EXHIBIT 13.1
MANAGEMENT'S STATEMENT
The financial statements of Virco Mfg. Corporation were prepared by management,
which is responsible for the integrity and objectivity of the financial
information presented, including amounts that must necessarily be based on
judgments and estimates. The statements were prepared in conformity with
accounting principles generally accepted in the United States, and in situations
where acceptable alternative accounting principles exist, management selected
the method that it believed was most appropriate in the circumstances.
Virco depends upon the Company's system of internal controls in meeting its
responsibilities for reliable financial statements. This system is designed to
be cost-effective while providing reasonable assurance that assets are
safeguarded and transactions are properly recorded and executed in accordance
with management's authorization. Judgments are required to assess and balance
the relative cost and expected benefits of these controls.
The financial statements have been audited by the Company's independent
auditors, Ernst & Young LLP. The independent auditors provide an objective,
independent review as to management's discharge of its responsibilities insofar
as they relate to the fairness of reported operating results and financial
condition. They obtain and maintain an understanding of Virco's accounting and
financial controls, and conduct such tests and procedures as they deem necessary
to arrive at an opinion on the fairness of the financial statements.
The Audit Committee of the Board of Directors, which is composed of Directors
from outside the Company, maintains an ongoing appraisal of the effectiveness of
audits and the independence of the auditors. The Committee meets periodically
with the auditors and management. The independent auditors have free access to
the Committee, without management present, to discuss the results of their audit
work and their opinions on the adequacy of internal financial controls and the
quality of financial reporting.
Based on a review and discussions of the Company's 2003 audited consolidated
financial statements with management and discussions with the independent
auditors, the Audit Committee recommended to the Board of Directors that the
Company's 2003 audited consolidated financial statements be included in the
Company's annual report on Form 10-K. The Board of Directors concurred.
EXECUTIVE OVERVIEW
Management's strategy is to position Virco as the overall value supplier of
moveable furniture. The markets that Virco serves include the education market
(the Company's primary market), which includes public and private schools
(preschool through 12th grade), junior and community colleges, four-year
colleges and universities, and trade, technical and vocational schools;
convention centers and arenas; the hospitality industry, with respect to their
banquet and meeting facilities requirements; government facilities at the
federal, state, county and municipal levels; and places of worship. In addition,
the Company sells to wholesalers, distributors, retailers and catalog retailers
that serve these same markets. These institutions are frequently characterized
by extreme seasonality and/or a bid-based purchasing function. The Company's
business model, which is designed to support this strategy, includes the
development of several competencies to enable superior service to the markets in
which Virco competes. An important element of Virco's business model is the
Company's emphasis on developing and maintaining key manufacturing and
distribution capabilities. Finally, management continues to hone Virco's ability
to forecast, finance, manufacture, warehouse, deliver, and install furniture
within the relatively narrow delivery window associated with the highly seasonal
demand for education sales. In fiscal year 2003, over 50% of the Company's total
sales were delivered in June, July, August and September with an even higher
portion of educational sales delivered in that period. Virco's substantial
warehouse space allows the Company to build adequate inventories to service this
narrow delivery window for the education market.
The commercial furniture markets have suffered from the worst recorded recession
in recent history during the last three years. As a group, the members of BIFMA
(the Business and Institutional Furniture Manufacturer's Association) recorded a
3% decrease in shipments in calendar year 2003. This followed decreases of 19.1%
and 17.4% in 2002 and 2001, respectively. During the first two years of the
recession, Virco's core public school market was less affected by economic
conditions, and Virco incurred declines of 5.1% in 2002 and 10.4% in 2001.
During 2003, the core school markets suffered severe financial difficulties,
resulting in a sales decline of 21.5% compared to 2002. The causes of, and
effects on Virco of the general economic conditions are discussed below
under "Results of Operations (2003 vs. 2002)--Industry Overview".
In response to the recession and the resulting decrease in sales of Virco's
products, the Company has used a variety of tactics to reduce spending,
including its Assemble-to-Ship (ATS) operating model, which permits the Company
to hold reduced inventory levels, wage and hiring freezes, and reductions in its
workforce. These cost saving measures allowed the Company to finish the year
with cash flow from operations being only slightly negative, despite having
incurred a large operating loss for the year.
The Company does not anticipate that demand for furniture in the education
markets will change substantially in the coming year. It is our intent to
maintain our core workforce at current levels for the near future, supplemented
with temporary labor as considered necessary in order to produce, warehouse,
deliver, and install furniture during the coming summer. Because the Company has
not
closed any manufacturing or distribution facilities, any increase in demand for
our product can be met without any required investment in physical
infrastructure, resulting in favorable operating leverage.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements that reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed herein, in Item 1, and elsewhere in this report on
Form 10-K, that could cause actual results to differ materially from historical
results or those anticipated. Risks and uncertainties that could cause actual
results to vary materially from anticipated results, include without limitation,
material availability and cost of materials, especially steel, plastic, fuel and
energy; availability and cost of labor, demand for the Company's products, and
competitive conditions affecting selling prices and margins, capital costs and
general economic conditions. In this report, words such as "anticipates,"
"believes," "expects," "estimates, "projects," "future," "intends," "plans,"
"potential," "may," "could" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of Virco's financial condition and results of
operations is based upon the Company's financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires Virco
management to make estimates and judgments that affect the Company's reported
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, management evaluates such
estimates, including those related to revenue recognition, allowance for
doubtful accounts, valuation of inventory including LIFO and obsolescence
reserves, self-insured retention for products and general liability insurance,
self-insured retention for workers compensation insurance, provision for
warranty, liabilities under defined benefit and other compensation programs, and
estimates related to deferred tax assets and liabilities. Management bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. This forms the basis of
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Factors that could cause or
contribute to these differences include the factors discussed above under Item
1, Business, and elsewhere in this report on Form 10-K. Virco's critical
accounting policies are as follows:
Revenue Recognition: The Company recognizes revenue in accordance with Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition," as revised by SAB No.
104. Sales are recorded when title passes and collectability is reasonably
assured under its various shipping terms. In 2002 the Company purchased the
assets of Furniture Focus(TM), a company that sells complete Furniture, Fixture,
and Equipment (FF&E) packages to schools. For package orders, the Company
records revenue upon completion of the project. The Company reports sales as net
of sales returns and allowances.
Allowances for Doubtful Accounts: Considerable judgment is required when
assessing the ultimate realization of receivables, including assessing the
probability of collection, current economic trends, historical bad debts and the
current creditworthiness of each customer. The Company maintains allowances for
doubtful accounts that may result from the inability of our customers to make
required payments. Over the past five years, the Company's allowance for
doubtful accounts has approximately ranged from 0.7% to 1.4% of accounts
receivable at year-end. The allowance is evaluated using historic experience
combined with a detailed review of past due accounts. The Company does not
typically obtain collateral to secure credit risk. The primary reason that
Virco's allowance for doubtful accounts represents such a small percentage of
accounts receivable is that a large portion of the accounts receivable are
attributable to low-credit-risk governmental entities, giving Virco's
receivables a historically high degree of collectability. Although many states
are experiencing budgetary difficulties, it is not anticipated that Virco's
credit risk will be significantly impacted by these events. Over the next year,
no significant change is expected in the Company's sales to government entities
as a percentage of total revenues.
Inventory Valuation: Inventory is valued at the lower of cost or market. The
Company uses the LIFO (last-in, first-out) method of accounting for the material
component of inventory. The Company maintains allowances for estimated obsolete
inventory to reflect the difference between the cost of inventory and the
estimated market value. Valuation allowances are determined through a physical
inspection of the product in connection with a physical inventory, a review of
slow moving product, and consideration of active marketing programs. The market
for education furniture is traditionally driven by value, not style, and the
Company has not typically incurred significant obsolescence expense. If market
conditions are less favorable than those anticipated by management, additional
allowances may be required. Due to reductions in sales volume in the past year,
the manufacturing facilities are operating at reduced levels of capacity. The
Company records the cost of excess capacity as a period expense, not as a
component of capitalized inventory valuation.
Self-Insured Retention: For 2003, the Company was self-insured for product
liability losses up to $500,000 per occurrence, for workers compensation losses
up to $250,000 per occurrence, and for auto liability up to $50,000 per
occurrence. For 2002, the Company was self-insured for product liability losses
up to $250,000 per occurrence and was self-insured for workers compensation
losses up to $200,000 per occurrence. The Company obtains annual actuarial
valuations for the self-insured retentions. Product liability and auto reserves
for known and unknown (IBNR) losses are recorded at the net present value of the
estimated losses using a 6.0% discount rate. Given the relatively short term
over which the IBNR losses are discounted, the sensitivity to the discount rate
is not significant. Estimated workers compensation losses are funded during the
insurance year and subject to retroactive loss adjustments. The Company's
exposure to self-insured retentions varies depending upon the market conditions
in the insurance industry and the availability of cost effective insurance
coverage. It is anticipated that self-insured retentions for 2004 will be
comparable to the retention levels for 2003.
Warranty Reserve: The Company provides a product warranty on most products. It
generally warranties that customers can return a defective product during the
specified warranty period following purchase in exchange for a replacement
product or that the Company can repair the product at no charge to the customer.
The Company determines whether replacement or repair is appropriate in each
circumstance. The Company uses historic data to estimate appropriate levels of
warranty reserves. Because product mix, production methods, and raw material
sources change over time, historic data may not always provide precise estimates
for future warranty expense. Warranty expense for the last two years has been
higher than normal due to a recurring cosmetic complaint relating to a high
volume component.
Defined Benefit Obligations: The Company has three defined benefit plans, the
Virco Employees Retirement Plan, the Virco Important Performers (VIP) Plan and
the Non-Employee Directors Retirement Plan, which provide retirement benefits to
employees and outside directors. Virco discounts the pension obligations under
the Plans using a 6.5% discount rate, before a 5.0% assumed rate of increases in
compensation rates, and estimating a 6.5% return on plan assets. These rate
assumptions can vary due to changes in interest rates, the employment market,
and expected returns in the stock market. In prior years, the discount rate and
the anticipated rate of return on Plan assets have decreased by several
percentage points, causing pension expense and pension obligations to increase.
Although the Company does not anticipate any change in these rates in the coming
year, any moderate change should not have a significant effect on the Company's
financial position, results of operations or cash flows. Effective December 31,
2003, the Company froze new benefit accruals under all three Plans. The effect
of freezing future benefit accruals minimizes the impact of future raises in
compensation, but introduces a new assumption related to the Plan freeze. It is
the Company's intent to resume future benefit accruals when the profitability
and the financial condition of the Company allow, and the actuarial valuations
assume the Plans will be frozen for one year. If the assumption is modified to a
permanent freeze, the Company would be required to immediately recognize any
prior service cost / benefit. If the Company had assumed a permanent freeze,
pension expense for 2003 would decrease by approximately $125,000. The Company
obtains annual actuarial valuations for all three plans.
Deferred Tax Assets and Liabilities: The Company incurred a significant
operating loss in 2003. The Company recognized an income tax benefit for an
amount equal to the estimated available net operating loss carryback and has
recognized no benefit related to the net operating loss carryforwards. The
Company has net deferred tax assets of $7,701,000 at January 31, 2004, and has
established a valuation allowance of $7,701,000. At January 31, 2004, the
Company has net operating loss carryforwards for federal and state income tax
purposes, expiring at various dates through 2024 if not utilized. Federal net
operating losses that can potentially be carried forward total approximately
$9.2 million at January 31, 2004. The Company evaluates the adequacy of
valuation allowances against net deferred tax assets on a quarterly basis, and
in the event that we determine that it is more likely than not that we would be
able to realize the net deferred tax asset, an additional adjustment to the
deferred tax asset valuation allowance would be made to income in the period
such determination was made.
RESULTS OF OPERATIONS (2003 VS. 2002)
INDUSTRY OVERVIEW
As discussed above, the commercial furniture markets, including Virco's core
school markets, have suffered from the recent economic recession. The financial
difficulties experienced by our core education customers derive primarily from
budgetary pressures and shortfalls at state and local government levels. The
State of California has received significant press coverage regarding its $15
billion budget shortfall, but funding issues exist at virtually every state and
local level. The last time states faced such difficult fiscal conditions was
after the 1990-91 recession, but the states have reacted differently this time.
In 1991, the states raised taxes by approximately 5.4% of the previous year's
tax collections. In 2003, states raised taxes by 1.5% of the previous year's
revenues. Reluctance to raise taxes as aggressively or cut spending has
exacerbated the current budget condition. Because many states have used debt to
bridge budget gaps instead of balancing budgets with tax increases or spending
reductions, the outlook for 2004 suggests that the market for school furniture
will not improve substantially in the short term.
Funding for school furniture comes from two primary sources. The first source is
from bonds issued to fund new school construction and major renovations of older
schools. For 2003, funds relating to new school construction and renovation were
relatively stable compared to the prior year. The second source is the general
operating fund, which is a primary source of replacement furniture. The
reduction in sales is primarily attributable to replacement furniture purchased
from the general fund. Approximately 80-85% of a
school's budget is spent on salaries and benefits for teachers and
administrators. In times of budget shortfalls, schools traditionally attempt to
retain teachers and spend less on repairs, maintenance, and replacement
furniture.
During the last three years, many furniture manufacturers have responded by
shutting down significant portions of their manufacturing capacity and laying
off thousands of workers, incurring large restructuring charges in the process.
For the first two years of this recession, Virco responded with a different
approach designed to preserve the Company's manufacturing and distribution
infrastructure and save the jobs of Virco's trained workforce. The Company used
a variety of tactics to reduce spending. Capital expenditures were reduced to
approximately one quarter of depreciation expense in 2002 and one third of
depreciation expense in 2001. The Company has embraced the Assemble-to-Ship
(ATS) operating model, which facilitated a large reduction in inventory levels
in 2001, and improved levels of customer service while maintaining reduced
levels of inventory in 2002. To control and reduce the cost of Virco's
workforce, the Company used traditional measures such as wage freezes and hiring
freezes, as well as more creative measures that addressed the unique demands of
a highly seasonal business. The more creative measures included programs to
encourage workforce flexibility; moreover, in 2002 the Company introduced a
sabbatical program for employees during the traditionally slow fourth quarter.
