1
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
MANAGEMENT'S STATEMENT
The financial statements of Virco Mfg. Corporation were prepared by management,
which is responsible for the integrity and objectivity of the data presented,
including amounts that must necessarily be based on judgments and estimates.
The statements were prepared in conformity with generally accepted accounting
principles, and in situations where acceptable alternative accounting
principles exist, management selected the method that was most appropriate in
the circumstances.
Virco depends upon the Corporation's system of internal controls in meeting its
responsibilities for reliable financial statements. This system is designed to
provide reasonable assurance that assets are safeguarded and that transactions
are properly recorded and executed in accordance with management's
authorization.
Judgments are required to assess and balance the relative cost and expected
benefits of these controls.
The financial statements have been audited by our independent auditors, Ernst &
Young LLP. The independent auditors provide an objective, independent review
as to management's discharge of its responsibilities insofar as they relate to
the fairness of reported operating results and financial condition. They
obtain and maintain an understanding of Virco's accounting and financial
controls, and conduct such tests and procedures as they deem necessary to
arrive at an opinion on the fairness of financial statements.
The Audit Committee of the Board of Directors, which is composed solely 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.
12
2
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND RESULTS OF OPERATIONS
REVENUE AND INCOME
1996 vs. 1995
Net sales from operations increased to $236,300,000 for fiscal 1996, compared
to $224,300,000 in fiscal 1995. The increase in sales was primarily attained
by increasing selling prices combined with a small net increase in sales
volume. Sales volume improved in markets which were targeted for growth,
offset by a sizable reduction in sales of lower priced and lower margin
business to mass merchants. The net increase in sales and substantial
improvement in profitability reflects our success in replacing the lower margin
mass merchant volume with more profitable business.
Educational sales, representing 57% of corporate revenues, increased by
$15,300,000 from $119,300,000 to $134,600,000. This increase was achieved
through a variety of operational and marketing actions. First, while finished
goods inventories going into the summer shipping season were comparable to the
prior year, the composition of product inventoried better matched the demands
of the educational sales markets. Larger volumes of educational product and
reduced volumes of product for mass merchants were stocked. Other changes
affecting current year educational sales include continued growth of our newer
mobile cabinet and mobile table product lines and the introduction of our
Future Access line of computer furniture. These newer product lines typically
command higher margins than our more mature products. Increased production
capacity and strong demand for Virco's hard plastic furniture and for other
core educational products facilitated further growth.
Commercial sales, representing 38% of corporate revenues, decreased by
$4,900,000 from $93,700,000 to $88,800,000. Sales in this segment improved in
several target markets, including private schools, pre-schools, churches,
banquet and meeting halls, and cafeterias. The increased volumes in these
markets were more than offset by a reduction in sales to mass merchants. This
reduction was attributable to an intended shift in emphasis to higher price and
higher margin products.
Other sales, which primarily consist of international shipments, increased by
$1,400,000 from $11,400,000 to $12,800,000 million. Sales performance in this
segment reflected increased shipments into Canada, as well as the efforts to
establish distributorships in other international markets.
The $12,000,000 increase in sales provided an additional $9,400,000 of gross
margin. This significant increase in gross profit margin was primarily
attributable to carefully considered price increases and our successful effort
to shift product mix to higher margin products. In addition to an improved
product mix, material costs were stable throughout the year and slightly reduced
in 1996 compared to 1995, when material costs increased during the peak summer
shipping season before declining at year end. Continued investment in factory
automation, ongoing engineering improvements and efficiencies in distribution
contributed to the improved performance. Selling, general and administrative
expenses, as a percentage of sales, were consistent with the prior year.
Interest expenses decreased by $600,000 reflecting lower levels of borrowing.
This decrease in interest expense was offset by a reduction in other income
compared to the prior year. In fiscal year 1995, other income included an
involuntary conversion from tornado damage and a favorable settlement of legal
proceedings relating to our Southern Pines manufacturing facility.
1995 vs. 1994
Net Sales from operations increased to $224,300,000 for fiscal 1995, compared
to $215,700,000 in fiscal 1994. This sales performance was achieved in a
continued competitive market, and was accomplished through improved operational
performance in our manufacturing and distribution capabilities combined with an
aggressive pricing strategy.
Educational sales, representing 53% of corporate revenues, increased by
$7,200,000 from $112,100,000 to $119,300,000. This increase occurred in an
improved market and was achieved through competitive pricing, increased levels
of inventory going into the peak shipping periods, improved manufacturing
performance, and engineering improvements in certain product lines. Sales of
mobile cabinets and mobile tables demonstrated solid growth. Acceptance of
Virco's hard plastic furniture and other core educational products continued to
improve.
13
3
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND RESULTS OF OPERATIONS
Commercial sales, representing 42% of corporate revenues, increased by
$1,300,000 from $92,400,000 to $93,700,000. Sales improved in several markets,
with Virco targeting market penetration in the Hospitality, Private School, and
Church markets. Sales of products to mass merchandisers have decreased as the
Company is focusing on more profitable markets.
Other sales increased by $200,000 from $11,200,000 to $11,400,000. Sales
performance in this market reflected an improvement in sales to Canada offset
by declining sales into Mexico.
The $8,700,000 increase in sales provided an additional $3,500,000 of gross
margin. During the year, the Company incurred significant increases in
material costs accompanied by lagging increases in selling prices. Costs of
raw materials peaked during the middle of the year, and by year end had fallen
to more typical levels. Offsetting these increased costs, the Company
experienced efficiencies in both manufacturing overhead and distribution costs.
