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FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
January 31
in thousands except per share data 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales $ 266,641 $ 273,620 $ 258,194 $ 236,277 $ 224,349
Net income
Continuing operations $ 10,166 $ 17,630 $ 13,852 $ 9,326 $ 5,209
Net income per share*
Continuing operations $ 0.96 $ 1.60 $ 1.25 $ 0.85 $ 0.48
Average number of shares outstanding 10,583,417 11,048,486 11,049,404 10,898,776 10,844,152
Dividends declared per share
adjusted for 10% stock dividend
Cash $ 0.08 $ 0.07 $ 0.06 $ 0.06 $ 0.02
OTHER FINANCIAL DATA
Total assets $ 190,863 $ 151,380 $ 122,015 $ 118,020 $ 119,225
Working capital 51,423 47,405 43,784 45,099 51,320
Current ratio 2.3/1 2.4/1 2.5/1 2.6/1 3.2/1
Total long-term obligations 53,995 25,690 13,512 25,396 39,900
Stockholders' equity 93,834 88,923 77,077 63,921 55,386
Shares outstanding at year-end*** 10,330,476 10,608,320 10,753,020 10,719,927 10,719,927
Stockholders' equity per share** 9.08 8.38 7.17 5.96 5.17
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* Based on average number of shares outstanding each year after giving
retroactive effect for stock dividends and 3 for 2 stock split.
** Based on number of shares outstanding at year-end after giving effect for
stock dividends and 3 for 2 stock split.
*** Adjusted for stock dividends and 3 for 2 stock split.
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FINANCIAL HIGHLIGHTS
January 31
in thousands, except per share data 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Summary of Operations
Net sales - continuing operations $266,641 $273,620 $258,194 $236,277 $224,349
Net income
Continuing operations 10,166 17,630 13,852 9,326 5,209
Discontinued operations -- -- -- -- --
Change in accounting methods -- -- -- -- --
-----------------------------------------------------------------
10,166 17,630 13,852 9,326 5,209
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Net income per share* $ 0.96 $ 1.60 $ 1.25 $ 0.85 $ 0.48
Stockholder's equity 93,834 88,923 77,077 63,921 55,386
Stockholder's equity per share** 9.08 8.38 7.17 5.96 5.17
in thousands, except per share data 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------
Summary of Operations
Net sales - continuing operations $ 215,659 $ 205,629 $ 191,324 $ 187,384 $ 189,393
Net income
Continuing operations 5,001 4,302 3,827 3,453 2,536
Discontinued operations -- -- (668) (347) (337)
Change in accounting methods -- (275) -- -- --
------------------------------------------------------------------------
5,001 4,027 3,159 3,106 2,199
------------------------------------------------------------------------
Net income per share* $ 0.46 $ 0.38 $ 0.29 $ 0.29 $ 0.20
Stockholder's equity 50,466 45,637 41,937 39,164 36,206
Stockholder's equity per share** 4.72 4.26 3.92 3.66 3.38
* Based on average number of shares outstanding each year after giving
retroactive effect for stock dividends and 3 for 2 stock split.
** Based on number of shares outstanding at year-end giving effect for stock
dividends and 3 for 2 stock split.
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MANAGEMENT'S STATEMENT
The financial statements of Virco Mfg. Corporation were prepared by management,
which is responsible for the integrity and objectivity of the data 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 was most
appropriate in the circumstances.
Virco depends upon the Corporation's system of internal controls in meeting its
responsibilities for reliable financial statements. This system is designed to
provide 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 our 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 primarily of
Directors from outside the Company, maintain 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
REVENUE AND INCOME
1999 vs. 1998
For the year ended January 31, 2000, sales declined 2.6% to $266,600,000,
compared to $273,600,000 for the same period last year. The Company believes two
factors have contributed to the decline in sales. First, the Company experienced
some very aggressive price competition from regional competitors that resulted
in a slight reduction in year-to-date educational sales. Second, sales and
orders of commercial furniture declined as a result the Company's strategic
decision to reduce sales to mass merchandisers. This decision, which was
initiated in 1995, is now substantially complete. The Company does not
anticipate further significant impact on sales volume relating to this market
segment. The reduction in sales to mass merchandisers have been partially offset
by increases in sales to hospitality markets, convention centers, churches, and
the Government Services Administration. The Company continues to believe that
its long-term interests will be served by avoiding the low-margin mass
merchandising commodity business by emphasizing higher margin products and
customers. For 1999, the Company continued to be more selective and more
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disciplined in what business it pursued in terms of product mix, customer mix
and pricing in order to emphasize profitable business rather than pursue sales
volume increase. As the Company has grown in more profitable markets and
products, we have reduced our business in certain commodity type products, which
typically generate lower profit margins. With the expansion of the Company's
Conway, Arkansas manufacturing and distribution facility, it will allow the
Company to more aggressively pursue sales growth into these more profitable
markets.
Education sales, which are primarily composed of sales to publicly funded K-12
schools and represents 63% of corporate revenues, decreased slightly by
$1,400,000 to $166,800,000 from $168,200,000 in the prior year. Sales of our
newer computer furniture, our line of Core-a-Gator lightweight tables and mobile
tables improved, but were offset by reductions in some of our older product
lines.
Commercial sales, which include private schools, pre-schools, churches and
church affiliated schools, convention centers, federal and county and city
agencies, furniture distributors, retailers and catalog retailers, represents
37% of corporate revenues and decreased by $5,600,000 to $99,800,000 from
$105,400,000 in the prior year. Commercial sales have been affected more
significantly by our efforts to reduce sales to mass merchandisers. The
reduction in business to mass merchants is partially offset by an increase in
sales in other markets. Sales of our Core-a-Gator lightweight table, the breadth
of our product line for target niche markets, and the continuing success of our
Quick Ship stocking program favorably affected sales for the other commercial
sales channels.
Gross profits for the year ended January 31, 2000, as a percent of sales, were
comparable to the prior year. During 1999, the Company incurred increased
overhead costs related to the start up of the new factory in Conway, Arkansas.
These increased overhead costs were offset by a more favorable product mix and
stable material costs.
Selling, general and administrative expense for the year ended January 31, 2000
increased both in total dollars and as a percentage of sales compared to the
same period last year. The increase in selling, general and administrative
expense was partially attributable to product mix. The reduction in mass
merchant business, which was typically sold FOB factory, has been replaced in
part by sales to commercial customers, which frequently include freight and
installation. In addition, the inefficiencies related to the plant start up
mentioned above, combined with the concurrent go live of the SAP system
contributed to some additional costs incurred in the delivery and installation
of furniture. The Company has also incurred additional selling expenses relating
to increased direct sales representatives and product development expenses. The
increase in general and administration expense was primarily attributable to an
increase in depreciation expense, system maintenance services, training costs
and other expenses relating to the implementation of an SAP Enterprise Resources
Planning System.
