EXHIBIT 13.1
MANAGEMENT'S STATEMENT
The financial statements of Virco Mfg. Corporation were prepared by management,
which is responsible for the integrity and objectivity of the financial
information presented, including amounts that must necessarily be based on
judgments and estimates. The statements were prepared in conformity with
accounting principles generally accepted in the United States, and in situations
where acceptable alternative accounting principles exist, management selected
the method that it believed was most appropriate in the circumstances.
Virco depends upon the Company's system of internal controls in meeting its
responsibilities for reliable financial statements. This system is designed to
be cost-effective while providing reasonable assurance that assets are
safeguarded and transactions are properly recorded and executed in accordance
with management's authorization. Judgments are required to assess and balance
the relative cost and expected benefits of these controls.
The financial statements have been audited by the Company's independent
auditors, Ernst & Young LLP. The independent auditors provide an objective,
independent review as to management's discharge of its responsibilities insofar
as they relate to the fairness of reported operating results and financial
condition. They obtain and maintain an understanding of Virco's accounting and
financial controls, and conduct such tests and procedures as they deem necessary
to arrive at an opinion on the fairness of the financial statements.
The Audit Committee of the Board of Directors, which is composed of Directors
from outside the Company, maintains an ongoing appraisal of the effectiveness of
audits and the independence of the auditors. The Committee meets periodically
with the auditors and management. The independent auditors have free access to
the Committee, without management present, to discuss the results of their audit
work and their opinions on the adequacy of internal financial controls and the
quality of financial reporting.
Based on a review and discussions of the Company's 2002 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 2002 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. Risks and uncertainties that could cause actual
results to vary materially from anticipated results, include without limitation,
material availability and cost of materials, especially steel, plastic, fuel and
energy; availability and cost of labor, demand for the Company's products, and
competitive conditions affecting selling prices and margins, capital costs and
general economic conditions. In this report, words such as "anticipates,"
"believes," "expects," "estimates, "projects," "future," "intends," "plans,"
"potential," "may," "could" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of Virco's financial condition and results of
operations is based upon the Company's financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires Virco
management to make estimates and judgments that affect the Company's reported
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, management evaluates such
estimates, including those related to revenue recognition, allowance for
doubtful accounts, valuation of inventory including LIFO and obsolescence
reserves, self-insured retention for products and general liability insurance,
self-insured retention for workers compensation insurance, 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 and collectibility is reasonably assured under its various shipping
terms. In 2002 the Company purchased the assets of Furniture Focus(TM), a
company that sells complete Furniture, Fixture, and Equipment (FF&E) packages to
schools. For package orders, the Company records revenue upon completion of the
project. The Company reports sales as net of sales returns and allowances.
Allowances for Doubtful Accounts: Considerable judgment is required when
assessing the ultimate realization of receivables, including assessing the
probability of collection, current economic trends, historical bad debts and the
current creditworthiness of each customer. The Company maintains allowances for
doubtful accounts that may result from the inability of our customers to make
required payments. Over the
past five years, the Company's allowance for doubtful accounts has approximately
ranged from 0.7% to 1.3% of accounts receivable at year-end. The Company does
not typically obtain collateral to secure credit risk. The primary reason that
Virco's allowance for doubtful accounts represents such a small percentage of
accounts receivable is that a large portion of the accounts receivable are
attributable to low-credit-risk governmental entities, giving Virco's
receivables a historically high degree of collectability. Over the next year, no
significant change is expected in the Company's sales to government entities as
a percentage of total revenues.
Inventory Valuation: Inventory is valued at the lower of cost or market. The
Company uses the LIFO (last-in, first-out) method of accounting for the material
component of inventory. The Company maintains allowances for estimated obsolete
inventory to reflect the difference between the cost of inventory and the
estimated market value. If market conditions are less favorable than those
anticipated by management, additional allowances may be required.
Self-Insured Retention: For 2002, the Company was self-insured for product
liability losses up to $250,000 per occurrence and was self-insured for workers
compensation losses up to $200,000 per occurrence. For 2001, the Company was
self-insured for Product Liability losses up to $100,000 per occurrence. The
Company obtains annual actuarial valuations for the self-insured retentions.
Product liability reserves for known and unknown (IBNR) losses are recorded at
the net present value of the estimated losses using a 6.0% discount rate.
Estimated workers compensation losses are funded during the insurance year and
subject to retroactive loss adjustments.
Defined Benefit Obligations: The Company has three defined benefit plans, the
Virco Employees Retirement Plan, the Virco Important Performers (VIP) Plan and
the Non-Employee Directors Retirement Plan, which provide retirement benefits to
employees and outside directors. Virco discounts the pension obligations under
the plans using a 6.5% discount rate, 5.0% assumed rate of increases in
compensation rates, and estimating an 6.5% 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 moderate
change should 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 asset of $2,396,000 at January 31, 2003.
Management believes that it is more likely than not that future earnings will be
sufficient to recover deferred tax assets.
RESULTS OF OPERATIONS (2002 VS. 2001)
INDUSTRY OUTLOOK
The commercial furniture markets have suffered from the worst recorded recession
in recent history during the past two years. As a group, the members of BIFMA
(the Business and Institutional Furniture Manufacturer's Association) recorded a
19.1% decrease in shipments in calendar year 2002. This followed a 17.4%
decrease in calendar year 2001. This compares to declines at Virco of 5.1% in
2002 and 10.4% in 2001. To date, it appears that the Company's core public
school customers have been less affected by the recession. The outlook for 2003
suggests that the market for furniture will not improve in the short term. The
unfortunate combination of a lethargic economy combined with political
uncertainty is now being joined by significant budget challenges for many state
and local governments. Most states collected less revenue in the 2002-2003
fiscal year than budgeted and many states have announced that they plan to
reduce their budgets in the current fiscal year. As a large portion of many
states' budgets may be used to fund education, it is anticipated that reduced
state budgets may result in a decrease in sales of replacement furniture in
fiscal 2003. Despite decreased budgets, many of these same states are passing
bonds to finance school construction, which may result in an offsetting increase
in sales of furniture. It is unclear how the net effect of budgetary deficits
and bond-funded projects in states in which the Company sells its products will
impact furniture sales in the 2003 fiscal year.
During this two year period, many furniture manufacturers have responded by
shutting down significant portions of their manufacturing capacity and laying
off thousands of workers, incurring large restructuring charges in the process.
Virco has been servicing the education market for over 50 years, and has
experienced many business cycles affecting the demand for education furniture.
The Company believes that in the long term, demographics underlying the
furniture industry will reward companies that survive the current downturn in
sales. As such, Virco has responded to the current environment with a different
approach, one that has preserved the Company's manufacturing and distribution
infrastructure and saved the jobs of Virco's trained workforce. The Company has
used a variety of tactics to reduce spending. Capital spending has been
curtailed dramatically. Capital expenditures were reduced to approximately one
quarter of depreciation expense in 2002 and one third of depreciation expense in
2001. The Company has embraced the Assemble-to-Ship (ATS) operating model, which
facilitated a large reduction in inventory levels in 2001, and improved levels
of customer service while maintaining reduced levels of inventory in 2002. To
control and reduce the cost of Virco's workforce, the Company has used
traditional measures such as wage freezes and hiring freezes, as well as more
creative measures that address the unique demands of a highly seasonal business.
The more creative measures include programs to encourage workforce flexibility
and in 2002 the Company introduced a sabbatical program for employees during the
traditionally slow fourth quarter.
OVERVIEW
For the year ended January 31, 2003, the Company earned a modest net income of
$282,000 on net sales of $244,355,000 compared to a net income of $246,000 on
net sales of $257,462,000 in the same period last year. Earnings were $0.02 per
share for the year ended January 31, 2003, compared to $0.02 in the last year,
after giving effect to the 10% stock dividend declared August 20, 2002. Cash
flow from operations
was $12,045,000 compared to $35,037,000 in the prior year. The reduction in cash
flow from operations is primarily attributable to fluctuations in inventory
levels. In the current year inventory increased by $4,356,000 compared to the
prior year, when the large scale introduction of Assemble-to-Ship (ATS)
facilitated a reduction in inventory of $19,356,000, a $23,712,000 change.
SALES
Virco's 2002 sales decreased by 5% in 2002 to $244,355,000, from $257,462,000 in
2001. During 2002, the Company adhered to a policy of turning down low margin
and unprofitable business, despite substantial price competition in its primary
markets. The Company continued to emphasize the value of Virco's products, the
value of Virco's distribution and delivery capabilities, and the value of timely
deliveries during the peak seasonal delivery period. Although this policy had an
adverse effect on unit volume, the Company achieved a net increase in selling
prices.
Effective May 1, 2002, Virco acquired certain assets of Furniture Focus, a
reseller that offers complete package solutions for the Furniture, Fixtures and
Equipment (FF&E) segments of bond-funded public school construction projects.
This acquisition provided Virco with the ability to offer packages to its core
customer base. Because the acquisition date was very close to the peak summer
season, the marketing of package solutions or "PlanScape(TM)" was limited to the
five state region in which Furniture Focus has operated. Virco intends to begin
marketing package solutions nationwide in 2003.