These costs decreased in both absolute amounts as well as a percentage of
sales. Improvements in these areas are attributable to the closing of four
distribution centers in 1994, improved automation in the factories, and
increased production volumes.
Selling, general and administrative, and interest expenses, as a percentage of
sales, increased compared to the prior year. These increased costs related to
increased spending for product development as well as financing costs related
to the capital investment program and increased levels of inventory. Other
income and expense improved compared to the prior year due to non recurring
events arising from involuntary conversion from tornado damage, favorable
settlement of legal proceedings relating to our Southern Pines manufacturing
facility, and not needing to provide for a claim against the Company for
products sold under a GSA contract as had been required in the prior year.
1994 vs. 1993
Net Sales from continuing operations increased to $215,700,000 for fiscal 1994,
compared to $205,600,000 in fiscal 1993. This sales performance was achieved
in a continued competitive market, and was accomplished through an aggressive
pricing strategy.
Educational sales, representing 52% of corporate revenues, increased by
$2,900,000 from $109,200,000 to $112,100,000. This increase occurred in a
relatively flat market and was achieved through competitive pricing and
engineering improvements in certain product lines.
Commercial sales, representing 43% of corporate revenues, increased by
$6,600,000 from $85,800,000 to $92,400,000. Sales improved in all markets,
with Virco improving market penetration in the Hospitality, Private School, and
Church markets. Growth in sales to mass merchandisers has leveled off, with
sales to mass merchants representing a comparable percentage of Commercial
sales for 1994 and 1993.
Other sales increased by $600,000 from $10,600,000 to $11,200,000. This
increase was attained by increased export sales to Mexico offset by a decrease
in sales to the Federal Government.
The overall $10,000,000 increase in sales provided an additional $3,800,000 of
gross margin. Slight increases in material costs were offset by reductions in
overhead spending, resulting in stable gross margins as a percentage of sales.
A reduction in distribution and warehousing expenditures was achieved by
closing five distribution centers in the latter part of 1993 and four
additional distribution centers in the latter half of 1994. Selling, general
and administrative costs, as a percentage of sales, were comparable to the
prior year.
OTHER OPERATING ACTIVITIES
In 1994, the Board of Directors authorized the Company to investigate the
possible sale of our Virsan, Mexico manufacturing facility. This action was
taken in connection with our program of moving manufacturing operations into
more automated facilities which are closer to our primary markets. In 1996,
the Company entered into an agreement with a U. S. based manufacturer to sell
this facility. Subsequent to year end, the Company signed a letter of intent
with a final agreement expected in May 1997. We have reduced the levels of
production at this facility, anticipating the completion of the sale by mid
1997. The anticipated sale will include all production equipment and real
property located in Mexico. Inventory and the related production requirements
at this facility will be transferred to our two U.S. facilities which
manufacture the same product lines. It is anticipated that the sale of this
facility will not result in a material gain or loss.
14
4
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND RESULTS OF OPERATIONS
In April 1994, the Company entered into a ten year lease for a 560,000 square
foot manufacturing and warehousing facility in Torrance, California. This new
facility has enabled the Company to combine both manufacturing and warehousing
operations for the Western Region under one roof, reducing materials handling
and distribution expenses. The Company moved all west coast warehousing
operations into the new facility in the third quarter of 1994. In 1994 and in
1995, the Company made a large investment in automated equipment and leasehold
improvements at this new facility. The transfer of manufacturing operations
started in March 1995 and was substantially completed by the end of June 1995.
This move was accomplished with virtually no impact upon customer service or
level of shipments. Both 1995 and 1996 saw continued improvement in both the
volume and efficiency at which this plant operated. In connection with the
move, the factory has been redesigned to implement a "manufacturing cell"
concept. This cell concept required a substantial investment in capital
equipment, but has reduced labor costs as well as throughput time for
production of the Company's significant product lines. In addition, the new
equipment broadened the Company's manufacturing capabilities to facilitate
expansion into targeted markets and product lines. The new production
capabilities complement the Company's investment in enhanced product
engineering and design capabilities initiated in 1993 and continued through the
current year.
The Company's Conway, Arkansas manufacturing facility, which was expanded in
1991 and again in 1993, received nearly $6,500,000 of capital investment in
machinery and equipment in 1994, $6,900,000 in 1995, and an additional
$5,700,000 in 1996. This investment increased capacity to produce hard plastic
components, which are a critical element of the Company's educational product
line, increased and automated welding capabilities, expanded tube forming
operations, and significantly enhanced tool and die fabrication capabilities.
The current year's capital investments are a continuation of an effort
initiated several years ago to more fully automate the Arkansas facility.
In connection with the new west coast facility, the Company discontinued
operations at two facilities in the Los Angeles area. One facility, a 160,000
square foot manufacturing plant owned by the Company, was leased in 1995 under
a 15 year lease. Under the terms of the lease, the Company provided no tenant
improvement allowances and leased the building on an "as is" basis, saving
capital so as to invest available funds in equipment at the new manufacturing
facility. The second facility, a 200,000 square foot finished goods warehouse
and distribution center owned by the Company, was leased during the third
quarter of 1994 under a five year lease which will expire in January 2000.
In November 1994, the Company sold one of its two facilities in Newport,
Tennessee. This facility, formerly a finished goods warehouse, had been rented
to outside parties since 1988. The remaining property, formerly used in the
production of hard plastic components, is currently used to store finished
goods inventory.