Interest expense increased by $1,300,000 for the year ended January 31, 2000
compared to the same period last year. The increase was attributable to a higher
average borrowing balance offset by interest capitalized relating to assets
under construction.
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1998 vs. 1997
Net sales from operations increased to $273,600,000 for fiscal 1998, compared to
$258,200,000 for fiscal 1997. Roughly two thirds of this increase were
attributable to volume and one third attributable to price. This modest increase
in sales was attained by a continuation of practices, which have been followed
for the last several years. The Company continued to be more selective and more
disciplined in what business it pursues in terms of product mix, customer mix
and pricing in order to emphasize profitable business. As the Company has grown
in certain more profitable markets and products, we reduced our business in
certain commodity type products, which generate lower profit margins. The
results of the 1998 fiscal year reflected these efforts.
Education sales, which were composed of sales to publicly funded K-12 schools
and represented 61% of corporate revenues, increased by $12,700,000 to
$168,200,000 from $155,500,000. Sales of our newer computer furniture, our line
of Core-a-Gator lightweight tables, mobile cabinets and mobile tables improved,
offset by reductions in some of our older product lines. The gross margin in the
newer product lines is typically greater than sales of the older lines, which
explained a portion of our improvement in gross margin as a percentage of sales.
In the fourth quarter of 1998, the Company hired several sales representatives
to call directly upon the college and university markets. The impact of these
representatives was a slight increase in selling expenses in the fourth quarter,
with no significant impact on sales volume. During the fourth quarter of 1997,
the Company terminated relationships with several major educational dealers,
which represented nearly 15% of educational sales, and hired additional direct
sales representatives to cover the affected territories. The net impact of this
change in 1998 was that sales in the affected territories were approximately
level and the Company realized larger margins on these sales offset in large
part by increased selling expenses. While the impact in the first year of this
change was largely neutral, the Company has historically improved market
penetration and profitability in territories where it has gone direct. A result
of terminating several dealer relationships combined with an overall trend in
the nation's schools where school districts are closing their warehouses and
requiring delivery direct to the school site, was that sales are becoming even
more seasonal, with sales becoming more concentrated in July, August and
September.
Commercial sales, which include private schools, pre-schools, churches and
church affiliated schools, convention centers, federal and county and city
agencies, furniture distributors, retailers and catalog retailers, represented
39% of corporate revenues and increased by $2,700,000 to $105,400,000 from
$102,700,000 in the prior year. Commercial sales have been affected more
significantly by our efforts to improve margins. As the Company has increased
sales of more profitable product, we have reduced our business with mass
merchants and smaller distributors. Sales of our Core-a-Gator lightweight table,
the breadth of our product line for target niche markets, and the continuing
success of our Quick Ship stocking program favorably affected sales for the
other commercial sales channels.
The $15,400,000 increase in sales provided an additional $9,735,000 of gross
margin. As discussed above, the increase in sales of higher margin newer
products, combined with increased discipline in our pricing to support improved
margins contributed to the increase in gross margin. In addition, material costs
were stable and for some items slightly reduced in 1998 compared to 1997.
Selling, general, and administrative expenses increased over the prior year, and
as a percentage of sales, increased slightly.
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OTHER OPERATING ACTIVITIES
In August 1997, the Board of Directors authorized an expansion and
re-configuration of the Conway, Arkansas manufacturing facility. In late 1997
and early 1998, the Company acquired approximately 100 acres of land in Conway,
which will support up to 1,700,000 sq. ft. of manufacturing, warehousing,
office, and showroom facilities. Phase one of the project consisted of a 400,000
sq. ft. manufacturing plant and was completed in March 1999. This plant
replaced an existing 150,000 sq. ft. manufacturing facility, providing an
additional 250,000 sq. ft., which was earmarked for new manufacturing
processes to support our product development efforts as well as support future
growth in sales. This plant utilizes a manufacturing cell concept, which has
proven successful in our Torrance, California manufacturing facility. This new
manufacturing facility contains new equipment, which is selected to improve
manufacturing efficiency and flexibility as well as improve product quality. In
March 1999, substantially all of the production equipment from the existing
150,000 sq. ft. facility were transferred to the new plant. New processes
and equipment are being brought on line, as capacity and process requirement
demand. The 150,000 sq. ft. facility, which is adjacent to the main factory
in Conway, has been converted to a finished goods warehouse.
Phase two of our Conway project consists of an 800,000 sq. ft. warehouse and
distribution facility. Construction on the first 400,000 sq. ft. segment
began in March 1999 and was completed and fully operational in December 1999.
The second 400,000 sq. ft. segment is under construction and is projected to
be in operation by late May of 2000. This new warehouse and distribution
facility will replace several leased facilities, which are scattered throughout
the Conway vicinity. This new facility will allow all finished goods
manufactured at Conway to be stored in one facility. This warehouse facility
will be equipped with high-density storage systems, features over 70 dock doors
dedicated to out-bound freight, and has substantial yard capacity for storing
and staging trailers. The Company believes that this facility will substantially
improve our ability to support increased sales during the peak delivery season
and enhance the efficiency with which orders are filled.
On March 1, 1999, the Company went live with its newly implemented ERP system.
As a result of this installation and implementation, the Company incurred
additional support costs, and experienced some inefficiencies related to
production scheduling, distribution and installation of furniture. The Company
invested in additional training, and with a full year of experience using the
new system, is beginning to realize the inherent benefits of our new SAP
information platform. At the February 2000 annual sales meeting, the Company
distributed laptop computers to our entire sales force to provide them with an
efficient link between our factories and our customers. In the same meeting, the
Company also unveiled its new business-to-business website designed to provide
our sales force and existing customers with the ability to access the Company's
ERP system through the Internet. This will greatly enhance the level of customer
service and support. These significant advances would not have been possible on
our old information platform.
At the end of January 31, 1999, the Company closed two of its distribution
facilities. This leaves the Company with its main distribution facilities at the
Torrance and Conway factories, and one satellite facility in Pennsylvania.
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In 1994, the Board of Directors authorized the Company to investigate the
possible sale of our Virsan, Mexico manufacturing facility. This action was
taken in connection with our program of moving manufacturing operations into
more automated facilities which are closer to our primary markets. In addition,
this decision was consistent with the Company's efforts to reduce emphasis on
the sale of high volume, low margin products to mass merchants, many of which
were produced at this factory. In May 1997 the Company announced plans to close
this facility. Later in 1997, the Company reached an agreement for the bulk sale
of the assets. The Company recorded a provision for $2,970,000 during 1997. The
provision is primarily composed of mandatory severance payments in accordance
with Mexico law. Other components of the reserve include environmental
remediation and other miscellaneous costs. The Company did not incur any
significant costs related to the liquidation of this subsidiary in 1998 or 1999.
IMPACT OF THE YEAR 2000
The Company has queried significant suppliers and vendors that do not share
information systems with the Company (external agents). To date, the Company is
not aware of any external agent with a Year 2000 issue that would materially
impact the Company's results of operations, liquidity, of capital resources.
