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 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 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 2001 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 2001 audited consolidated financial statements be included in the
Company's annual report on Form 10-K. The Board of Directors concurred.
MANAGEMENT'S DISCUSSION AND ANALYSIS 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. In this report, words such as "anticipates,"
"believes," "expects," "future," "intends," "plans," "potential," "may," "could"
and similar expressions identify forward-looking
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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 our 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 allowance for doubtful accounts, valuation of
inventory including LIFO reserves, self-insured retention for products and
general liability insurance, self-insured retention for workers compensation
insurance, 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: Effective February 1, 2000, the Company changed its method
of accounting for revenue recognition in accordance with Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." Under the
new accounting method adopted, the Company recognizes all sales when title
passes under its various shipping terms. 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. 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 high degree of
collectability.
Inventory Valuation: The Company uses the LIFO 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. If market conditions are less favorable than those
anticipated by management, additional allowances may be required.
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Self-Insured Retention: For 2001, the Company was self-insured for Product
Liability losses up to $100,000 per occurrence. The Company obtains annual
actuarial estimates of total expected future losses for liability claims and
records the net present value of losses.
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 7.75% discount rate and estimating an 8.00% return on plan
assets. The Company obtains annual actuarial valuations for all three plans.
Although the Company does not anticipate any change in these rates in the coming
year, any change would not have a significant effect on the Company's financial
position, results of operations or cash flows.
Deferred Tax Assets and Liabilities: The Company has not provided an allowance
against the deferred tax assets recorded in the financial statements. The
Company had a net deferred tax liability of $590,000 at January 31, 2002.
Management believes that it is more likely than not that future earnings will be
sufficient to recover deferred tax assets.
RESULTS OF OPERATIONS (2001 VS. 2000)
For the year ended January 31, 2002, the Company had a modest net income of
$246,000 on net sales of $257,462,000 compared to a net income of $4,016,000 on
net sales of $287,342,000 in the same period last year. Prior year results
included a pre-tax gain of $7,945,000 on the sale of real estate and other
income of $4,052,000 related to the settlement of a dispute. The settlement was
a non-recurring payment unrelated to the Company's ongoing operations. Earnings
were $0.02 per share for the year ended January 31, 2002, compared to $0.32 in
the same period last year, after giving effect to the 10% stock dividend
declared August 21, 2001. For 2001, furniture operations provided net income of
$246,000 on net sales of $257,462,000. This compares to a loss on furniture
operations of $3,391,000 (which excludes the one-time items mentioned above) on
substantially higher sales of $287,342,000 in fiscal 2000. In addition, cash
flow from operations reached a historical high of $35,037,000, due largely to a
$19,356,000 reduction in inventories made possible by our Assemble-to-Ship
Program and the decrease in net sales due to the lingering effects of a decline
in the commercial furniture market.
Sales
In recent years, Virco's sales force has been organized into two groups,
"Education" and "Commercial". During November of 2001, the Company announced a
reorganization of the sales force. Instead of having two representatives
pursuing separate customers within the same geographical territory, Virco now
has only one National Sales Group. It became increasingly clear that the needs
of Virco's commercial and educational customers were evolving towards greater
similarity and that combining the Company's sales efforts would allow individual
representatives to plow more deeply in a smaller field. In addition, Virco also
established a Corporate Sales Group to pursue wholesalers, mail order accounts
and national chains where management believes that it would be more efficient to
have a single sales representative or group approach such persons, as
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they tend to have needs that transcend the geographic boundaries established for
our local accounts.
By traditional measures, Virco's 2001 results may not look impressive, but
viewed in the context of the worst recorded recession in recent history of the
commercial furniture industry, management is reasonably satisfied. As a group,
the members of BIFMA (the Business and Institutional Manufacturer's Association)
reported a sales decline of 17.4% for calendar 2001, with an even more dramatic
29.2% decline in the fourth quarter. This compares with only a 10.4% decline at
Virco. The Company's core public school customers appear to have been affected
less by the overall recession. Sales to public schools declined modestly during
2001, but management believes that many of them will be functioning under
reduced budgets next year. Commercial sales were substantially less than the
prior year, more closely reflecting the statistical results recorded by BIFMA.
The reduction in commercial sales experienced in the recent year is expected to
continue in the next fiscal year. Virco's quarterly reports on Form 10-Q and
related press releases will provide updated information on order volume.
Because of the recession in the furniture industry, the Company experienced
substantial price competition in its primary markets. During 2001, the Company
adhered to a policy of turning down low margin and unprofitable business.
Although this policy had an adverse effect on unit volume, the Company achieved
a net increase in selling prices. Consequently, the gross margin percentage for
the year increased modestly compared to 2000, despite unfavorable manufacturing
variances related to reductions in production levels.
Subsequent to year end, Virco signed a letter of intent to purchase the assets
of Furniture Focus, a reseller that offers complete package solutions for the
Furniture, Fixtures and Equipment (FF&E) segments of bond-funded public school
construction projects. We expect the acquisition to add between $5,000,000 and
$7,000,000 in sales over the remainder of fiscal 2002.
Cost of Sales
Virco began 2001 with a plan to reduce inventory levels and to implement the
Assemble-to-Ship (ATS) model. The effect of the reduction in sales volume,
combined with management's decision to implement the ATS model to reduce
inventories, resulted in a substantial reduction in production hours. In effort
to match spending to the lower levels of output, Virco reduced headcount,
capital expenditures, and other discretionary spending. Despite reductions in
spending, the Company incurred increased manufacturing variances compared to the
prior year. These variances were more than offset by the effects of reduced
costs for certain raw materials, and an increase in selling prices. The net
effect was a modest increase in gross margins for the year.
In 2002, the Company intends to more fully implement the ATS model and further
reduce levels of inventory. The intended reduction in inventory will not be as
significant as achieved in 2001. Production levels, which will vary depending
upon selling volumes, are anticipated to be approximately level with the prior
year.
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Inflation rates did not have a significant net impact on the Company's cost of
sales in 2001. Material costs decreased, offset by increased costs for certain
utilities and employee benefits. The Company anticipates upward pressure on
costs, particularly in the areas of certain raw materials, transportation,
energy, and benefits in the coming year and others. 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, 2002.
Selling, General and Administrative and Others
Selling, general and administrative expense for the year ended January 31, 2002,
decreased by approximately $11,376,000 compared to the same period last year.
These costs decreased both in absolute dollars and as a percentage of sales.
Freight costs declined by approximately $3,500,000 due to a reduction in selling
volume, and were slightly lower as a percentage of sales. Other SG&A costs were
lower in absolute dollars and as a percentage of sales due to reductions in
staffing, reduced sales incentives, and other reductions in spending, including
a temporary 10% reduction in salaries and wages during the fourth quarter.