The tactics used by Virco to weather the reductions in sales during 2001 and
2002 were not adequate to address the 21.5% reduction in sales in 2003. In
addition to the cost saving efforts used in the prior two years, Virco
implemented a voluntary separation program, which was accepted by 485 employees
(25% of our workforce) in the second quarter. In the third quarter, the Company
laid off an additional 160 employees. The reduction in headcount combined with
other savings were intended to allow the Company to operate profitably at an
annual sales volume of approximately $200 million.
FINANCIAL RESULTS AND CASH FLOW
For the year ended January 31, 2004, the Company had a net loss of $21,961,000
on net sales of $191,852,000 compared to a net income of $282,000 on net sales
of $244,355,000 in the same period last year. The loss was $1.68 per share for
the year ended January 31, 2004, compared to $0.02 per share in the prior year.
Cash flow from operations was $(498,000) compared to $12,045,000 in the prior
year. During 2003, the Company incurred a large operating loss, yet managed to
finish the year with cash flow from operations being slightly negative. To
accomplish this the Company reduced inventory balances by over $14 million. The
Company generated cash from investing activities by controlling capital
expenditures, curtailing a split dollar life insurance program, and selling a
manufacturing plant that was no longer used in operations. By year-end, the
Company was able to reduce its long-term debt by more than $3.7 million.
SALES
Virco's sales decreased by 21.5% in 2003 to $191,852,000, from $244,355,000 in
2002. As discussed above, the reduction in sales is primarily attributable to
severe budget shortfalls incurred by the Company's primary customers, publicly
funded schools. In addition, the commercial furniture markets have not recovered
from a severe recession incurred in 2001 and 2002. Although certain states were
impacted more severely than others, virtually all state and local governments
have been affected. Virco's sales declined in all but seven of the states in
which Virco does business. During 2003, the Company continued to maintain
pricing discipline in its primary markets. The reduction in sales dollar volume
was attributable to a reduction in unit volume, not price. The Company continued
to emphasize the value of Virco's products, the value of Virco's distribution
and delivery capabilities, and the value of timely deliveries during the peak
seasonal delivery period. Although this policy had an adverse effect on unit
volume, the Company achieved a slight net increase in selling prices.
COST OF SALES
For fiscal 2003, cost of sales was 72% of sales compared to 66% of sales in the
prior year. Raw material costs increased by approximately 2% of sales, primarily
due to increased steel prices. The balance of the increase was attributable to
reduced levels of production. In response to reduced levels of sales, the
Company severely reduced levels of manufacturing output in order to control
inventory levels. The Company ended 2003 with $14.5 million less inventory than
in 2002. Overhead spending was not reduced by a comparable amount, and the
factories incurred unfavorable production variances.
Inflation rates had a moderate impact on the Company's cost of sales. In March
2002, tariffs of up to 30% on imports of selected steel products were imposed
pursuant to Section 201 of the Trade Act of 1974. Cold-rolled steel is the
single largest raw material used by many in the educational furniture industry,
including Virco, and was subject to the maximum 30% tariff. Because Virco had
acquired a substantial portion of its steel requirements by the effective date
of the tariff, the Company did not incur the higher steel prices until the
latter part of 2002. Virco incurred higher steel prices for all of 2003.
In 2004, the Company intends to more tightly integrate the ATS model with our
marketing programs, product development programs, and product stocking plan.
This anticipated improvement in execution of ATS should allow the Company to
offer a wide variety of
product while improving on-time delivery performance. Because the Company is
beginning the year with significantly less inventory, production levels, which
will vary depending upon selling volumes, are anticipated to be higher than in
2003.
The Company anticipates continued upward pressure on costs, particularly in the
areas of certain raw materials, transportation, energy, and benefits in the
coming year. There has been significant volatility in the market for steel
during the first quarter of 2004. For more information, please see the section
entitled "Inflation and Future Change in Prices" in the Management's Discussion
and Analysis section contained in Virco's Annual Report to Shareholder for the
year ended January 31, 2004.
SELLING, GENERAL AND ADMINISTRATIVE AND OTHERS
Selling, general and administrative expenses for the year ended January 31,
2004, excluding severance costs, decreased by nearly $9 million, and were 36.8%
as a percentage of sales in 2003 as compared to 32.5 % in 2002. During the
summer of 2003 the Company reduced its workforce by 485 employees. While the
reduction in the workforce successfully lowered the Company's cost structure,
the Company incurred certain inefficiencies in coordinating production,
shipment, and installation of customer orders during the third quarter of 2003.
Freight costs declined by approximately $2,250,000 due to a reduction in selling
volume offset by increased freight rates and an increased percentage of
less-than-truckload (LTL) shipments. Other SG&A spending was adversely affected
by increased installation costs, offset by other reductions in selling and
administrative expenses.
For 2004, the Company has initiated programs to streamline product offerings,
has tightly integrated the inventory stocking program to coordinate with
marketing programs, and has reorganized freight and installation teams to
improve the efficiency of freight and installation costs. The Company expects to
reduce these costs as a percentage of sales, but there can be no assurance of
attaining a reduction due to volatility in fuel and freight rates as well as
fluctuations in the portion of business requiring full service.
During the second and third quarters of 2003, the Company determined that the
reduced level of orders received in the first quarter would likely continue for
the rest of the year and possibly through 2004 as well. In the second quarter of
2003 the Company announced a voluntary separation program in addition to other
measures that included voluntary part-time work and voluntary sabbaticals. Under
the program, employees who voluntarily terminated their employment with the
Company were paid six months of severance pay. During the second quarter, 485
employees accepted this offer. Approximately 25% of the workforce severed their
employment in June and July. Including employer taxes, the Company incurred
approximately $7.8 million in severance costs during the second quarter.
During the third quarter of 2003, the Company elected to further reduce expenses
and head count through a non-voluntary reduction in force. In September, the
Company laid off an additional 160 employees. These employees were given six
months of severance pay in addition to a variety of outplacement service
benefits to help them locate new employment. The Company incurred approximately
$2.6 million of severance costs in the third quarter related to this reduction
in force. In addition to the severance costs, the Company incurred additional
pension settlement costs of approximately $2 million in the third quarter and
recorded another $1.5 million of pension settlement costs during the fourth
quarter.
As a result of the hiring freeze and the voluntary and involuntary severance
programs, the Company anticipates spending on salaries and wages in 2004 to
decrease by approximately $20 million compared to 2002, with 2003 being a
transition year. In addition to the reduction in salaries, the Company
anticipates it will save the related costs for retirement, health, and welfare
benefits.
Interest expense was approximately $1,300,000 less than in the prior year due to
reduced levels of borrowing and lower interest rates. The Company anticipates
comparable average borrowing levels and an increase in the average interest rate
paid in 2004.
In the current year, Virco realized a significant gain on the sale of a former
manufacturing facility. This facility has been held as rental property since
1994 when the Company relocated the Torrance, California, manufacturing and
distribution operation. The gain on sale for the current year was $5,497,000.
This compares to a loss on sale of assets of approximately $149,000 in the prior
year.
PROVISION FOR INCOME TAXES
The income tax benefit for the year ended January 31, 2004, was determined
primarily by evaluating the net operating loss carryback that is available to
the Company and adjusting the provision for income tax contingencies. During the
year, the Company established a $7,701,000 valuation allowance against the net
deferred income tax assets on the basis that the Company believed that it is
more likely than not that a portion of our net deferred tax assets will not be
realized during the next three years, notwithstanding that some of these may
have longer lives under applicable tax laws. The effect of the establishment of
a valuation allowance was that the effective rate for the income tax benefit for
the current year was less that the effective tax rate for income taxes accrued
on a historic basis. Future changes in market conditions and the results of
operations may affect our assessment of the adequacy of the reserve. In the
event that we determine that it is more likely than not that we would be able to
realize a different portion of the net deferred tax assets, an additional
adjustment to the deferred tax asset valuation allowance would be made to income
in the period such determination was made.
RESULTS OF OPERATIONS (2002 VS. 2001)
FINANCIAL RESULTS AND CASH FLOW
For the year ended January 31, 2003, the Company earned a modest net income of
$282,000 on net sales of $244,355,000 compared to a net income of $246,000 on
net sales of $257,462,000 in the same period of the previous year. Earnings were
$0.02 per share for the year ended January 31, 2003, compared to $0.02 per share
in the prior year, after giving effect to the 10% stock dividend declared August
20, 2002. Cash flow from operations was $12,045,000 compared to $35,037,000 in
the prior year. The reduction in cash flow from operations was primarily
attributable to fluctuations in inventory levels. In the year ended January 31,
2003, inventory increased by $4,356,000 compared to the prior year, when the
large scale introduction of Assemble-to-Ship (ATS) facilitated a reduction in
inventory of $19,356,000, a $23,712,000 change.
SALES
Virco's 2002 sales decreased by 5% in 2002 to $244,355,000, from $257,462,000 in
2001. During 2002, the Company adhered to a policy of turning down low margin
and unprofitable business, despite substantial price competition in its primary
markets. The Company continued to emphasize the value of Virco's products, the
value of Virco's distribution and delivery capabilities, and the value of timely
deliveries during the peak seasonal delivery period. Although this policy had an
adverse effect on unit volume, the Company achieved a net increase in selling
prices.
Effective May 1, 2002, Virco acquired certain assets of Furniture Focus, a
reseller that offers complete package solutions for the Furniture, Fixtures and
Equipment (FF&E) components of bond-funded public school construction projects.
This acquisition provided Virco with the ability to offer packages to its core
customer base. Because the acquisition date was very close to the peak summer
season, the marketing of package solutions or "PlanSCAPE(TM)" was limited to the
five state region in which Furniture Focus operated.
COST OF SALES
For fiscal 2002, cost of sales was 69% of sales compared to 70% of sales in the
prior year. The improvement was primarily attributable to increases in selling
prices. Raw material costs increased, primarily due to increased steel prices.
Increased material costs were offset by reductions in labor and overhead
spending. Virco began 2002 with a plan to maintain reduced levels of inventory
and to use the Assemble-to-Ship (ATS) model to provide acceptable levels of
service to customers. In an effort to match spending to the continued low levels
of output, Virco controlled headcount, capital expenditures, and other
discretionary spending. As a result, manufacturing spending and production
levels were flat compared to the prior year.
Inflation rates had a moderate impact on the Company's cost of sales for the
first half of 2002. In the second half of 2002, the Company experienced
significant increases in the cost of steel. On March 5, 2002, President Bush
announced that he would impose, effective March 20th, tariffs of up to 30% on
imports of selected steel products pursuant to Section 201 of the Trade Act of
1974. The duties were imposed for a three-year period and were to be
progressively reduced each year as required by the World Trade Organization.
Cold-rolled steel is the single largest raw material used by many in the
educational furniture industry, including Virco, and was subject to the maximum
30% tariff. In addition, domestic steel manufacturers filed a dumping claim
against certain international suppliers, which, if successful, could serve to
prevent steel prices from falling in the future.
SELLING, GENERAL AND ADMINISTRATIVE AND OTHERS
Selling, general and administrative expenses for the year ended January 31,
2003, increased 1% from the prior year, and were 29.7% as a percentage of sales
in 2002 as compared to 27.9% in 2001. Freight costs declined by approximately
$500,000 due to a reduction in selling volume, and were slightly higher as a
percentage of sales. Other SG&A costs were adversely affected by increased
installation costs reflecting an increase in installed orders, the acquisition
of Furniture Focus, and an increase in retirement plan costs, but were offset by
other reductions in selling and administrative expenses.
Interest expense was approximately $1,100,000 less than in the prior year due to
reduced levels of borrowing and lower interest rates. The Company entered into a
swap agreement with Wells Fargo Bank, which had the effect of establishing a
fixed rate of interest for $20,000,000 of loans for both 2001 and 2002. This
interest swap expired in March 2003. Interest rates paid under the swap
agreement were greater than the current rate paid under the Wells Fargo Bank
line of credit.
In 2002, Virco realized a $149,000 loss on disposition of fixed assets. This
compares to a loss on sale of assets of approximately $86,000 in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL REQUIREMENTS
Virco addresses liquidity and capital requirements in the context of short-term
seasonal requirements and the long-term capital requirements of the business.
The Company's core business of selling furniture to publicly funded educational
institutions is extremely seasonal. The seasonal nature of this business
permeates most of Virco's operational, capital, and financing decisions.
The Company's working capital requirements during and in anticipation of the
peak summer season oblige management to make estimates and judgments that affect
Virco's assets, liabilities, revenues and expenses. Management expends a
significant amount of time during the year, and especially in the first quarter,
developing a stocking plan and estimating the number of employees, the amount of
raw materials, and the types of components and products that will be required
during the peak season. If management underestimates any of these requirements,
Virco's ability to fill customer orders on a timely basis or to provide adequate
customer service may be diminished. If management overestimates any of these
requirements, the Company may be required to absorb higher storage, labor and
related costs, each of which may affect profitability. On an ongoing basis,
management evaluates such estimates, including those related to market demand,
labor costs, and inventory levels, and continually strives to improve Virco's
ability to correctly forecast business requirements during the peak season each
year.
As part of Virco's efforts to address seasonality, financial performance and
quality without sacrificing service or market share, management has been
refining the Company's ATS operating model. ATS is Virco's version of
mass-customization, which assembles standard, stocked components into customized
configurations before shipment. The Company's ATS program reduces the total
amount of inventory and working capital needed to support a given level of
sales. It does this by increasing the inventory's versatility, delaying assembly
until the last moment, and reducing the amount of warehouse space needed to
store finished goods.
In addition, Virco finances its largest balance of accounts receivable during
the peak season. This occurs for two primary reasons. First, accounts receivable
balances naturally increase during the peak season as shipments of products
increase. Second, many customers during this period are government institutions,
which tend to pay accounts receivable more slowly than commercial customers.