With regard to the Company's product line, the Company manufactures furniture,
including furniture designed for computers. There is no software or hardware
embedded in the furniture. Accordingly, the Company believes that there is no
Year 2000 exposure for any products it has sold.
The Company utilized both internal and external resources to reprogram, replace,
test and implement the software and operating equipment for the Year 2000. This
includes costs to install and implement the SAP Enterprise Resource Planning
System, which is expected to significantly enhance the Company's operating
capabilities.
As of the date of this report, the Company has experienced no significant
problems related to the Year 2000 issue. After extensive system verification and
testing, all computerized information and process control systems are operating
normally. The performance of critical customers and suppliers continues without
notable change. Production and business activities are normal at all locations.
The Company continues to monitor the status of its operations, suppliers and
distribution channels to ensure no significant interruptions.
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. The Company has expended, and can be expected
to expend, significant amounts in the future for the investigation of
environmental conditions, installation of environmental control equipment and
remediation of environmental contamination.
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Currently, the Company is self-insured for Product Liability losses up to
$100,000 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 $100,000 up to a
limit of $30,000,000. In 1993, the Company initiated a program to reduce product
liability losses and to more aggressively litigate product liability cases. This
program has continued through 1999 and has resulted in reductions in litigated
product liability cases. 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 in the U.S. did not have a significant impact on the Company's
operating results for the fiscal year just ended. Material costs were stable in
1999. The Company anticipates upward pressure on costs, particularly in the
areas of transportation, raw materials and labor in the coming year. Total
material costs for 2000, as a percentage of sales, could be slightly higher than
in 1999. However, no assurance can be given that the Company will experience
stable, modest or substantial increase in prices in 2000. 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.
The Company uses the LIFO method of accounting for 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. The Company has made significant fixed asset acquisitions during the
last three fiscal years. The assets acquired will result in higher depreciation
charges, but due to technological advances should result in operating cost
savings. 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 $38,700,000
borrowings at January 31, 2000 and any seasonal borrowings used to finance
additional inventory and receivables during the summer. Fluctuating interest
rates may adversely impact the Company's results of operations and cash flows
for its variable rate bank borrowings. Subsequent to the year-end, 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
$30,000,000 for the period February 22, 2000 through February 29, 2001. The
notional swap amount then decreases to $20,000,000 until the end of the swap
agreement, March 3, 2003. Under this agreement, interest is payable monthly at
7.23% plus a fluctuating margin of 1.25% to 1.50%.
LIQUIDITY
In January 2000, the Company renewed its loan facility with Wells Fargo Bank,
extending the agreement to a three-year commitment. The line was increased to
$80,000,000. The Company is currently obligated to pay commitment fees equal to
0.25% to 0.375% per annum on the unused amount of the credit facility. The
credit facility includes certain restrictive financial and operating covenants.
The terms of the facility are described in more detail in Note 3 of the notes
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to the consolidated financial statements. Major provisions of the agreement
include that the line is uncollateralized and the interest rate is at prime.
This facility also allows the Company the option to borrow under 30, 60, and 90
day fixed term rates at LIBOR plus 1.25% to 1.50%. The applicable LIBOR margin
is adjusted quarterly based on the Company's funded debt to EBITDA ratio. Under
the same agreement, there is also a letter of credit sub-feature, where the
Company issues commercial and standby letters of credit. This loan facility is
intentionally large enough to finance more production in the early part of the
year to have adequate inventories available for the summer / fall educational
delivery season.
In April 1998, the Board of Directors approved a stock buyback program giving
authorization to buy back up to $5,000,000 of Company Stock. In January 1999,
the Board increased the authorization to $7,000,000 and subsequently increased
to $14,000,000. As of January 31, 2000 the Company had repurchased approximately
589,000 shares at a cost of approximately $10,097,000. The Company intends to
continue buying back shares of Virco common stock as long as the Company feels
the shares are undervalued and operating cash flow and borrowing capacity under
the Wells Fargo line allows.
In 1997, the Company initiated two large capital projects, which had significant
cash flow effects on the 1998 and 1999 fiscal years. The first project is the
implementation of the SAP Enterprise Resource Planning system, initiated in
October 1997. General Electric Capital Corporation (GECC) financed the initial
portion of this project under a lease arrangement, which will be treated as a
capital lease for book purposes and an operating lease for tax purposes. This
arrangement allowed the Company to initiate the project in 1997 without
violating the limitations on capital investment at the Torrance, California
facility imposed by the Industrial Revenue Bond. As of January 31, 2000, the
Company expended $13,000,000 relating to this project. Capital and training
costs not funded by the lease are financed by cash flow from operations and from
the loan facility with Wells Fargo Bank.
The second project is the expansion and re-configuration of the Conway, Arkansas
manufacturing and distribution facility. During the fourth quarter of 1997 the
Company expended approximately $1,200,000 to acquire roughly 70 acres of land
for the expansion. In 1998, the Company expended approximately $20,600,000 to
buy an additional 30 acres of land, initiate construction of a 400,000 sq. ft.
manufacturing facility and to purchase production equipment for the Conway,
Arkansas location. During 1999, the Company expended approximately $29,200,000
to complete the construction of the factory, purchase additional production
equipment, construct and complete the first 400,000 sq. ft. segment of the
planned 800,000 sq. ft. distribution facility, and initiate the construction of
the second 400,000 sq. ft. segment of that facility. In addition, approximately
$8,800,000 worth of equipment was leased from General Electric Capital
Corporation (GECC) under operating leases. The balance of the cash required was
provided by the loan facility with Wells Fargo Bank and by operating cash flow.
In addition to these capital expenditures, it is likely that the Company will
identify additional production equipment needs in the manufacturing facilities.
These capital expenditures will be financed out of operating cash flow and by
the expanded line of credit with Wells Fargo Bank. In the coming fiscal year,
the Company anticipates to incur approximately $6,000,000 to complete the new
distribution facility and acquire material handling and storage equipment.
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Subsequent to the year ended January 31, 2000, the Company entered into an
agreement to sell its 200,000 sq. ft. warehouse located on 8.5 acres of land in
Torrance, California. This sale transaction closed as of April 20, 2000. The
Company received approximately $9,500,000 in cash and will record a pre-tax gain
of approximately $7,900,000 on disposition.
In the second quarter of 1998, the Company sold the manufacturing facility in
Southern Pines, North Carolina. This sale generated approximately $945,000 in
cash and resulted in a $128,000 loss on disposition.
In 1997, the sale of production equipment and real property of the Company's
Mexico manufacturing facility generated an additional $2,210,000 of cash, offset
by closing costs incurred related to the shutdown.
Management believes cash generated from operations and raised from the
previously described sources will be adequate to meet its capital requirements
in the short term.