Interest expense was approximately $400,000 less than in the prior year due to
reduced levels of borrowing and lower interest rates. The Company expects to
continue to reduce borrowing levels in 2002. The Company has entered into a swap
agreement with Wells Fargo Bank, which has the effect of establishing a fixed
rate of interest for $20,000,000 of loans for both 2001 and 2002. The balance of
borrowing is based upon LIBOR, and will fluctuate with the market rate of
interest.
In the current year, Virco realized an $86,000 loss on disposition of fixed
assets. This compares to a gain on sale of assets of approximately $7,667,000 in
the prior year, and a prior year pre-tax gain of $4,052,000 on a settlement.
RESULTS OF OPERATIONS (2000 VS. 1999)
Sales
For the year ended January 31, 2001, sales increased 7.2% to $287,300,000,
compared to $268,100,000 for the same period last year. Approximately 90% of the
increase in sales for the year ended January 31, 2001, was from education sales,
with the balance from commercial sales. The increase in revenues was
attributable to the Company pursuing an aggressive pricing policy during the
educational bidding season of late 1999/early 2000. The attained sales growth
was substantially less than the Company had planned to achieve with this pricing
strategy.
Education sales, which were primarily composed of sales to publicly funded K-12
schools and represent 64% of corporate revenues, increased by $17,300,000 to
$184,100,000 from $166,800,000 in the prior year. Sales of our newer computer
furniture, Plateau(R) tables, Core-a-Gator(R) lightweight folding tables, mobile
tables and mobile cabinets improved, as did many of our older product lines. Due
to aggressive pricing, the sales increase was achieved primarily by unit volume,
not price increases.
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Virco's commercial sales included private schools, pre-schools, churches,
convention centers, agencies at city, county, state and federal levels,
furniture distributors, retailers and catalog retailers. Commercial sales, which
represented 36% of corporate revenues, increased by $1,900,000 to $103,200,000
from $101,300,000 in the prior year. The breadth of Virco's product line for
target niche markets, and the continuing success of its Quick Ship stocking
program favorably affected sales for the commercial sales channels.
Cost of Sales
During the 1999 fiscal year, the Company initiated production at a new
manufacturing plant and implemented a new enterprise resources planning system.
The combined effect of these two significant events resulted in inadequate
levels of customer service during the summer of 1999. In addition, the new
manufacturing facility provided the Company with enhanced capacity to support a
substantial sales increase. In order to address both of these concerns, the
Company pursued two objectives in 2000 which adversely affected gross margins.
The first objective was to substantially improve the level of customer service
by increasing the stocking plan for inventories to ensure better service during
the summer delivery season. The second objective was to increase sales and
utilize the new factory capacity through aggressive pricing. To support these
two objectives, the Company ran its factories at high levels of output for the
first eight months of the year in order to build to the enhanced stocking plan
and in anticipation of increased sales. The aggressive pricing strategy did
increase sales, but not to the extent anticipated. In order to return
inventories to more normal levels, the Company significantly reduced production
in the third and fourth quarters, resulting in unfavorable manufacturing
variances. The Company reduced its work force and spending in the fourth
quarter, but not in time to prevent the decline in manufacturing efficiency
related to the sharply curtailed production levels. The aggressive pricing
strategy affected the entire sales volume, not only at the margin, and the
Company experienced a slight reduction in prices for the year, while absorbing
cost increases related to some materials, labor and benefit costs, and
additional capacity from the plant expansion. As a result of the events
described above, gross profits for the year ended January 31, 2001, as a percent
of sales, decreased by 5.5% to 29.1% from 34.6% in the prior year.
Selling, General and Administrative
Selling, general and administrative expense for the year ended January 31, 2001,
increased both in total dollars and as a percentage of sales compared to the
same period last year. The higher selling, freight and warehousing expense was
primarily attributable to growth in unit sales volume, increased freight rates,
costs incurred during the consolidation of our Conway warehouses, and reduction
in selling prices, which increased these costs as a percentage of sales. The
increase in general and administration expense was primarily attributable to
greater depreciation expense, as well as system maintenance services, training
costs and other expenses relating to the implementation of sales force
automation, a business-to-business website, and an upgrade of the Company's SAP
enterprise resource planning system
In December, the Company announced a corporate reorganization and reduction in
force. As part of this reorganization, the Company reduced its workforce by 141
employees. This reduction was
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distributed proportionately among managerial, administrative, and support
positions at both divisions and at the Corporate headquarters. The reduction in
force did not include any direct labor. In the fourth quarter, the Company
incurred approximately $1,500,000 in severance costs related to this reduction
in force.
Interest expense increased by $2,577,000 for the year ended January 31, 2001,
compared to the same period last year. This was attributable to increases in
interest rates during the year and a larger average borrowing balance due to
increased levels of inventory and the completion of the Company's capital
expansion in Conway, Arkansas.
During 2000, the Company benefited from two one-time events which favorably
affected income. In the first quarter the Company sold a warehouse located in
Torrance, California, that had been held as rental property. The sale resulted
in a pre-tax gain of approximately $7,945,000. In the third quarter, the Company
realized a $4,052,000 pre-tax gain from a settlement of certain claims.
LIQUIDITY AND CAPITAL RESOURCES
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 require management to make estimates and judgments that
affect our assets, liabilities, revenues and expenses. Virco's 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 timely meet customer orders 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 costly
assembly until the last moment, and reducing the amount of warehouse space
needed to store finished goods.
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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 the next fiscal year, we have entered into a
revolving credit facility with Wells Fargo Bank, amended and restated March
2002, but effective at January 31, provides a secured revolving line of credit
that varies from $40,000,000 to $70,000,000. This credit facility is
intentionally structured to provide additional working capital during the
Company's traditional peak period. At October 1, 2002, the available commitment
reduces to $40,000,000. This is a three-year non-amortizing line with interest
payable monthly at a fluctuating rate equal to the Bank's prime rate plus a
fluctuating margin of 0.25% to 0.50% (4.75% at January 31, 2002). The line also
allows the Company the option to borrow under 30- 60- and 90-day fixed term
rates at LIBOR plus a fluctuating margin of 1.50% to 2.50%. Approximately
$25,175,000 was available for borrowing as of January 31, 2002.
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 had significant cash flow effects on the 1998,
1999, and 2000 fiscal years. 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 the most current version of SAP in the fourth quarter of 2000.
General Electric Capital Corporation (GECC) financed the initial portion of this
project under a lease arrangement, which is treated as a capital lease for book
purposes and an operating lease for tax purposes. As of January 31, 2002, the
Company had expended $13,100,000 relating to this project. Capital and training
costs not funded by the lease are financed by cash flows from operations and
from the loan facility with Wells Fargo Bank.