As the capital required for this summer season generally exceeds cash available
from operations, Virco has historically relied on third-party bank financing to
meet seasonal cash flow requirements. Virco has established a long-term
relationship with its primary lender, Wells Fargo Bank. On an annual basis, the
Company prepares a forecast of seasonal working capital requirements, and renews
its revolving line of credit. For fiscal 2004, Virco has entered into a
revolving credit facility with Wells Fargo Bank, amended and restated January
27, 2004, which provides a term loan of $12,500,000 and a secured revolving line
of credit that varies with levels of inventory and receivables, up to a maximum
of $45,000,000. The term loan is a three-year amortizing line with interest
payable monthly at a fluctuating rate equal to the Bank's prime rate plus a
fluctuating margin of 0.75%, or at LIBOR plus 3.25%. Under the term loan, the
Bank is entitled to require the Company to fix the interest rate on up to $6
million of debt. Effective February 1, 2004, Virco purchased an interest rate
swap from Wells Fargo Bank, that effectively fixed the rate of interest on $6
million for a period of three years at a rate of 6.32%. The revolving line has
an 18-month maturity with interest payable monthly at a fluctuating rate equal
to the Bank's prime rate plus a margin of 0.50%, or at LIBOR plus 2.75%. The
revolving line also allows the Company the option to borrow under 30- 60- and
90-day fixed term rates at LIBOR plus 2.75%. Approximately $7,900,000 was
available for borrowing as of January 31, 2004.
During 2003, the Company incurred a large operating loss, yet managed to finish
the year with less debt than at the beginning of the year. This was accomplished
through the following actions. First, the Company reduced inventory balances by
over $14 million. This was accomplished by streamlining the product offering for
2004, delaying until February Virco's seasonal production of stock inventory for
summer delivery, and aggressively reducing other inventories. Second, the
Company spent less than $2.3 million on capital expenditures, compared to
depreciation expense of $11.6 million, providing more than $9 million of cash.
Third, the Company sold a former manufacturing facility, formerly held as rental
property, which generated nearly $5,800,000 in cash. Finally, the Company
terminated or curtailed certain benefit programs, including split dollar life
insurance and deferred compensation plans, which reduced other non-current
assets by $2.5 million. Many of these actions are one-time events, and will not
be repeated in future years. The only anticipated recurring event is the excess
of depreciation over capital expenditures. The Company is budgeting for capital
expenditures to be less than depreciation for 2004, and the amount of cash
generated is expected to be approximately $5 million.
Management believes cash generated from operations and from the previously
described sources will be adequate to meet its capital requirements in the next
12 months.
LONG-TERM CAPITAL REQUIREMENTS
In addition to short-term liquidity considerations, the Company continually
evaluates long-term capital requirements. In 1997, the Company initiated two
large capital projects, which have had significant effects on cash flow for the
past five years. In the 1998, 1999, and 2000 fiscal years the Company expended
significant amounts of capital on these projects. Upon completion of these
projects, the Company dramatically reduced capital spending. As shown in the
Company's consolidated statements of cash flows, during 2001, capital
expenditures were approximately one-third of depreciation expense. During 2002
and 2003 capital expenditures were
approximately one-quarter of depreciation expense.
The first project was the implementation of the SAP enterprise resources
planning system, initiated in October 1997. The Company went live with the new
system in March 1999, implemented a business-to-business website along with
sales force automation in the first quarter of 2000, and upgraded to a more
current version of SAP in the fourth quarter of 2000. The initial portion of
this project was financed with a lease from General Electric Capital Corporation
(GECC). Capital and training costs not funded by the lease were financed from
cash flows from operations and from the loan facility from Wells Fargo Bank.
During fiscal year 2002 the Company paid off the balance of the capital lease.
The second project was the expansion and re-configuration of the Conway,
Arkansas, manufacturing and distribution facility. During 1997, 1998, 1999, and
2000 the Company expended approximately $67,000,000 to purchase 100 acres of
land, and build a 1,200,000 sq. ft. manufacturing and distribution facility
equipped with new manufacturing and warehousing equipment. To finance this
project, the Company borrowed $30,000,000 from Wells Fargo Bank, obtained
equipment with operating leases from GECC, and used operating cash flow. As
phases of the Conway expansion were completed, the Company was able to vacate
several leased warehouses, sell a small production facility, and convert a
second production facility into a warehouse. In addition, Virco sold a warehouse
located in Torrance, California, which had been held as rental property.
Upon the completion of these substantial capital projects, the Company
significantly reduced capital spending in 2003, 2002 and 2001. Management
intends to limit future capital spending until growth in sales volume fully
utilizes the new plant and distribution capacity. The Company has established a
goal of limiting capital spending to approximately $5,000,000 for 2004, which is
approximately one-half of anticipated depreciation expense.
ASSET IMPAIRMENT
In 2002, Virco acquired certain assets of Furniture Focus. As part of this
acquisition, the Company recorded goodwill of $2,200,000. During 2003, the
Company rolled out the Furniture Focus package business nationwide. For 2004,
Virco has expended significant effort training the sales force in package
selling. In addition, Virco will stock selected products of other manufacturers
that complement Virco's product line, enabling Virco to fill nearly the entire
FF&E budget line item for a K-12 school from products carried in stock. Virco
evaluates the impairment of goodwill at least annually, or when indicators of
impairment occur. As of the year ended January 31, 2004, there has been no
impairment to the goodwill recorded.
In December 2003, Virco acquired certain assets of Corex Products, Inc., a
manufacturer of compression molded components, for approximately $1 million. The
assets have been transferred to the Company's Conway, Arkansas, location where
they will be integrated with Virco's existing compression molding operation. In
connection with this acquisition, Virco acquired certain patents and other
intangible assets. As of the year ended January 31, 2004, there has been no
impairment to the intangible assets recorded.
Virco made substantial investments in its infrastructure in 1998, 1999, and
2000. The investments included a new factory, new warehouse, and new production
and distribution equipment. The factory, warehouse, and equipment acquired are
used to produce, store, and ship a variety of product lines, and the use of any
one piece of equipment is not dependent on the success or volume of any
individual product. New products are designed to use as many common or existing
components as practical. As a result, both our ATS inventory components and the
machines used to produce them become more versatile. Virco evaluates the
potential for impaired assets on a quarterly basis. As of the year ended January
31, 2004, there has been no impairment to the long-term assets of the Company.
CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS
The Company leases manufacturing, transportation, and office equipment, as well
as real estate under a variety of operating leases. The Company leases
substantially all vehicles, including trucks and passenger cars under operating
leases where the lessor provides fleet management services for the Company. The
fleet management services provide Virco with operating efficiencies relating to
the acquisition, administration, and operation of leased vehicles. The use of
operating leases for manufacturing equipment has enabled the Company to qualify
for and use Industrial Revenue Bond financing. Real estate leases have been used
where the Company did not want to make a long-term commitment to a location, or
when economic conditions favored leasing. The Company does not have any capital
lease obligations or purchase commitments in excess of normal recurring
obligations.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
AMOUNT IN THOUSANDS PAYMENTS DUE BY PERIOD
- -------------------------------------------------------------------------------------------------------------------
LESS THAN 1 MORE THAN
TOTAL YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
---------- ---------- ---------- ---------- ---------
Long-Term Debt Obligations $ 25,333 $ 3,138 $ 22,090 $ 44 $ 61
Capital Lease Obligations - - - - -
Operating Lease Obligations 17,337 7,502 6,953 2,506 376
Purchase Obligations 15,271 15,271 - - -
Other Long-Term Obligations - - - - -
---------- ---------- ---------- ---------- ----------
Total $ 57,941 $ 25,911 $ 29,043 $ 2,550 $ 437
========== ========== ========== ========== ==========
Virco's largest market is publicly funded school districts. A significant
portion of this business is awarded on a bid basis. Many school districts
require that a bid bond be posted as part of the bid package. In addition to bid
bonds, many districts require a performance bond when the bid is awarded. At
January 31, 2004, the Company had bonds outstanding valued at approximately
$5,250,000. To the best of management's knowledge, in over 50 years of selling
to schools, Virco has never had a bid or performance bond called.
The Company accrues an estimate of its exposure to warranty claims based upon
both product sales data and warranty claims incurred. For 2003, warranty claims
were higher than normal due to a recurring cosmetic complaint relating to a high
volume component. At the current time, management cannot reasonably determine
whether warranty claims for the upcoming fiscal year will be less than, equal
to, or greater than warranty claims incurred in 2003. The following is a summary
of the Company's warranty-claim activity during 2003.
Balance at January 31, 2003 Provision Costs Incurred Balance at January 31, 2004
- -----------------------------------------------------------------------------------------------
$ 900,000 $ 1,976,000 $ 1,125,000 $ 1,751,000
RETIREMENT OBLIGATIONS
The Company provides retirement benefits to employees and non-employee directors
under three defined benefit retirement plans; the Virco Employee's Retirement
Plan, the Virco Important Performers (VIP) Retirement Plan, and the Retirement
Plan for Non-Employee Directors. The Virco Employee Retirement Plan is a
qualified retirement plan that is funded through a trust held at Wells Fargo
Bank (Trustee). The other two Plans are non-qualified retirement plans. The VIP
Plan is secured by life insurance policies held in a rabbi trust and the Plan
for Non-Employee Directors is not funded.
In 2002 the Company adopted more conservative assumptions for estimating the
return on plan assets held in the Wells Fargo Bank Trust (Trust) and the rate
used to discount the Projected Benefit Obligation (PBO). For 2003 and 2002 the
Company used a 6.5% expected return on plan assets, a 5.0% expected rate of
increase in compensation, and a 6.5% discount rate. The result of using these
more conservative estimates was to increase annual pension expense for the
fiscal year ended January 31, 2003, by approximately $1.5 million and to
increase the PBO by approximately $6 million. The combined impact of reduced
discount rates and poor investment results over the three years ended January
31, 2003 resulted in the Plan being under-funded. To correct this condition, the
Company made an $8 million contribution to the Trust in September 2002, and a
total contribution of approximately $10 million for the fiscal year ended
January 31, 2003.
Three significant events occurred during 2003 that affected the retirement
Plans. First, approximately 40% of Virco's employees severed their employment
with Virco during the year. The majority of these employees accepted a voluntary
severance package. This severance was treated as Plan curtailment. Second, a
significant number of employees that severed their employment elected a lump sum
benefit. During 2003 the pension trust disbursed approximately $6.3 million to
severed employees. These distributions were accounted for as a Plan settlement.
Finally, effective December 31, 2003, Virco froze all future benefit accruals
under the Plans. Employees can continue to vest under the benefits earned to
date, but no covered participants will earn additional benefits under the Plan
freeze. The Plan freeze is not intended to be permanent. It is management's
intention to restore Plan benefits when the Company's profitability and cash
flow allow. As a result of these activities, Virco incurred additional pension
expense of approximately $1,250,000 related to the Plan curtailment, additional
pension expense of approximately $1,540,000 related to the Plan settlement, and
additional pension expense of approximately $40,000 related to the Plan freeze.
As a result of the freeze, the projected benefit obligation decreased by
approximately $7,500,000.
It is the Company's intent to maintain the funded status of the qualified Plan
at a minimum of 90% of the current liability as determined by the Plan's
actuaries. As discussed above, the Company made a large cash contribution to the
Plan in 2002. During 2003, the Company contributed approximately $1,550,000 to
the qualified Plan and paid approximately $265,000 under the non-qualified
Plans. It is anticipated that contributions for 2004 will be approximately $1
million.
The Company does not anticipate making any significant changes to the pension
assumptions in the near future. If the Company were to have used different
assumptions in fiscal year ended January 31, 2004, a 1% reduction in investment
return would increase expense by approximately $180,000, a 1% change in the rate
of compensation increase would increase expense by approximately $300,000 and a
1% reduction in the discount rate would increase expense by $1,440,000. A 1%
reduction in the discount rate would increase the PBO by approximately $5.1
million. Refer to Note 4 to the consolidated financial statements for additional
information regarding the pension plans and related expenses.
SHAREHOLDERS' EQUITY
In April 1998, the Board of Directors approved a stock buy-back program giving
authorization to buy back up to $5,000,000 of Company stock. The authorization
of this stock buy-back program was increased to $7,000,000, $14,000,000,
$20,000,000 and $22,000,000 in January 1999, April 1999, December 2001 and
December 2002, respectively. As of the end of January 2004 and 2003, the Company
had repurchased approximately 1,454,000 and 1,383,000 shares at a cost of
approximately $18,788,000 and $18,151,000 respectively. The current line of
credit with Wells Fargo Bank does not allow for repurchases of stock. When the
results of operations and cash flow allow, the Company will re-evaluate the
stock buyback program.
Prior to the current year, Virco had established a track record of paying cash
dividends to its stockholders for more than 20 consecutive years. As a result of
the current year operating loss, the Company discontinued paying dividends in
the second quarter of 2003. The current line of credit with Wells Fargo Bank
does not allow for cash dividends. When the results of operations and cash flow
allow, the Company intends to reinstate the cash dividend policy.
Virco issued a 10% stock dividend or 3/2 stock split every year beginning in
1982 through 2002. Although the stock dividend has no cash consequences to the
Company, the accounting methodology required for 10% dividends has affected the
equity section of the balance sheet. When the Company records a 10% stock
dividend, 10% of the market capitalization of the Company on the date of the
declaration is reclassified from retained earnings to additional paid-in
capital. During the period from 1982 through 2002, the cumulative effect of the
stock dividends has been to reclassify over $122 million from retained earnings
to additional paid-in capital. The equity section of the balance sheet on
January 31, 2004, reflects additional paid-in capital of approximately $127
million and deficit retained earnings of approximately $41 million. Other than
the current year loss, the retained deficit is a result of the accounting
reclassification, and is not the result of accumulated losses.
ENVIRONMENTAL AND CONTINGENT LIABILITIES
The Company and other furniture manufacturers are subject to federal, state, and
local laws and regulations relating to the discharge of materials into the
environment and the generation, handling, storage, transportation, and disposal
of waste and hazardous materials. In addition to policies and programs designed
to comply with environmental laws and regulations, Virco has enacted programs
for recycling and resource recovery that have earned repeated commendations,
including designation in 2003 as a Charter Member of the WasteWise Hall of Fame,
in 2002 as a WasteWise Partner of the Year, and in 2001 as a WasteWise Program
Champion for Large Businesses by the United States Environmental Protection
Agency. Despite these significant accomplishments, environmental laws have
changed rapidly in recent years, and Virco may be subject to more stringent
environmental laws in the future. The Company has expended, and expects to
continue to expend, significant amounts in the future for the investigation of
environmental conditions, installation of environmental control equipment, and
remediation of environmental contamination.