ENVIRONMENTAL AND CONTINGENT LIABILITIES
The Company and other furniture manufacturers are subject to federal, state,
and local laws and regulations relating to the discharge of materials into the
environment and the generation, handling, storage, transportation, and disposal
of waste and hazardous materials. The Company has expended, and can be
expected to expend significant amounts in the future for the investigation of
environmental conditions, installation of environmental control equipment, and
remediation of environmental contamination.
Currently, the Company is self insured for Product, and General Liability
losses up to $100,000 per occurrence. In prior years the Company has been self
insured for Workers Compensation, Automobile, Product, and General Liability
losses. The Company has purchased insurance to cover losses in excess of
$100,000 up to a limit of $20,000,000. In 1993 the Company initiated a program
to reduce product liability losses and to more aggressively litigate product
liability cases. This program has continued through 1996 and has resulted in
reductions in litigated product liability cases. Management does not
anticipate that any related settlement, after consideration of the existing
reserves for claims and potential insurance recovery, would have a material
adverse effect on the Company's financial position, results of operations, or
cash flows.
15
5
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND RESULTS OF OPERATIONS
INFLATION AND FUTURE CHANGE IN PRICES
Inflation rates in the U.S. did not have a significant impact on the Company's
operating results for the fiscal year just ended. Material costs were stable
throughout the year and slightly reduced in 1996 compared to 1995. If current
trends continue, we anticipate that total material costs for 1997, as a
percentage of sales, could be comparable to or slightly less than in 1996.
However, no assurance can be given that the Company will experience stable
prices in 1997. The Company is working to control and reduce costs by improving
production methodologies, investigating new packaging and shipping materials,
and searching for new sources of purchased components. In 1995, material costs
were volatile, with significant cost increases in plastic and cartons, as well
as increased steel prices. These costs increased during the year and then
dropped back to more normal levels near the end of the year.
The material cost and certain overhead expenditures of product manufactured in
Mexico is paid for and denominated in U.S. Dollars, but the cost of labor and
many overhead expenditures are denominated in Mexico Pesos. The volatility and
recession in the Mexican markets continues to adversely affect efforts to sell
product into Mexico, but has reduced our cost of producing goods for
distribution in the United States. The Company's exposure to the uncertainties
of this market will be significantly reduced with the intended sale of the
Mexico manufacturing facility.
The Company uses the LIFO method of accounting for inventory. Under this
method, the cost of products sold as reported in the financial statements
approximates current cost, and reduces the distortion in reported income due to
increasing costs. Depreciation expense represents an allocation of historic
acquisition costs and is less than if based on the current cost of productive
capacity consumed. The Company has made significant fixed asset acquisitions
during the last three fiscal years. The assets acquired will result in higher
depreciation charges, but due to technological advances should result in
operating cost savings. Anticipated fixed asset additions in 1997 should
reflect to a more normal level, with 1997 capital acquisitions approximating
1997 depreciation expense.
LIQUIDITY
In October 1996, the Company renewed its $49,500,000 loan facility, extending
the agreement to a three year commitment. The terms of the facility are
described in Note 4 of the notes to the consolidated financial statements.
Major provisions of the agreement include that the line is uncollateralized and
the interest rate is at prime. This new facility allows the Company the option
to borrow under 30, 60, and 90 day fixed term rates at LIBOR plus 1.75%. Under
this agreement, there is letter of credit sub feature where the Company issues
commercial and standby letters of credit. This loan facility is intentionally
large enough to finance more production in the early part of the year to have
adequate inventories available for the summer / fall educational delivery
season.
During 1994, the Company issued an $8,900,000 Industrial Revenue Bond through
the City of Torrance, CA. The Bond was privately placed with General Electric
Capital Corporation (GECC). This Industrial Revenue Bond provides capital
funds which are limited to the acquisition of machinery, equipment, and
leasehold improvements in the Torrance, California facility. Under the terms
of the Bond, capital spending at the Torrance facility will be limited to
$8,900,000 over a three year period. The Company has drawn down $8,470,000 to
cover capital expenditures and bond issuance costs. To supplement the Bond
proceeds, the Company has entered into true tax leases with GECC for
approximately $60,000, $2,200,000 and $4,100,000 worth of machinery and
equipment in fiscal years 1996, 1995 and 1994, respectively. Capital assets
obtained through these true tax leases will not be applied toward the
$8,900,000 three year limit on capital spending in Torrance. The Company has
received approval from GECC to lease an additional $3,000,000 of equipment
under comparable leases in 1997.
Capital investments for machinery and equipment installed at the Conway,
Arkansas facility totaled $5,700,000 in 1996, $6,900,000 in 1995 and $6,500,000
in 1994. These capital investments were financed by operating cash flow and
from the loan facility with Wells Fargo Bank. Capital expansion at this
facility is expected to continue through 1997 at a comparable level. The 1997
capital additions will be funded by cash generated from operations and as
necessary the Wells Fargo credit facility.
As a result of the intended sale of the Mexico manufacturing facility, the
Company reduced the levels of raw material and work in process inventory at
this location. Inventory levels (at FIFO) at this facility were $3,100,000,
$3,800,000, and $7,000,000 at January 31, 1997, 1996, and 1995, respectively.
The sale of production equipment and real property at this facility is
16
6
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND RESULTS OF OPERATIONS
expected to generate an additional $1,000,000 of cash. The remaining inventory
and production requirements will be transferred to other Virco manufacturing
facilities. The consolidation of the Mexico production to the two remaining
factories should result in efficiencies which allow a portion of the existing
$3,100,000 of inventory to be converted to cash.