The second project was 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 purchase production equipment for the
Conway, Arkansas location. During 1999, the Company expended approximately
$29,200,000 to complete 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 a second 400,000 sq. ft. segment of that facility. In 2000, the
Company expended approximately $15,974,000 to complete the expansion and to
acquire high-density racking and material handling systems. To finance this
project, the Company borrowed
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$30,000,000 from Wells Fargo Bank that was scheduled to be repaid in three
annual $10,000,000 installments, the first of which was paid on January 31,
2001; moreover, as explained below, the Company paid off the entire balance of
this loan prior to January 31, 2002. In addition to the loan from Wells Fargo,
the Company acquired equipment with operating leases from GE Capital, 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 2001, with depreciation expense
exceeding capital spending by approximately $10,584,000. 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 between $5,000,000 to $7,000,000 for 2002, which is
approximately one-half of anticipated depreciation expense. Subsequent to
year-end, the Company entered into an agreement to purchase the assets of
Furniture Focus Corporation for $2,400,000. The $2,400,000 purchase price is
included in the $5,000,000 to $7,000,000 the Company has budgeted for capital
expenditures.
In the fourth quarter of 2001, primarily due to the reduction in inventory
related to the implementation of the previously described ATS model and the
reduced levels of capital expenditures, Virco was able to pay off the
$20,000,000 balance on the loan facility with Wells Fargo Bank which was used to
finance the Conway expansion.
The Company is currently marketing three properties for sale or lease, which
have a cumulative estimated market value of approximately $8,000,000. One of
these properties, a former production facility in Conway, Arkansas, is currently
being utilized as a finished goods warehouse. A second property, located in Los
Angeles, California, is vacant. The third property, a former production facility
located in Newport, Tennessee, has been leased to a third party who has an
option to purchase the property at any time during the first three years of the
lease.
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 and
$20,000,000 in January 1999, April 1999 and December 2001, respectively. As of
the end of January 2002 and 2001, the Company had repurchased approximately
884,000 and 690,000 shares at a cost of approximately $13,505,000 and
$11,539,000 respectively. The Company intends to continue buying back shares of
Virco common stock as long as the Company feels the shares are undervalued and
either operating cash flow or borrowing capacity under the Wells Fargo Bank line
is available.
Management believes cash generated from operations and from the previously
described sources will be adequate to meet its capital requirements.
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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.
In 2001, the Company was self-insured for Product Liability losses up to
$100,000 per occurrence. For the insurance year beginning April 1, 2002, the
Company is self-insured for Products and General Liability losses up to $250,000
per occurrence and a Workers Compensation deductible of $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. 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 2001 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 net impact on the
Company's operating results for the fiscal year just ended. Material costs
decreased, offset by increased costs for certain utilities and employee
benefits. The Company anticipates upward pressure on costs, particularly in the
areas of certain raw materials, transportation, energy and employee benefits in
the coming year. In April 2002, under section 201 steel sanction, a 30% tariff
was imposed on imported steel. In addition, domestic steel manufacturers have
filed a dumping claim against certain international suppliers. The effect of
these actions could cause the Company to incur at least $2,000,000 of
incremental steel costs in year 2002. Total material costs for 2002, as a
percentage of sales, could be higher than in 2001. However, no assurance can be
given that the Company will experience stable, modest or substantial increases
in prices in 2002. 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 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 2001, the Company significantly
reduced its expenditures for capital assets, but in the prior 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.
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The Company is also subject to interest rate risk related to its $28,708,000 of
borrowings as of January 31, 2002, and any seasonal borrowings used to finance
additional inventory and receivables during the summer. 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 $476,000 for the twelve months
ended January 31, 2002. The Company would benefit from a similar interest
savings if the base rate were to fluctuate downward by a like amount.
In February 2000, 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 28, 2001. The notional swap amount then decreased 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
1.50% to 2.50%. At January 31, 2002, the carrying value approximated the fair
value of $1,103,000. During the year ended January 31, 2002, the Company
recorded an additional loss amount of $662,000 (net of an applicable income tax
benefit of $441,000) in other comprehensive loss in order to account for the
change in fair value. The fair value of the swap is estimated on pricing models
using current assumptions.
FINANCIAL STRATEGY
Virco's financial strategy is to continue 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 June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes Accounting Principles Board Opinion No. 17. 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 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.
Accordingly, the Company will apply the provisions of SFAS No. 141 should it
enter into any business combinations. The Company believes SFAS No. 142 will not
have a significant effect on the Company's financial position, results of
operations or cash flows.
11
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs, and requires such obligations and costs to be recognized
at fair value in the period in which they are incurred. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002, although earlier application is encouraged. The Company expects to
adopt SFAS No. 143 as of February 1, 2003, and has not yet determined what
impact, if any, the adoption of the Statement will have on the Company's
financial position and results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and superseded
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations for a
Disposal of a Segment of a Business." FAS 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company expects to adopt FAS 144 as of February 1, 2002, and it does not expect
that the adoption of the Statement will have a significant impact on the
Company's financial position and results of operations.
12
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
in thousands except per share data 2001 2000 1999 1998 1997
- ---------------------------------- --------- ----------- --------- --------- ---------
SUMMARY OF OPERATIONS
Net sales(4)(5) $ 257,462 $ 287,342 $ 268,079 $ 275,096 $ 259,586
Net income before cumulative effect of
change in accounting principle $ 246 $ 4,313 $ 10,166 $ 17,630 $ 13,852
Cumulative effect of change in accounting
principle, net of $191 tax benefit(5) (297)
--------- ----------- --------- --------- ---------
Net income $ 246 $ 4,016 $ 10,166 $ 17,630 $ 13,852
========= =========== ========= ========= =========
Per share data
Income before cumulative effect of change in
accounting principle(1)
Basic $ 0.02 $ 0.34 $ 0.81 $ 1.35 $ 1.06
Assuming dilution 0.02 0.34 0.79 1.32 1.04
Cumulative effect of change in
accounting principle(1)
Basic -- (0.02) -- -- --
Assuming dilution -- (0.02) -- -- --
Net income(1)
Basic 0.02 0.32 0.81 1.35 1.06
Assuming dilution 0.02 0.32 0.79 1.32 1.04
Pro forma amounts assuming the accounting
change is applied retroactively
Net income(5) $ 246 $ 4,313 $ 10,186 $ 17,663 $ 13,963
Per share data
Net income
Basic 0.02 0.35 0.81 1.35 1.07
Assuming dilution 0.02 0.34 0.80 1.32 1.04
Dividends declared per share, adjusted for
10% stock dividend
Cash dividends $ 0.08 $ 0.07 $ 0.06 $ 0.06 $ 0.05
OTHER FINANCIAL DATA
Total assets $ 161,372 $ 199,549 $ 190,863 $ 151,380 $ 122,015
Working capital $ 34,464 $ 43,173 $ 51,423 $ 47,405 $ 43,784
Current ratio 2.2/1 1.9/1 2.3/1 2.4/1 2.5/1
Total long-term obligations $ 40,853 $ 55,075 $ 53,995 $ 25,690 $ 13,512
Stockholders' equity $ 90,223 $ 94,141 $ 93,834 $ 88,923 $ 77,077
Shares outstanding at year-end(3) 12,223 12,411 12,500 12,836 13,011
Stockholders' equity per share(2) $ 7.38 $ 7.59 $ 7.51 $ 6.93 $ 5.92
- --------------------------------------------------------------------------------
(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.