In 2003, the Company was self-insured for product liability losses up to
$500,000 per occurrence, for workers compensation losses up to $250,000 per
occurrence, and for auto liability up to $50,000 per occurrence. For 2002, the
Company was self-insured for product liability losses up to $250,000 per
occurrence and was self-insured for workers compensation losses up to $200,000
per occurrence. In prior years the Company has been self-insured for workers
compensation, automobile, product, and general liability losses. The Company has
purchased insurance to cover losses in excess of the self-insured retention or
deductible up to a limit of $30,000,000. For the insurance year beginning April
1, 2004, the Company will be self-insured for product liability losses up to
$500,000 per occurrence, for workers compensation losses up to $250,000 per
occurrence, and for auto liability up to $50,000 per occurrence. In future
years, the Company's exposure to self-insured retentions will vary depending
upon the market conditions in the insurance industry and the availability of
cost effective insurance coverage.
During the past 10 years the Company has aggressively pursued a program to
improve product quality, reduce product liability claims and losses, and to more
aggressively litigate product liability cases. This program has continued
through 2003 and has resulted in reductions in product liability claims and
litigated product liability cases. In addition, the Company has active safety
programs to improve plant safety and control Workers Compensation losses.
Management does not anticipate that any related settlement, after consideration
of the existing reserves for claims and potential insurance recovery, would have
a material adverse effect on the Company's financial position, results of
operations, or cash flows.
INFLATION AND FUTURE CHANGE IN PRICES
Inflation rates had a significant impact on the results of operations for 2003
when compared to 2002. Virco incurred a significant increase in steel prices
toward the end of 2002. These higher prices remained in effect throughout 2003,
causing the material portion of cost of sales to increase during the year.
For 2004, the Company anticipates upward pressure on costs, particularly in the
areas of certain raw materials, transportation, energy and employee benefits. In
2002, President Bush announced that he would impose, tariffs of up to 30% on
imports of selected steel products pursuant to Section 201 of the Trade Act of
1974. During the second half of 2002, the Company incurred higher costs related
to steel prices. During 2003, steel prices remained relatively stable, but at
the higher levels incurred in the later half of 2002. During the beginning of
2004, Virco has incurred significant disruption in the supply of steel in
addition to markedly higher prices. Very significant purchases of steel by
China, of both finished product and raw materials to produce steel, have
impacted the market for steel. In addition, a fire in one of the largest coal
mines in the United States disrupted the supply of domestic steel. Increased
prices for steel could cost as much as $7-8 million for 2004. There is pressure
on raw material costs that are affected by the price of oil, especially
plastics. Transportation costs are also expected to be adversely affected by
increased oil prices, in the form of increased operation costs for our fleet,
and surcharges on freight paid to third-party carriers. Virco expects to incur
increased pressure on employee benefit costs. Virco has aggressively addressed
these costs by reducing headcount, freezing certain pension benefits, passing on
a portion of increased medical costs to employees, and hiring temporary workers
who are not eligible for benefit programs.
To counter the impact of increased costs, the Company has raised the list prices
for our products. As a significant portion of our business is obtained through
competitive bids, the Company is carefully considering the increased material
cost in addition to increased transportation costs as part of the bidding
process. Total material costs for 2004, as a percentage of sales, could be
higher than in 2003. However, no assurance can be given that the Company will
experience stable, modest or substantial increases in prices in 2004. The
Company is working to control and reduce costs by improving production and
distribution methodologies, investigating new packaging and shipping materials,
and searching for new sources of purchased components and raw materials.
The Company uses the LIFO method of accounting for the material component of
inventory. Under this method, the cost of products sold as reported in the
financial statements approximates current cost, and reduces the distortion in
reported income due to increasing costs. Depreciation expense represents an
allocation of historic acquisition costs and is less than if based on the
current cost of productive capacity consumed. In 2003, 2002 and 2001, the
Company significantly reduced its expenditures for capital assets, but in the
previous three fiscal years (1998, 1999, and 2000) the Company made the
significant fixed asset acquisitions described above. The assets acquired result
in higher depreciation charges, but due to technological advances should result
in operating cost savings and improved product quality. In addition, some
depreciation charges will be offset by a reduction in lease expense.
The Company is also subject to interest rate risk related to its $25,333,000 of
borrowings as of January 31, 2004, and any seasonal borrowings used to finance
additional inventory and receivables. Fluctuating interest rates may adversely
affect the Company's results of operations and cash flows related to its
variable-rate bank borrowings. Accordingly, a 100 basis point upward fluctuation
in the lender's base rate would cause the Company to incur additional interest
charges of approximately $404,000 for the twelve months ended January 31, 2004.
The Company would have benefited from a similar interest savings if the base
rate were to have fluctuated downward by a like amount.
In February 2004, the Company entered into an interest rate swap agreement with
Wells Fargo Bank to reduce exposure due to changes in interest rates. The
initial notional swap amount is $6,000,000 for the period February 1, 2004,
through January 31, 2007. Under this agreement, interest is payable monthly at
6.32% for a term of three years.
FINANCIAL STRATEGY
Virco's financial strategy is to continue to strive to increase levels of
profitability by targeting specific profitable market segments and customers.
The Company has organized its sales force, developed products, and acquired
production and distribution facilities for the specific needs of these
customers. During the fiscal years 1998, 1999, and 2000, the Company made
significant capital expenditures to support future sales growth in these
targeted markets. For the next several years, the Company intends to increase
sales to these markets, and to service these sales without making further
significant investments in facilities or working capital.
ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which is effective for fiscal years beginning after June 15, 2002.
SFAS No. 143 requires legal obligations associated with the retirement of
long-lived assets to be recognized at their fair value at the time the
obligations are incurred. Upon initial recognition of a liability, that cost
should be capitalized as part of the related long-lived asset and allocated to
expense over the estimated useful life of the asset. SFAS No. 143 was adopted by
the Company on February 1, 2003, and did not have a material impact on the
Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, effective for exit or disposal activities initiated
after December 31, 2002. SFAS No. 146 addresses the financial accounting and
reporting for certain costs
associated with exit or disposal activities, including restructuring actions.
SFAS No. 146 excludes from its scope severance benefits that are subject to an
on-going benefit arrangement governed by SFAS No. 112, Employer's Accounting for
Postemployment Benefits, and asset impairments governed by SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 146 was
adopted by the Company on February 1, 2003, and did not have a material impact
on the Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 clarifies the requirements of SFAS
No. 5, Accounting for Contingencies, relating to a guarantor's accounting for,
and disclosure of, the issuance of certain types of guarantees. For certain
guarantees issued after December 31, 2002, FIN 45 requires a guarantor to
recognize, upon issuance of a guarantee, a liability for the fair value of the
obligations it assumes under the guarantee. Guarantees issued prior to January
1, 2003, are not subject to liability recognition, but are subject to expanded
disclosure requirements. FIN 45 was adopted by the Company on February 1, 2003,
and did not have a material impact on the Company's financial position or
results of operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, ("FIN 46"). FIN 46 introduces a new consolidation model, the variable
interests model, which determines control (and consolidation) based on potential
variability in gains and losses of the entity being evaluated for consolidation.
The requirements for FIN 46, including its disclosures, apply immediately. FIN
46 provides guidance for determining whether an entity qualifies as a variable
interest entity ("VIE") by considering, among other considerations, whether the
entity lacks sufficient equity or its equity holders lack adequate
decision-making ability. If the entity does not qualify as a VIE, then the
consolidation criteria is based on previously established accounting standards.
Qualifying VIEs are covered by FIN 46 and are individually evaluated for
consolidation based on their variable interests. FIN 46 requires consideration
and estimates of a significant number of possible future outcomes of the VIE as
well as the probability of each outcome occurring. Based on the allocation of
possible outcomes, a calculation is performed to determine which party, if any,
has a majority of potential negative outcomes (expected losses) or a majority of
the potential positive outcomes (expected residual returns), with an emphasis on
negative outcomes. That party, if any, is the primary beneficiary and is
required to consolidate the VIE. FIN 46 was adopted by the Company and did not
have a material impact on the Company's financial position or results of
operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. SFAS No. 149 was
adopted by the Company on July 1, 2003, and did not have a material impact on
the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. SFAS No. 150 was adopted by the Company and did not have a material
impact on the Company's financial position or results of operations.
In December 2003 the FASB issued SFAS No. 132 (Revised), Employer's Disclosure
about Pensions and Other Postretirement Benefits. SFAS No. 132 (Revised)
retained disclosure requirements of the original SFAS No. 132 and requires
additional disclosures relating to assets, obligations, cash flows, and net
periodic benefit cost. SFAS No. 132 (Revised) is effective for fiscal years
ending after December 15, 2003, except that certain disclosures are effective
for fiscal years ending after June 15, 2004. Interim period disclosures are
effective for interim periods beginning after December 15, 2003. The adoption of
the disclosure provisions of SFAS No. 132 (Revised) did not have a material
impact on the Company's financial position or results of operations.
EXHIBIT 13.1 - FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
in thousands except per share data 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales (4) (5) $ 191,852 $ 244,355 $ 257,462 $ 287,342 $ 268,079
Net (loss) income before cumulative effect of
change in accounting principle $ (21,961) $ 282 $ 246 $ 4,313 $ 10,166
Cumulative effect of change in accounting
principle, net of $191 tax benefit (5) (297)
-----------------------------------------------------------------------------
Net (loss) income $ (21,961) $ 282 $ 246 $ 4,016 $ 10,166
=============================================================================
Per share data
(Loss) income before cumulative effect of change
in accounting principle (1)
Basic $ (1.68) $ 0.02 $ 0.02 $ 0.31 $ 0.74
Assuming dilution (1.68) 0.02 0.02 0.31 0.72
Cumulative effect of change in accounting
principle (1)
Basic - - - (0.02) -
Assuming dilution - - - (0.02) -
Net (loss) income (1)
Basic (1.68) 0.02 0.02 0.29 0.74
Assuming dilution (1.68) 0.02 0.02 0.29 0.72
Pro forma amounts assuming the
accounting change is applied retroactively
Net (loss) income (5) $ (21,961) $ 282 $ 246 $ 4,313 $ 10,186
Per share data
Net (loss) income
Basic (1.68) 0.02 0.02 0.31 0.73
Assuming dilution (1.68) 0.02 0.02 0.31 0.72
Dividends declared per share, adjusted for
10% stock dividend
Cash dividends $ 0.04 $ 0.08 $ 0.07 $ 0.06 $ 0.06
OTHER FINANCIAL DATA
Total assets $ 126,268 $ 154,796 $ 161,372 $ 199,549 $ 190,863
Working capital $ 25,404 $ 38,748 $ 34,464 $ 43,173 $ 51,423
Current ratio 2.0/1 2.4/1 2.2/1 1.9/1 2.3/1
Total long-term obligations $ 37,934 $ 44,702 $ 43,154 $ 59,608 $ 58,526
Stockholders' equity $ 62,352 $ 82,774 $ 90,223 $ 94,141 $ 93,834
Shares outstanding at year-end (3) 13,096 13,111 13,445 13,652 13,750
Stockholders' equity per share (2) $ 4.76 $ 6.31 $ 6.71 $ 6.90 $ 6.82
- --------------------------------------
(1) Based on average number of shares outstanding each year after giving
retroactive effect for stock dividends and 3 for 2 stock split.
(2) Based on number of shares outstanding at year-end after giving effect
for stock dividends and 3 for 2 stock split.
(3) Adjusted for stock dividends and 3 for 2 stock split.
(4) The prior period statements of operations contain certain
reclassifications to conform to the presentation required by EITF
No. 00-10, "Accounting for Shipping and Handling Fees and Costs,"
which the Company adopted during the fourth quarter of the year ended
January 31, 2001.
(5) During the fourth quarter of 2000, the Company changed its method of
accounting for revenue recognition in accordance with Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements."
Pursuant to Financial Accounting Standards Board Statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements,"
effective February 1, 2000, the Company recorded the cumulative effect
of the accounting change.
FINANCIAL HIGHLIGHTS
in thousands, except per share data 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Net sales (3, 4) $ 191,852 $ 244,355 $ 257,462 $ 287,342 $ 268,079
Net (loss) income
Net (loss)/income before change in accounting methods $ (21,961) 282 246 4,313 10,166
Change in accounting methods - - - (297) -
----------------------------------------------------------------------
$ (21,961) $ 282 $ 246 $ 4,016 $ 10,166
======================================================================
Net (loss) income per share (1) $ (1.68) $ 0.02 $ 0.02 $ 0.29 $ 0.72
Stockholder's equity 62,352 82,774 90,223 94,141 93,834
Stockholder's equity per share (2) 4.76 6.31 6.71 6.90 6.82
in thousands, except per share data 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Net sales (3, 4) $ 275,096 $ 259,586 $ 237,551 $ 225,559 $ 216,822
Net (loss) income
Net (loss) income before change in accounting methods 17,630 13,852 9,326 5,209 5,001
Change in accounting methods - - - - -
---------------------------------------------------------------------
$ 17,630 $ 13,852 $ 9,326 $ 5,209 $ 5,001
=====================================================================
Net income per share (1) $ 1.20 $ 0.94 $ 0.64 $ 0.36 $ 0.35
Stockholder's equity 88,923 77,077 63,921 55,386 50,466
Stockholder's equity per share (2) 6.30 5.39 4.48 3.88 3.55
(1) Based on average number of shares outstanding each year after giving
retroactive effect for stock dividends and 3 for 2 stock split.
(2) Based on number of shares outstanding at year-end giving effect for stock
dividends and 3 for 2 stock split.
(3) The prior period statements of operations contain certain reclassifications
to conform to the presentation required by EITF No. 00-10, Accounting for
Shipping and Handling Fees and Costs, which the Company adopted during the
fourth quarter of the year ended January 31, 2001.
(4) During the fourth quarter of 2000, the Company changed its method of
accounting for revenue recognition in accordance with Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." Pursuant
to Financial Accounting Standards Board Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements," effective February 1,
2000, the Company recorded the cumulative effect of the accounting change.
Report of Independent Auditors
Virco Mfg. Corporation
We have audited the accompanying consolidated balance sheets of Virco Mfg.
Corporation as of January 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 2004. 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 auditing standards generally accepted
in the 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 consolidated financial position of Virco Mfg.