Subsequent to fiscal year end, the Company's sole supplier of lightweight
plastic table tops developed liquidity concerns. In order to secure future
supplies for this new product introduction, Virco purchased all of the
productive assets as well as the raw material and work in process inventories
which relate to the production of Virco tables from this supplier. This
acquisition required a net outlay of approximately $205,000 for the assets plus
a $200,000 advance payment on royalties related to the plastic table
development.
During 1994, the Company sold one property located in Newport, Tennessee. This
sale provided nearly $700,000 in cash proceeds.
In October 1996 the Board of Directors raised the cash dividend from $.04 per
share to $.10 per share. In December 1996, the Company's Board of Directors
voted to initiate a quarterly cash dividend policy beginning with the payment
of a $.025 per share dividend on January 31, 1997. The amount of quarterly
dividend will be reviewed each quarter in the light of the Company's earnings
and cash flow.
Management believes cash raised from the previously described sources will be
adequate to meet its capital requirements in the short term.
FINANCIAL STRATEGY
Virco's financial strategy is to continue to increase levels of profitability
by focusing on specific profitable market segments for future growth,
accelerating new product development for those target markets, acquiring
automated production equipment and new production technologies, the elimination
of under performing assets and continual reassessment of the manufacturing and
distribution capacity needed to meet future demand. This continual assessment
of production capacity led to an expansion of our Conway, Arkansas production
facility in both 1991 and 1993, and the 1994 move from the existing Los
Angeles, California plant to a larger, more automated facility. In 1996, the
Company entered into an agreement with a U. S. based manufacturer to sell the
Virsan, Mexico manufacturing facility. Subsequent to year end the Company
signed a letter of intent to sell Virsan with a final agreement expected in May
1997. We are continuing in our effort to eliminate or lease underutilized real
estate.
As discussed in Note 7 of the consolidated financial statements, the Company
has not provided an allowance against the deferred tax assets recorded in the
financial statements. The net deferred tax asset represents less than 3% of
the current year pre-tax earnings. The gross deferred tax asset represents
approximately 14% of current pre-tax earnings. Management believes that it is
more likely than not that future earnings will be sufficient to recover
deferred tax assets.
The Company discounts the pension obligations under the Virco Employees
Retirement Plan and the Virco Important Performers Plan (VIP) utilizing an 8%
discount rate. Although the Company does not anticipate any change in this
rate in the coming year, any such change would not have a significant effect on
the Company's financial position, results of operations, or cash flows.
FORWARD-LOOKING STATEMENTS
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing, including those contained
herein. Such forward-looking statements may be included in, without
limitation, reports to stockholders, press releases, oral statements made with
the approval of an authorized executive officer of the Company and filings with
the Securities and Exchange Commission. The words or phrases "anticipates,"
"expects," "will continue," "estimates," "projects," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The results contemplated by
the Company's forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to vary materially from
anticipated results including, without limitation, material costs, demand for
the Company's products, and competitive conditions affecting selling prices and
margins.
17
7
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In thousands, except per share data) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales - continuing operations $ 236,277 $ 224,349 $ 215,659 $ 205,629 $ 191,324
Net income
Continuing operations 9,326 5,209 5,001 4,302 3,827
Discontinued operations - - - - (668)
Change in accounting methods - - - (275) -
-----------------------------------------------------------------
$ 9,326 $ 5,209 $ 5,001 $ 4,027 $ 3,159
=================================================================
Net income per share*
Continuing operations $ 1.55 $ .87 $ .84 $ .73 $ .65
Discontinued operations - - - - (.11)
Change in accounting methods - - - (.05) -
-----------------------------------------------------------------
$ 1.55 $ .87 $ .84 $ .68 $ .54
=================================================================
Average number of shares outstanding 6,004,835 5,974,739 5,949,569 5,911,105 5,846,183
Dividends declared per share:
Cash $ .125 $ .04 $ .04 $ .04 $ .04
Stock 10% 10% 10% 10% 10%
OTHER FINANCIAL DATA
Total assets $ 118,020 $ 119,225 $ 115,008 $ 97,164 $ 98,947
Working capital 45,143 51,320 42,780 47,038 52,236
Current ratio 2.6/1 3.2/1 2.6/1 3.2/1 3.5/1
Total long-term obligations 25,396 39,900 37,428 29,722 34,651
Stockholders' equity 63,695 55,461 50,466 45,637 41,937
Shares outstanding at year-end*** 5,906,296 5,906,296 5,896,616 5,896,616 5,896,616
Stockholders' equity per share** 10.83 9.39 8.56 7.74 7.10
-----------------------------------------------------------------
* Based on average number of shares outstanding each year after giving
retroactive effect for stock dividends.
** Based on number of shares outstanding at year-end giving effect for
stock dividends declared.