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, 2002 and 2001, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended January 31, 2002. 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, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2002, in conformity with accounting principles generally accepted in
the United States.
As discussed in Note 1 to the consolidated financial statements, during the year
ended January 31, 2001, the Company changed its method of revenue recognition
for certain of its product sales.
/s/ Ernst & Young LLP
Long Beach, California
March 15, 2002, except for
Note 10 as to which the date is
March 28, 2002
1
Virco Mfg. Corporation
Consolidated Balance Sheets
(In thousands, except per share data)
JANUARY 31
--------------------
2002 2001
-------- --------
ASSETS
Current assets
Cash $ 1,704 $ 351
Trade accounts receivable (less allowance for doubtful accounts of
$200 in 2002 and 2001) 19,251 24,559
Other receivables 175 586
Inventories
Finished goods 16,159 27,009
Work in process 12,322 14,442
Raw materials and supplies 10,202 16,588
-------- --------
38,683 58,039
Income taxes receivable -- 2,508
Prepaid expenses and other current assets 935 1,150
Deferred income taxes 1,711 1,780
-------- --------
Total current assets 62,459 88,973
Property, plant and equipment
Land and land improvements 3,548 3,880
Buildings and building improvements 50,245 50,382
Machinery and equipment 100,999 98,024
Leasehold improvements 1,375 1,218
-------- --------
156,167 153,504
Less accumulated depreciation and amortization 72,761 58,859
-------- --------
Net property, plant and equipment 83,406 94,645
Other assets 15,507 15,931
-------- --------
Total assets $161,372 $199,549
======== ========
2
JANUARY 31
------------------------
2002 2001
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Checks released but not yet cleared bank $ 2,930 $ 2,216
Accounts payable 8,816 13,930
Income tax payable 1,282 --
Accrued compensation and employee benefits 8,602 11,471
Current portion of long-term debt 2,061 12,101
Other accrued liabilities 4,304 6,082
--------- ---------
Total current liabilities 27,995 45,800
Noncurrent liabilities
Accrued self-insurance retention 2,777 2,598
Accrued pension expenses 11,429 8,736
Long-term debt, less current portion 26,647 43,741
--------- ---------
Total noncurrent liabilities 40,853 55,075
Deferred income taxes 2,301 4,533
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 13,167,399
shares in 2002 and 12,032,233 shares in 2001 132 120
Additional paid-in capital 109,638 97,656
Retained (deficit) earnings (2,006) 10,645
Less treasury stock at cost (944,352 shares in 2001 and 749,246 shares
in 2000) (13,975) (12,009)
Less unearned ESOP shares -- (696)
Less accumulated comprehensive loss (3,566) (1,575)
--------- ---------
Total stockholders' equity 90,223 94,141
--------- ---------
Total liabilities and stockholders' equity $ 161,372 $ 199,549
========= =========
See accompanying notes.
3
Virco Mfg. Corporation
Consolidated Statements of Income
(In thousands, except per share data)
YEAR ENDED JANUARY 31
--------------------------------------
2002 2001 2000
--------- --------- ---------
Net sales $ 257,462 $ 287,342 $ 268,079
Costs of goods sold 180,275 203,765 175,247
--------- --------- ---------
Gross profit 77,187 83,577 92,832
Selling, general and administrative expenses 71,816 83,192 73,360
Provision for doubtful accounts 288 156 188
Interest expense 4,561 4,962 2,385
Loss (Gain) on sale of assets 86 (7,667) 206
Other income -- (4,052) --
--------- --------- ---------
Income before income taxes and cumulative effect of change in
accounting principle 436 6,986 16,693
Provision for income taxes 190 2,673 6,527
--------- --------- ---------
Income before cumulative effect of change in
accounting principle 246 4,313 10,166
Cumulative effect of change in accounting principle -- (297) --
--------- --------- ---------
Net income $ 246 $ 4,016 $ 10,166
========= ========= =========
AMOUNTS PER COMMON SHARE -- BASIC
Income before cumulative effect of change in
accounting principle $ 0.02 $ 0.34 $ 0.81
Cumulative effect of change in accounting principle -- (0.02) --
--------- --------- ---------
Net income $ 0.02 $ 0.32 $ 0.81
========= ========= =========
AMOUNTS PER COMMON SHARE -- ASSUMING DILUTION
Income before cumulative effect of change
in accounting principle $ 0.02 $ 0.34 $ 0.79
Cumulative effect of change in accounting principle -- (0.02) --
--------- --------- ---------
Net income $ 0.02 $ 0.32 $ 0.79
========= ========= =========
Pro forma amounts assuming the accounting change is applied retroactively:
Net income $ 246 $ 4,313 $ 10,186
Net income per common share -- basic 0.02 0.35 0.81
Net income per common share -- assuming dilution 0.02 0.34 0.80
Weighted average shares outstanding:
Basic 12,259 12,497 12,629
Assuming dilution 12,432 12,623 12,806
See accompanying notes.
4
Virco Mfg. Corporation
Consolidated Statements of Stockholders' Equity
(In thousands, except per share amounts)
Common Stock Additional Retained
------------------------------ Paid-In Earnings Comprehensive
Shares Amount Capital (Deficit) Income(Loss)
------------ ------------ ------------ ------------ ------------
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 -- 232 -- --
Stock dividend (10%) 947,704 10 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 --
Net income -- -- -- 4,016 $ 4,016
Minimum pension liability, net of tax -- -- -- -- (1,155)
------------
Comprehensive income -- -- -- -- $ 2,861
============
Unearned ESOP shares -- -- -- -- --
Stock issued under option plans 49,783 -- 284 -- --
Stock dividend (10%) 1,030,100 10 12,737 (12,747) --
Cash dividends -- -- -- (866) --
Purchase of treasury stock (127,372) -- -- -- --
------------ ------------ ------------ ------------ ------------
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) --
============ ============ ============ ============ ============
Accumulated
Treasury ESOP Comprehensive
Stock Trust Loss Total
------------ ------------ ------------ ------------
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
Net income -- -- -- 4,016
Minimum pension liability, net of tax -- -- (1,155) (1,155)
Comprehensive income
Unearned ESOP shares -- (655) -- (655)
Stock issued under option plans -- -- -- 284
Stock dividend (10%) -- -- -- --
Cash dividends -- -- -- (866)
Purchase of treasury stock (1,317) -- -- (1,317)
------------ ------------ ------------ ------------
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
============ ============ ============ ============
See accompanying notes.
