 27, 2005, the Plan was amended to change the definition of the "Plan
Year". Effective December 28, 2005, "Plan Year" means the Plan's accounting
year of twelve months commencing on January 1 of each year and ending on the
following December 31. Prior to December 28, 2005, the Plan Year commenced
December 28 of each year and ended the following December 27. As a result, the
Statement of Changes in Net Assets Available for Benefits presented includes
activity for the period from December 28, 2004 through December 31, 2005.
Plan Administration
Certain officers or employees of the Company serve as Trustees of the Plan
(Plan Trustees). Merrill Lynch serves as the 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.
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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's matching contribution is discretionary. The Company currently
contributes 50 cents for each dollar of salary that a Company employee
participant contributes on the first 6% of salary. 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 (semi-monthly) basis.
ESOP and Company matching 401(k) contributions (but not PAYSOP allocations) are
subject to a graded vesting schedule. Effective December 28, 2001, the vesting
schedule changed to 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 applied to reduce the Company's
contribution in the following year. Total forfeitures applied as a reduction of
the Company's contribution for 2005 and 2004 were $54,233 and $100,576,
respectively, and unused forfeitures at December 31, 2005 and December 27, 2004,
were approximately $86,457 and $60,752, 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 2005 and 2004 of $14,000
and $13,000, 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 25
separately managed funds currently offered under the Plan by the Plan's
third-party administrator, Merrill Lynch.
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VSE Corporation Employee ESOP/401(k) Plan
Notes to Financial Statements (continued)
Dividends received on VSE Stock held in participant accounts and
nonparticipant directed investments are allocated pro rata to such participant
and nonparticipant accounts. In 2005 and 2004, the Plan allowed employees age
50 and older by the end of the Plan Year to contribute up to an additional
$4,000 and $3,000, respectively, pursuant to IRS "catch-up" regulations.
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.
Effective January 1, 2004, the Plan was amended to revise the Minimum Required
Distribution rules in the Plan. Generally, the Minimum Required Distribution
rules set forth procedures for required distributions to (i) terminated
employees who have attained age 70 1/2, but have not yet received a distribution
from the Plan, and (ii) certain business owners who have attained age 70 1/2.
The new rules liberalize the requirements and permit smaller required annual
distributions.
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
-8-
VSE Corporation Employee ESOP/401(k) Plan
Notes to Financial Statements (continued)
of the vested rights and benefits provided by contributions allocated to the
participant's account.
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 direct administrative expenses of the Plan for the Plan year ended
December 31, 2005 of approximately $26 thousand, were paid by the Company.
3. Investments
Investments
Merrill Lynch offers 12 Core Investment Options and 13 Mutual Fund Window
Investment Options. In addition, 10 Goal Manager Portfolio Models are offered
through the Plan. Each Goal Manager 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 at fair market value.
-9-
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 31 December 27
2005 2004
----------- -----------
VSE Stock $11,067,585 $ 6,639,522
ML Ret Preservation Trust 3,196,085 2,867,663
MFS Massachusetts Investors GR Stk (A) 2,864,302 3,008,528
American Funds Washington Mutual Investors Fund 2,093,906 2,123,757
Templeton Foreign Fund 1,836,681 1,711,845
MFS Total Return Fund 1,772,391 1,850,599
The Plan's investment in VSE Stock at December 31, 2005 and December 27, 2004,
is presented in the following table:
Number of shares 262,913 281,933
Cost $ 1,274,913 $1,348,573
Market $11,067,585 $6,639,552
Nonparticipant-Directed Investments
Nonparticipant-directed investments, held in the Plan as of December 31, 2005
and December 27, 2004, consisted entirely of VSE Stock. These net assets, and
changes are as follows:
Net assets 2005 2004
-------------------------------------------------------------------------------
VSE Stock $11,067,585 $6,639,522
-10-
VSE Corporation Employee ESOP/401(k) Plan
Notes to Financial Statements (continued)
3. Investments (continued)
Nonparticipant-Directed Investments (continued)
Year ended
December 31
2005
-----------
Changes in net assets:
Net realized and unrealized gain on VSE Stock $4,977,351
Dividends 60,241
Distributions to participants (609,528)
----------
$4,428,064
==========
During 2005, 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 and VSE Stock) by $5,295,221 as follows:
Mutual funds $ 317,870
VSE Stock 4,977,351
----------
$5,295,221
==========
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 31 December 27
2005 2004
--------------------------
Net assets available for benefits per the financial
statements $30,205,098 $23,571,376
Amounts allocated to withdrawing participants (411) (473)
----------- -----------
Net assets available for benefits per Form 5500 $30,204,687 $23,570,903
=========== ===========
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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 $2,748,690
Add amounts allocated to withdrawing participants at
December 31, 2005 411
Less amounts allocated to withdrawing participants at
December 27, 2004 (473)
----------
Benefits paid to participants per Form 5500 $2,748,628
==========
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
Merrill Lynch serves as third party plan administrator as defined by the Plan;
therefore, these transactions qualify as party-in-interest transactions.
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.
-12-
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.
-13-
Supplemental Schedules
-14-
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 31, 2005
Description of
Identity of Issue Investment Cost Fair Value
----------------- ---------- ---- ----------
MFS Massachusetts Investors Gr Stk (A) Mutual Fund shares *** $ 2,864,302
American Washington Mutual Investors (R-3) Mutual Fund shares *** 2,093,906
Templeton Foreign Fund Mutual Fund shares *** 1,836,681
MSF Total Return Fund Mutual Fund shares *** 1,772,391
Alger MidCap Growth Institutional Portfolio Mutual Fund shares *** 1,266,355
Merrill Lynch Basic Value Fund, Inc. (A) Mutual Fund shares *** 931,250
PIMCO Total Return Fund (A) Mutual Fund shares *** 928,807
Blackrock Global Rescs Prtf A Mutual Fund shares *** 737,288
JPMorgan Government Bond FD A Mutual Fund shares *** 722,688
Merrill Lynch Healthcare Fund, Inc. (A) Mutual Fund shares *** 647,761
Goldman Sachs Mid Cap Value (A) Mutual Fund shares *** 348,636
Hotchkis & Wiley Small Cap Value Fund Mutual Fund shares *** 345,795
Phoenix-Duff & Phelps Real Estate
Securities Fund (A) Mutual Fund shares *** 160,984
Merrill Lynch Global Allocation Fund, Inc. (A) Mutual Fund shares *** 140,608
Ariel Fund Mutual Fund shares *** 139,948
Merrill Lynch S&P 500 Index Fund (I) Mutual Fund shares *** 107,378
Eaton Vance Utilities (A) Mutual Fund shares *** 104,486
Victory Diversified Stock Fund (A) Mutual Fund shares *** 97,679
Thornburg Inter Value Fund (A) Mutual Fund shares *** 90,118
USB U.S. Small Cap Growth Fund (A) Mutual Fund shares *** 68,620
Franklin Mutual Financial Services Fund (A) Mutual Fund shares *** 64,917
Pioneer High Yield Fund Class A Mutual Fund shares *** 42,783
Seligman Communications & Information (A) Mutual Fund shares *** 20,401
Evergreen Sel Adj Rate Fund CL (A) Mutual Fund shares *** 392
ML Ret Preservation Trust Common/Collective Trust *** 3,196,085
VSE Stock * ** Common Stock shares $1,274,913 11,067,585
Participant Loans (interest rates varied from
5% to 10.5% during 2004) Participant loans 176,355
-----------
Total assets held for investment purposes $29,974,199
===========
* 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.
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