Corporation at January 31, 2004 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2004, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Los Angeles, California
March 12, 2004
Virco Mfg. Corporation
Consolidated Balance Sheets
(In thousands, except share and per share data)
JANUARY 31
2004 2003
----------------------------
ASSETS
Current assets:
Cash $ 2,059 $ 1,639
Trade accounts receivable (less allowance for doubtful
accounts of $225 in 2003 and 2002) 17,333 17,178
Income taxes receivable 1,423 -
Other receivables 138 223
Inventories:
Finished goods 10,470 16,510
Work in process 11,141 18,233
Raw materials and supplies 6,860 8,296
----------------------------
28,471 43,039
Prepaid expenses and other current assets 1,962 1,495
Deferred income taxes - 2,494
----------------------------
Total current assets 51,386 66,068
Property, plant and equipment:
Land and land improvements 3,287 3,626
Buildings and building improvements 49,548 50,311
Machinery and equipment 103,185 101,648
Leasehold improvements 1,251 1,278
----------------------------
157,271 156,863
Less accumulated depreciation and amortization 93,913 83,827
----------------------------
Net property, plant and equipment 63,358 73,036
Goodwill and other intangible assets 2,350 2,200
Other assets 9,174 13,492
----------------------------
Total assets $ 126,268 $ 154,796
============================
JANUARY 31
2004 2003
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks released but not yet cleared bank $ 2,702 $ 2,506
Accounts payable 9,513 8,395
Income taxes payable - 3,538
Accrued compensation and employee benefits 5,636 7,109
Current portion of long-term debt 3,138 1,087
Other accrued liabilities 4,993 4,685
----------------------------
Total current liabilities 25,982 27,320
Noncurrent liabilities:
Accrued self-insurance retention and other 4,053 2,936
Accrued pension expenses 11,686 13,763
Long-term liabilities, less current portion 22,195 27,905
Deferred tax liabilities - 98
----------------------------
Total noncurrent liabilities 37,934 44,702
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Authorized 3,000,000 shares, $.01 par value;
none issued or outstanding
Common stock:
Authorized 25,000,000 shares, $.01 par value; issued
14,583,331 shares in 2003 and 14,527,074 shares in 2002 146 145
Additional paid-in capital 127,133 126,284
Retained deficit (41,412) (18,927)
Less treasury stock at cost (1,487,530 shares in 2003
and 1,416,472 shares in 2002) (19,271) (18,634)
Less accumulated comprehensive loss (4,244) (6,094)
----------------------------
Total stockholders' equity 62,352 82,774
----------------------------
Total liabilities and stockholders' equity $ 126,268 $ 154,796
============================
See accompanying notes.
Virco Mfg. Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
YEAR ENDED JANUARY 31
2004 2003 2002
---------------------------------------------------
Net sales $ 191,852 $ 244,355 $ 257,462
Costs of goods sold 137,420 160,652 172,453
---------------------------------------------------
Gross profit 54,432 83,703 85,009
Selling, general and administrative expenses 70,593 79,721 79,926
Separation costs 13,920 - -
Interest expense 2,054 3,410 4,561
(Gain) loss on sale of assets (5,497) 149 86
---------------------------------------------------
(Loss) income before income taxes (26,638) 423 436
Provision for income taxes (4,677) 141 190
---------------------------------------------------
Net (loss) income $ (21,961) $ 282 $ 246
===================================================
Net (loss) income per common share - basic
Basic $ (1.68) $ 0.02 $ 0.02
Assuming dilution (1.68) 0.02 0.02
Weighted average shares outstanding:
Basic 13,106 13,344 13,485
Assuming dilution 13,106 13,458 13,675
See accompanying notes.
Virco Mfg. Corporation
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
Additional Retained
Common Stock Paid-In Earnings Comprehensive
Shares Amount Capital (Deficit) Income (Loss)
----------------------------------------------------------------------------
Balance at January 31, 2001 11,282,987 $ 120 $ 97,656 $ 10,645
Net income - - - 246 $ 246
Minimum pension liability, net of tax - - - - (1,329)
Derivative instrument, net of tax - - - - (662)
-----------
Comprehensive loss, net of tax - - - - $ (1,745)
===========
Unearned ESOP shares - - - -
Stock issued under option plans 13,847 - 30 -
Stock dividend (10%) 1,120,268 12 11,952 (11,952)
Cash dividends - - - (945)
Purchase of treasury stock (194,055) - - -
-----------------------------------------------------------
Balance at January 31, 2002 12,223,047 132 109,638 (2,006)
Net income - - - 282 $ 282
Minimum pension liability, net of tax - - - - (3,072)
Derivative instrument, net of tax - - - - 544
-----------
Comprehensive loss, net of tax - - - - $ (2,246)
===========
Stock issued under option plans 147,004 1 469 -
Stock dividend (10%) 1,212,671 12 16,177 (16,189)
Cash dividends - - - (1,014)
Purchase of treasury stock (472,120) - - -
-----------------------------------------------------------
Balance at January 31, 2003 13,110,602 145 126,284 (18,927)
Net loss - - - (21,961) $ (21,961)
Minimum pension liability - - - - 1,732
Derivative instrument - - - - 118
-----------
Comprehensive loss - - - - $ (20,111)
===========
Stock issued under option plans and tax benefits 56,257 1 849 -
Cash dividends - - - (524)
Purchase of treasury stock (71,058) - - -
===========================================================
Balance at January 31, 2004 13,095,801 $ 146 $ 127,133 $ (41,412)
===========================================================
Accumulated
Treasury ESOP Comprehensive
Stock Trust Loss Total
--------------------------------------------------------------
Balance at January 31, 2001 $ (12,009) $ (696) $ (1,575) $ 94,141
Net income - - - 246
Minimum pension liability, net of tax - - (1,329) (1,329)
Derivative instrument, net of tax - - (662) (662)
Comprehensive loss, net of tax - - - -
Unearned ESOP shares - 696 - 696
Stock issued under option plans - - - 30
Stock dividend (10%) - - - 12
Cash dividends - - - (945)
Purchase of treasury stock (1,966) - - (1,966)
--------------------------------------------------------------
Balance at January 31, 2002 (13,975) - (3,566) 90,223
Net income - - - 282
Minimum pension liability, net of tax - - (3,072) (3,072)
Derivative instrument, net of tax - - 544 544
Comprehensive loss, net of tax - - - -
Stock issued under option plans - - - 470
Stock dividend (10%) - - - -
Cash dividends - - - (1,014)
Purchase of treasury stock (4,659) - - (4,659)
--------------------------------------------------------------
Balance at January 31, 2003 (18,634) - (6,094) 82,774
Net loss - - - (21,961)
Minimum pension liability - - 1,732 1,732
Derivative instrument - - 118 118
Comprehensive loss - - - -
Stock issued under option plans and tax benefits - - - 850
Cash dividends - - - (524)
Purchase of treasury stock (637) - - (637)
==============================================================
Balance at January 31, 2004 $ (19,271) $ - $ (4,244) $ 62,352
==============================================================
See accompanying notes.
Virco Mfg. Corporation
Consolidated Statements of Cash Flows
(In thousands, except per share data)
YEAR ENDED JANUARY 31
2004 2003 2002
----------------------------------------------
OPERATING ACTIVITIES
Net (loss) income $ (21,961) $ 282 $ 246
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Depreciation and amortization 11,605 13,659 15,813
Provision for doubtful accounts 36 267 288
(Gain) loss on sale of property, plant and equipment (5,497) 149 86
Deferred income taxes 674 555 (1,722)
Changes in assets and liabilities:
Trade accounts receivable (191) 4,156 5,020
Other receivables 85 (48) 411
Inventories 14,568 (4,356) 19,356
Income taxes (4,461) 2,256 3,790
Prepaid expenses and other current assets (467) (560) 215
Accounts payable and accrued liabilities 5,231 (4,443) (8,230)
Other (120) 128 (236)
----------------------------------------------
Net cash (used in) provided by operating activities (498) 12,045 35,037
INVESTING ACTIVITIES
Capital expenditures (2,236) (3,532) (5,229)
Proceeds from sale of property, plant and equipment 5,806 93 570
Net investment in life insurance 1,622 (109) 1,385
Acquisition of business - (4,550) -
----------------------------------------------
Net cash provided by (used in) investing activities 5,192 (8,098) (3,274)
Virco Mfg. Corporation
Consolidated Statements of Cash Flows (continued)
(In thousands, except per share data)
YEAR ENDED JANUARY 31
2004 2003 2002
----------------------------------------------
FINANCING ACTIVITIES
Dividends paid $ (524) $ (1,014) $ (945)
Issuance of long-term debt 2,051 4,240 -
Repayment of long-term debt (5,514) (3,049) (28,237)
Proceeds from issuance of common stock 153 178 30
Purchase of treasury stock (440) (4,367) (1,954)
ESOP loan - - 696
----------------------------------------------
Net cash used in financing activities (4,274) (4,012) (30,410)
Net increase (decrease) in cash 420 (65) 1,353
Cash at beginning of year 1,639 1,704 351
----------------------------------------------
Cash at end of year $ 2,059 $ 1,639 $ 1,704
==============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the year for:
Interest, net of amounts capitalized $ 2,183 $ 3,513 $ 4,805
Income tax, net 1,421 (2,495) (1,935)
See accompanying notes.
Virco Mfg. Corporation
Notes to Consolidated Financial Statements
January 31, 2004
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Virco Mfg. Corporation, which operates in one business segment, is engaged in
the design, production and distribution of quality furniture for the commercial
and education markets. Over 50 years of manufacturing has resulted in a wide
product assortment. Major products include mobile tables, mobile storage
equipment, desks, computer furniture, chairs, activity tables, folding chairs
and folding tables. The Company manufactures its products in Torrance,
California, and Conway, Arkansas, for sale primarily in the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Virco Mfg.
Corporation and its wholly owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the 2002 and 2001 information to conform to
the 2003 presentation.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of accounts receivable. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
potential credit losses. The Company purchases insurance on receivables from
commercial sales to minimize the Company's credit risk. The Company does not
typically obtain collateral to secure credit risk. A substantial percentage of
the Company's receivables comes from low-risk government entities. No customers
exceeded 10% of the Company's sales for each of the three years in the period
ended January 31, 2004. Foreign sales were less than 5% for each of the three
years in the period ended January 31, 2004.
DERIVATIVES
The Company uses derivative financial instruments to reduce interest rate risks.
The Company does not hold or issue derivative financial instruments for trading
purposes. All derivatives are recognized as either assets or liabilities in the
statement of financial condition and are measured at fair value. At January 31,
2004, the Company has no derivative instruments; however, see Note 3 for swap
agreement entered into subsequent to January 31, 2004.
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out (LIFO) method of valuation for the material content of
inventories and the first-in, first-out (FIFO) method for labor and overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated depreciation.
Depreciation and amortization is computed on the straight-line method for
financial reporting purposes based upon the following estimated useful lives:
Land improvements 5 to 25 years
Buildings and building improvements 5 to 40 years
Machinery and equipment 3 to 10 years
Leasehold improvements Life of lease
Certain assets are depreciated under accelerated methods for income tax
purposes.
Interest costs, amounting to $13,000, $38,000 and $55,000 for the years ended
January 31, 2004, 2003 and 2002, respectively, have been capitalized as part of
the acquisition cost of property, plant and equipment.
The Company capitalizes costs associated with software purchased or developed
for its own use. Such costs are amortized over three to seven years from the
date the software becomes operational. The net book value of capitalized
software, included in machinery and equipment, was $3,118,000 and
$5,149,000 at January 31, 2004 and 2003, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
An impairment loss is recognized in the event facts and circumstances indicate
the carrying amount of an asset may not be recoverable, and an estimate of
future undiscounted cash flows is less than the carrying amount of the asset.
Impairment is recorded based on the excess of the carrying amount of the
impaired asset over the fair value. Generally, fair value represents the
Company's expected future cash flows from the use of an asset or group of
assets, discounted at a rate commensurate with the risks involved.
NET (LOSS) INCOME PER SHARE
Basic net (loss) income per share is calculated by dividing net (loss) income by
the weighted-average number of common shares outstanding. Diluted net income per
share is calculated by dividing net income by the weighted-average number of
common shares outstanding plus the dilution
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
effect of convertible securities. The following table sets forth the computation
of basic and diluted earnings per share:
2003 2002 2001
--------------------------------------------------
Numerator
Net (Loss) income $ (21,961,000) $ 282,000 $ 246,000
==================================================
Denominator
Denominator for basic (loss) earnings per share
- weighted-average shares 13,106,000 13,344,000 13,485,000
Dilutive potential common shares - 114,000 190,000
--------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions 13,106,000 13,458,000 13,675,000
==================================================
Basic earnings per share:
Net (loss) income $ (1.68) $ .02 $ .02
Diluted earnings per share:
Net (loss) income $ (1.68) $ .02 $ .02
All per share and weighted-average share amounts have been restated to reflect
stock dividends and stock splits previously declared. For the period ended
January 31, 2004, options to purchase approximately 20,000 shares of common
stock were excluded in the computation of diluted net income per share, as the
effect would be anti-dilutive.
GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 is effective for any business combination completed
subsequent to June 30, 2001, and SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. Under SFAS No. 142, goodwill and intangible
assets deemed to have an indefinite life will no longer be amortized and will be
subjected to annual impairment tests. Other intangible assets will continue to
be amortized over their useful lives. The adoption of SFAS No. 142 did not have
a material effect on the Company's financial position, results of operations or
cash flows as prior to April 2002 the Company did not have any recorded goodwill
or any indefinite lived or finite lived intangible assets, other than deferred
pension assets (see note 11). At January 31, 2004, goodwill totaled $2,200,000
and was subject to annual tests for impairment on that date.
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
ENVIRONMENTAL COSTS
Costs incurred to investigate and remediate environmental waste are expensed as
incurred, unless the remediation extends the useful life of the assets employed
at the site. Remediation costs that extend the useful life of assets are
capitalized and amortized over the useful life of the assets.
ADVERTISING COSTS
Advertising costs are expensed in the period in which they occur. Selling,
general and administrative expenses include advertising costs of $2,757,000 in
2003, $2,921,000 in 2002 and $4,237,000 in 2001.
PRODUCT WARRANTY EXPENSE
The Company provides for a product warranty on most of the products. It
generally provides that customers can return a defective product during the
specified warranty period following purchase in exchange for a replacement
product or repair at no cost to the consumer. The Company accrues an estimate of
its exposure to warranty claims based upon both current and historical product
sales data and warranty costs incurred. The Company recorded reserves of
$1,751,000 and $900,000 as of January 31, 2004 and 2003, respectively.