5
Virco Mfg. Corporation
Consolidated Statements of Cash Flows
(In thousands, except per share data)
YEAR ENDED JANUARY 31
------------------------------------
2002 2001 2000
-------- -------- --------
OPERATING ACTIVITIES
Net income $ 246 $ 4,016 $ 10,166
Adjustments to reconcile net income to net cash provided by
operating activities
Cumulative effect of accounting change -- 297 --
Depreciation and amortization 15,813 13,412 9,993
Provision for doubtful accounts 288 156 188
Loss (Gain) on sale of property, plant and equipment
86 (7,667) 112
Deferred income taxes (1,722) (407) 2,735
Changes in assets and liabilities:
Trade accounts receivable 5,020 1,742 3,820
Other receivables 411 341 (619)
Inventories 19,356 (981) (8,589)
Income taxes 3,790 (755) (2,557)
Prepaid expenses and other current assets 215 138 (347)
Accounts payable and accrued liabilities (8,230) 560 8,182
Other (236) (4,383) (2,506)
-------- -------- --------
Net cash provided by operating activities 35,037 6,469 20,578
INVESTING ACTIVITIES
Capital expenditures (5,229) (22,711) (38,849)
Proceeds from sale of property, plant and equipment 570 10,258 128
Net investment in life insurance 1,385 -- (956)
-------- -------- --------
Net cash used in investing activities (3,274) (12,453) (39,677)
6
Virco Mfg. Corporation
Consolidated Statements of Cash Flows (continued)
(In thousands, except per share data)
YEAR ENDED JANUARY 31
------------------------------------
2002 2001 2000
-------- -------- --------
FINANCING ACTIVITIES
Dividends paid $ (945) $ (866) $ (800)
Issuance of long-term debt -- 19,817 26,794
Repayment of long-term debt (28,237) (12,000) (2,468)
Proceeds from issuance of common stock 30 284 232
Purchase of treasury stock (1,954) (1,317) (4,878)
ESOP loan 696 (655) 205
-------- -------- --------
Net cash (used in) provided by financing activities (30,410) 5,263 19,085
-------- -------- --------
Net increase (decrease) in cash 1,353 (721) (14)
Cash at beginning of year 351 1,072 1,086
-------- -------- --------
Cash at end of year $ 1,704 $ 351 $ 1,072
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the year for
Interest, net of amounts capitalized $ 4,805 $ 4,953 $ 2,277
Income tax, net (1,935) 3,835 6,416
See accompanying notes.
7
Virco Mfg. Corporation
Notes to Consolidated Financial Statements
January 31, 2002
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 student 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 2000 and 1999 information to conform to
the 2001 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. 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, 2002. Foreign sales were less than 5% for each of
the three years in the period ended January 31, 2002.
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,
2002, the only derivative instrument is an interest rate swap that qualifies as
a cash flow hedge. Changes in the fair value of the swap are recorded in other
comprehensive income/loss as the hedge is effective in achieving offsetting
changes in the fair value of cash flows of the liability.
8
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 $55,000, $453,000 and $1,461,000 for the years
ended January 31, 2002, 2001 and 2000, 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
$7,593,000 and $10,004,000 at January 31, 2002 and 2001, respectively.
The book value of assets held under capital leases included in machinery and
equipment amounted to $2,294,000 and $2,856,000 at January 31, 2002 and 2001,
respectively. Amortization of capital leases is included in depreciation
expense.
9
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
The following table sets forth the computation of basic and diluted earnings per
share before cumulative effect of the accounting change:
2001 2000 1999
----------- ----------- -----------
Numerator:
Income before cumulative effect of the
accounting change $ 246,000 $ 4,313,000 $10,166,000
=========== =========== ===========
Denominator:
Denominator for basic earnings
per share -- weighted-average shares 12,259,000 12,497,000 12,629,000
Dilutive potential common shares 173,000 126,000 177,000
----------- ----------- -----------
Denominator for diluted earnings per
share -- adjusted weighted-average
shares and assumed conversions 12,432,000 12,623,000 12,806,000
=========== =========== ===========
On August 21, 2001, the Company's Board of Directors authorized a 10% stock
dividend payable on September 28, 2001, to stockholders of record as of
September 6, 2001. This resulted in the issuance of approximately
1,120,000 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.
10
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 noncurrent 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 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 $4,237,000 in
2001, $3,517,000 in 2000 and $3,775,000 in 1999.
SELF-INSURANCE
The Company has a self-insured retention for workers' compensation, automobile
and 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 issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." The Interpretation addressed
implementation practice issues in accounting for compensation costs under
existing rules prescribed by Accounting Principles Board No. 25. The new rules
were applied by the Company prospectively after July 1, 2000.
11
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 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
Effective February 1, 2000, the Company changed its method of accounting for
revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements." Previously, the Company had
recognized revenue upon shipment of merchandise to the customer even though at
each fiscal year-end and quarter a portion of its merchandise was shipped FOB
destination. The company believes it had given up substantially all the risks
and rewards of ownership upon shipment. Under the new accounting method adopted
retroactive to February 1, 2000, the Company now recognizes all sales when title
passes under its various shipping terms. The cumulative effect of the change on
prior years resulted in a charge to income of $297,000 (net of income taxes of
$191,000), which is included in income for the year ended January 31, 2001.
There was no effect on the Company's net income for the year ended January 31,
2001, before the cumulative effect of the accounting change was made. The pro
forma amounts presented in the income statement were calculated assuming the
accounting change was made retroactively to prior periods.
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, 2002, 2001 and 2000, shipping and handling costs of approximately
$27,491,000, $31,903,000 and $24,656,000, respectively, were included in
selling, general and administrative expenses.
FISCAL YEAR END
Fiscal years 2001, 2000 and 1999, refer to the years ended January 31, 2002,
2001 and 2000, respectively.
12
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE ACCOUNTING REQUIREMENTS
In June 2001 the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes Accounting Principles Board Opinion No. 17. 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 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.
Accordingly, the Company will apply the provisions of SFAS No. 141 should it
enter into any business combinations. The Company believes the adoption of SFAS
No. 142 will not have a material effect on the Company's financial position,
results of operations or cash flows.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs, and requires such obligations and costs to be recognized
at fair value in the period in which they are incurred. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002, although earlier application is encouraged. The Company expects to
adopt SFAS No. 143 as of February 1, 2003, and has not yet determined what
impact, if any, the adoption of the Statement will have on the Company's
financial position and results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and superseded
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations for a
Disposal of a Segment of a Business." FAS 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company expects to adopt FAS 144 as of February 1, 2002 and it does not expect
that the adoption of the Statement will have a significant impact on the
Company's financial position and results of operations.
13
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
2. INVENTORIES
The current material cost for inventories exceeded LIFO cost by $2,048,000 and
$3,585,000 at January 31, 2002 and 2001, respectively. Liquidation of prior year
LIFO layers due to a reduction in certain inventories (decreased) increased
income by ($825,000), $111,000 and $59,000 in the years ended January 31, 2002,
2001 and 2000, respectively.