COST OF SALES
For fiscal 2002, cost of sales was 69% of sales compared to 70% of sales in the
prior year. The improvement was primarily attributable to increases in selling
prices. Raw material costs increased, primarily due to increased steel prices.
Increased material costs were offset by reductions in labor and overhead
spending. Virco began 2002 with a plan to maintain reduced levels of inventory
and to use the Assemble-to-Ship (ATS) model to provide acceptable levels of
service to our customers. In an effort to match spending to the continued low
levels of output, Virco controlled headcount, capital expenditures, and other
discretionary spending. As a result, manufacturing spending and production
levels were flat compared to the prior year.
Inflation rates had a moderate impact on the Company's cost of sales for the
first half of 2002. In the second half of 2002, the Company experienced
significant increases in the cost of steel. On March 5, 2002, President Bush
announced that he would impose, effective March 20th, tariffs of up to 30% on
imports of selected steel products pursuant to Section 201 of the Trade Act of
1974. The duties were imposed for a three-year period and are to be
progressively reduced each year as required by the World Trade Organization.
Cold-rolled steel is the single largest raw material used by many in the
educational furniture industry, including Virco, and is subject to the maximum
30% tariff. In addition, domestic steel manufacturers filed a dumping claim
against certain international suppliers, which, if successful, could serve to
prevent steel prices from falling in the future.
In 2003, the Company intends to more tightly integrate the ATS model with our
marketing programs, product development programs, and product-stocking plan.
This anticipated improvement in execution of ATS should allow the Company to
offer a greater variety of product while continuing to improve on-time delivery
performance. The ATS model should allow the Company to build inventory earlier
in the year and reduce costly overtime and temporary labor costs during the
summer. Production levels, which will vary depending upon selling volumes, are
anticipated to be slightly lower than in 2002.
The Company anticipates continued 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, 2003.
SELLING, GENERAL AND ADMINISTRATIVE AND OTHERS
Selling, general and administrative expenses for the year ended January 31,
2003, increased 1% from the prior year, and were 29.7% as a percentage of sales
in 2002 as compared to 27.9% in 2001. Freight costs declined by approximately
$500,000 due to a reduction in selling volume, and were slightly higher as a
percentage of sales. Other SG&A costs were adversely affected by increased
installation costs reflecting an increase in installed orders, the acquisition
of Furniture Focus, and an increase in retirement plan costs, offset by other
reductions in selling and administrative expenses.
Interest expense was approximately $1,100,000 less than in the prior year due to
reduced levels of borrowing and lower interest rates. The Company anticipates a
modest reduction in average borrowing levels and a reduction in the average
interest rate paid in 2003. The Company entered into a swap agreement with Wells
Fargo Bank, which had the effect of establishing a fixed rate of interest for
$20,000,000 of loans for both 2001 and 2002. This interest swap expired in March
2003. Interest rates paid under the swap agreement were greater than the current
rate paid under the Wells Fargo line of credit.
In the current year, Virco realized a $149,000 loss on disposition of fixed
assets. This compares to a loss on sale of assets of approximately $86,000 in
the prior year.
RESULTS OF OPERATIONS (2001 VS. 2000)
OVERVIEW
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 for fiscal 2000. Fiscal 2000
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 $0.29 in the same period last year, after giving effect to the 10%
stock dividends declared August 20, 2002 and 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 years prior to November 2001, Virco's sales force had 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 created 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 they tend to have needs that transcend the geographic boundaries
established for local accounts.
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 were less
affected by the overall recession. Sales to public schools declined modestly
during 2001. Commercial sales were substantially less than the prior year, more
closely reflecting the statistical results recorded by BIFMA.
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.
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 an
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.
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.
SELLING, GENERAL AND ADMINISTRATIVE AND OTHERS
Selling, general and administrative expenses for the year ended January 31,
2002, decreased by approximately $11,376,000 compared to the same period in the
immediately preceding 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 in fiscal 2001 than in fiscal
2000 due to reduced levels of borrowing and lower interest rates. The Company
expected to continue to reduce borrowing levels in 2002. The Company 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 fluctuated with the
market rate of interest.
In fiscal 2001, 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.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL REQUIREMENTS
Virco addresses liquidity and capital requirements in the context of short-term
seasonal requirements and the long-term capital requirements of the business.
The Company's core business of selling furniture to publicly funded educational
institutions is extremely seasonal. The seasonal nature of this business
permeates most of Virco's operational, capital, and financing decisions.
The Company's working capital requirements during and in anticipation of the
peak summer season require management to make estimates and judgments that
affect Virco's assets, liabilities, revenues and expenses. Management expends a
significant amount of time during the year, and especially in the first quarter,
developing a stocking plan and estimating the number of employees, the amount of
raw materials, and the types of components and products that will be required
during the peak season. If management underestimates any of these requirements,
Virco's ability to 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 assembly
until the last moment, and reducing the amount of warehouse space needed to
store finished goods.
In addition, Virco finances its largest balance of accounts receivable during
the peak season. This occurs for two primary reasons. First, accounts receivable
balances naturally increase during the peak season as shipments of products
increase. Second, many customers during this period are government institutions,
which tend to pay accounts receivable more slowly than commercial customers.
As the capital required for this summer season generally exceeds cash available
from operations, Virco has historically relied on third party bank financing to
meet seasonal cash flow requirements. Virco has established a long-term
relationship with its primary lender, Wells Fargo Bank. On an annual basis, the
Company prepares a forecast of seasonal working capital requirements, and renews
its revolving line of credit. For the next fiscal year, Virco has entered into a
revolving credit facility with Wells Fargo Bank, amended and restated February
2003, but effective at January 31, 2003, which 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 September 1, 2003, the available
commitment reduces to $60,000,000, and at November 1, 2003, the line reduces to
$40,000,000. This is a two-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, 2003). 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 $13,345,000 was
available for borrowing as of January 31, 2003.
LONG-TERM CAPITAL REQUIREMENTS
In addition to short-term liquidity considerations, the Company continually
evaluates long-term capital requirements. In 1997, the Company initiated two
large capital projects, which have had significant effects on cash flow for the
past five years. In the 1998, 1999, and 2000 fiscal years the Company expended
significant amounts of capital on these projects. Upon completion of these
projects, the Company dramatically reduced capital spending. As shown in the
Company's consolidated statements of cash flows, during 2001, capital
expenditures were approximately one third of depreciation expense and during
2002, capital expenditures were approximately one quarter of depreciation
expense.
The first project was the implementation of the SAP enterprise resources
planning system, initiated in October 1997. The Company went live with the new
system in March 1999, implemented a business-to-business website along with
sales force automation in the first quarter of 2000, and upgraded to the most
current version of SAP in the fourth quarter of 2000. The initial portion of
this project was financed with a lease from General Electric Capital Corporation
(GECC). Capital and training costs not funded by the lease were financed from
cash flows from operations and from the loan facility from Wells Fargo. During
fiscal year 2002 the Company paid off the balance on the capital lease.
The second project was the expansion and re-configuration of the Conway,
Arkansas, manufacturing and distribution facility. During 1997, 1998, 1999, and
2000 the Company expended approximately $67,000,000 to purchase 100 acres of
land, and build a 1,200,000 sq. ft. manufacturing and distribution facility
equipped with new manufacturing and warehousing equipment. To finance this
project, the Company borrowed $30,000,000 from Wells Fargo Bank 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 obtained 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.
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 that was used to
finance the Conway expansion.
Upon the completion of these substantial capital projects, the Company
significantly reduced capital spending in 2002 and 2001. Management intends to
limit future capital spending until growth in sales volume fully utilizes the
new plant and distribution capacity. The Company has established a goal of
limiting capital spending to between $5,000,000 to $7,000,000 for 2003, which is
approximately one-half of anticipated depreciation expense.
The Company is currently marketing two 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 currently leased to a third party.
ASSET IMPAIRMENT
In 2002, Virco acquired certain assets of Furniture Focus. As part of this
acquisition, the Company recorded goodwill of $2,200,000. For 2003, the Company
is rolling out the Furniture Focus package business throughout its nationwide
sales force. Virco evaluates the impairment of goodwill at least annually, or
when indicators of impairment occur. As of the year ended January 31, 2003,
there has been no impairment to the goodwill recorded.
Virco made substantial investments in its infrastructure in 1998, 1999, and
2000. The investments included a new factory, new warehouse, and new production
and distribution equipment. The factory, warehouse, and equipment acquired are
used to produce, store, and ship a variety of product lines, and the use of any
one piece of equipment is not dependent on the success or volume of any
individual product. New products are designed to use as many common or existing
components as practical. As a result, both our ATS inventory components and the
machines used to produce them become more versatile. Virco evaluates the
potential for impaired assets on a quarterly basis. As of the year ended January
31, 2003, there has been no impairment to the long-term assets of the
corporation.
CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS
The Company leases manufacturing, transportation, and office equipment, as well
as real estate under a variety of operating leases. The Company leases
substantially all vehicles, including trucks and passenger cars under operating
leases where the lessor provides fleet management services for the Company. The
fleet management services provide Virco with operating efficiencies relating to
the acquisition, administration, and operation of leased vehicles. The use of
operating leases for manufacturing equipment has enabled the Company to qualify
for and use Industrial Revenue Bond financing. Real estate leases have been used
where the Company did not want to make a long-term commitment to a location, or
when economic conditions favored leasing. The Company does not have any capital
lease obligations or purchase commitments in excess of normal recurring
obligations.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 1-3 YEARS 3-5 YEARS MORE THAN 5 YEARS
----------------------- ------- ---------------- --------- --------- -----------------
Long-Term Debt Obligations $28,992 $ 1,087 $27,905 $ 0 $ 0
Capital Lease Obligations 0 0 0 0 0
Operating Lease Obligations 26,000 8,946 11,899 4,651 504
Purchase Obligations 0 0 0 0 0
Other Long-Term Obligations 0 0 0 0 0
------- ------- ------- ------- -------
Total $54,992 $10,033 $39,804 $ 4,651 $ 504
======= ======= ======= ======= =======
Virco's largest market is publicly funded school districts. A significant
portion of this business is awarded on a bid basis. Many school districts
require that a bid bond be posted as part of the bid package. In addition to bid
bonds, many districts require a performance bond when the bid is awarded. At
January 31, 2003, the Company had bonds outstanding valued at approximately
$6,850,000. To the best of management's knowledge, in over 50 years of selling
to schools, Virco has never had a bid or performance bond called.
The Company accrues an estimate of its exposure to warranty claims based upon
both product sales data and warranty claims incurred. For 2002, warranty claims
were higher than normal due to a recurring cosmetic complaint relating to a high
volume component. At the current time, management cannot reasonably determine
whether the warranty claims for the upcoming fiscal year will be less than,
equal to, or greater than the warranty claims incurred in 2002. The following is
a summary of the Company's warranty-claim activity during 2002.
BALANCE AT JANUARY 31, 2002 PROVISION COSTS INCURRED BALANCE AT JANUARY 31, 2003
$150,000 $2,091,000 $(1,341,000) $900,000
RETIREMENT OBLIGATIONS
The Company provides retirement benefits to employees and non-employee directors
under three defined benefit retirement plans; the Virco Employee's Retirement
Plan, the Virco Important Performers (VIP) Retirement Plan, and the Retirement
Plan for Non-Employee Directors. The Virco Employee Retirement Plan is a
qualified retirement plan that is funded through a trust held at Wells Fargo
Bank (Trustee). The other two plans are non-qualified retirement plans. The VIP
Plan is secured by life insurance policies held in a rabbi trust and the plan
for Non-Employee Directors is not funded. In 2002 the Company used more
conservative assumptions for estimating the return on plan assets held in the
Wells Fargo Trust (Trust) and the rate used to discount the Projected Benefit
Obligation (PBO). For 2002 the Company used a 6.5% expected return on plan
assets, a 5.0% expected rate of increase in compensation, and a 6.5% discount
rate. The result of using these more conservative estimates was to increase
annual pension expense for the fiscal year ended January 31, 2003, by
approximately $1.5 million and to increase the PBO by approximately $6 million.
The Company expects that it will continue to incur the higher annual pension
expense through the foreseeable future. The combined impact of reduced discount
rates and poor investment results over the past three years resulted in the plan
being under-funded. To correct this condition, the Company made an $8 million
contribution to the Trust in September 2002, and a total contribution of
approximately $10 million for the fiscal year. The Company does not anticipate
that it will need to make a similar large contribution in the future, and that
annual funding will more closely approximate annual pension expense. The Company
does not anticipate making any changes to the pension assumptions in the near
future. If the Company were to have used different assumptions in fiscal year
ended January 31, 2003, a 1% reduction in investment return would increase
expense by approximately $125,000, a 1% change in the rate of compensation
increase would increase expense by approximately $355,000 and a 1% reduction in
the discount rate would increase expense by $1,240,000. A 1% reduction in the
discount rate would increase the PBO by approximately $7.5 million. Refer to
note 4 of the financial statements for additional information regarding the
pension plans and related expenses.
SHAREHOLDERS EQUITY
In April 1998, the Board of Directors approved a stock buy-back program giving
authorization to buy back up to $5,000,000 of Company stock. The authorization
of this stock buy-back program was increased to $7,000,000, $14,000,000,
$20,000,000 and $22,000,000 in January 1999, April 1999, December 2001 and
December 2002, respectively. As of the end of January 2003 and 2002, the Company
had repurchased approximately 1,383,000 and 884,000 shares at a cost of
approximately $18,151,000 and $13,505,000 respectively. The Company intends to
continue buying back shares of Virco common stock as long as the Company
believes the shares are undervalued and either operating cash flow or borrowing
capacity under the Wells Fargo Bank line is available.
Virco has established a track record of paying cash dividends to its
stockholders for more than 20 consecutive years. The Company paid an annual cash
dividend from 1983 through 1996. In 1996 the Company converted from one annual
cash dividend to paying quarterly cash dividends. When combined with the effect
of our annual stock dividend, Virco has a track record of 20 consecutive years
of increasing cash dividends. Virco evaluates its dividend policy on a quarterly
basis, and there can be no assurance that past dividend practices will be
indicative of future practices. If the Company maintains its current dividend
policy, it will pay cash dividends approximating $1.2 million in 2003.
In addition to the quarterly cash dividend policy, Virco has issued a 10% stock
dividend or 3/2 stock split every year beginning in 1982. Although the stock
dividend has no cash consequences to the Company, the accounting methodology
required for 10% dividends has affected the equity section of the balance sheet.
When the Company records a 10% stock dividend, 10% of the market capitalization
of the Company on the date of the declaration is reclassified from retained
earnings to additional paid in capital. During the period from 1982 through
2002, the cumulative effect of the stock dividends has been to reclassify over
$122 million from retained earnings to additional paid in capital. The equity
section of the balance sheet on January 31, 2003, reflects additional paid in
capital of approximately $126 million and deficit retained earnings of
approximately $19 million. The retained deficit is a result of the accounting
reclassification, and is not the result of accumulated losses.
Management believes cash generated from operations and from the previously
described sources will be adequate to meet its capital requirements.
ENVIRONMENTAL AND CONTINGENT LIABILITIES
The Company and other furniture manufacturers are subject to federal, state, and
local laws and regulations relating to the discharge of materials into the
environment and the generation, handling, storage, transportation, and disposal
of waste and hazardous materials. In addition to policies and programs designed
to comply with environmental laws and regulations, Virco has enacted programs
for recycling and resource recovery that have earned repeated commendations,
including designation in 2002 as a WasteWise Partner of the Year and 2001 as a
WasteWise Program Champion for Large Businesses by the United States
Environmental Protection Agency. Despite these significant accomplishments,
environmental laws have changed rapidly in recent years, and Virco may be
subject to more stringent environmental laws in the future. The Company has
expended, and expects to continue to expend, significant amounts in the future
for the investigation of environmental conditions, installation of environmental
control equipment, and remediation of environmental contamination.
In 2002, the Company was self-insured for Product Liability losses up to
$250,000 per occurrence and had a Workers Compensation deductible
of $200,000 per occurrence. For the insurance year beginning April 1, 2003, the
Company is self-insured for Product Liability losses up to $500,000 per
occurrence and has a Workers Compensation deductible of $250,000 per occurrence,
and a deductible of $50,000 for auto liability. 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. During
the past 10 years the Company has aggressively pursued a program to improve
product quality, reduce product liability claims and losses, and to more
aggressively litigate product liability cases. This program has continued
through 2002 and has resulted in reductions in product liability claims and
litigated product liability cases. In addition, the Company has active safety
programs to improve plant safety and reduce Workers Compensation losses.
Management does not anticipate that any related settlement, after consideration
of the existing reserves for claims and potential insurance recovery, would have
a material adverse effect on the Company's financial position, results of
operations, or cash flows.
INFLATION AND FUTURE CHANGE IN PRICES
Inflation rates had a modest impact on the Company's operating costs for the
first half of 2002. In the second half of 2002, the Company experienced
significant increases in the cost of steel. Please refer to the discussion of
steel tariffs under the "Results of Operation" for 2002 section of this MD&A for
additional information. In addition, the Company incurred increases in utilities
costs in California, and increases in employee benefits, especially medical
insurance.
For 2003, the Company anticipates upward pressure on costs, particularly in the
areas of certain raw materials, transportation, energy and employee benefits.
Although the increase in steel prices appears to have stabilized in 2003, prices
have not returned to the lower levels of early 2002. There is pressure on raw
material costs that are affected by the price of oil, especially plastics.
Transportation costs are also expected to be adversely affected by increased oil
prices, in the form of increased operation costs for our fleet, and surcharges
on freight paid to 3rd party carriers. For 2003, the Company has mitigated the
increased costs of employee benefits, primarily by passing on a greater portion
of medical costs to our employees.