*** Adjusted for stock dividends
18
8
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
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, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 12, 1997
19
9
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
January 31
(In thousands, except per share data) 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 722 $ 661
Trade accounts receivable (less a $100 allowance for doubtful accounts) 24,640 25,924
Other receivables 870 2,078
Income taxes receivable - 197
Inventories:
Finished goods 26,902 22,585
Work in process 6,402 6,949
Raw materials and supplies 10,340 13,486
----------------------
43,644 43,020
Prepaid expenses and other current assets 1,478 1,883
Deferred income taxes 1,334 859
----------------------
Total current assets 72,688 74,622
Restricted short-term investments 660 1,272
Property, plant and equipment:
Land and land improvements 3,647 3,543
Buildings 14,269 13,661
Machinery and equipment 59,906 54,667
Leasehold improvements 1,844 1,822
----------------------
79,666 73,693
Less accumulated depreciation and amortization 42,188 36,738
----------------------
Net property, plant and equipment 37,478 36,955
Other assets 7,194 6,376
----------------------
Total assets $ 118,020 $ 119,225
======================
See accompanying notes.
[BAR GRAPH]
92 93 94 95 96
18.9 23.7 31.3 37.0 37.5
3.8 8.8 12.4 11.1 7.1
NET PROPERTY, PLANT &
EQUIPMENT/
CAPITAL EXPENDITURES
in millions
20
10
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS (CONTINUED)
January 31
(In thousands, except per share data) 1997 1996
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks released but not yet cleared bank $ 4,790 $ 3,545
Accounts payable 11,029 10,199
Accrued compensation and employee benefits 7,416 5,659
Income taxes payable 317 -
Current portion of long-term debt 980 924
Other accrued liabilities 3,013 2,975
----------------------
Total current liabilities 27,545 23,302
Noncurrent liabilities:
Accrued self-insurance retention 1,556 1,535
Accrued pension expenses 2,327 2,456
Long-term debt, less current portion 21,513 35,909
----------------------
Total noncurrent liabilities 25,396 39,900
Deferred income taxes 1,114 562
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Authorized 3,000,000 shares, $.01 par value;
none issued or outstanding - -
Common stock:
Authorized 10,000,000 shares, $.01 par value; issued
5,928,685 shares in 1996 and 5,391,749 shares in 1995 59 54
Additional paid-in capital 50,104 42,055
Retained earnings 14,251 13,717
Less treasury stock at cost (22,389 shares) (172) (172)
Less unearned ESOP shares (277) (193)
----------------------
Total stockholders' equity 63,965 55,461
----------------------
Total liabilities and stockholders' equity $ 118,020 $ 119,225
======================
See accompanying notes.
[BAR GRAPH]
92 93 94 95 96
41.9 45.6 50.5 55.5 64.0
STOCKHOLDERS' EQUITY
in millions
21
11
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
Year ended January 31
(In thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Net sales $ 236,277 $ 224,349 $ 215,659
Costs of goods sold 166,293 163,728 158,539
-------------------------------------
Gross profit 69,984 60,621 57,120
Selling, general and administrative expenses 51,574 50,050 46,047
Provision for doubtful accounts 202 67 220
Interest expense, net 2,507 3,130 2,329
Other expense (income) 647 (1,039) 500
-------------------------------------
Income before income taxes 15,054 8,413 8,024
Provision for income taxes 5,728 3,204 3,023
-------------------------------------
Net income $ 9,326 $ 5,209 $ 5,001
=====================================
Net income per share $ 1.55 $ .87 $ .84
=====================================
Weighted average shares outstanding 6,004,835 5,974,739 5,949,569
=====================================
See accompanying notes.
[BAR GRAPH]
92 93 94 95 96
191.3 205.6 215.7 224.3 236.3
NET SALES
in millions
[BAR GRAPH]
92 93 94 95 96
3.2 4.0 5.0 5.2 9.3
NET INCOME
in millions
[BAR GRAPH]
92 93 94 95 96
.54 .68 .84 .87 1.55
NET INCOME PER SHARE
in dollars
22
12
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Common Stock Additional
--------------------- Paid-In Retained Treasury ESOP
(In thousands, except per share data) Shares Amount Capital Earnings Stock Trust Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1994 4,430,215 $ 44 $ 33,231 $ 12,746 $ (234) $ (150) $ 45,637
Unearned ESOP shares - - - - - 22 22
Stock dividend (10%) 443,021 5 3,761 (3,766) - - -
Cash dividend ($.04) - - - (194) - - (194)
Net income - - - 5,001 - - 5,001
---------------------------------------------------------------------------------
Balance at January 31, 1995 4,873,236 49 36,992 13,787 (234) (128) 50,466
Unearned ESOP shares - - - - - (65) (65)
Sale of treasury stock 8,000 - 4 - 62 - 66
Stock dividend (10%) 488,124 5 5,059 (5,064) - - -
Cash dividend ($.04) - - - (215) - - (215)
Net income - - - 5,209 - - 5,209
---------------------------------------------------------------------------------
Balance at January 31, 1996 5,369,360 54 42,055 13,717 (172) (193) 55,461
Unearned ESOP shares - - - - - (84) (84)
Stock dividend (10%) 536,936 5 8,049 (8,054) - - -
Cash dividend ($.125) - - - (738) - - (738)
Net income - - - 9,326 - - 9,326
---------------------------------------------------------------------------------
Balance at January 31, 1997 5,906,296 $ 59 $ 50,104 $ 14,251 $ (172) $ (277) $ 63,965
=================================================================================
See accompanying notes.