SELF-INSURANCE
The Company has a self-insured retention for workers' compensation, automobile
and general and product liability claims. Actuaries assist the Company in
determining its liability for the self-insured component of claims, which have
been discounted to their net present value.
STOCK-BASED COMPENSATION PLANS
The Company uses the "intrinsic value based" method for accounting for stock
options as prescribed by Accounting Principles Board No. 25. The Company
provides pro forma disclosures as if the fair value method had been applied in
accordance with SFAS No. 123 and SFAS No. 148. SFAS No. 123, as amended by SFAS
No. 148, requires pro forma information regarding net income and net income per
share to be disclosed for new options granted after fiscal year 1996. The fair
value of these options was determined at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rates of 4.11% to 6.26%; dividend yield of 0.00%
to 0.98%; volatility factor of the expected market price of the Company's common
stock of 0.26 to 0.42; and a weighted-average expected life of the option of
five years.
The estimated fair value of the options is amortized to expense over the
options' vesting period for pro forma disclosures. The per share "pro forma" for
the effects of SFAS No. 123, as amended by SFAS 148, is not indicative of
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
the effects on reported net income (loss) income for future years. The Company's
"reported" and "pro forma" information is are as follows:
YEAR ENDED JANUARY 31
2004 2003 2002
-------------------------------------------------
Net (loss) income, as reported $ (21,961) $ 282 $ 246
Deduct: Total stock-based employee
compensation expense determined under
the fair value based method for all awards,
net of tax effects (58) (41) (42)
-------------------------------------------------
Pro forma net (loss) income $ (22,019) $ 241 $ 204
=================================================
Basic earnings per share:
Net (loss) income, as reported $ (1.68) $ .02 $ .02
Net (loss) income, pro forma $ (1.68) $ .02 $ .02
Diluted earnings per share:
Net (loss) income, as reported $ (1.68) $ .02 $ .02
Net (loss) income, pro forma $ (1.68) $ .02 $ .01
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes all sales when title passes under its various shipping
terms and when collectability is reasonably assured.
In 2002, the Company purchased certain assets of Furniture Focus, a company
which sells complete educational furniture packages to schools. For package
orders, the Company records revenue upon completion and delivery of the project.
The Company reports sales as net of sales returns and allowances.
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
SHIPPING AND HANDLING FEES
Shipping and handling fees are included as revenue in net sales. Costs related
to shipping and handling are included in operating expenses. For the years ended
January 31, 2004, 2003 and 2002, shipping and handling costs of approximately
$34,443,000, $27,590,000 and $27,491,000, respectively, were included in
selling, general and administrative expenses.
FISCAL YEAR END
Fiscal years 2003, 2002 and 2001, refer to the years ended January 31, 2004,
2003 and 2002, respectively.
FUTURE ACCOUNTING REQUIREMENTS
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which is effective for fiscal years beginning after June 15, 2002.
SFAS No. 143 requires legal obligations associated with the retirement of
long-lived assets to be recognized at their fair value at the time the
obligations are incurred. Upon initial recognition of a liability, that cost
should be capitalized as part of the related long-lived asset and allocated to
expense over the estimated useful life of the asset. SFAS No. 143 was adopted by
the Company on February 1, 2003, and did not have a material impact on the
Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, effective for exit or disposal activities initiated
after December 31, 2002. SFAS No. 146 addresses the financial accounting and
reporting for certain costs associated with exit or disposal activities,
including restructuring actions. SFAS No. 146 excludes from its scope severance
benefits that are subject to an on-going benefit arrangement governed by SFAS
No. 112, Employer's Accounting for Postemployment Benefits, and asset
impairments governed by SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. SFAS No. 146 was adopted by the Company on February 1,
2003, and did not have a material impact on the Company's financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 clarifies the requirements of SFAS
No. 5, Accounting for Contingencies, relating to a guarantor's accounting for,
and disclosure of, the issuance of certain types of guarantees. For certain
guarantees issued after December 31, 2002, FIN 45 requires a guarantor to
recognize, upon issuance of a guarantee, a liability for the fair value of the
obligations it assumes under the guarantee. Guarantees issued prior to January
1, 2003, are not subject to liability recognition, but are subject to expanded
disclosure requirements. FIN 45 was adopted by the Company on February 1, 2003,
and did not have a material impact on the Company's financial position or
results of operations.
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, ("FIN 46"). FIN 46 introduces a new consolidation model, the variable
interests model, which determines control (and consolidation) based on potential
variability in gains and losses of the entity being evaluated for consolidation.
The requirements for FIN 46, including its disclosures, apply immediately. FIN
46 provides guidance for determining whether an entity qualifies as a variable
interest entity ("VIE") by considering, among other considerations, whether the
entity lacks sufficient equity or its equity holders lack adequate
decision-making ability. If the entity does not qualify as a VIE, then the
consolidation criteria is based on previously established accounting standards.
Qualifying VIEs are covered by FIN 46 and are individually evaluated for
consolidation based on their variable interests. FIN 46 requires consideration
and estimates of a significant number of possible future outcomes of the VIE as
well as the probability of each outcome occurring. Based on the allocation of
possible outcomes, a calculation is performed to determine which party, if any,
has a majority of potential negative outcomes (expected losses) or a majority of
the potential positive outcomes (expected residual returns), with an emphasis on
negative outcomes. That party, if any, is the primary beneficiary and is
required to consolidate the VIE. FIN 46 was adopted by the Company and did not
have a material impact on the Company's financial position or results of
operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. SFAS No. 149 was
adopted by the Company on July 1, 2003, and did not have a material impact on
the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. SFAS No. 150 was adopted by the Company on June 15, 2003, and did not
have a material impact on the Company's financial position or results of
operations.
In December 2003 the FASB issued SFAS No. 132 (Revised), Employer's Disclosure
about Pensions and Other Postretirement Benefits. SFAS No. 132 (Revised)
retained disclosure requirements of the original SFAS No. 132 and requires
additional disclosures relating to assets, obligations, cash flows, and net
periodic benefit cost. SFAS No. 132 (Revised) is effective for fiscal years
ending after December 15, 2003, except that certain disclosures are effective
for fiscal years ending after June 15, 2004. Interim period disclosures are
effective for interim periods beginning after December 15, 2003. The adoption of
the disclosure provisions of SFAS No. 132 (Revised) did not have a material
impact on the Company's financial position or results of operations.
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
2. INVENTORIES
The current material cost for inventories exceeded LIFO cost by $4,042,000 and
$3,519,000 at January 31, 2004 and 2003, respectively. Liquidation of prior year
LIFO layers due to a reduction in certain inventories increased (decreased)
income by $771,000, $(423,000) and $(825,000) in the years ended January 31,
2004, 2003 and 2002, respectively.
Details of inventory amounts, including the material portion of inventory which
is valued at LIFO, at January 31, 2004 and 2003, are as follows (in thousands):
JANUARY 31, 2004
--------------------------------------------------
MATERIAL LABOR,
CONTENT AT LIFO OVERHEAD
FIFO RESERVE AND OTHER TOTAL
---------- ---------- ---------- ----------
Finished goods $ 8,399 $ (1,493) $ 3,565 $ 10,470
Work in process 7,789 (1,033) 4,384 11,141
Raw materials and supplies 8,376 (1,516) - 6,860
---------- ---------- ---------- ----------
Total $ 24,564 $ (4,042) $ 7,949 $ 28,471
========== ========== ========== ==========
JANUARY 31, 2003
--------------------------------------------------
MATERIAL LABOR,
CONTENT AT LIFO OVERHEAD
FIFO RESERVE AND OTHER TOTAL
---------- ---------- ---------- ----------
Finished goods $ 10,772 $ (981) $ 6,719 $ 16,510
Work in process 9,822 (1,314) 9,725 18,233
Raw materials and supplies 9,520 (1,224) - 8,296
---------- ---------- ---------- ----------
Total $ 30,114 $ (3,519) $ 16,444 $ 43,039
========== ========== ========== ==========
3. DEBT
Outstanding balances (in thousands) for the Company's long-term debt were as
follows:
JANUARY 31
2004 2003
-------- --------
Revolving credit line with Wells Fargo Bank (a) $ 11,629 $ 26,655
Term note with Wells Fargo Bank (a) 12,500 -
IRB with the City of Torrance (b) 1,055 2,141
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
Derivative instrument (a) - 196
Other 149 -
-------- --------
25,333 28,992
Less current portion 3,138 1,087
-------- --------
$ 22,195 $ 27,905
======== ========
Outstanding stand-by letters of credit $ - $ -
(a) Virco has entered into a revolving credit facility with Wells Fargo
Bank, amended and restated January 27, 2004, which provides a term loan
of $12,500,000 and a secured revolving line of credit that varies as a
percentage of inventory and receivables, up to a maximum of
$45,000,000. The term loan is a three-year line amortizing at $521,000
per quarter with interest payable monthly at a fluctuating rate equal
to the Bank's prime rate plus a fluctuating margin of 0.75%, or at
LIBOR plus 3.25% at January 31, 2004 (4.375% at January 31, 2004).
Under the term loan, the Bank is entitled to require the Company to fix
the rate on up to $6 million of debt. Effective February 1, 2004, Virco
entered into an interest rate swap agreement with Wells Fargo, that
effectively fixed the rate of interest on $6 million for a period of
three years at a rate of 6.32%. The revolving line has an 18-month
maturity with interest payable monthly at a fluctuating rate equal to
the Bank's prime rate plus a margin of 0.50%, or at LIBOR plus 2.75%
(3.875 - 4.5% at January 31, 2004). The revolving line also allows the
Company the option to borrow under 30- 60- and 90-day fixed term rates
at LIBOR plus 2.75%. The revolving line typically provides for advances
of 80% on eligible accounts receivable and 20% - 60% on eligible
inventory. The advance rates fluctuate depending on the time of the
year and the types of assets. The agreement has an unused commitment
fee of 0.375%. Approximately $7,900,000 was available for borrowing as
of January 31, 2004.
The revolving credit facility with Wells Fargo Bank is subject to
various financial covenants including a liquidity requirement, a
leverage requirement, a cash flow coverage requirement and
profitability requirements. The agreement also places certain
restrictions on capital expenditures, new operating leases, dividends
and the repurchase of the Company's common stock. The revolving credit
facility is secured by the Company's accounts receivable, inventory,
equipment and property. The Company is in compliance with its covenants
at January 31, 2004.
The $11,629,000 due under Wells Fargo Bank's line of credit will be
payable on August 1, 2005, if the agreement is not renewed. The Company
intends to renew the agreement.
On February 22, 2000, the Company entered into an interest rate swap
agreement with Wells Fargo Bank. The initial notional swap amount was
$30,000,000 for the period February 22, 2000 through February 28, 2001.
The notional swap
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
amount decreased to $20,000,000 until its expiration on March 3, 2003.
The swap agreement was in consideration for a fixed rate at 7.23% plus
a fluctuating margin of 1.50% to 2.50%. The swap agreement expired on
March 1, 2003.
(b) 10-year $8,900,000 IRB issued through the City of Torrance. This
5.994% fixed interest rate bond is payable in monthly installments of
$99,000, including interest, through December 2004.
Long-term debt repayments are approximately as follows (in thousands):
Year ending January 31
- ----------------------
2005 $ 3,138
2006 13,735
2007 8,355
2008 22
2009 22
Thereafter 61
-------------
$ 25,333
=============
The Company believes that the carrying value of debt under the Wells Fargo
credit facility approximates fair value at January 31, 2004 and 2003, as the
majority of the long-term debt bears interest at variable rates or is fixed for
periods equal to or less than 90 days. The carrying value of other debt
instruments approximates their fair value given the Company's incremental
borrowing rate for similar types of financing arrangements.
4. RETIREMENT PLANS
Virco Mfg. Corporation maintains three defined benefit pension plans, the Virco
Employees Retirement Plan, the VIP Retirement Plan, and the Non-Employee
Directors Retirement Plan. Three significant events occurred during the fiscal
year ended January 31, 2004. First, approximately 40% of Virco's employees
severed their employment with Virco during the year. The majority of these
employees accepted a voluntary severance package. This severance was treated a
Plan curtailment. Second, a significant number of employees that severed their
employment elected a lump sum benefit. During 2003 the pension trust disbursed
approximately $6.3 million to severed employees. These distributions were
accounted for as a Plan settlement. Finally, effective December 31, 2003, Virco
froze all future benefit accruals under the Plans. Employees can continue to
vest under the benefits earned to date, but no covered participants will earn
additional benefits under the Plan freeze. The annual measurement date for the
Plans is December 31. As a result of these activities, Virco incurred additional
pension expense of approximately $1,250,000 related to the Plan curtailment,
additional pension expense of approximately $1,540,000 related to the plan
settlement, and additional pension expense of approximately $40,000 related to
the Plan freeze. As a result of the Plan freeze, the projected benefit
obligation decreased by approximately $7,500,000.
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
Accounting policy regarding pensions requires management to make complex and
subjective estimates and assumptions relating to amounts which are inherently
uncertain. Three primary economic assumptions influence the reported values of
plan liabilities and pension costs. The Corporation takes the following factors
into consideration.
The discount rate represents an estimate of the rate at which retirement plan
benefits could effectively be settled. The Corporation obtains data on several
reference points when setting the discount rate including current rates of
return available on longer term high grade bonds and changes in rates that have
occurred over the past year. This assumption is sensitive to movements in market
rates that have occurred since the preceding valuation date, and therefore, is
likely to change from year to year.
When setting its rate of compensation increase assumption, the Corporation takes
into consideration its recent experience with respect to average rates of
compensation increase, compensation survey data relative to average compensation
increases that other large corporations have awarded, and compensation increases
that other large corporations expect to award over the upcoming year. This
assumption is somewhat sensitive to inflation and may change from year to year.
Effective December 31, 2003, the Corporation froze future benefit accruals for
all three defined benefit plans. As such, the compensation increase assumption
impacted the pension expense for the fiscal year ended January 31, 2004, but did
not impact the Accumulated Benefit Obligation or Projected Benefit Obligation
reported effective January 31, 2004.
The assumed rate of return on plan assets represents an estimate of long-term
returns available to investors who hold a mixture of stocks, bonds, and cash
equivalent securities. When setting its expected return on plan assets
assumption, the Corporation considers long-term rates of return on various asset
classes (both historical and forecasted, using data collected from various
sources generally regarded as authoritative) in the context of expected
long-term average asset allocations for its defined benefit pension plan.