FINANCIAL STRATEGY
Virco's financial strategy is to continue to increase levels of profitability by
targeting specific profitable market segments for future growth, developing new
products for those target markets, acquisition of automated production equipment
and new production technologies, development of distribution techniques and
facilities, and continual reassessment of the manufacturing and distribution
capacity needed to meet future demand. This continual assessment of production
capacity led to a significant expansion of our Conway, Arkansas production
facility in 1997, the 1994 move from the Los Angeles, California plant to a
larger, more automated facility in Torrance, California and the shutdown of the
manufacturing subsidiary in Mexico in 1997.
The Company has not provided an allowance against the deferred tax assets
recorded in the financial statements. The Company has a net deferred tax
liability of $3,160,000 at January 31, 2000. The deferred tax asset represents
approximately 8% of current pre-tax earnings. Management believes that it is
more likely than not that future earnings will be sufficient to recover deferred
tax assets.
The Company discounts the pension obligations under the Virco Employees
Retirement Plan and the Virco Important Performers Plan (VIP) utilizing an 8%
discount rate. Although the Company does not anticipate any change in this rate
in the coming year, any such change would not have a significant effect on the
Company's financial position, results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing, including those contained
herein. Such forward-looking statements may be included in, without limitation,
reports to stockholders, press releases, oral statements made with the approval
of an authorized executive officer of the Company and filings with the
Securities and Exchange Commission. The words or phrases "anticipates,"
"expects," "will continue," "estimates," "projects," or similar expressions are
intended to identify forward-looking statements within the meaning of the
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Private Securities Litigation Reform Act of 1995. The results contemplated by
the Company's forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to vary materially from
anticipated results, including without limitation, material costs, demand for
the Company's products and competitive conditions affecting selling prices and
margins.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation." The
Interpretation addresses implementation practice issues in accounting for
compensation costs under existing rules prescribed by Accounting Principles
Board No. 25. The new rules are applied prospectively to all new awards,
modifications to outstanding awards and changes in grantee status after July 1,
2000, with certain exceptions. The Company is considering the effects these
changes make and will implement any changes to its plans as deemed appropriate.
In December 1999, Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," or SAB 101. SAB
101 summarizes certain of the SEC Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company does not believe that this SAB results in any material change to its
revenue recognition policies.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and for
Hedging Activities." SFAS 133 requires derivatives to be recorded on the balance
sheet at fair value and establishes special accounting for the following three
types of hedges: hedges of changes in the fair value of assets, liabilities or
firm commitments (referred to as fair value hedges); hedges of the variable cash
flows of forecasted transactions (cash flow hedges); and hedges of foreign
currency exposures of net investments in foreign operations. The accounting
treatment and criteria for each of the three types of hedges is unique. Changes
in fair value of derivatives that do not meet the criteria of one of these three
categories of hedges would be included in income. SFAS 133 was amended by SFAS
137, which delayed its effective date. The Company does not believe that
adopting this standard will have a material effect on its financial position,
results of operations and cash flows. Currently, the Company does not anticipate
adopting this standard before February 1, 2001.
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Report of Independent Auditors
The Board of Directors and Stockholders
Virco Mfg. Corporation
We have audited the accompanying consolidated balance sheets of Virco Mfg.
Corporation as of January 31, 2000 and 1999, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended January 31, 2000. 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, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2000, in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LLP
Long Beach, California
March 17, 2000
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Virco Mfg. Corporation
Consolidated Balance Sheets
(In thousands, except per share data)
JANUARY 31
2000 1999
----------------------
ASSETS
Current assets:
Cash $ 1,072 $ 1,086
Trade accounts receivable (less allowance for doubtful
accounts of $200 in 2000 and 1999) 26,457 30,465
Other receivables 927 308
Inventories:
Finished goods 35,795 32,211
Work in process 9,260 6,713
Raw materials and supplies 12,003 9,544
----------------------
57,058 48,468
Income taxes receivable 1,753 --
Prepaid expenses and other current assets 1,288 942
Deferred income taxes 1,371 1,239
----------------------
Total current assets 89,926 82,508
Property, plant and equipment:
Land and land improvements 4,871 4,633
Buildings 43,240 22,229
Machinery and equipment 87,238 72,296
Leasehold improvements 966 877
----------------------
136,315 100,035
Less accumulated depreciation and amortization 48,378 40,715
----------------------
Net property, plant and equipment 87,937 59,320
Other assets 13,000 9,552
----------------------
Total assets $190,863 $151,380
======================
2
14
JANUARY 31
2000 1999
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks released but not yet cleared bank $ 4,786 $ 4,670
Accounts payable 19,749 14,398
Accrued compensation and employee benefits 10,333 9,156
Current portion of long-term debt 1,998 2,354
Income taxes payable -- 803
Other accrued liabilities 1,637 3,722
-------------------------
Total current liabilities 38,503 35,103
Noncurrent liabilities:
Accrued self-insurance retention 2,560 1,329
Accrued pension expenses 5,408 3,017
Long-term debt, less current portion 46,027 21,344
-------------------------
Total noncurrent liabilities 53,995 25,690
Deferred income taxes 4,531 1,664
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
10,952,350 shares in 2000 and 9,945,014 shares in 1999 110 100
Additional paid-in capital 84,635 68,361
Retained earnings 20,242 26,928
Less treasury stock at cost (621,874 shares in 2000 and
301,087 shares in 1999) (10,692) (5,814)
Less unearned ESOP shares (41) (246)
Less accumulated comprehensive loss (420) (406)
-------------------------
Total stockholders' equity 93,834 88,923
-------------------------
Total liabilities and stockholders' equity $ 190,863 $ 151,380
=========================
See accompanying notes.
3
15
Virco Mfg. Corporation
Consolidated Statements of Income
(In thousands, except per share data)
YEAR ENDED JANUARY 31
2000 1999 1998
------------------------------------
Net sales $266,641 $273,620 $258,194
Costs of goods sold 175,247 180,554 174,863
------------------------------------
Gross profit 91,394 93,066 83,331
Selling, general and administrative expenses 71,922 62,363 55,366
Provision for doubtful accounts 188 530 119
Provision for plant shutdown - - 2,970
Interest expense, net 2,385 1,111 1,794
Other expense 206 160 478
------------------------------------
Income before income taxes 16,693 28,902 22,604
Provision for income taxes 6,527 11,272 8,752
------------------------------------
Net income $ 10,166 $ 17,630 $ 13,852
====================================
Net income per share $ .97 $ 1.63 $ 1.29
Net income per share - assuming dilution $ .96 $ 1.60 $ 1.25
See accompanying notes.