[BAR GRAPH]
92 93 94 95 96
7.10 7.74 8.56 9.39 10.83
STOCKHOLDERS' EQUITY
PER SHARE
in millions
23
13
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
CASH FLOW
[BAR GRAPH]
94 95 96
$5.00 $5.21 $9.33
NET INCOME
Source
[BAR GRAPH]
94 95 96
$2.21 $0.82 $14.34
REDUCTION OF
LONG-TERM DEBT
Use
[BAR GRAPH]
94 95 96
$12.42 $11.07 $7.13
PURCHASE OF
PROPERTY, PLANT
AND EQUIPMENT
Use
24
14
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended January 31
(In thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 9,326 $ 5,209 $ 5,001
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6,541 5,364 4,243
Provision for doubtful accounts 202 67 220
Loss (Gain) on sale of property, plant and equipment 49 (51) (90)
Changes in assets and liabilities:
Trade accounts receivable 1,082 (146) (2,679)
Other receivables 1,208 (554) 6,303
Inventories (624) (3,800) (4,234)
Prepaid expenses and other current assets 405 (378) 159
Accounts payable and accrued liabilities 3,762 (3,288) 6,554
Income taxes payable 514 (1,569) (169)
Deferred income taxes 77 795 (734)
Other (168) 230 (649)
-----------------------------------
Net cash provided by operating activities 22,374 1,879 13,925
Investing Activities
Capital expenditures (7,125) (11,068) (12,422)
Proceeds from sale of property, plant and equipment 12 118 667
Net investment in life insurance (650) (1,685) 453
Restricted short-term investments 612 7,665 (8,937)
-----------------------------------
Net cash used in investing activities (7,151) (4,970) (20,239)
Financing Activities
Dividends paid $ (738) $ (215) $ (194)
Issuance of long-term debt - 4,205 8,900
Repayment of long-term debt (14,340) (824) (2,212)
Sale of treasury stock - 66 -
ESOP (loan) payment (84) (65) 22
-----------------------------------
Net cash (used in) provided by financing activities (15,162) 3,167 6,516
-----------------------------------
Net increase in cash 61 76 202
Cash at beginning of year 661 585 383
-----------------------------------
Cash at end of year $ 722 $ 661 $ 585
===================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 2,606 $ 3,299 $ 2,288
Income taxes 5,322 3,978 4,027
See accompanying notes.
25
15
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Business
Virco Mfg. Corporation is engaged in the production and distribution of
furniture for the education and contract furniture markets worldwide. The
majority of sales are made to educational institutions and contract furniture
markets located throughout the United States and Canada.
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.
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.
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 (including improvements) 5 to 40 years
Machinery and equipment 3 to 10 years
Leasehold improvements Life of lease
Certain assets are depreciated under accelerated methods for income tax
purposes.
Interest costs, amounting to $122,000, $190,000 and $134,000 for the years
ended January 31, 1997, 1996 and 1995, 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 years from the date the software is
operational. The Company capitalized $359,000, $398,000, and $374,000 and
recorded depreciation expense of $376,000, $366,000, and $344,000 in fiscal
years ended January 31, 1997, 1996, and 1995, respectively. The net book value
of capitalized software was $546,000 and $563,000 at January 31, 1997 and 1996,
respectively.
Impairment of Long-Lived Assets
Effective February 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangible assets, and goodwill related to these assets.
SFAS No. 121 prescribes an impairment loss be 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 quoted market prices or 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. Adoption of SFAS No. 121 had no material effect on the
financial statements as the Company's previous method of estimating impairment
was based on net realizable value which approximated fair value.
26
16
Income Per Share
Net income per common share is based on the weighted average number of shares
of common stock outstanding during each year and common stock equivalents,
after giving retroactive effect to stock dividends.
Foreign Currency Translation
The "functional currency" for the financial statements of the Mexico subsidiary
is the U.S. dollar. In accordance with SFAS No. 52, all non-monetary balance
sheet accounts have been remeasured using historical rates. Income statement
amounts have been remeasured using the average exchange rate in effect during
the year. All remeasurement gains and losses are included in the consolidated
statement of income. The effect on the statement of income of gains and losses
is insignificant for all years presented.
Intangible Assets
Intangible assets, which consist principally of deferred pension assets and
which are included in other assets, are recorded at cost and are amortized over
their estimated useful lives using the straight-line method.
Environmental Costs
Costs incurred to investigate and remediate environmental waste are expensed as
incurred, unless the remediation extends the useful life of the assets employed
at the site. Remediation costs which extend the useful life of assets are
capitalized and amortized over the useful life of the assets.
Advertising Costs
Advertising costs are expensed in the period in which they occur. Selling,
general and administrative expenses include advertising costs of $3,024,000 in
1996, $2,790,000 in 1995 and $2,934,000 in 1994.
Self-Insurance
The Company has a self-insured retention for general and product liability
claims. Consulting actuaries assist the Company in determining its liability
for the self-insured component of claims which have been discounted to their
net present value.
Stock-Based Compensation Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales is recognized upon shipment of merchandise.
Fiscal Year End
Fiscal years 1996, 1995 and 1994 refer to the years ended January 31, 1997,
1996 and 1995, respectively.
Reclassifications
The consolidated financial statements for the years ended January 31, 1996 and
1995 contain certain reclassifications to conform to the presentation for the
year ended January 31, 1997.
2. INVENTORIES
The current material cost for inventories exceeded LIFO cost by $5,180,000,
$5,751,000 and $6,507,000 at January 31, 1997, 1996 and 1995, respectively.
Liquidation of prior year LIFO layers due to a reduction in certain inventories
(decreased) increased income by $(90,000), $288,000 and $174,000 in the years
ended January 31, 1997, 1996 and 1995, respectively.