To counter the impact of increased costs, the Company has raised the list prices
for our product. As a significant portion of our business is through competitive
bids, the Company is carefully considering the increased material cost in
addition to increased transportation costs as part of the bidding process. Total
material costs for 2003, as a percentage of sales, could be higher than in 2002.
However, no assurance can be given that the Company will experience stable,
modest or substantial increases in prices in 2003. The Company is working to
control and reduce costs by improving production and distribution methodologies,
investigating new packaging and shipping materials, and searching for new
sources of purchased components and raw materials.
The Company uses the LIFO method of accounting for the material component of
inventory. Under this method, the cost of products sold as reported in the
financial statements approximates current cost, and reduces the distortion in
reported income due to increasing costs. Depreciation expense represents an
allocation of historic acquisition costs and is less than if based on the
current cost of productive capacity consumed. In 2002 and 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.
The Company is also subject to interest rate risk related to its $26,655,000 of
borrowings as of January 31, 2003, and any seasonal borrowings used to finance
additional inventory and receivables. Fluctuating interest rates may adversely
affect the Company's results of operations and cash flows related to its
variable rate bank borrowings. Accordingly, a 100 basis point upward fluctuation
in the lender's base rate would cause the Company to incur additional interest
charges of approximately $331,000 for the twelve months ended January 31, 2003.
The Company would have benefited from a similar interest savings if the base
rate were to have fluctuated downward by a like amount.
In February 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 on 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, 2003, the carrying value approximated the fair
value of $196,000. During the year ended January 31, 2003, the Company recorded
a reduction of $544,000 (net of an applicable income tax of $363,000) 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 strive to increase levels of
profitability by targeting specific profitable market segments and customers.
The Company has organized its sales force, developed products, and acquired
production and distribution facilities for the specific needs of these
customers. During the fiscal years 1998, 1999, and 2000, the Company made
significant capital expenditures to support future sales growth in these
targeted markets. For the next several years, the Company intends to increase
sales to these markets, and to service these sales without making further
significant investments in facilities or working capital.
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") 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. The Company
will adopt SFAS No. 143 as of February 1, 2003, and does not expect any material
effect upon the adoption of the Statement on the Company's financial position,
results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 requires most gains and losses on extinguishment of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required. SFAS No. 145 also amends SFAS No. 13
to require certain lease modifications to be treated as sales-leaseback
transactions. Certain provisions of SFAS No. 145 are effective for transactions
occurring after May 15, 2002, while other provisions are effective for fiscal
years beginning after May 15, 2002. The adoption of SFAS No. 145 has not had a
material effect on the Company's results of operations or financial condition.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires the recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002. The
Company does not expect a material effect on its results of operations or
financial condition as a result of the adoption of SFAS No. 146.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which elaborates on required disclosures
by a guarantor in its financial statements about obligations under certain
guarantees that it has issued and clarifies the need for a guarantor to
recognize, at the inception of certain guarantees, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The disclosure
requirements of the Interpretation, which are effective for the Company's year
ended January 31, 2003, are included in note 9 to the consolidated financial
statements, which discuss disclosures relative to its product warranty
liability.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
IN THOUSANDS EXCEPT PER SHARE DATA 2002 2001 2000 1999 1998
- --------------------------------------------- -------- -------- -------- -------- --------
SUMMARY OF OPERATIONS
Net sales (4) (5) $244,355 $257,462 $287,342 $268,079 $275,096
Net income before cumulative effect of change
in accounting principle $ 282 $ 246 $ 4,313 $ 10,166 $ 17,630
Cumulative effect of change in accounting
principle, net of $191 tax benefit(5) (297)
-------- -------- -------- -------- --------
Net income $ 282 $ 246 $ 4,016 $ 10,166 $ 17,630
======== ======== ======== ======== ========
Per share data
Income before cumulative effect of
change in accounting principle(1)
Basic $ 0.02 $ 0.02 $ 0.31 $ 0.74 $ 1.22
Assuming dilution 0.02 0.02 0.31 0.72 1.20
Cumulative effect of change in accounting
principle(1)
Basic -- -- (0,02) -- --
Assuming dilution -- -- (0,02) -- --
Net income(1)
Basic 0.02 0.02 0.29 0.74 1.22
Assuming dilution 0.02 0.02 0.29 0.72 1.20
Pro forma amounts assuming the accounting
change is applied retroactively
Net income(5) $ 282 $ 246 $ 4,313 $ 10,186 $ 17,663
Per share data
Net income
Basic 0.02 0.02 0.31 0.73 1.23
Assuming dilution 0.02 0.02 0.31 0.72 1.20
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 $154,796 $161,372 $199,549 $190,863 $151,380
Working capital $ 38,748 $ 34,464 $ 43,173 $ 51,423 $ 47,405
Current ratio 2.4/1 2.2/1 1.9/1 2.3/1 2.4/1
Total long-term obligations $ 44,604 $ 40,853 $ 55,075 $ 53,995 $ 25,690
Stockholders' equity $ 82,774 $ 90,223 $ 94,141 $ 93,834 $ 88,923
Shares outstanding at year-end (3) 13,111 13,445 13,652 13,750 14,119
Stockholders' equity per share (2) $ 6.31 $ 6.71 $ 6.90 $ 6.82 $ 6.30
(1) Based on average number of shares outstanding each year after giving
retroactive effect for stock dividends and 3 for 2 stock split.
(2) Based on number of shares outstanding at year-end after giving effect for
stock dividends and 3 for 2 stock split.
(3) Adjusted for stock dividends and 3 for 2 stock split.
(4) The prior period statements of operations contain certain
reclassifications to conform to the presentation required by EITF No.
00-10, "Accounting for Shipping and Handling Fees and Costs," which the
Company adopted during the fourth quarter of the year ended January 31,
2001.
(5) During the fourth quarter of 2000, the Company changed its method of
accounting for revenue recognition in accordance with Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." Pursuant
to Financial Accounting Standards Board Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements," effective February 1,
2000, the Company recorded the cumulative effect of the accounting change.
FINANCIAL HIGHLIGHTS
in thousands, except per share data 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Net sales - continuing operations (3, 4) $ 244,355 $ 257,462 $ 287,342 $ 268,079 $ 275,096
Net income
Continuing operations 282 246 4,313 10,166 17,630
Discontinued operations - - - - -
Change in accounting methods - - (297) - -
----------------------------------------------------------------------------
$ 282 $ 246 $ 4,016 $ 10,166 $ 17,630
----------------------------------------------------------------------------
Net income per share (1) $ 0.02 $ 0.02 $ 0.29 $ 0.72 $ 1.20
Stockholder's equity 82,774 90,223 94,141 93,834 88,923
Stockholder's equity per share (2) 6.31 6.71 6.90 6.82 6.30
FINANCIAL HIGHLIGHTS
in thousands, except per share data 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Net sales - continuing operations (3, 4) $ 259,586 $ 237,551 $ 225,559 $ 216,822 $ 206,738
Net income
Continuing operations 13,852 9,326 5,209 5,001 4,302
Discontinued operations - - - - -
Change in accounting methods - - - - (275)
----------------------------------------------------------------------------
$ 13,852 $ 9,326 $ 5,209 $ 5,001 $ 4,027
----------------------------------------------------------------------------
Net income per share (1) $ 0.94 $ 0.64 $ 0.36 $ 0.35 $ 0.28
Stockholder's equity 77,077 63,921 55,386 50,466 45,637
Stockholder's equity per share (2) 5.39 4.48 3.88 3.55 3.20
(1) Based on average number of shares outstanding each year after giving
retroactive effect for stock dividends and 3 for 2 stock split.
(2) Based on number of shares outstanding at year-end giving effect for
stock dividends and 3 for 2 stock split.
(3) The prior period statements of operations contain certain
reclassifications to conform to the presentation required by EITF No.
00-10, Accounting for Shipping and Handling Fees and Costs, which the
Company adopted during the fourth quarter of the year ended January 31,
2001.
(4) During the fourth quarter of 2000, the Company changed its method of
accounting for revenue recognition in accordance with Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements."
Pursuant to Financial Accounting Standards Board Statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements,"
effective February 1, 2000, the Company recorded the cumulative effect
of the accounting change.