4
16
Virco Mfg. Corporation
Consolidated Statements of Stockholders' Equity
(In thousands, except per share amounts)
Common Stock Additional
--------------------------- Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income
---------------------------------------------------------------------------------
Balance at January 31, 1997 5,906,296 $ 59 $ 50,104 $ 14,251 --
Net income -- -- 13,852 $ 13,852
Minimum pension liability, net
of tax -- -- -- -- (204)
-----------
Comprehensive income $ 13,648
===========
Unearned ESOP shares -- -- -- --
Stock issued under option plans 20,600 -- 197 --
Stock split (3 for 2) 2,959,898 30 -- (30)
Cash dividends -- -- -- (650)
---------------------------------------------------------------------------------
Balance at January 31, 1998 8,886,794 89 50,301 27,423
Net income -- -- -- 17,630 $ 17,630
Minimum pension liability, net
of tax -- -- -- -- (158)
-----------
Comprehensive income $ 17,472
===========
Unearned ESOP shares -- -- -- --
Stock issued under option plans 134,180 2 690 --
Stock dividend (10%) 891,213 9 17,370 (17,379)
Cash dividends -- -- -- (746)
Purchase of treasury stock (268,260) -- -- --
---------------------------------------------------------------------------------
Balance at January 31, 1999 9,643,927 100 68,361 26,928
Net income -- -- -- 10,166 $ 10,166
Minimum pension liability, net
of tax -- -- -- -- (14)
-----------
Comprehensive income $ 10,152
===========
Unearned ESOP shares -- -- -- --
Stock issued under option plans 33,261 1 232 --
Stock dividend (10%) 947,704 9 16,042 (16,052)
Cash dividends -- -- -- (800)
Purchase of treasury stock (294,416) -- -- --
--------------------------------------------------------------------------------
Balance at January 31, 2000 10,330,476 $ 110 $ 84,635 $ 20,242
================================================================================
Accumulated
Treasury ESOP Comprehensive
Stock Trust Loss Total
-----------------------------------------------------------------
Balance at January 31, 1997 $ (172) $ (277) $ (44) $ 63,921
Net income -- -- -- 13,852
Minimum pension liability, net
of tax -- -- (204) (204)
Comprehensive income
Unearned ESOP shares -- (39) -- (39)
Stock issued under option plans -- -- -- 197
Stock split (3 for 2) -- -- -- --
Cash dividends -- -- -- (650)
-----------------------------------------------------------------
Balance at January 31, 1998 (172) (316) (248) 77,077
Net income -- -- -- 17,630
Minimum pension liability, net
of tax -- -- (158) (158)
Comprehensive income
Unearned ESOP shares -- 70 -- 70
Stock issued under option plans (298) -- -- 394
Stock dividend (10%) -- -- -- --
Cash dividends -- -- -- (746)
Purchase of treasury stock (5,344) -- -- (5,344)
-----------------------------------------------------------------
Balance at January 31, 1999 (5,814) (246) (406) 88,923
Net income -- -- -- 10,166
Minimum pension liability, net
of tax -- -- (14) (14)
Comprehensive income
Unearned ESOP shares -- 205 -- 205
Stock issued under option plans -- -- -- 232
Stock dividend (10%) -- -- -- --
Cash dividends -- -- -- (800)
Purchase of treasury stock (4,878) -- -- (4,878)
-----------------------------------------------------------------
Balance at January 31, 2000 $ (10,692) $ (41) $ (420) $ 93,834
=================================================================
See accompanying notes.
5
17
Virco Mfg. Corporation
Consolidated Statements of Cash Flows
(In thousands, except per share data)
YEAR ENDED JANUARY 31
2000 1999 1998
--------------------------------------
OPERATING ACTIVITIES
Net income $ 10,166 $ 17,630 $ 13,852
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,993 7,132 7,110
Provision for doubtful accounts 188 530 119
Loss (gain) on sale of property, plant and
equipment 112 113 (575)
Deferred income taxes 2,735 420 225
Changes in assets and liabilities:
Trade accounts receivable 3,820 (5,292) (1,182)
Other receivables (619) 831 (269)
Inventories (8,589) (4,606) (218)
Income taxes (2,557) 859 (372)
Prepaid expenses and other current assets (347) 311 225
Accounts payable and accrued liabilities 8,182 5,493 667
Other (2,506) (506) (473)
--------------------------------------
Net cash provided by operating activities 20,578 22,915 19,109
INVESTING ACTIVITIES
Capital expenditures (38,849) (28,142) (10,701)
Proceeds from sale of property, plant and equipment 128 945 2,275
Net investment in life insurance (956) (1,024) (760)
Restricted short-term investments -- -- 660
--------------------------------------
Net cash used in investing activities (39,677) (28,221) (8,526)
6
18
Virco Mfg. Corporation
Consolidated Statements of Cash Flows (continued)
(In thousands, except per share data)
YEAR ENDED JANUARY 31
2000 1999 1998
------------------------------------
FINANCING ACTIVITIES
Dividends paid $ (800) $ (746) $ (650)
Issuance of long-term debt 26,794 13,109 3,067
Repayment of long-term debt (2,468) (2,312) (12,659)
Issuance of common stock 232 394 197
Purchase of treasury stock (4,878) (5,344) -
ESOP loan 205 70 (39)
------------------------------------
Net cash provided by (used in) financing activities 19,085 5,171 (10,084)
------------------------------------
Net (decrease) increase in cash (14) (135) 499
Cash at beginning of year 1,086 1,221 722
------------------------------------
Cash at end of year $ 1,072 $ 1,086 $ 1,221
====================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest, net of amounts capitalized $ 2,277 $ 2,069 $ 1,911
Income taxes 6,416 10,106 9,021
See accompanying notes.
7
19
Virco Mfg. Corporation
Notes to Consolidated Financial Statements
January 31, 2000
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. Fifty years of manufacturing has resulted in a wide
product range. Major products include student desks, computer stations, 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 1998 and 1997 information to conform to
the 1999 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. No customers exceeded
10% of the Company's sales for each of the three years in the period ended
January 31, 2000. Foreign sales were less than 5% for each of the three years
in the period ended January 31, 2000.
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.
8
20
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 (including 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 $1,461,000, $375,000 and $120,000 for the years
ended January 31, 2000, 1999 and 1998, respectively, have been capitalized as
part of the acquisition cost of property, plant and equipment.
The Company capitalizes costs associated with software 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 was
$11,492,000 and $4,306,000 at January 31, 2000 and 1999, 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.
9
21
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE
Basic net income per share is calculated by dividing net 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 effect of convertible securities.
2000 1999 1998
----------- ----------- -----------
Numerator:
Net income $10,166,000 $17,630,000 $13,852,000
=========== =========== ===========
Denominator:
Denominator for basic earnings
per share - weighted-average shares 10,436,964 10,821,509 10,753,020
Dilutive potential common shares 146,453 226,977 296,384
----------- ----------- -----------
Denominator for diluted earnings per
share - adjusted weighted-average shares
and assumed conversions 10,583,417 11,048,486 11,049,404
=========== =========== ===========
On August 17, 1999, the Company's Board of Directors authorized a 10% stock
dividend payable on September 30, 1999, to stockholders of record as of
September 3, 1999. This resulted in the issuance of 947,704 additional shares of
common stock. All per share and weighted-average share amounts have been
restated to reflect this stock dividend and any splits or dividends previously
declared.