27
17
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
The material portion of inventory which is valued at LIFO at January 31, 1997
and 1996 is as follows (in thousands):
January 31, 1997
Material Content LIFO Labor, Overhead
at FIFO Reserve and Other Total
- -------------------------------------------------------------------------------------------------------------------------
Finished goods $ 19,272 $ (2,969) $ 10,599 $ 26,902
Work in process 4,857 (823) 2,368 6,402
Raw materials and supplies 11,728 (1,388) - 10,340
----------------------------------------------------------------
Total $ 35,857 $ (5,180) $ 12,967 $ 43,644
================================================================
January 31, 1996
Material Content LIFO Labor, Overhead
at FIFO Reserve and Other Total
- -------------------------------------------------------------------------------------------------------------------------
Finished goods $ 15,138 $ (2,776) $ 10,223 $ 22,585
Work in process 5,452 (1,000) 2,497 6,949
Raw materials and supplies 15,461 (1,975) - 13,486
----------------------------------------------------------------
Total $ 36,051 $ (5,751) $ 12,720 $ 43,020
================================================================
3. RESTRICTED SHORT-TERM INVESTMENTS
In December 1994, the City of Torrance issued an $8,900,000 Industrial Revenue
Bond (IRB) which was privately placed with General Electric Capital Corporation
(GECC). The proceeds from this bond are held in money market funds in trust at
U.S. Trust Company and may only be used to pay for improvements and equipment
to be located at the Torrance, California facility. The terms of the IRB
restrict capital expenditures at the Torrance location to a cumulative total of
$8,900,000 for a three year period ending December 1997.
4. NOTES PAYABLE
Outstanding balances (in thousands) for the Company's long-term debt were as
follows:
January 31
1997 1996
- -------------------------------------------------------------------------------------------------------------
Revolving credit line with Wells Fargo Bank (a) $ 13,000 $ 26,359
IRB with the City of Torrance (b) 7,457 8,230
Other 2,036 2,244
----------------------
22,493 36,833
Less current portion 980 924
----------------------
$ 21,513 $ 35,909
======================
Outstanding stand-by letters of credit $ 3,911 $ 7,072
======================
(a) A new credit facility with Wells Fargo Bank effective October 1996
provides an unsecured revolving line of credit of up to $49,500,000
with a letter of credit subfeature. Approximately $32,589,000 was
available for borrowing as of January 31, 1997. This is a three year
non-amortizing line with interest payable monthly at a fluctuating
rate equal to the Bank's prime rate (8.25% at January 31, 1997). The
new line also allows the Company the option to borrow under 30, 60 and
90 day fixed term rates at LIBOR plus 1.75%. This new facility
replaced a two year facility with comparable terms.
(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.
28
18
Long-term debt repayments for the next five years and thereafter are
approximately as follows (in thousands):
Year ending January 31
- ----------------------------------------------------------------------------
1998 $ 980
1999 2,492
2000 898*
2001 954
2002 997
Thereafter 16,172
--------
$ 22,493
========
* The $13,000,000 due under Wells Fargo Bank's line of credit will be
payable in fiscal year ended January 31, 2000 if the agreement is not
renewed. It is the Company's intent to renew this agreement annually.
The Company believes that the carrying value of debt under the Wells Fargo
credit facility approximates fair value at January 31, 1997, as the debt bears
interest at variable rates or is fixed for periods equal to or less than 90
days. The carrying value of other debt instruments approximates their fair
value given the Company's incremental borrowing rate for similar types of
financing arrangements.
The Company guarantees a $1,500,000 line of credit from Wells Fargo Bank to the
Virco Employee Stock Ownership Plan (ESOP). At January 31, 1997 and 1996,
$277,000 and $193,000, respectively, was outstanding under the line.
5. RETIREMENT PLANS
The Company and its subsidiaries cover all of the United States based employees
under a noncontributory defined benefit retirement plan, the Virco Employees'
Retirement Plan (Plan). Benefits under the Plan are based on years of service
and career average earnings. The employees of the Mexican subsidiary are
covered under the social security law of Mexico. The Company's general funding
policy is to contribute amounts deductible for federal income tax purposes.
Assets of the Plan are invested in common trust funds.
The following table sets forth (in thousands) the funded status of the Plan at
December 31, 1996 and 1995:
1996 1995
- -------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation:
Vested $ (7,528) $ (6,868)
Nonvested (228) (224)
----------------------
$ (7,756) $ (7,092)
======================
Projected benefit obligation $ (9,430) $ (8,677)
Plan assets at fair value 7,480 6,922
----------------------
Projected benefit obligation in excess of plan assets (1,950) (1,755)
Unrecognized net transition asset being recognized over 15 years (434) (476)
Recognition of minimum liability (121) -
Unrecognized net loss 2,229 1,764
----------------------
Accrued pension cost $ (276) $ (467)
======================
The total pension expense for the Plan (in thousands) included the following
components:
December 31
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
Service cost $ 670 $ 620 $ 562
Interest cost 645 591 539
Actual return on plan assets (671) (916) 250
Net amortization and deferral 66 486 (832)
-----------------------------------
Net periodic pension cost $ 710 $ 781 $ 519
===================================
The weighted average discount rate was 8%, the rate of increase in future
compensation levels was 5%, and the expected long-term rate of return on assets
was 9.75% for 1996, 1995 and 1994. Gains and losses are amortized on a
straight-line basis over the average remaining service life of the employees.
29
19
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company 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 $2,099,000 and $1,849,000 at January 31, 1997 and
1996, respectively. These cash surrender values are included in other assets in
the consolidated balance sheets.