Details of inventory amounts, including the material portion of inventory which
is valued at LIFO, at January 31, 2002 and 2001, are as follows (in thousands):
JANUARY 31, 2002
------------------------------------------------------
MATERIAL LABOR,
CONTENT AT LIFO OVERHEAD
FIFO RESERVE AND OTHER TOTAL
---------- ------- --------- -------
Finished goods $10,583 $ (493) $ 6,069 $16,159
Work in process 6,081 (586) 6,827 12,322
Raw materials and supplies 11,171 (969) -- 10,202
------- ------- ------- -------
Total $27,835 $(2,048) $12,896 $38,683
======= ======= ======= =======
JANUARY 31, 2001
------------------------------------------------------
MATERIAL LABOR,
CONTENT AT LIFO OVERHEAD
FIFO RESERVE AND OTHER TOTAL
---------- ------- --------- -------
Finished goods $18,858 $(1,211) $ 9,362 $27,009
Work in process 8,626 (1,059) 6,875 14,442
Raw materials and supplies 17,903 (1,315) -- 16,588
------- ------- ------- -------
Total $45,387 $(3,585) $16,237 $58,039
======= ======= ======= =======
14
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
----------------------
2002 2001
------- -------
Revolving credit line with Wells Fargo Bank (a) $22,414 $28,555
Term loan with Wells Fargo Bank(a) -- 20,000
IRB with the City of Torrance (b) 3,165 4,124
Equipment credit line with GECC(c) 884 1,857
Derivative instrument (a) 1,103 --
Other 1,142 1,306
------- -------
28,708 55,842
Less current portion 2,061 12,101
------- -------
$26,647 $43,741
======= =======
Outstanding stand-by letters of credit $ 2,411 $ 3,163
(a) A revolving credit facility with Wells Fargo Bank, amended and restated
in March 2002, but effective at January 31, provides a secured
revolving line of credit that ranged from $40,000,000 to $70,000,000 to
allow for additional working capital requirements during the Company's
traditional peak period. At October 1, 2002, the available commitment
reduces to $40,000,000. This is a three-year non-amortizing line with
interest payable monthly at a fluctuating rate equal to the Bank's
prime rate, plus a fluctuating margin of 0.25% - 0.50% (4.75% at
January 31, 2002). The line also allows the Company the option to
borrow under 30- 60- and 90-day fixed term rates at LIBOR plus a
fluctuating margin of 1.50% to 2.50%. Approximately $25,175,000 was
available for borrowing as of January 31, 2002.
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 amount decreased to $20,000,000 until expiration on
March 3, 2003. The swap agreement is in consideration for a fixed rate
at 7.23% plus a fluctuating margin of 1.50% to 2.50%. The Company
adopted SFAS No. 133 "Accounting for Derivatives and Hedging
Activities" on February 1, 2001. The adjustment to adopt SFAS 133
resulted in recording a liability of $920,000 and an offset to other
comprehensive loss, which was $552,000 net
15
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
3. NOTES PAYABLE (CONTINUED)
of applicable income tax benefit of $368,000. At January 31, 2002, the
carrying value of the swap approximated the fair value of $1,103,000,
with an offset to other comprehensive loss of $662,000 net of an
applicable tax benefit of $441,000. The revolving credit facility and
the term loan with Wells Fargo Bank are 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,
dividends and the repurchase of the Company's common stock. The
revolving credit facility and the term loan are secured by the
Company's accounts receivable, inventory and equipment.
(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 finalized 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. As of January 31, 2002, the Company
has not exercised the buy-out option.
Long-term debt repayments are approximately as follows (in thousands):
Year ending January 31
- ----------------------
2003 $ 2,061
2004* 25,592
2005 1,055
-------
$28,708
=======
* The $22,414,000 due under Wells Fargo Bank's line of credit will be
payable in the fiscal year ending January 31, 2004, if the agreement is
not renewed. The Company intends to renew the agreement.
16
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
3. NOTES PAYABLE (CONTINUED)
The Company believes that the carrying value of debt under the Wells Fargo
credit facility approximates fair value at January 31, 2002 and 2001, 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.
For fiscal year 2000, the Company guaranteed a $1,500,000 line of credit from
Wells Fargo Bank to the Virco Employee Stock Ownership Plan (ESOP), of which
$696,000 was outstanding under the line at January 31, 2001. The ESOP plan was
dissolved during the year ended January 31, 2002.
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. Minimum pension liability
adjustments for the years 2001, 2000 and 1999 were $1,329,000, $1,155,000 and
$14,000, respectively (net of taxes of $1,026,000, $716,000 and $9,000,
respectively), and are included in comprehensive loss. Assets of the Plan are
invested in common trust funds.
17
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, 2001 and 2000:
PENSION BENEFITS
-------------------------
2001 2000
-------- --------
Change in benefit obligation
Benefit obligation at beginning of year $ 19,435 $ 15,916
Service cost 1,017 930
Interest cost 1,515 1,425
Plan amendments 438 2,384
Actuarial loss 748 384
Benefit paid (1,990) (1,604)
-------- --------
Benefit obligation at end of year $ 21,163 $ 19,435
======== ========
Change in plan assets
Fair value at beginning of year $ 10,193 $ 11,657
Actual return on plan assets (2,116) (1,099)
Company contributions 2,721 1,239
Benefits paid (1,990) (1,604)
-------- --------
Fair value at end of year $ 8,808 $ 10,193
======== ========
Funded status of plan $(12,355) $ (9,242)
Unrecognized net transition amount (225) (267)
Unrecognized prior service cost 4,430 4,555
Unrecognized net actuarial loss 8,702 5,415
-------- --------
Net amount recognized $ 552 $ 461
======== ========
Statements of financial position
Accrued benefit liability $ (8,680) $ (6,718)
Intangible asset 4,430 4,555
Accumulated other comprehensive income 4,802 2,624
-------- --------
Net amount recognized $ 552 $ 461
======== ========
18
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
4. RETIREMENT PLANS (CONTINUED)
2001 2000
----- -----
Weighted average assumptions
Discount rate 7.75% 8.00%
Expected return on plan assets 8.00% 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
---------------------------------------
2001 2000 1999
------- ------- -------
Components of net cost
Service cost $ 1,017 $ 930 $ 752
Interest cost 1,515 1,425 1,091
Expected return on plan assets (821) (1,089) (936)
Amortization of transition amount (42) (42) (42)
Amortization of prior service cost 562 528 294
Recognized net actuarial loss 398 148 128
------- ------- -------
Benefit cost $ 2,629 $ 1,900 $ 1,287
======= ======= =======
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 $2,138,000 and $1,977,000 at January 31, 2002
and 2001, 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 December 31, 2001 and 2000:
NONQUALIFIED PENSION
-----------------------
2001 2000
------- -------
Change in benefit obligation
Benefit obligation at beginning of year $ 4,298 $ 4,004
Service cost 490 417
Interest cost 323 299
Plan amendments (438) (1,240)
Actuarial loss 492 1,166
Benefit paid (344) (348)
------- -------
Benefit obligation at end of year $ 4,821 $ 4,298
======= =======
19
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
4. RETIREMENT PLANS (CONTINUED)
NONQUALIFIED PENSION
-----------------------
2001 2000
------- -------
Change in plan assets
Company contributions $ 344 $ 348
Benefits paid (344) (348)
------- -------
Fair value at end of year $ -- $ --
======= =======
Funded status of plan $(4,821) $(4,298)
Unrecognized prior service cost (3,035) (2,964)
Unrecognized net actuarial loss 2,718 2,420
------- -------
Accrued benefit cost $(5,138) $(4,842)
======= =======
Statements of financial position
Accrued benefit liability $(5,138) $(4,842)
------- -------
Net amount recognized $(5,138) $(4,842)
======= =======
2001 2000
------ -------
Weighted average assumptions
Discount rate 7.75% 8.00%
Expected return on plan assets 8.00% 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
---------------------------------
2001 2000 1999
----- ----- -----
Components of net cost
Service cost $ 490 $ 417 $ 296
Interest cost 323 299 254
Amortization of prior service cost (366) (314) (181)
Recognized net actuarial loss 193 157 369
----- ----- -----
Benefit cost $ 640 $ 559 $ 738
===== ===== =====
20
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
4. RETIREMENT PLANS (CONTINUED)
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, 2002, the Plan held
577,476 shares of Virco Stock. While these shares were included in the employee
stock ownership component prior to the dissolution of the ESOP Plan, allocated
shares held by the Trust were included in shares outstanding and the related
dividends were charged to retained earnings. For the fiscal years ended January
31, 2002, 2001 and 2000, 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 $3,523,000 and
$3,550,000 at January 31, 2002 and 2001, 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 $1,461,000 and $1,226,000 for the
years ended January 31, 2002 and 2001, 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.