FOREIGN CURRENCY TRANSLATION
As is described more fully in Note 9, the Company discontinued its Mexican
subsidiary operations. The "functional currency" for the financial statements of
the Mexican subsidiary was the U.S. dollar. In accordance with SFAS No. 52, all
non-monetary balance sheet accounts were remeasured using historical rates.
Income statement amounts were remeasured using the average exchange rate in
effect during the year. All re-measurement gains and losses were included in the
consolidated statements of income. The effect on the statements of income of
gains and losses was insignificant.
10
22
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets, which consist principally of deferred pension assets and
which are included in other non-current assets, are recorded at cost and are
amortized over their estimated useful lives using the straight-line method.
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, which 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 $3,775,000 in
1999, $3,535,000 in 1998 and $3,007,000 in 1997.
SELF-INSURANCE
The Company has a self-insured retention for general and product liability
claims. Consulting 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
Stock-based compensation is recognized using the intrinsic-value method. For
disclosure purposes, pro forma net income and earnings per share impacts are
provided as if the fair-value method had been applied. The Financial Accounting
Standards Board has issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." The Interpretation addresses
implementation practice issues in accounting for compensation costs under
existing rules prescribed by Accounting Principles Board No. 25. The new rules
are applied prospectively to all new awards, modifications to outstanding awards
and changes in grantee status after July 1, 2000, with certain exceptions. The
Company is considering the effects these changes make and will implement any
changes to its plans as deemed appropriate.
11
23
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles 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
Revenue from product sales is recognized upon shipment of merchandise. In
December 1999, Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," or SAB 101. SAB
101 summarizes certain of the SEC Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company does not believe that this SAB results in any material change to its
revenue recognition policies.
FISCAL YEAR END
Fiscal years 1999, 1998 and 1997, refer to the years ended January 31, 2000,
1999 and 1998, respectively.
FUTURE ACCOUNTING REQUIREMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and for
Hedging Activities." SFAS 133 requires derivatives to be recorded on the balance
sheet at fair value and establishes special accounting for the following three
types of hedges: hedges of changes in the fair value of assets, liabilities or
firm commitments (referred to as fair value hedges); hedges of the variable cash
flows of forecasted transactions (cash flow hedges); and hedges of foreign
currency exposures of net investments in foreign operations. The accounting
treatment and criteria for each of the three types of hedges is unique. Changes
in fair value of derivatives that do not meet the criteria of one of these three
categories of hedges would be included in income. SFAS 133 was amended by SFAS
137, which delayed its effective date. The Company does not believe that
adopting this standard will have a material effect on its financial position,
results of operations and cash flows. Currently, the Company does not anticipate
adopting this standard before February 1, 2001.
12
24
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
2. INVENTORIES
The current material cost for inventories exceeded LIFO cost by $2,462,000 and
$2,808,000 at January 31, 2000 and 1999, respectively. Liquidation of prior year
LIFO layers due to a reduction in certain inventories increased income by
$59,000, $8,000 and $29,000 in the years ended January 31, 2000, 1999 and 1998,
respectively.
Details of inventory amounts, including the material portion of inventory which
is valued at LIFO, at January 31, 2000 and 1999, are as follows (in thousands):
JANUARY 31, 2000
---------------------------------------------------
MATERIAL LABOR,
CONTENT AT LIFO OVERHEAD
FIFO RESERVE AND OTHER TOTAL
---------------------------------------------------
Finished goods $ 19,954 $ (964) $ 16,805 $ 35,795
Work in process 5,017 (718) 4,961 9,260
Raw materials and
supplies 12,783 (780) -- 12,003
---------------------------------------------------
Total $ 37,754 $ (2,462) $ 21,766 $ 57,058
===================================================
JANUARY 31, 1999
---------------------------------------------------
MATERIAL LABOR,
CONTENT AT LIFO OVERHEAD
FIFO RESERVE AND OTHER TOTAL
---------------------------------------------------
Finished goods $ 19,934 $ (1,800) $ 14,077 $ 32,211
Work in process 4,090 (393) 3,016 6,713
Raw materials and
supplies 10,159 (615) -- 9,544
---------------------------------------------------
Total $ 34,183 $ (2,808) $ 17,093 $ 48,468
===================================================
13
25
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
3. NOTES PAYABLE
Outstanding balances (in thousands) for the Company's long-term debt were as
follows:
JANUARY 31
2000 1999
-----------------------
Revolving credit line with Wells Fargo Bank (a) $ 38,739 $ 11,944
IRB with the City of Torrance (b) 5,037 5,892
Equipment credit line with GECC(c) 2,779 3,932
Other 1,470 1,930
-----------------------
48,025 23,698
Less current portion 1,998 2,354
-----------------------
$ 46,027 $ 21,344
=======================
Outstanding stand-by letters of credit $ 5,481 $ 5,852
(a) A credit facility with Wells Fargo Bank, effective January 2000,
provides an unsecured revolving line of credit of up to $80,000,000.
This is a three-year non-amortizing line with interest payable monthly
at a fluctuating rate equal to the Bank's prime rate (8.50% at January
31, 2000). The line also allows the Company the option to borrow under
30- 60- and 90-day fixed term rates at LIBOR plus a margin of 1.25% to
1.50%. Approximately $37,128,000 was available for borrowing as of
January 31, 2000. On February 22, 2000, the Company entered into an
interest rate swap agreement with Wells Fargo Bank. The initial
notional swap amount is $30,000,000 for the period February 22, 2000
through February 29, 2001. The notional swap amount then decreases to
$20,000,000 until the end of the swap agreement, March 3, 2003. The
swap agreement is in consideration for a fixed rate at 7.23% plus a
fluctuating margin of 1.25% to 1.50%.
(b) Ten-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.
(c) In October 1998, the Company entered into a credit agreement with
General Electric Capital Corporation (GECC) to finance the initial
portion of the new business information system. This is a four-year
amortizing capital lease with principal and interest (approximately
7.5%) payable of $87,500 monthly. The Company has the option of buying
out the lease three years into the lease period.
14
26
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
3. NOTES PAYABLE (CONTINUED)
Long-term debt repayments for the next five years and thereafter are
approximately as follows (in thousands):
Year ending January 31
- ----------------------
2001 $ 1,998
2002 2,101
2003 40,791*
2004 2,078
2005 1,057
----------
$ 48,025
==========
* The $38,739,000 due under Wells Fargo Bank's line of credit will be
payable in the fiscal year ending January 31, 2003, if the agreement is
not renewed. The Company intends to renew the agreement.
The Company believes that the carrying value of debt under the Wells Fargo
credit facility approximates fair value at January 31, 2000 and 1999, as the
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.
The Company guarantees a $1,500,000 line of credit from Wells Fargo Bank to the
Virco Employee Stock Ownership Plan (ESOP). At January 31, 2000 and 1999,
$41,000 and $246,000, respectively, was outstanding under the line.
4. RETIREMENT PLANS
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 amounts
deductible for federal income tax purposes. Assets of the Plan are invested in
common trust funds.