Two of the Corporations defined benefit pension plans (the VIP Plan and the
Non-Employee Directors Plan) are executive benefit plans that are not funded and
are subject to the Corporation's creditors. Because these Plans are not funded,
the assumed rate of return has no impact on pension expense or the funded status
of the Plans.
The Corporation maintains a trust and funds the pension obligations for the
Virco Mfg. Corporation Employees Pension. The Board of Directors appoints a
Retirement Plan Committee that establishes policy for investment and funding
strategies. Approximately 85% of the trust assets are managed by investment
advisors with the balance managed by the Retirement Plan Committee. The
Committee has established target asset allocations to its investment advisors,
who invest the trust assets in a variety of institutional collective trust
funds. The long term asset allocation target provided to the investment advisors
is 85% stock and 15% bond, with maximum allocations of 80% large cap stocks, 30%
small cap stocks, and 30% international stock. Virco has established a custom
benchmark derived from a variety of stock and bond indices that are weighted to
approximate the
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
asset allocation provided to the investment advisors. The investment advisors
performance is compared to the custom index as part of the evaluation of the
investment advisors performance. The Committee receives monthly reports from the
investment advisors and meets periodically with them to discuss investment
performance. At December 31, 2003, approximately 10% of the Plans assets were
invested in bond or short-term investment funds and the balance in equity funds
or investments. The Trust does not hold any Virco Stock. It is the Company's
policy to contribute adequate funds to the Trust accounts to cover benefit
payments under the VIP and Non-Employee Director Plans and to maintain the
funded status of the Virco Mfg. Corporation Employees Pension at a minimum of
90% of the current liability as determined by the Plan actuaries. It is
anticipated that the Company will be required to contribute approximately $1
million to the Plans during the fiscal year ending January 31, 2005.
QUALIFIED PENSION PLAN
The Company and its subsidiaries cover all employees under a noncontributory
defined benefit retirement plan, the Virco Employees' Retirement Plan (the
Plan). Benefits under the Plan are based on years of service and career average
earnings. The Company's general funding policy is to contribute enough to
maintain a funded status of at least 90% of the current liability as determined
by the Plan actuaries. Minimum pension liability adjustments for the years 2003,
2002 and 2001 were $5,635,000, $3,072,000 and $1,329,000, respectively (net of
taxes of $0, $2,005,000 and $850,000, respectively), and are included in
comprehensive loss. Assets of the Plan are invested in common trust funds.
The following table sets forth (in thousands) the funded status of the Plan at
December 31, 2003 and 2002:
PENSION BENEFITS
2003 2002
---------- ----------
Change in benefit obligation
Benefit obligation at beginning of year $ 28,787 $ 21,163
Service cost 1,384 1,437
Interest cost 1,706 1,684
Plan amendments 611 503
Settlement and curtailment (5,062) -
Actuarial loss 526 4,520
Benefit paid (6,312) (520)
---------- ----------
Benefit obligation at end of year $ 21,640 $ 28,787
========== ==========
Change in plan assets
Fair value at beginning of year $ 17,074 $ 8,808
Actual return on plan assets 4,179 (1,696)
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
Company contributions 1,535 10,482
Benefits paid (6,312) (520)
---------- ----------
Fair value at end of year $ 16,476 $ 17,074
========== ==========
Funded status of plan $ (5,164) $ (11,713)
Unrecognized net transition amount (126) (184)
Unrecognized prior service cost 2,842 4,333
Unrecognized net actuarial loss 4,370 14,700
---------- ----------
Net amount recognized $ 1,922 $ 7,136
========== ==========
Statements of financial position
Accrued benefit liability $ (5,163) $ (7,077)
Intangible asset 2,841 4,333
Accumulated other comprehensive income 4,244 9,880
---------- ----------
Net amount recognized $ 1,922 $ 7,136
========== ==========
Supplementary Data
Projected benefit obligation $ 21,640 $ 28,787
Accumulated benefit obligation 21,640 24,150
Fair value of plan assets 16,476 17,074
Weighted average assumptions
Discount rate 6.50% 6.50%
Expected return on plan assets 6.50% 6.50%
Rate of compensation increase 5.00% 5.00%
The total pension expense for the Plan (in thousands) included the following
components:
2003 2002 2001
-------- -------- --------
Components of net cost
Service cost $ 1,384 $ 1,437 $ 1,017
Interest cost 1,864 1,684 1,515
Expected return on plan assets (1,175) (820) (821)
Amortization of transition amount (42) (42) (42)
Amortization of prior service cost 562 601 562
Recognized net actuarial loss 1,078 1,039 398
Settlement and curtailment 3,077 - -
-------- -------- --------
Benefit cost $ 6,748 $ 3,899 $ 2,629
======== ======== ========
Additional Information
Increase in minimum liability included in
other comprehensive income $ 4,244 $ 9,880 $ 4,802
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
VIP RETIREMENT PLAN
The Company also provides a supplementary retirement plan for certain key
employees, the VIP Retirement Plan (VIP Plan). The VIP Plan provides a benefit
up to 50% of average compensation for the last five years in the VIP Plan,
offset by benefits earned under the Virco Employees' Retirement Plan. The VIP
Plan benefits are secured by a life insurance program. The cash surrender values
of the policies securing the VIP Plan were $2,691,000 and $2,419,000 at January
31, 2004 and 2003, respectively. These cash surrender values are included in
other assets in the consolidated balance sheets.
The Company maintains a Rabbi Trust to hold assets related to the VIP Retirement
Plan, the Dual Option Life Insurance Plan, and the Deferred Compensation Plan.
Substantially all assets securing these Plans are held in the Rabbi Trust.
The following table sets forth (in thousands) the funded status of the VIP Plan
at December 31, 2003 and 2002:
NONQUALIFIED VIP PENSION
2003 2002
---- ----
Change in benefit obligation
Benefit obligation at beginning of year $ 7,756 $ 4,821
Service cost 801 820
Interest cost 489 431
Plan amendments (610) (503)
Settlement and curtailment (3,442) -
Actuarial loss 524 2,453
Benefit paid (264) (266)
-------- --------
Benefit obligation at end of year $ 5,254 $ 7,756
======== ========
Change in plan assets
Company contributions $ 264 $ 266
Benefits paid (264) (266)
-------- --------
Fair value at end of year $ - $ -
======== ========
Funded status of plan $ (5,254) $ (7,756)
Unrecognized prior service cost (2,968) (3,121)
Unrecognized net actuarial loss 1,489 4,816
-------- --------
Accrued benefit cost $ (6,733) $ (6,061)
======== ========
Statements of financial position
Accrued benefit liability $ (6,733) $ (6,061)
-------- --------
Net amount recognized $ (6,733) $ (6,061)
======== ========
Supplementary Data
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
Projected benefit obligation $ 5,254 $ 7,756
Accumulated benefit obligation 5,254 4,407
Fair value of plan assets - -
Weighted average assumptions
Discount rate 6.50% 6.50%
Rate of compensation increase 5.00% 5.00%
The total plan expense for the VIP Retirement Plan included the following
components (in thousands):
2003 2002 2001
-------- -------- --------
Components of net cost
Service cost $ 801 $ 820 $ 490
Interest cost 489 431 323
Amortization of prior service cost (499) (417) (366)
Recognized net actuarial loss 409 355 193
Settlement and curtailment (264) - -
-------- -------- --------
Benefit cost $ 936 $ 1,189 $ 640
======== ======== ========
NON-EMPLOYEE DIRECTORS RETIREMENT PLAN
In April 2001, the Board of Directors established a non-qualified plan for
non-employee directors of the Company. The Plan provides a lifetime annual
retirement benefit equal to the director's annual retainer fee for the fiscal
year in which the director terminates his or her position with the Board,
subject to the director providing 10 years of service to the Company. At January
31, 2004, the Plan did not hold any assets.
The following table sets forth (in thousands) the funded status of the
Non-Employee Directors Retirement Plan at December 31, 2003:
NON-EMPLOYEE DIRECTOR
PENSION
2003 2002
------ ------
Change in benefit obligation
Benefit obligation at beginning of year $ 554 $ 485
Service cost 19 29
Interest cost 23 34
Actuarial (gain)/loss (230) 6
------ ------
Benefit obligation at end of year $ 366 $ 554
====== ======
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
Change in plan assets
Fair value of plan assets at inception and end of year $ - $ -
====== ======
Funded status of plan $ (366) $ (554)
Unrecognized prior service cost 198 286
Unrecognized net actuarial (gain)/loss (237) (30)
------ ------
Net amount recognized $ (405) $ (298)
====== ======
Statements of financial position
Accrued benefit liability $ (405) $ (554)
Intangible asset - 256
------ ------
Net amount recognized $ (405) $ (298)
====== ======
2003 2002
------ ------
Weighted average assumptions
Discount rate 6.50% 6.50%
Rate of compensation increase 5.00% 5.00%
The total plan expense for the Non-Employee Directors Retirement Plan included
the following components (in thousands):
2003 2002 2001
------ ------ ------
Components of net cost
Service cost $ 19 $ 29 $ 24
Interest cost 23 34 36
Actuarial gain (23) - -
Amortization of prior year service cost 88 88 88
------ ------ ------
Benefit Cost $ 107 $ 151 $ 148
====== ====== ======
401(k) RETIREMENT PLAN
The Company's retirement plan, which covers all U.S. employees, allows
participants to defer from 1% to 15% of their eligible compensation through a
401(k) retirement program. Through December 31, 2001, the Plan included an
employee stock ownership component. The Plan continues to include the Virco
Stock Fund as one of the investment options. Shares owned by the Plan are held
by the Plan Trustee, Security Trust Company. At January 31, 2004, the Plan held
496,375 shares of Virco Stock. For the fiscal years ended January 31, 2004, 2003
and 2002, there was no employer match and therefore no compensation cost to the
Company.
LIFE INSURANCE
The Company provided current and post-retirement life insurance to certain
salaried employees with split dollar life insurance policies under the Dual
Option Life Insurance Plan. Effective January 2004, the Company terminated the
Plan for active employees. Cash surrender values of
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
these policies, which are included in other assets in the consolidated balance
sheets, were $2,633,000 and $3,915,000 at January 31, 2004 and 2003,
respectively.
DEFERRED COMPENSATION PLAN
The Company established, effective January 1, 1997, a Deferred Compensation
Plan, which allows certain key employees to defer up to a maximum of 90% of
their base annual salary and/or up to 90% of their annual bonus on a pretax
basis. The total participant deferrals were $1,983,000 and $1,772,000 for the
years ended January 31, 2004 and 2003, respectively. The Deferred Compensation
Plan is funded with investment funds held in the Rabbi Trust and are included in
other assets in the consolidated balance sheets at January 31, 2003. The
Deferred Compensation Plan was terminated in December 2003 and all assets were
distributed to participants in January 2004.
5. STOCK OPTIONS AND STOCKHOLDERS' RIGHTS
The Company's two stock plans are the 1997 Employee Incentive Plan (the 1997
Plan) and the 1993 Employee Incentive Stock Plan (the 1993 Plan). Under the
Plans, the Company may grant an aggregate of approximately 1,432,000 shares (as
adjusted for stock splits and stock dividends) to its employees in the form of
stock options. Non-employee directors automatically receive a grant for options
to purchase 2,000 shares of common stock on the first business day following
each annual meeting of the Company's stockholders.
As of January 31, 2004, 403,319 shares remain available for future grant.
Options granted under the Plans have an exercise price equal to the market price
at the date of grant, have a maximum term of 10 years and generally become
exercisable ratably over a five-year period. During 2003, certain optionees
satisfied the exercise price of their options by exchanging shares already owned
rather than paying cash. As a result, 19,991 and 29,632 shares were recorded as
treasury stock for the years ended January 31, 2004 and 2003, respectively.
A summary of the Company's stock option activity, and related information for
the years ended January 31 are as follows:
2004 2003 2002
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- --------- -------- --------- -------- ---------
Outstanding at beginning
of year 481,774 $ 10.82 659,475 $ 9.09 714,679 $ 9.34
Granted 10,000 8.40 13,200 13.59 38,720 8.37
Exercised (56,257) 6.22 (149,431) 3.15 (16,498) 2.20
Forfeited (63,136) 12.58 (41,470) 11.68 (77,426) 12.27
-------- -------- --------
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
Outstanding at end of year 372,381 11.15 481,774 10.82 659,475 9.09
======== ======== ========
Exercisable at end of year 337,509 11.30 433,280 10.81 578,076 8.96
Weighted-average fair value of
options granted during the
year $ 3.53 $ 5.54 $ 3.45
Information regarding stock options outstanding as of January 31, 2004, is as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICE RANGE SHARES LIFE PRICE SHARES PRICE
- ----------- --------- ----------- -------- --------- --------
$ 2.41-3.81 8,141 1.40 $ 3.05 8,141 $ 3.05
6.36-8.82 96,386 5.26 7.41 71,190 7.10
10.14-16.07 267,854 4.81 12.60 258,178 12.57
--------- ---------
372,381 337,509
========= =========
The Company has elected to account for its employee stock options under
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," (APB 25) and related interpretations in accounting for employee
stock options. No compensation expense is recorded under APB 25 because the
exercise price of the Company's employee common stock options equals the market
price of the underlying common stock on the grant date.
STOCKHOLDERS' RIGHTS
On October 15, 1996, the Board of Directors declared a dividend of one preferred
stock purchase right (a Right) for each outstanding share of the Company's
common stock. Each Right entitles a stockholder to purchase for an exercise
price of $50.00 ($20.70, as adjusted for stock splits and stock dividends),
subject to adjustment, one one-hundredth of a share of Series A Junior
Participating Cumulative Preferred Stock of the Company, or under certain
circumstances, shares of common stock of the Company or a successor company with
a market value equal to two times the exercise price. The Rights are not
exercisable, and would only become exercisable for all other persons when any
person has acquired or commences to acquire a beneficial interest of at least
20% of the Company's outstanding common stock. The Rights expire on October 25,
2006, have no voting privileges, and may be redeemed by the Board of Directors
at a price of $.001 per Right at any time prior to the acquisition of a
beneficial ownership of 20% of the outstanding common shares. There are 200,000
shares (483,153 shares as adjusted by stock splits and stock dividends) of
Series A Junior Participating Cumulative Preferred Stock reserved for issuance
upon exercise of the Rights.