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.
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, 2002, the Plan did not hold any assets.
21
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
Non-Employee Directors Retirement Plan at December 31, 2001:
NONQUALIFIED
PENSION
2001
------------
Change in benefit obligation
Benefit obligation at beginning of year $ 461
Service cost 24
Interest cost 36
Plan amendments --
Actuarial loss (36)
Benefits paid --
-----
Benefit obligation at end of year $ 485
=====
Change in plan assets
Fair value of plan assets at inception and end of year $ --
=====
Funded status of plan $(485)
Unrecognized prior service cost 373
Unrecognized net actuarial loss (36)
-----
Net amount recognized $(148)
=====
Statements of financial position
Accrued benefit liability $(485)
Intangible asset 337
-----
Net amount recognized $(148)
=====
2001
----------
Weighted average assumptions
Discount rate 7.75%
Expected return on plan assets --
Rate of compensation increase --
22
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
4. RETIREMENT PLANS (CONTINUED)
The total plan expense for the Non-Employee Directors retirement plan included
the following components (in thousands):
DECEMBER 31,
2001
------------
Components of net cost
Service cost $ 24
Interest cost 36
Amortization of prior year service cost 88
Recognized net actuarial gain/loss --
----
Benefit Cost $148
====
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 1,301,921 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 2,000 shares of common stock on the first business day following each
annual meeting of the Company's stockholders.
As of January 31, 2002, 313,768 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, 1,051 and 983 shares were recorded as
treasury stock for the years ended January 31, 2002 and 2001, 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 4.69% to 6.26%; dividend yield of 0.10% 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.
23
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTIONS AND STOCKHOLDERS' RIGHTS (CONTINUED)
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
--------------------------------
2002 2001 2000
------- ------- --------
Pro forma net income $ 204 $ 3,914 $ 9,698
Pro forma net income per share -- assuming
dilution $ 0.02 $ 0.31 $ 0.76
A summary of the Company's stock option activity, and related information for
the years ended January 31 are as follows:
2002 2001 2000
---------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- ---------
Outstanding at beginning 649,708 $ 10.27 699,063 $ 9.87 618,698 7.09
of year
Granted 35,200 9.21 6,050 10.35 155,727 12.15
Exercised (14,998) 2.42 (55,405) 5.10 (75,362) 3.08
Forfeited (70,387) 13.50 -- --
------- ------- -------
Outstanding at end of year 599,523 10.00 649,708 10.27 699,063 9.87
======= ======= =======
Exercisable at end of year 525,524 9.86 542,878 9.79 584,075 9.55
Weighted-average fair value
of options granted
during the year $ 3.80 $ 3.60 $ 5.13
The data included in the above table have been retroactively adjusted, if
applicable, for stock dividends and the stock split.
24
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTIONS AND STOCKHOLDERS' RIGHTS (CONTINUED)
Information regarding stock options outstanding as of January 31, 2002, 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
--------------- ---------- ----------- --------- --------- ---------
$ 2.06 TO 9.70 272,745 2.59 YEARS $ 5.34 240,896 $ 4.80
11.16 TO 15.29 217,739 7.22 12.57 179,031 12.46
18.22 TO 19.44 109,039 5.69 16.60 107,575 16.58
-------- --------
599,523 4.83 10.00 527,502 9.80
======== ========
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 ($22.77, 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 (439,230 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.
25
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
6. PROVISION FOR INCOME TAXES (CONTINUED)
The provisions for the last three years are reconciled to the statutory federal
income tax rate using the liability method as follows:
JANUARY 31
------------------------------
2002 2001 2000
---- ---- ----
Statutory 34.0% 34.0% 35.0%
State taxes (net of federal tax) 4.1 3.2 3.1
Nondeductible expenses and other 5.5 1.1 1.0
---- ---- ----
43.6% 38.3% 39.1%
==== ==== ====
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
---------------------------------------
2002 2001 2000
------- ------- -------
Current:
Federal $ 1,562 $ 2,690 $ 2,952
State 350 390 840
------- ------- -------
1,912 3,080 3,792
Deferred:
Federal (1,449) (350) 2,347
State (273) (57) 388
------- ------- -------
(1,722) (407) 2,735
------- ------- -------
$ 190 $ 2,673 $ 6,527
======= ======= =======
26
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
6. PROVISION FOR INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities (in thousands) are comprised of the
following:
JANUARY 31
-----------------------
2002 2001
------- -------
Deferred tax assets
Accrued vacation and sick leave $ 1,090 $ 1,242
Retirement plans 3,308 2,678
Insurance reserves 1,306 1,410
Inventory 244 322
Other 1,068 216
------- -------
7,016 5,868
Deferred tax liabilities
Tax in excess of book depreciation (4,288) (4,381)
Capitalized software development costs (3,318) (4,240)
------- -------
(7,606) (8,621)
Net deferred tax liability $ (590) $(2,753)
======= =======
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, 2002, are as follows:
Year ending January 31
- ----------------------
2003 $ 10,314
2004 7,914
2005 6,064
2006 3,200
2007 906
Thereafter 868
----------------
$ 29,266
================
27
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS (CONTINUED)
Rent expense relating to operating leases was as follows (in thousands):
Year ending January 31
- ----------------------
2002 $ 11,042
2001 12,937
2000 10,516
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.