15
27
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
4. RETIREMENT PLANS (CONTINUED)
The following table sets forth (in thousands) the funded status of the Plan at
December 31, 1999 and 1998:
PENSION BENEFITS
-----------------------
1999 1998
-----------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 10,603 $ 10,151
Service cost 752 794
Interest cost 1,091 765
Plan amendments 2,992 -
Actuarial loss 2,325 17
Benefit paid (1,847) (1,124)
-----------------------
Benefit obligation at end of year $ 15,916 $ 10,603
=======================
Change in plan assets:
Fair value at beginning of year $ 9,843 $ 8,312
Actual return on plan assets 1,867 1,334
Company contributions 1,794 1,321
Benefits paid (1,847) (1,124)
-----------------------
Fair value at end of year $ 11,657 $ 9,843
=======================
Funded status of plan $ (4,259) $ (760)
Unrecognized net transition amount (309) (351)
Unrecognized prior service cost 2,698 -
Unrecognized net actuarial loss 2,991 1,724
Accrual of minimum liability (3,399) -
-----------------------
Prepaid/(accrued) benefit cost $ (2,278) $ 613
=======================
Statements of financial position:
Prepaid benefit cost $ -- $ 613
Accrued benefit liability (2,278) --
Intangible asset 2,698 --
Accumulated other comprehensive income 420 --
-----------------------
Net amount recognized $ 840 $ 613
=======================
16
28
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
4. RETIREMENT PLANS (CONTINUED)
1999 1998
-------------------------
Weighted average assumptions:
Discount rate 8.00% 8.00%
Expected return on plan assets 9.75% 9.75%
Rate of compensation increase 5.00% 5.00%
The total pension expense for the Plan (in thousands) included the following
components:
DECEMBER 31
1999 1998 1997
-------------------------------
Components of net cost:
Service cost $ 752 $ 794 $ 740
Interest cost 1,091 765 693
Expected return on plan assets (936) (818) (698)
Amortization of transition amount (42) (42) (42)
Amortization of prior service cost 294 - -
Recognized net actuarial loss 128 134 140
-------------------------------
Benefit cost $ 1,287 $ 833 $ 833
===============================
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 is funded by a life insurance program. The cash surrender values of the
policies funding the VIP Plan were $3,405,000 and $2,901,000 at January 31, 2000
and 1999, respectively. These cash surrender values are included in other assets
in the consolidated balance sheets.
The following table sets forth (in thousands) the funded status of the VIP Plan
at January 31, 2000 and 1999:
NONQUALIFIED PENSION
-----------------------
1999 1998
-----------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,794 $ 4,976
Service cost 296 212
Interest cost 254 426
Plan amendments (2,519) -
Actuarial loss 501 489
Benefit paid (322) (309)
-----------------------
Benefit obligation at end of year $ 4,004 $ 5,794
=======================
17
29
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
4. RETIREMENT PLANS (CONTINUED)
NONQUALIFIED PENSION
-----------------------
1999 1998
-----------------------
Change in plan assets:
Company contributions 322 309
Benefits paid (322) (309)
-----------------------
Fair value at end of year $ 0 $ 0
=======================
Funded status of plan $ (4,004) $ (5,794)
Unrecognized net transition amount 0 12
Unrecognized prior service cost (2,037) 241
Unrecognized net actuarial loss 1,410 1,410
Accrual of minimum liability 0 (997)
-----------------------
Accrued benefit cost $ (4,631) $ (5,128)
=======================
Statements of financial position:
Accrued benefit liability $ (4,631) $ (5,128)
Intangible asset 0 253
Accumulated other comprehensive income 0 406
-----------------------
Net amount recognized $ (4,631) $ (4,469)
=======================
2000 1999
-----------------------
Weighted average assumptions:
Discount rate 8.00% 8.00%
Expected return on plan assets 9.75% 9.75%
Rate of compensation increase 5.00% 5.00%
The total plan expense for the VIP retirement plan included the following
components (in thousands):
DECEMBER 31
1999 1998 1997
--------------------------------
Components of net cost:
Service cost $ 296 $ 212 $ 332
Interest cost 254 426 333
Amortization of transition amount 0 4 4
Amortization of prior service cost (181) 111 118
Recognized net actuarial loss 369 65 45
--------------------------------
Benefit cost $ 738 $ 818 $ 832
================================
18
30
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
4. RETIREMENT PLANS (CONTINUED)
The Company's Employee Stock Ownership 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. One of the four investment options is the
Virco Stock Fund. Shares owned by the ESOP are held by the Plan Trustee, U.S.
Trust Company of California. At January 31, 2000, the Plan held 506,022 shares
of Virco Stock including 503,171 shares allocated to participants' accounts.
Using the January 31, 2000 closing price of $12.56, the unallocated account has
2,851 shares valued at $35,817. At January 31, 2000, the Plan had borrowed
$41,000 directly from Wells Fargo Bank. This loan is secured by the unallocated
shares and guaranteed by Virco. Allocated shares held by the Trust are included
in shares outstanding and the related dividends are charged to retained
earnings. For the fiscal years ended January 31, 2000 and 1999, there was no
employer match and therefore no compensation cost to the Company.
The Company provides current and post-retirement life insurance to certain
salaried employees with split dollar life insurance policies under the Dual
Option Life Insurance Plan. Cash surrender values of these policies, which are
included in other assets in the consolidated balance sheets, were $3,551,000 and
$3,182,000 at January 31, 2000 and 1999, respectively.
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 $976,000 and $608,000 for the years
ended January 31, 2000 and 1999, respectively.
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 funding these Plans are held in the Rabbi Trust.
19
31
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
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 these
stock plans, the Company may grant an aggregate of 1,075,968 shares (as adjusted
for the stock split and stock dividends) to its employees in the form of stock
options. Non-employee directors automatically receive a grant for options to
purchase 1,000 shares of common stock on the first business day following each
annual meeting of the Company's stockholders. As of January 31, 2000, 235,734
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 the year, certain optionees satisfied the exercise price of their
options by exchanging shares already owned rather than paying cash. As a result,
8,791 and 10,438 shares were recorded as treasury stock for the years ended
January 31, 2000 and 1999, respectively.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair-value method of SFAS No. 123. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following ranges of weighted-average assumptions:
risk-free interest rates of 5.00% to 6.26%; dividend yield of 0.31% to 0.98%;
volatility factor of the expected market price of the Company's common stock of
0.26 to 0.39; and a weighted-average expected life of the option of five years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The pro forma effect
only takes into account options granted since January 1, 1993, and is likely to
increase in future years as additional options are granted and amortized ratably
over the vesting period. The Company's pro forma information follows (in
thousands except for net income per share information):
YEAR ENDED JANUARY 31
2000 1999 1998
-----------------------------------
Pro forma net income $ 9,698 $ 17,401 $ 13,549
Pro forma net income per share -
assuming dilution $ .92 $ 1.58 $ 1.23
20
32
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTIONS AND STOCKHOLDERS' RIGHTS (CONTINUED)
A summary of the Company's stock option activity, and related information for
the years ended January 31 follows:
2000 1999 1998
----------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------------------------------------------------------------------------------
Outstanding at beginning 511,317 $ 10.25 610,241 $ 7.80 389,991 $ 3.79
of year
Granted 128,700 14.70 69,025 17.02 253,344 13.71
Exercised (62,283) 3.73 (167,949) 4.21 (33,094) 5.62
Forfeited -- -- -- -- --
-------- -------- --------
Outstanding at end of year 577,734 11.94 511,317 10.25 610,241 7.80
======== ======== ========
Exercisable at end of year 482,707 $ 11.55 386,132 $ 9.31 424,600 $ 6.77
Weighted-average fair
value of options
granted during the year $ 6.20 $ 6.99 $ 4.89
The data included in the above table has been retroactively adjusted, if
applicable, for stock dividends and the stock split.