Report of Independent Auditors
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, 2003 and 2002, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended January 31, 2003. 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, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2003, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Long Beach, California
March 14, 2003
1
Virco Mfg. Corporation
Consolidated Balance Sheets
(In thousands, except per share data)
JANUARY 31
2003 2002
-------------------
ASSETS
Current assets
Cash $ 1,639 $ 1,704
Trade accounts receivable (less allowance for doubtful accounts of
$225 in 2003 and $200 in 2002) 17,178 19,251
Other receivables 223 175
Inventories
Finished goods 16,510 16,159
Work in process 18,233 12,322
Raw materials and supplies 8,296 10,202
-------------------
43,039 38,683
Prepaid expenses and other current assets 1,495 935
Deferred income taxes 2,494 1,711
-------------------
Total current assets 66,068 62,459
Property, plant and equipment
Land and land improvements 3,626 3,548
Buildings and building improvements 50,311 50,245
Machinery and equipment 101,648 100,999
Leasehold improvements 1,278 1,375
-------------------
156,863 156,167
Less accumulated depreciation and amortization 83,827 72,761
-------------------
Net property, plant and equipment 73,036 83,406
Other assets 15,692 15,507
-------------------
Total assets $154,796 $161,372
===================
2
JANUARY 31
2003 2002
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Checks released but not yet cleared bank $ 2,506 $ 2,930
Accounts payable 8,395 8,816
Income tax payable 3,538 1,282
Accrued compensation and employee benefits 7,109 8,602
Current portion of long-term debt 1,087 2,061
Other accrued liabilities 4,685 4,304
----------------------
Total current liabilities 27,320 27,995
Noncurrent liabilities
Accrued self-insurance retention 2,936 2,777
Accrued pension expenses 13,763 11,429
Long-term debt, less current portion 27,905 26,647
----------------------
Total noncurrent liabilities 44,604 40,853
Deferred income taxes 98 2,301
Commitments and contingencies
Stockholders' equity
Preferred stock:
Authorized 3,000,000 shares, $.01 par value;
none issued or outstanding
Common stock:
Authorized 25,000,000 shares, $.01 par value; issued 14,527,074
shares in 2003 and 13,167,399 shares in 2002 145 132
Additional paid-in capital 126,284 109,638
Retained deficit (18,927) (2,006)
Less treasury stock at cost (1,416,472 shares in 2003 and 944,352
shares in 2002) (18,634) (13,975)
Less accumulated comprehensive loss (6,094) (3,566)
----------------------
Total stockholders' equity 82,774 90,223
----------------------
Total liabilities and stockholders' equity $ 154,796 $ 161,372
======================
See accompanying notes.
3
Virco Mfg. Corporation
Consolidated Statements of Income
(In thousands, except per share data)
YEAR ENDED JANUARY 31
2003 2002 2001
---------------------------------
Net sales $ 244,355 $ 257,462 $ 287,342
Costs of goods sold 167,570 180,275 203,765
---------------------------------
Gross profit 76,785 77,187 83,577
Selling, general and administrative expenses 72,536 71,816 83,192
Provision for doubtful accounts 267 288 156
Interest expense 3,410 4,561 4,962
Loss (Gain) on sale of assets 149 86 (7,667)
Other income -- -- (4,052)
---------------------------------
Income before income taxes and cumulative effect of change in 423 436 6,986
accounting principle
Provision for income taxes 141 190 2,673
---------------------------------
Income before cumulative effect of change in 282 246 4,313
accounting principle
Cumulative effect of change in accounting principle -- -- (297)
---------------------------------
Net income $ 282 $ 246 $ 4,016
=================================
AMOUNTS PER COMMON SHARE - BASIC
Income before cumulative effect of change in
accounting principle $ 0.02 $ 0.02 $ 0.31
Cumulative effect of change in accounting principle -- -- (0.02)
---------------------------------
Net income $ 0.02 $ 0.02 $ 0.29
=================================
AMOUNTS PER COMMON SHARE - ASSUMING DILUTION
Income before cumulative effect of change
in accounting principle $ 0.02 $ 0.02 $ 0.31
Cumulative effect of change in accounting principle -- -- (0.02)
---------------------------------
Net income $ 0.02 $ 0.02 $ 0.29
=================================
Weighted average shares outstanding
Basic 13,344 13,485 13,747
Assuming dilution 13,458 13,675 13,885
See accompanying notes.
4
Virco Mfg. Corporation
Consolidated Statements of Stockholders' Equity
(In thousands, except per share data)
Additional Retained
Common Stock Paid-In Earnings Comprehensive
Shares Amount Capital (Deficit) Income (Loss)
----------------------------------------------------------------------
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)
Net income -- -- -- 282 282
Minimum pension liability, net of tax -- -- -- -- (3,072)
Derivative instrument, net of tax -- -- -- -- 544
-------------
Comprehensive loss, net of tax -- -- -- -- $ (2,246)
=============
Stock issued under option plans 147,004 1 469
Stock dividend (10%) 1,212,671 12 16,177 (16,189)
Cash dividends -- -- -- (1,014)
Purchase of treasury stock (472,120) -- -- --
----------------------------------------------------------------------
Balance at January 31, 2003 13,110,602 $ 145 $ 126,284 $ (18,927)
======================================================================
Accumulated
Treasury ESOP Comprehensive
Stock Trust Loss Total
------------------------------------------------------------
Balance at January 31, 2000 $ (10,692) $ (41) $ (420) $ 93,878
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
Net income -- -- -- 282
Minimum pension liability, net of tax -- -- (3,072) (3,072)
Derivative instrument, net of tax -- -- 544 544
Comprehensive loss, net of tax -- -- -- --
Stock issued under option plans -- -- -- 470
Stock dividend (10%) -- -- -- --
Cash dividends -- -- -- (1,014)
Purchase of treasury stock (4,659) -- -- (4,659)
------------------------------------------------------------
Balance at January 31, 2003 $ (18,634) $ -- $ (6,094) $ 82,774
============================================================
See accompanying notes.
5
Virco Mfg. Corporation
Consolidated Statements of Cash Flows
(In thousands, except per share data)
YEAR ENDED JANUARY 31
2003 2002 2001
--------------------------------
OPERATING ACTIVITIES
Net income $ 282 $ 246 $ 4,016
Adjustments to reconcile net income to net cash
provided by operating activities
Cumulative effect of accounting change -- 297
Depreciation and amortization 13,659 15,813 13,412
Provision for doubtful accounts 267 288 156
Loss (Gain) on sale of property, plant and
equipment 149 86 (7,667)
Deferred income taxes 555 (1,722) (407)
Changes in assets and liabilities:
Trade accounts receivable 4,156 5,020 1,742
Other receivables (48) 411 341
Inventories (4,356) 19,356 (981)
Income taxes 2,256 3,790 (755)
Prepaid expenses and other current assets (560) 215 138
Accounts payable and accrued liabilities (4,443) (8,230) 560
Other 128 (236) (4,383)
--------------------------------
Net cash provided by operating activities 12,045 35,037 6,469
INVESTING ACTIVITIES
Capital expenditures (3,532) (5,229) (22,711)
Proceeds from sale of property, plant and equipment 93 570 10,258
Net investment in life insurance (109) 1,385 --
Acquisition of business (4,550) -- --
--------------------------------
Net cash used in investing activities (8,098) (3,274) (12,453)
6
Virco Mfg. Corporation
Consolidated Statements of Cash Flows (continued)
(In thousands, except per share data)
YEAR ENDED JANUARY 31
2003 2002 2001
--------------------------------
FINANCING ACTIVITIES
Dividends paid $ (1,014) $ (945) $ (866)
Issuance of long-term debt 4,240 -- 19,817
Repayment of long-term debt (3,049) (28,237) (12,000)
Proceeds from issuance of common stock 178 30 284
Purchase of treasury stock (4,367) (1,954) (1,317)
ESOP loan -- 696 (655)
--------------------------------
Net cash (used in) provided by financing activities (4,012) (30,410) 5,263
Net increase (decrease) in cash (65) 1,353 (721)
Cash at beginning of year 1,704 351 1,072
--------------------------------
Cash at end of year $ 1,639 $ 1,704 $ 351
================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the year for
Interest, net of amounts capitalized $ 3,513 $ 4,805 $ 4,953
Income tax, net (2,495) (1,935) 3,835
See accompanying notes.
7
Virco Mfg. Corporation
Notes to Consolidated Financial Statements
January 31, 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Virco Mfg. Corporation, which operates in one business segment, is engaged in
the design, production and distribution of quality furniture for the commercial
and education markets. Over 50 years of manufacturing has resulted in a wide
product assortment. Major products include mobile tables, mobile storage
equipment, desks, computer furniture, chairs, activity tables, folding chairs
and folding tables. The Company manufactures its products in Torrance,
California, and Conway, Arkansas, for sale primarily in the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Virco Mfg.
Corporation and its wholly owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the 2001 and 2000 information to conform to
the 2002 presentation.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of accounts receivable. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
potential credit losses. The Company purchases insurance on receivables from
commercial sales to minimize the Company's credit risk. The Company does not
typically obtain collateral to secure credit risk. A substantial percentage of
the Company's receivables comes from low-risk government entities. No customers
exceeded 10% of the Company's sales for each of the three years in the period
ended January 31, 2003. Foreign sales were less than 5% for each of the three
years in the period ended January 31, 2003.
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,
2003, 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 $38,000, $55,000 and $453,000 for the years ended
January 31, 2003, 2002 and 2001, 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
$5,149,000 and $7,593,000 at January 31, 2003 and 2002, respectively.
The net book value of assets held under capital leases included in machinery and
equipment amounted to $0 and $2,294,000 at January 31, 2003 and 2002,
respectively. Amortization of capital leases is included in depreciation
expense.