Minimum future lease-receipts (in thousands) for leases relating to properties
owned or subleased as of January 31, 2002, are as follows:
Year ending January 31
- ----------------------
2003 $ 33
2004 33
2005 33
2006 33
2007 33
Thereafter 147
----------------
$ 312
================
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,
2002 and 2001, there are no required reserves for such environmental
contingencies.
28
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
8. CONTINGENCIES (CONTINUED)
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 $3,908,000 at January 31, 2002,
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.
9. GAIN ON SALE OF ASSETS AND OTHER INCOME
On April 25, 2000, the Company completed the sale of its Torrance, California,
warehouse, which was held as rental property. The Company received $9,385,000 in
cash and recorded a $7,945,000 pre-tax gain on disposition during the quarter
ended April 30, 2000.
In October 2000, the Company entered into a confidential settlement of a dispute
involving past services related to the installation of non-manufacturing
equipment for which it received a final cash payment in November 2000. This
payment is a non-recurring amount unrelated to the Company's ongoing operations.
In the third quarter ended October 31, 2000, the Company recognized $4,052,000
in other income from this settlement.
29
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
10. SUBSEQUENT EVENT
Subsequent to the year ended January 31, 2002, the Company entered into an
agreement with Dew El to purchase Furniture Focus, Inc., an Ohio reseller that
offers complete package solutions for the Furniture, Fixtures and Equipment
(FF&E) segments of bond-funded public school construction projects, primarily in
the upper Midwest. Pending the successful completion of due diligence, the
Company will pay $2,400,000 in cash for certain assets of the corporation.
11. QUARTERLY RESULTS (UNAUDITED)
The Company's quarterly results for the years ended January 31, 2002 and 2001
are summarized as follows (in thousands, except per share data):
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
-------- -------- ---------- ----------
Year ended January 31, 2002
Net sales $ 42,457 $ 89,193 $ 86,232 $ 39,580
Gross profit 11,483 28,349 28,591 8,764
Net (loss) income (3,765) 4,490 3,912 (4,391)
Per common share(1) (2):
Net income
Basic (0.30) 0.37 0.32 (0.36)
Assuming dilution (0.30) 0.36 0.32 (0.36)
Year ended January 31, 2001
Net sales $ 46,432 $ 96,578 $ 99,016 $ 45,316
Gross profit 14,481 31,768 29,593 7,735
Income (Loss) before cumulative
effect of accounting change 2,617 4,262 4,713 (7,279)
Cumulative effect of accounting
change, net of tax
Revenue recognition (297) -- -- --
-------- -------- -------- --------
Net income (loss) $ 2,320 $ 4,262 $ 4,713 $ (7,279)
======== ======== ======== ========
30
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
11. QUARTERLY RESULTS (UNAUDITED) (CONTINUED)
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
Per common share(1) (2):
Income (Loss) before cumulative
effect of accounting changes:
Basic $ 0.21 $ 0.34 $ 0.38 $ (0.59)
Assuming dilution 0.21 0.34 0.37 (0.59)
Net income:
Basic 0.19 0.34 0.38 (0.59)
Assuming dilution 0.18 0.34 0.37 (0.59)
(1) Net income per share has been adjusted to reflect the 10% stock dividend
declared in August 2001 and 2000.
(2) 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.
31
SUPPLEMENTAL STOCKHOLDERS' INFORMATION
ANNUAL MEETING
The Annual Meeting of Virco stockholders will be held on Tuesday, June 18, 2002,
at 2:00 p.m., at 2027 Harpers Way, Torrance, California. The record date for
this meeting is May 3, 2002. The Proxy Statement and Proxy pertaining to this
meeting will be mailed on or about May 24, 2002.
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 23, 2002, there were
approximately 350 registered stockholders according to the transfer agent
records. There are approximately 1,500 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, 85
Challenger Road, Ridgefield Park, NJ 07660, telephone 1-800-356-2017.
If a stock certificate is lost or mutilated, immediately communicate with Mellon
Investor Services at the above address.
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 our furniture.
QUARTERLY DIVIDEND AND STOCK MARKET INFORMATION
Cash Dividends Declared Common Stock Range
1-31-2002 1-31-2001 1-31-2002 1-31-2001
-----------------------------------------------------------------------------
High Low High Low
------ ------- ------ ------
1st Quarter $0.02 $0.02 $10.00 $ 8.86 $10.69 $ 8.06
2nd Quarter 0.02 0.02 9.68 8.95 12.29 8.26
3rd Quarter 0.02 0.02 10.40 9.32 12.05 10.68
4th Quarter 0.02 0.02 10.20 8.15 10.23 7.73
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
George W. Ott
President, Ott and Hansen, Inc.
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
Robert J. Mills
Vice President - Engineering and Product Development
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
One World Trade Center
Long Beach, California 90831
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, 2000, 2001 AND 2002
(In Thousands)
Col. A Col. B Col. C Col. D Col. E Col. F
Additions
Balance at Beginning Charged to Costs Charged to Other Deductions from Balance at Close of
Description of Period and Expenses Accounts Reserves Period
- ----------- -------------------- ---------------- ---------------- --------------- -------------------
Allowance for Doubtful
Accounts:
Year Ended:
January 31, 2000 $ 200 $ 188 $ 188 (1) $ 200
January 31, 2001 $ 200 $ 156 $ 156 (1) $ 200
January 31, 2002 $ 200 $ 288 $ 288 (1) $ 200
(1) Uncollectible accounts written off, net of recoveries.
FINANCIAL HIGHLIGHTS
in thousands, except per share data 2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Summary of Operations
Net sales - continuing operations (3, 4) $ 257,462 $ 287,342 $ 268,079 $ 275,096 $ 259,586
Net income
Continuing operations 246 4,313 10,166 17,630 13,852
Discontinued operations -- -- -- -- --
Change in accounting methods -- (297) -- -- --
--------- --------- --------- --------- ---------
$ 246 $ 4,016 $ 10,166 $ 17,630 $ 13,852
========= ========= ========= ========= =========
Net income per share (1) $ 0.02 $ 0.32 $ 0.79 $ 1.32 $ 1.04
Stockholder's equity 90,223 94,141 93,834 88,923 77,077
Stockholder's equity per share (2) 7.38 7.59 7.51 6.93 5.92
in thousands, except per share data 1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
Summary of Operations
Net sales - continuing operations (3, 4) $ 237,551 $ 225,559 $ 216,822 $ 206,738 $ 192,356
Net income
Continuing operations 9,326 5,209 5,001 4,302 3,827
Discontinued operations -- -- -- -- (668)
Change in accounting methods -- -- -- (275) --
--------- --------- --------- --------- ---------
$ 9,326 $ 5,209 $ 5,001 $ 4,027 $ 3,159
========= ========= ========= ========= =========
Net income per share (1) $ 0.71 $ 0.40 $ 0.38 $ 0.31 $ 0.24
Stockholder's equity 63,921 55,386 50,466 45,637 41,937
Stockholder's equity per share (2) 4.93 4.27 3.90 3.53 3.24
(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.