Information regarding stock options outstanding as of January 31, 2000 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
- --------------------------------------------------------------------------------
$ 2.49 to $8.47 264,726 2.72 years $ 5.83 232,488 $ 5.50
13.50 to 15.50 198,149 8.63 15.38 137,780 14.82
20.05 to 21.38 114,859 7.05 20.08 112,439 20.06
------- -------
577,734 5.60 11.94 482,707 11.55
======= =======
21
33
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTIONS AND STOCKHOLDERS' RIGHTS (CONTINUED)
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 ($27.55, as adjusted for the stock split and stock dividend),
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 (363,000 shares as adjusted by the stock split and stock dividend) of
Series A Junior Participating Cumulative Preferred Stock reserved for issuance
upon exercise of the Rights.
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
2000 1999 1998
------------------------------
Statutory 35.0% 35.0% 35.0%
State taxes (net of federal tax) 3.1 3.2 2.9
Nondeductible expenses 1.0 .8 .8
------------------------------
39.1% 39.0% 38.7%
==============================
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34
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
6. PROVISION FOR INCOME TAXES
Significant components of the provision for income taxes (in thousands) are as
follows:
JANUARY 31
2000 1999 1998
-----------------------------------
Current:
Federal $ 2,952 $ 9,425 $ 7,336
State 840 1,427 1,191
-----------------------------------
3,792 10,852 8,527
Deferred:
Federal 2,347 376 222
State 388 44 3
-----------------------------------
2,735 420 225
-----------------------------------
$ 6,527 $ 11,272 $ 8,752
===================================
Significant components of the Company's deferred tax assets and liabilities (in
thousands) are as follows:
JANUARY 31
2000 1999
-----------------------
Deferred tax assets:
Accrued vacation and sick leave $ 1,179 $ 867
Retirement plans 2,017 1,498
Insurance reserves 1,371 795
Inventory 196 292
Other 339 326
-----------------------
5,102 3,778
Deferred tax liabilities:
Tax in excess of book depreciation 3,654 3,418
Capitalized software development costs 4,608 785
-----------------------
8,262 4,203
-----------------------
Net deferred tax liability $ (3,160) $ (425)
=======================
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.
23
35
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS
Minimum future lease payments (in thousands) for operating leases in effect as
of January 31, 2000, are as follows:
Year ending January 31
- ----------------------
2001 $ 6,058
2002 4,976
2003 4,672
2004 4,158
2005 3,252
Thereafter 239
----------
$ 23,355
==========
Rent expense relating to operating leases was as follows (in thousands):
Year ending January 31
- ----------------------
2000 $ 10,516
1999 9,438
1998 8,255
The Company leases machinery and equipment from GECC under a 10-year operating
lease arrangement. The total amount of machinery and equipment leased in 1999
and 1998 was $8,800,000 and 0, respectively. The Company has the option of
buying out the leases three to five years into the lease period.
Minimum future lease-receipts (in thousands) for leases relating to properties
owned or subleased as of January 31, 2000 are as follows:
Year ending January 31
- ----------------------
2001 $ 1,046
2002 555
2003 459
2004 459
2005 459
Thereafter 2,482
-----------
$ 5,460
===========
24
36
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
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,
2000 and 1999, there are no required reserves for such environmental
contingencies.
The Company has a self-insured retention for product and general liability
losses up to $100,000 per occurrence. The Company has purchased insurance to
cover losses in excess of $100,000 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 $3,320,000 at January 31, 2000,
based upon the Company's estimated payout period of four years using a 10%
discount rate.
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.
25
37
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
9. FOREIGN OPERATION
In May 1997, the Company decided to shut down its Mexican manufacturing
facility. Subsequently, the Company sold a majority of the assets of the Mexican
facility on October 8, 1997. The facility ceased operations on October 20, 1997.
Total revenues of this operation, consisting primarily of transfers between
geographic areas of the Company, were $5,389,000 for the year ended January 31,
1998. The production requirements from this facility were transferred to the
Torrance, California, and Conway, Arkansas, manufacturing plants.
10. QUARTERLY RESULTS (UNAUDITED)
The Company's quarterly results for the years ended January 31, 2000 and 1999,
are summarized as follows (in thousands, except per share data):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------------------------------------------
Year ended January 31, 2000:
Net sales $ 37,479 $ 88,224 $ 93,895 $ 47,043
Gross profit 11,361 30,468 33,683 15,882
Net income (loss) (1,965) 6,527 6,414 (810)
Net income (loss) per share (.18) .63 .62 (.08)
Net income (loss) per share - (.18) .61 .61 (.08)
diluted
Year ended January 31, 1999:
Net sales $ 44,938 $ 87,539 $ 92,691 $ 48,452
Gross profit 14,675 28,655 32,376 17,360
Net income 790 6,368 7,304 3,168
Net income per share .07 .59 .68 .30
Net income per share - diluted .07 .57 .66 .29
Net income per share has been adjusted to reflect the 10% stock dividend
declared in August 1999 and 1998.
26
38
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
11. SUBSEQUENT EVENTS
Subsequent to the year ended January 31, 2000, the Company entered into an
agreement to sell its Torrance, California warehouse. This sale transaction
closed as of April 20, 2000. The Company received approximately $9,500,000 in
cash and will record approximately $7,900,000 pre-tax gain on disposition
during the quarter ending April 30, 2000.
27
39
VIRCO MFG. CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED JANUARY 31, 1998, 1999 AND 2000
(In Thousands)
Col. A Col. B Col. C Col. D Col. E Col. F
Additions
Balance at Charged to Costs Charged to Other Deductions from Balance at Close of
Description Beginning of Period and Expenses Accounts Reserves Period
- ----------- ------------------- ---------------- ---------------- --------------- -------------------
Allowance for Doubtful
Accounts:
Year Ended:
January 31, 1998 $ 100 $ 119 $ 119(1) $ 100
January 31, 1999 $ 100 $ 530 $ 430(1) $ 200
January 31, 2000 $ 200 $ 188 $ 188(1) $ 200
(1) Uncollectible accounts written off, net of recoveries.