IMPAIRMENT OF LONG-LIVED ASSETS
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 supersedes
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
9
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provisions of APB Opinion No. 30, "Reporting the Results of Operations for a
Disposal of a Segment of a Business." The adoption of the Statement on February
1, 2002 did not have a significant impact on the Company's financial position,
results of operations, or cash flows.
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:
2002 2001 2000
---------------------------------------
Numerator
Income before cumulative effect of the
accounting change $ 282,000 $ 246,000 $ 4,313,000
=======================================
Denominator
Denominator for basic earnings
per share - weighted-average shares 13,344,000 13,485,000 13,747,000
Dilutive potential common shares 114,000 190,000 138,000
---------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 13,458,000 13,675,000 13,885,000
=======================================
On August 20, 2002, the Company's Board of Directors authorized a 10% stock
dividend payable on September 30, 2002, to stockholders of record as of
September 6, 2002. This resulted in the issuance of approximately 1,213,000
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)
GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 is effective for any business combination completed
subsequent to June 30, 2001, and SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. Under SFAS No. 142, goodwill and intangible
assets deemed to have an indefinite life will no longer be amortized and will be
subjected to annual impairment tests. Other intangible assets will continue to
be amortized over their useful lives. The adoption of SFAS No. 142 did not have
a material effect on the Company's financial position, results of operations or
cash flows as prior to April 2002 the Company did not have any recorded goodwill
or any indefinite lived or finite lived intangible assets, other than deferred
pension assets (see note 11). At January 31, 2003, goodwill totaled $2,200,000.
ENVIRONMENTAL COSTS
Costs incurred to investigate and remediate environmental waste are expensed as
incurred, unless the remediation extends the useful life of the assets employed
at the site. Remediation costs that extend the useful life of assets are
capitalized and amortized over the useful life of the assets.
ADVERTISING COSTS
Advertising costs are expensed in the period in which they occur. Selling,
general and administrative expenses include advertising costs of $2,921,000 in
2002, $4,237,000 in 2001 and $3,517,000 in 2000.
PRODUCT WARRANTY EXPENSE
The Company provides for a product warranty on most of the products. It
generally provides that customers can return a defective product during the
specified warranty period following purchase in exchange for a replacement
product or repair at no cost to the consumer. The Company accrues an estimate of
its exposure to warranty claims based upon both current and historical product
sales data and warranty costs incurred. The Company recorded reserves of
$900,000 and $150,000 as of January 31, 2003 and 2002, respectively.
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.
11
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION PLANS
Stock based compensation--In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123 "Accounting of Stock Based Compensation," which
established accounting and reporting standards for stock based employee
compensation plans effective after fiscal year 1996. SFAS No. 123 encourages
entities to adopt the fair value based method of accounting; however, it also
allows an entity to continue to measure compensation cost using the intrinsic
value based method prescribed by Accounting Principles Board No. 25. Entities
electing to remain on the "intrinsic value based" method must make certain pro
forma disclosures as if the new fair value method had been applied. At this
time, the Company has not adopted the recognition provision of SFAS No. 123, but
has provided pro forma disclosures.
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting For Stock Based
Compensation--Transition and Disclosure." SFAS No. 148 amended SFAS No. 123
"Accounting For Stock-Based Compensation", to provide new guidance concerning
the transition when a company changes from the intrinsic-value method to the
fair-value method of accounting for employee stock-based compensation cost. As
amended by SFAS No. 148, SFAS No. 123 also requires additional disclosure
regarding such cost in annual financial statements and in condensed interim
financial statements. Certain disclosure provisions of SFAS No. 148 were adopted
by the Company in its financial statements prepared as of January 31, 2003.
SFAS No. 123, as amended by SFAS No. 148, requires pro forma information
regarding net income and net income per share to be disclosed for new options
granted after fiscal year 1996. The fair value of these options was determined
at the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: risk-free interest rates of 4.11% to
6.26%; dividend yield of 0.10% to 0.98%; volatility factor of the expected
market price of the Company's common stock of 0.26 to 0.40; and a
weighted-average expected life of the option of five years.
12
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimated fair value of the options is amortized to expense over the
options' vesting period for pro forma disclosures. The per share "pro forma" for
the effects of SFAS No. 123, as amended by SFAS 148, is not indicative of the
effects on reported net income (loss) for future years. The Company's "reported"
and "pro forma" information is as follows:
YEAR ENDED JANUARY 31
2003 2002 2001
-------------------------------
Net income, as reported $ 282 $ 246 $ 4,016
Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net
of tax effects (41) (42) (102)
-------------------------------
Pro forma net income $ 241 $ 204 $ 3,914
===============================
Basic earnings per share
Net income, as reported $ .02 $ .02 $ .29
Net income, pro forma $ .02 $ .02 $ .28
Diluted earnings per share
Net income, as reported $ .02 $ .02 $ .29
Net income, pro forma $ .02 $ .01 $ .28
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
13
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
In 2002, the Company purchased certain assets of Furniture Focus, a company
which sells complete educational furniture packages to schools. For package
orders, the Company records revenue upon completion of the projects and delivery
of all products. The Company reports sales as net of sales returns and
allowances.
SHIPPING AND HANDLING FEES
Shipping and handling fees are included as revenue in net sales. Costs related
to shipping and handling are included in operating expenses. For the years ended
January 31, 2003, 2002 and 2001, shipping and handling costs of approximately
$27,590,000, $27,491,000 and $31,903,000, respectively, were included in
selling, general and administrative expenses.
FISCAL YEAR END
Fiscal years 2002, 2001 and 2000, refer to the years ended January 31, 2003,
2002 and 2001, respectively.
FUTURE ACCOUNTING REQUIREMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") 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. The Company
will adopt SFAS No. 143 as of February 1, 2003, and does not expect any material
effect upon the adoption of the Statement on the Company's financial position,
results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 requires most gains and losses on extinguishment of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required. SFAS No. 145 also amends SFAS No. 13
to require certain lease modifications to be treated as sales-leaseback
14
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
transactions. Certain provisions of SFAS No. 145 are effective for transactions
occurring after May 15, 2002, while other provisions are effective for fiscal
years beginning after May 15, 2002. The adoption of SFAS No. 145 has not had a
material effect on the Company's results of operations or financial condition.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires the recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002. The
Company does not expect a material effect on its results of operations or
financial condition as a result of the adoption of SFAS No. 146.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others: (the Interpretation or FIN No. 45)." The
Interpretation's disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company adopted
FIN No. 45 effective January 31, 2003, and disclosed the Company's accounting
policy and methodology used in determining its liability for product warranties.
A tabular reconciliation of the changes in the Company's product warranty
liability is included in Note 9.
2. INVENTORIES
The current material cost for inventories exceeded LIFO cost by $3,519,000 and
$2,048,000 at January 31, 2003 and 2002, respectively. Liquidation of prior year
LIFO layers due to a reduction in certain inventories (decreased) increased
income by $(423,000), $(825,000) and $111,000 in the years ended January 31,
2003, 2002 and 2001, respectively.
Details of inventory amounts, including the material portion of inventory which
is valued at LIFO, at January 31, 2003 and 2002, are as follows (in thousands):
JANUARY 31, 2003
---------------------------------------------
MATERIAL LABOR,
CONTENT AT LIFO OVERHEAD
FIFO RESERVE AND OTHER TOTAL
---------------------------------------------
Finished goods $10,772 $ (981) $ 6,719 $16,510
Work in process 9,822 (1,314) 9,725 18,233
Raw materials and supplies 9,520 (1,224) -- 8,296
---------------------------------------------
Total $30,114 $(3,519) $16,444 $43,039
=============================================
15
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
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
=============================================
3. NOTES PAYABLE
Outstanding balances (in thousands) for the Company's long-term debt were as
follows:
JANUARY 31
2003 2002
------------------
Revolving credit line with Wells Fargo Bank (a) $26,655 $22,414
IRB with the City of Torrance (b) 2,141 3,165
Equipment credit line with GECC (c) -- 884
Derivative instrument (a) 196 1,103
Other -- 1,142
------------------
28,992 28,708
Less current portion 1,087 2,061
------------------
$27,905 $26,647
==================
Outstanding stand-by letters of credit $ -- $ 2,411
(a) A revolving credit facility with Wells Fargo Bank, amended and restated in
February 2003, but effective at January 31, 2003 provides a secured
revolving line of credit that ranges from $40,000,000 to $70,000,000 to
allow for additional working capital requirements during the Company's
traditional peak period. This is a two-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,
2003). 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 $13,345,000 was available for borrowing as of January
31, 2003.
The $26,655,000 due under Wells Fargo Bank's line of credit will be payable
in the
16
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
3. NOTES PAYABLE (CONTINUED)
fiscal year ending January 31, 2005, if the agreement is not renewed.
The Company intends to renew the agreement.
On February 22, 2000, the Company entered into an interest rate swap
agreement with Wells Fargo Bank. The initial notional swap amount was
$30,000,000 for the period February 22, 2000 through February 28, 2001.