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
6. PROVISION FOR INCOME TAXES
The Company uses the liability method to determine the provision for income
taxes. Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
The provisions for the last three years are reconciled to the statutory federal
income tax rate using the liability method as follows:
JANUARY 31
2004 2003 2002
------ ---- ----
Statutory 34.0% 34.0% 34.0%
State taxes (net of federal tax) 3.04 1.0 4.1
Change in valuation allowance (22.73) - -
Nondeductible expenses and other 3.25 (1.7) 5.5
------ ---- ----
17.56% 33.3% 43.6%
====== ==== ====
Significant components of the provision for income taxes (in thousands)
attributed to income before income taxes and cumulative effect of the accounting
change are as follows:
JANUARY 31
2004 2003 2002
-------- -------- --------
Current
Federal $ (4,677) $ (333) $ 1,562
State - (81) 350
-------- -------- --------
(4,677) (414) 1,912
Deferred
Federal (6,359) 469 (1,449)
State (1,283) 86 (273)
-------- -------- --------
(7,641) 555 (1,722)
Valuation Allowance 7,641 - -
-------- -------- --------
- 555 (1,722)
-------- -------- --------
$ (4,677) $ 141 $ 190
======== ======== ========
Deferred tax assets and liabilities (in thousands) are comprised of the
following:
JANUARY 31
2004 2003
---------- ----------
Deferred tax assets
Accrued vacation and sick leave $ 906 $ 1,209
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
Retirement plans 3,986 3,996
Insurance reserves 1,626 1,607
Inventory 1,320 574
Net operating loss carryforwards 4,055 -
Other - 372
---------- ----------
11,892 7,758
Deferred tax liabilities
Tax in excess of book depreciation (3,476) (4,148)
Capitalized software development costs (472) (1,214)
Other (243) -
---------- ----------
(4,191) (5,362)
Valuation allowance (7,701) -
---------- ----------
Net deferred tax asset $ 0 $ 2,396
========== ==========
The Company recognized an income tax benefit for an amount equal to the
estimated available net operating loss carryback and has recognized no benefit
related to the net operating loss carryforwards. The Company has net deferred
tax assets of $7,701,000 at January 31, 2004, and has established a valuation
allowance of $7,701,000. At January 31, 2004, the Company has net operating loss
carryforwards for federal and state income tax purposes, expiring at various
dates through 2024 if not utilized. Federal net operating losses that can
potentially be carried forward total approximately $9.2 million at January 31,
2004. The Company evaluates the adequacy of valuation allowances against net
deferred tax assets on a quarterly basis, and in the event that the Company
determines that is more likely than not that we would be able to realize the net
deferred tax asset, an additional adjustment to the deferred tax asset valuation
allowance would be made to income in the period such determination was made.
7. COMMITMENTS
The Company has long-term leases on real property and equipment, which expire at
various dates. Certain of the leases contain renewal, purchase options and
require payment for property taxes and insurance.
Minimum future lease payments (in thousands) for operating leases in effect as
of January 31, 2004, are as follows:
Year ending January 31
- ----------------------
2005 $ 7,502
2006 3,767
2007 3,186
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
2008 2,108
2009 398
Thereafter 376
---------
$ 17,337
=========
Rent expense relating to operating leases was as follows (in thousands):
Year ending January 31
- ----------------------
2004 $ 9,999
2003 9,969
2002 11,042
The Company leases machinery and equipment from GECC under a 10-year operating
lease arrangement. The Company has the option of buying out the leases three to
five years into the lease period.
The Company has no minimum future lease-receipts for leases relating to
properties owned or subleased as of January 31, 2004.
8. CONTINGENCIES
The Company and other furniture manufacturers are subject to federal, state and
local laws and regulations relating to the discharge of materials into the
environment and the generation, handling, storage, transportation and disposal
of waste and hazardous materials. The Company has expended, and may be expected
to expend significant amounts for the investigation of environmental conditions,
installation of environmental control equipment and remediation of environmental
contamination.
The Company is subject to contingencies pursuant to environmental laws and
regulations that in the future may require the Company to take action to correct
the effects on the environment of prior disposal practices or releases of
chemical or petroleum substances by the Company or other parties. At January 31,
2004 and 2003, there are no required reserves for such environmental
contingencies.
The Company has a self-insured retention for product and general liability
losses up to $500,000 per occurrence, workers' compensation liability losses up
to $250,000 and automobile liability losses up to $50,000 per occurence. The
Company has purchased insurance to cover losses in excess of the retention up to
a limit of $30,000,000. The Company has obtained an actuarial estimate of its
total expected future losses for liability claims and recorded the net present
value of $4,476,000 at January 31, 2004, based upon the Company's estimated
payout period of four years using a 6% discount rate.
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
Workers' compensation, automobile, general and product liability claims may be
asserted in the future for events not currently known by management. Management
does not anticipate that any related settlement, after consideration of the
existing reserve for claims incurred and potential insurance recovery, would
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
The Company and its subsidiaries are defendants in various legal proceedings
resulting from operations in the normal course of business. It is the opinion of
management that the ultimate outcome of all such matters will not materially
affect the Company's financial position, results of operations or cash flows.
9. WARRANTY
The Company accrues an estimate of its exposure to warranty claims based upon
both current and historical product sales data and warranty costs incurred. The
majority of the Company's products carry a five-year warranty. The Company
periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary. The warranty liability is in accrued
liabilities in the accompanying consolidated balance sheet.
Changes in the Company's warranty liability were as follows (in thousands):
JANUARY 31
2004 2003
------------ ------------
Balance at January 31, 2003 $ 900 $ 150
Provision 1,976 2,091
Costs incurred (1,125) (1,341)
------------ ------------
Balance at January 31, 2004 $ 1,751 $ 900
============ ============
10. GAIN ON SALE OF ASSETS AND OTHER INCOME
In\ November 2003, the Company completed the sale of its Gardena, California,
manufacturing facility, which was held as rental property. The Company received
$5,801,000 in cash and recorded a $5,557,000 pre-tax gain on the disposition
during the fiscal year ended January 31, 2004.
11. ACQUISITION OF BUSINESS
In April 2002, the Company entered into an agreement with Dew-El Corporation to
purchase Furniture Focus, Inc., an Ohio reseller that offers complete package
solutions for the Furniture, Fixtures and Equipment components of bond-funded
public school construction projects, primarily in the upper Midwest. In May
2002, the Company paid $2,400,000 in cash for certain assets of the corporation
and recorded goodwill of $2,200,000. The goodwill is not expected to be
deductible for income tax. In addition, the Company purchased approximately
$2,150,000 of
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
accounts receivable. The financial statements for the fiscal 2002 included nine
months of Furniture Focus operations. The additional revenue and operating
results as a result of this acquisition did not have a significant effect on the
Company's financial position, operations or cash flows.
12. QUARTERLY RESULTS (UNAUDITED)
The Company's quarterly results for the years ended January 31, 2004 and 2003
are summarized as follows (in thousands, except per share data):
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
---------- ---------- ---------- ----------
Year ended January 31, 2004
Net sales $ 31,180 $ 65,861 $ 65,802 $ 29,009
Gross profit 10,411 20,966 18,865 $ 4,190
Net loss (4,013) (8,286) (7,675) $ (1,987)
Per common share (1)
Net loss
Basic (0.31) (0.63) (0.59) (0.15)
Assuming dilution (0.31) (0.63) (0.59) (0.15)
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
---------- ---------- ---------- ----------
Year ended January 31, 2003
Net sales $ 41,168 $ 83,164 $ 85,022 $ 35,001
Gross profit 14,299 30,989 31,217 7,198
Net (loss) income (2,137) 4,260 3,244 (5,085)
Per common share(1)
Net (loss) income
Basic (0.16) 0.32 0.24 (0.39)
Assuming dilution (0.16) 0.32 0.24 (0.39)
(1) Per common share amounts for the quarters and full years have each been
calculated separately. Accordingly, quarterly amounts may not add to the
annual amounts because of differences in the average common shares
outstanding during each period and with regard to diluted per common share
amounts only, because of the effect of potentially dilutive securities only
in the periods in which the effect would have been dilutive.
EXHIBIT 13.1 - SUPPLEMENTAL STOCKHOLDERS' INFORMATION
ANNUAL MEETING
The Annual Meeting of Virco stockholders will be held on Tuesday, June 8, 2004,
at 10:00 a.m., at Highway 65, South, Conway, Arkansas 72032. The record date for
this meeting is April 26, 2004. The Proxy Statement and Proxy pertaining to this
meeting will be mailed on or about May 10, 2004.
SEC FORM 10-K
A copy of the annual report to the Securities and Exchange Commission on Form
10-K may be obtained without charge upon written request to:
Corporate Secretary
Virco Mfg. Corporation
2027 Harpers Way
Torrance, CA 90501
VIRCO COMMON STOCK
The American Stock exchange is the principal market on which Virco Mfg.
Corporation (VIR) stock is traded. As of April 7, 2004, there were approximately
329 registered stockholders according to the transfer agent records. There are
approximately 1,083 beneficial stockholders.
STOCKHOLDER RECORDS
Records pertaining to stockholdings and dividends are maintained by Mellon
Investor Services. Inquiries with respect to these matters, as well as notices
of address changes, should be directed to:
Mellon Investor Services, PO Box 3315
South Hackensack, New Jersey 07606
Phone: 1-800-356-2017 & foreign: 201-329-8660
TDD for Hearing Impaired: (800)231-5469
website address: www.melloninvestor.com
If a stock certificate is lost or mutilated, immediately communicate with Mellon
Investor Services at the above addresses.
ADDITIONAL SERVICES FOR STOCKHOLDERS
Information about the Company is now available to stockholders at the Company's
website (www.virco.com). A brief description of Virco's product line is offered
together with illustrations showing a sampling of furniture.
QUARTERLY DIVIDEND AND STOCK MARKET INFORMATION
Cash Dividends Declared Common Stock Range
1-31-2004 1-31-2003 1-31-2004 1-31-2003
----------------------- ----------------- -----------------
High Low High Low
---- --- ---- ---
1st Quarter $ 0.02 $ 0.02 $10.08 $8.43 $ 9.54 $8.09
2nd Quarter 0.02 0.02 9.65 6.11 13.70 9.18
3rd Quarter - 0.02 7.62 5.60 12.18 8.43
4th Quarter - 0.02 7.55 5.55 10.48 7.98
The data included in the above table has been retroactively adjusted, if
applicable, for the stock split and stock dividends.
DIRECTORS, OFFICERS AND FACILITIES
DIRECTORS
Robert A. Virtue
President, Chairman of the Board and Chief Executive Officer
Donald S. Friesz
Former Vice President - Sales and Marketing
Evan M. Gruber
Chairman and Chief Executive Officer, Modtech Holdings, Inc.
Robert K. Montgomery
Partner, Gibson, Dunn & Crutcher
Glen D. Parish
Vice President and General Manager, Conway Division
Donald A. Patrick
Management Consultant, Diversified Business Resources, Inc.
Douglas A. Virtue
Executive Vice President
Dr. James R. Wilburn
Dean of the School of Public Policy, Pepperdine University
OFFICERS
Robert A. Virtue
President, Chairman of the Board and Chief Executive Officer
Douglas A. Virtue
Executive Vice President
Robert E. Dose
Vice President - Finance, Secretary and Treasurer
Glen D. Parish
Vice President and General Manager - Conway Division
Wesley D. Roberts
Vice President and Chief Information Officer
D. Randal Smith
Vice President - Marketing
Lori L. Swafford
Vice President - Legal Affairs
Larry O. Wonder
Vice President - Sales
INDEPENDENT AUDITORS
Ernst & Young LLP
725 South Figueroa Street
Los Angeles, CA 90017
LEGAL COUNSEL
Gibson, Dunn & Crutcher
2029 Century Park East
Los Angeles, California 90067
CORPORATE HEADQUARTERS
2027 Harpers Way
Torrance, California 90501
(310) 533-0474
MAJOR FACILITIES
Torrance Division
2027 Harpers Way
Torrance, California 90501
Conway Division
Highway 65, South
Conway, Arkansas 72032
VIRCO MFG. CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
(In Thousands)
Col. A Col. B Col. C
Additions
Balance at Beginning of Period Charged to Costs and Expenses
------------------------------ -----------------------------
Allowance for doubtful accounts for the period ended:
31-Jan-04 $ 225 $ 36
31-Jan-03 $ 200 $ 267
31-Jan-02 $ 200 $ 288
Inventory valuation reserve for the period ended:
31-Jan-04 $ 575 $ 575
31-Jan-03 $ 628 $ 0
31-Jan-02 $ 828 $ 0
Warranty reserve for the period ended:
31-Jan-04 $ 900 $ 1,976
31-Jan-03 $ 150 $ 2,091
31-Jan-02 $ 150 $ 700
Product liability reserve for the period ended:
31-Jan-04 $ 3,080 $ 1,217
31-Jan-03 $ 3,500 $ 1,407
31-Jan-02 $ 3,154 $ 1,245
Deferred tax valuation allowance for the period ended:
31-Jan-04 $ 0 $ 7,701
31-Jan-03 $ 0 $ 0
31-Jan-02 $ 0 $ 0
Col. A Col. E Col. F
Deductions from Reserves Balance at Close of Period
------------------------ --------------------------
Allowance for doubtful accounts for the period ended:
31-Jan-04 $ 36 $ 225
31-Jan-03 $ 242 $ 225
31-Jan-02 $ 288 $ 200
Inventory valuation reserve for the period ended:
31-Jan-04 $ 0 $ 1,150
31-Jan-03 $ 53 $ 575
31-Jan-02 $ 200 $ 628
Warranty reserve for the period ended:
31-Jan-04 $ 1,125 $ 1,751
31-Jan-03 $ 1,341 $ 900
31-Jan-02 $ 700 $ 150
Product liability reserve for the period ended:
31-Jan-04 $ 0 $ 4,297
31-Jan-03 $ 1,827 $ 3,080
31-Jan-02 $ 899 $ 3,500
Deferred tax valuation allowance for the period ended:
31-Jan-04 $ 0 $ 7,701
31-Jan-03 $ 0 $ 0
31-Jan-02 $ 0 $ 0