The notional swap amount decreased to $20,000,000 until its 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 of applicable income tax
benefit of $368,000. At January 31, 2003, the carrying value of the
swap approximated the fair value of $196,000, with an offset to other
comprehensive loss of $118,000 net of an applicable tax benefit of
$78,000. The revolving credit facility with Wells Fargo Bank is subject
to various financial covenants including a liquidity requirement, a
leverage requirement, a cash flow coverage requirement and
profitability requirements. The agreement also places certain
restrictions on capital expenditures, dividends and the repurchase of
the Company's common stock. The revolving credit facility is 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) 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. During the year ended January 31, 2003, the Company exercised
the buy-out option.
Long-term debt repayments are approximately as follows (in thousands):
Year ending January 31
- ----------------------
2004 $ 1,087
2005 27,905
-------
$28,992
=======
17
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
The Company believes that the carrying value of debt under the Wells Fargo
credit facility approximates fair value at January 31, 2003 and 2002, 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
QUALIFIED PENSION PLAN
The Company and its subsidiaries cover all employees under a noncontributory
defined benefit retirement plan, the Virco Employees' Retirement Plan (the
Plan). Benefits under the Plan are based on years of service and career average
earnings. The Company's general funding policy is to contribute amounts
deductible for federal income tax purposes. Minimum pension liability
adjustments for the years 2002, 2001 and 2000 were $3,072,000, $1,329,000 and
$1,155,000, respectively (net of taxes of $2,005,000, $850,000 and $768,000,
respectively), and are included in comprehensive loss. Assets of the Plan are
invested in common trust funds.
18
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, 2002 and 2001:
PENSION BENEFITS
2002 2001
----------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 21,163 $ 19,435
Service cost 1,437 1,017
Interest cost 1,684 1,515
Plan amendments 503 438
Actuarial loss 4,520 748
Benefit paid (520) (1,990)
----------------------------
Benefit obligation at end of year $ 28,787 $ 21,163
============================
Change in plan assets
Fair value at beginning of year $ 8,808 $ 10,193
Actual return on plan assets (1,696) (2,116)
Company contributions 10,482 2,721
Benefits paid (520) (1,990)
----------------------------
Fair value at end of year $ 17,074 $ 8,808
============================
Funded status of plan $(11,713) $(12,355)
Unrecognized net transition amount (184) (225)
Unrecognized prior service cost 4,333 4,430
Unrecognized net actuarial loss 14,700 8,702
----------------------------
Net amount recognized $ 7,136 $ 552
============================
Statements of financial position
Accrued benefit liability $ (7,077) $ (8,680)
Intangible asset 4,333 4,430
Accumulated other comprehensive income 9,880 4,802
----------------------------
Net amount recognized $ 7,136 $ 552
============================
2002 2001
------------------------
Weighted average assumptions
Discount rate 6.50% 7.75%
Expected return on plan assets 6.50% 8.00%
Rate of compensation increase 5.00% 5.00%
The total pension expense for the Plan (in thousands) included the following
components:
19
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
4. RETIREMENT PLANS (CONTINUED)
DECEMBER 31
2002 2001 2000
-------------------------------------------
Components of net cost
Service cost $ 1,437 $ 1,017 $ 930
Interest cost 1,684 1,515 1,425
Expected return on plan assets (820) (821) (1,089)
Amortization of transition amount (42) (42) (42)
Amortization of prior service cost 601 562 528
Recognized net actuarial loss 1,039 398 148
-------------------------------------------
Benefit cost $ 3,899 $ 2,629 $ 1,900
===========================================
VIP RETIREMENT PLAN
The Company also provides a supplementary retirement plan for certain key
employees, the VIP Retirement Plan (VIP Plan). The VIP Plan provides a benefit
up to 50% of average compensation for the last five years in the VIP Plan,
offset by benefits earned under the Virco Employees' Retirement Plan. The VIP
Plan is funded by a life insurance program. The cash surrender values of the
policies funding the VIP Plan were $2,419,000 and $2,138,000 at January 31, 2003
and 2002, respectively. These cash surrender values are included in other assets
in the consolidated balance sheets.
The Company maintains a rabbi trust to hold assets related to the VIP Plan, the
Dual Option Life Insurance Plan, and the Deferred Compensation Plan.
Substantially all assets funding these Plans are held in the rabbi trust.
20
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 VIP Plan
at December 31, 2002 and 2001:
NONQUALIFIED VIP PENSION
2002 2001
------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 4,821 $ 4,298
Service cost 820 490
Interest cost 431 323
Plan amendments (503) (438)
Actuarial loss 2,453 492
Benefit paid (266) (344)
------- -------
Benefit obligation at end of year $ 7,756 $ 4,821
======= =======
Change in plan assets
Company contributions $ 266 $ 344
Benefits paid (266) (344)
------- -------
Fair value at end of year $ - $ -
======= =======
Funded status of plan $(7,756) $(4,821)
Unrecognized prior service cost (3,121) (3,035)
Unrecognized net actuarial loss 4,816 2,718
------- -------
Accrued benefit cost $(6,061) $(5,138)
======= =======
Statements of financial position
Accrued benefit liability $(6,061) $(5,138)
------- -------
Net amount recognized $(6,061) $(5,138)
======= =======
2002 2001
---------------------
Weighted average assumptions
Discount rate 6.50% 7.75%
Rate of compensation increase 5.00% 5.00%
21
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
4. RETIREMENT PLANS (CONTINUED)
The total plan expense for the VIP Plan included the following components (in
thousands):
DECEMBER 31
2002 2001 2000
--------------------------
Components of net cost
Service cost $ 820 $ 490 $ 417
Interest cost 431 323 299
Amortization of prior service cost (417) (366) (314)
Recognized net actuarial loss 355 193 157
--------------------------
Benefit cost $1,189 $ 640 $ 559
==========================
NON-EMPLOYEE DIRECTORS RETIREMENT PLAN
In April 2001, the Board of Directors established a non-qualified plan for
non-employee directors of the Company. This Non-Employee Directors Retirement
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, 2003, this Plan did not hold any assets.
22
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, 2002:
NON EMPLOYEE DIRECTOR
PENSION
2002 2001
-------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 485 $ 461
Service cost 29 24
Interest cost 34 36
Plan amendments -- --
Actuarial loss 6 (36)
Benefits paid -- --
-------------------------
Benefit obligation at end of year $ 554 $ 485
=========================
Change in plan assets
Fair value of plan assets at inception and end of year $ -- $ --
=========================
Funded status of plan $ (554) $(485)
Unrecognized prior service cost 286 373
Unrecognized net actuarial loss (30) (36)
-------------------------
Net amount recognized $ (298) $(148)
=========================
Statements of financial position
Accrued benefit liability $ (554) $(485)
Intangible asset 256 337
-------------------------
Net amount recognized $ (298) $(148)
=========================
2002 2001
------------------
Weighted average assumptions
Discount rate 6.50% 7.75%
Rate of compensation increase 5.00% 5.00%
23
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
2002 2001
----------------
Components of net cost
Service cost $ 29 $ 24
Interest cost 34 36
Amortization of prior year service cost 88 88
----------------
Benefit Cost $151 $148
================
401(k) RETIREMENT PLAN
The Company's Retirement Plan, which covers all U.S. employees, allows
participants to defer from 1% to 15% of their eligible compensation through a
401(k) retirement program. Through December 31, 2001, this Plan included an
employee stock ownership component. This Plan continues to include the Virco
Stock Fund as one of the investment options. Shares owned by this Plan are held
by the Plan Trustee, Security Trust Company. At January 31, 2003, this Plan held
561,914 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, 2003, 2002 and 2001, there was no employer match and therefore no
compensation cost to the Company.
LIFE INSURANCE
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 $3,915,000 and
$3,523,000 at January 31, 2003 and 2002, respectively.
DEFERRED COMPENSATION PLAN
The Company established, effective January 1, 1997, a Deferred Compensation
Plan, which allows certain key employees to defer up to a maximum of 90% of
their base annual salary and/or up to 90% of their annual bonus on a pretax
basis. The total participant deferrals were $1,772,000 and $1,461,000 for the
years ended January 31, 2003 and 2002, 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.
24
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTIONS AND STOCKHOLDERS' RIGHTS
The Company's two stock plans are the 1997 Employee Incentive Plan (the 1997
Plan) and the 1993 Employee Incentive Stock Plan (the 1993 Plan). Under these
stock plans, the Company may grant an aggregate of approximately 1,432,000
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, 2003, 373,000 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, 29,632 and 1,051 shares were recorded as
treasury stock for the years ended January 31, 2003 and 2002, respectively.
A summary of the Company's stock option activity, and related information for
the years ended January 31 are as follows:
2003 2002 2001
------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------------------------------------------------------------------------------
Outstanding at beginning
of year 659,475 $ 9.09 714,679 $ 9.34 768,970 $ 8.97
Granted 13,200 13.59 38,720 8.37 6,655 9.40
Exercised (149,431) 3.15 (16,498) 2.20 (60,946) 4.64
Forfeited (41,470) 11.68 (77,426) 12.27 -- --
-------- ------- -------
Outstanding at end of year 481,774 10.82 659,475 9.09 714,679 9.34
======== ======= =======
Exercisable at end of year 433,280 10.81 578,076 8.96 597,166 8.90
Weighted-average fair value
of options granted
during the year $ 5.54 $ 3.45 $ 3.27
The data included in the above table have been retroactively adjusted, if
applicable, for stock dividends and the stock split.
25
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, 2003, 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
- --------------------------------------------------------------------------------------------
$ 1.87 TO 8.55 153,428 4.00 YEARS $ 6.67 132,812 $ 6.42
10.14 TO 13.59 223,870 6.34 11.68 196,475 11.52
15.06 TO 16.07 104,476 4.69 15.80 103,993 15.01
------- -------
481,774 5.23 10.82 433,280 10.81
======= =======
The Company has elected to account for its employee stock options under
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations in accounting for employee stock
options. No compensation expense is recorded under APB 25 because the exercise
price of the Company's employee common stock options equals the market price of
the underlying common stock on the grant date.
On October 15, 1996, the Board of Directors declared a dividend of one preferred
stock purchase right (a Right) for each outstanding share of the Company's
common stock. Each Right entitles a stockholder to purchase for an exercise
price of $50.00 ($20.70, as adjusted for 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 (483,153 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.
26
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
6. PROVISION FOR INCOME TAXES
The Company uses the liability method to determine the provision for income
taxes. Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
The provisions for the last three years are reconciled to the statutory federal
income tax rate using the liability method as follows:
JANUARY 31
2003 2002 2001
----------------------------------------
Statutory 34.0% 34.0% 34.0%
State taxes (net of federal tax) 1.0 4.1 3.2
Nondeductible expenses and other (1.7) 5.5 1.1
----------------------------------------
33.3% 43.6% 38.3%
========================================
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
2003 2002 2001
-------------------------------------
Current
Federal $ (333) $ 1,562 $ 2,690
State (81) 350 390
-------------------------------------
(414) 1,912 3,080
Deferred
Federal 469 (1,449) (350)
State 86 (273) (57)
-------------------------------------
555 (1,722) (407)
-------------------------------------
$ 141 $ 190 $ 2,673
=====================================
27
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
2003 2002
-------------------------
Deferred tax assets
Accrued vacation and sick leave $ 1,209 $ 1,090
Retirement plans 3,996 3,308
Insurance reserves 1,607 1,306
Inventory 574 244
Other 372 1,068
-------------------------
7,758 7,016
Deferred tax liabilities
Tax in excess of book depreciation (4,148) (4,288)
Capitalized software development costs (1,214) (3,318)
-------------------------
(5,362) (7,606)
-------------------------
Net deferred tax asset (liability) $ 2,396 $ (590)
=========================
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, 2003, are as follows:
Year ending January 31
- ----------------------
2004 $ 8,946
2005 7,560
2006 4,339
2007 2,997
2008 1,654
Thereafter 504
-------
$26,000
=======
28
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
- ----------------------
2003 $ 9,969
2002 11,042
2001 12,937
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, 2003, are as follows:
Year ending January 31
- ----------------------
2004 $ 628
2005 627
2006 33
2007 33
2008 33
Thereafter 112
------
$1,466
======
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,
2003 and 2002, there are no required reserves for such environmental
contingencies.
29
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 $250,000 per occurrence. The Company has purchased insurance to
cover losses in excess of the retention up to a limit of $30,000,000. The
Company has obtained an actuarial estimate of its total expected future losses
for liability claims and recorded the net present value of $4,130,000 at January
31, 2003, based upon the Company's estimated payout period of four years using a
6% 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. WARRANTY
The Company accrues an estimate of its exposure to warranty claims based upon
both current and historical product sales data and warranty costs incurred. The
majority of the Company's products carry a five-year warranty. The Company
periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary. The warranty liability is in accrued
liabilities in the accompanying consolidated balance sheet.
Changes in the Company's warranty liability were as follows (in thousands):
JANUARY 31
2003 2002
-------------------
Balance at January 31, 2002 $ 150 $ 150
Provision 2,091 703
Costs incurred (1,341) (703)
-------------------
Balance at January 31, 2003 $ 900 $ 150
===================
30
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
10. 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.
11. ACQUISITION OF BUSINESS
In April 2002, the Company entered into an agreement with Dew-El Corporation to
purchase certain assets of Furniture Focus (TM), Inc., an Ohio reseller that
offers complete package solutions for the furniture, fixtures and equipment
segments of bond-funded public school construction projects, primarily in the
upper Midwest. In May 2002, the Company paid $2,400,000 in cash for certain
assets of the corporation and recorded goodwill of $2,200,000. The goodwill is
not expected to be deductible for income tax. In addition, the Company purchased
approximately $2,150,000 of accounts receivable. The financial statements for
the fiscal 2002 included nine months of Furniture Focus operations. The
additional revenue and operating results as a result of this acquisition did not
have a significant effect on the Company's financial position, operations or
cash flows.
31
Virco Mfg. Corporation
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY RESULTS (UNAUDITED)
The Company's quarterly results for the years ended January 31, 2003 and 2002
are summarized as follows (in thousands, except per share data):
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
--------------------------------------------------
Year ended January 31, 2003
Net sales $41,168 $83,164 $85,022 $35,001
Gross profit 13,056 29,080 28,893 5,756
Net income (loss) (2,137) 4,260 3,244 (5,085)
Per common share(1) (2)
Net income
Basic (0.16) 0.32 0.24 (0.39)
Assuming dilution (0.16) 0.32 0.24 (0.39)
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 income (loss) (3,765) 4,490 3,912 (4,391)
Per common share(1) (2)
Net income:
Basic (0.27) 0.34 0.29 (0.33)
Assuming dilution (0.27) 0.33 0.29 (0.33)
(1) Net income per share has been adjusted to reflect the 10% stock dividend
declared in August 2002 and 2001.
(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.
32
SUPPLEMENTAL STOCKHOLDERS' INFORMATION
ANNUAL MEETING
The Annual Meeting of Virco stockholders will be held on Tuesday, June 10, 2003,
at 10:00 a.m., at 2027 Harpers Way, Torrance, California. The record date for
this meeting is May 2, 2003. The Proxy Statement and Proxy pertaining to this
meeting will be mailed on or about May 16, 2003.
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 16, 2002, there were
approximately 341 registered stockholders according to the transfer agent
records. There are approximately 1,900 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
web site (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
1-31-2003 1-31-2002 1-31-2003 1-31-2002
-------------------------------------------------------------------------
High Low High Low
---------------------------------------
1st Quarter $0.02 $0.02 $ 9.54 $8.09 $9.09 $8.06
2nd Quarter 0.02 0.02 13.70 9.18 8.80 8.14
3rd Quarter 0.02 0.02 12.18 8.43 9.45 8.50
4th Quarter 0.02 0.02 10.48 7.98 8.18 7.41
The data included in the above table has been retroactively adjusted, if
applicable, for the stock split and stock dividends.
DIRECTORS, OFFICERS AND FACILITIES
DIRECTORS
Robert A. Virtue
President, Chairman of the Board and Chief Executive Officer
Donald S. Friesz
Former Vice President - Sales and Marketing
Evan M. Gruber
Chairman and Chief Executive Officer, Modtech Holdings, Inc.
Robert K. Montgomery
Partner, Gibson, Dunn & Crutcher
Glen D. Parish
Vice President and General Manager, Conway Division
Donald A. Patrick
Management Consultant, Diversified Business Resources, Inc.
Douglas A. Virtue
Executive Vice President
Dr. James R. Wilburn
Dean of the School of Public Policy, Pepperdine University
OFFICERS
Robert A. Virtue
President, Chairman of the Board and Chief Executive Officer
Douglas A. Virtue
Executive Vice President
Robert E. Dose
Vice President - Finance, Secretary and Treasurer
Glen D. Parish
Vice President and General Manager - Conway Division
Wesley D. Roberts
Vice President and Chief Information Officer
D. Randal Smith
Vice President - Marketing
Lori L. Swafford
Vice President - Legal Affairs
Larry O. Wonder
Vice President - Sales
INDEPENDENT AUDITORS
Ernst & Young LLP
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, 2001, 2002 AND 2003
(In Thousands)
Col. A Col. B Col. C Col. D Col. E Col. F
Additions
Balance at Charged to Costs Charged to Other Deductions from Balance at Close of
Description Beginning of Period and Expenses Accounts Reserves Period
----------- ------------------- ------------ -------- -------- ------
Allowance for Doubtful
Accounts:
Year Ended:
January 31, 2001 $ 200 $ 156 $ 156 (1) $ 200
January 31, 2002 $ 200 $ 288 $ 288 (1) $ 200
January 31, 2003 $ 200 $ 267 $ 242 (1) $ 225
(1) Uncollectable accounts written off, net of recoveries.