The following table sets forth (in thousands) the funded status of the VIP Plan
at January 31, 1997 and 1996.
1997 1996
- -------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation:
Vested $ (3,407) $ (3,005)
Nonvested (230) (138)
----------------------
$ (3,637) $ (3,143)
======================
Projected benefit obligation $ (4,284) $ (4,032)
Plan assets at fair value - -
----------------------
Projected benefit obligation in excess of plan assets (4,284) (4,032)
Unrecognized prior service cost 450 568
Unrecognized net transition liability being amortized over 15 years 20 24
Recognition of minimum liability (625) (798)
Unrecognized net loss 802 1,095
----------------------
Accrued pension cost $ (3,637) $ (3,143)
======================
The total pension expense for the VIP Plan (in thousands) included the
following components:
January 31
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Service cost $ 332 $ 241 $ 270
Interest cost 314 228 203
Actual return on plan assets - - -
Net amortization and deferral 208 124 128
----------------------------------
Net periodic pension cost $ 854 $ 593 $ 601
==================================
The weighted average discount rate was 8%, the rate of increase in future
compensation levels was 5% and the expected long-term rate of return on assets
was 9.75% for 1996, 1995 and 1994. Prior service cost and gains and losses are
amortized on a straight-line basis over the average remaining service life of
the employees.
The Company's Employee Stock Ownership Plan, which covers all U.S. employees,
allows participants to defer from 1% to 15% of their eligible compensation
through a 401(k) retirement program. One of the four investment options is the
Virco Stock Fund. Shares owned by the ESOP are held by the Plan Trustee, U.S.
Trust Company. At January 31, 1997, the Plan held 257,940 shares of Virco Stock
including 224,634 shares allocated to participants accounts. Using the January
31, 1997 closing price of $14.75, the unallocated account has 33,306 shares
valued at $491,264. At January 31, 1997, the Plan had borrowed $277,000
directly from Wells Fargo Bank. This loan is secured by the unallocated shares
and guaranteed by Virco. Allocated shares held by the Trust are included in
shares outstanding and the related dividends are charged to retained earnings.
For the fiscal years ended January 31, 1997 and 1996, there was no Employer
match and therefore no compensation cost to the Company.
The Company provides current and post-retirement life insurance to certain
salaried employees with split dollar life insurance policies under the Dual
Option Life Insurance Plan. Cash surrender values of these policies which are
included in other assets in the consolidated balance sheets were $2,174,000 and
$1,757,000 at January 31, 1997 and 1996, respectively.
The Company established, effective January 1, 1997, a Deferred Compensation
Plan, which allows certain key employees to defer up to a maximum of 90% of
their Base Annual Salary and/or up to 90% of their Annual Bonus on a pretax
basis.
In 1996, the Company created a Rabbi Trust to hold assets related to the VIP
Retirement Plan, the Dual Options Life Insurance Plan, and the Deferred
Compensation Plan. Substantially all assets funding these Plans are held in the
Rabbi Trust.
30
20
6. STOCK OPTIONS AND STOCKHOLDERS RIGHTS
The Company's 1993 Stock Incentive Plan (the 1993 Plan) authorized the grant of
options to all employees for up to 200,000 shares (292,820 shares as adjusted
for stock dividends) of the Company's common stock. Non-employee directors
automatically receive a grant for options to purchase 500 shares of common
stock on the first business day following each annual meeting of the Company's
stockholders. All options expire ten years after the adoption date of the Plan.
All options granted as of January 31, 1997 vest and become fully exercisable
20% each year for the first five years following the grant date.
On October 15, 1996, the Board of Directors granted 73,250 options at an
exercise price of $15.375 to 33 management employees, contingent upon attaining
certain profit levels for the fiscal year ended January 31, 1997. On March 12,
1997 (measurement date), it was determined that the required profit level was
met and the options were awarded to the employees. These options vested and
became exercisable on the measurement date.
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of SFAS No. 123. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.26%
and 5.31%; dividend yields of 0.70% and 0.45%; volatility factors of the
expected market price of the Company's common stock of 0.28 and 0.26; and a
weighted-average expected life of the option of five years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Given this method of
amortization, the initial impact of applying SFAS No. 123 on pro forma net
income and pro forma earnings per share is not representative of the potential
impact on pro forma amounts in future years, when the effect of the
amortization from multiple awards would be reflected.
The Company's pro forma information follows (in thousands except for earnings
per share information):
Year ended January 31
1997 1996
- -------------------------------------------------------------------------------------------------------------
Pro forma net income $ 9,310 $ 5,208
Pro forma earnings per share $ 1.55 $ .87
A summary of the Company's stock option activity, and related information for
the years ended January 31 follows:
1997 1996 1995
----------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000's) Price (000's) Price (000's) Price
- -------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 167,671 $4.48 165,251 $4.54 177,894 $4.53
Granted 47,200 15.09 2,420 7.03 2,664 5.82
Exercised - - - - - -
Forfeited - - - - (15,307) 4.58
------- ------- -------
Outstanding at end of year 214,871 6.89 167,671 4.58 165,251 4.54
======= ======= =======
Exercisable at end of year 99,235 4.55 65,701 4.52 32,651 4.53
Weighted-average fair value
of options granted during the year $ 5.21 $ 2.73 $ 2.55
- -------------------------------------------------------------------------------------------------------------
The data included in the above table has been retroactively adjusted, if
applicable, for the stock dividends.
Exercise prices for options outstanding as of January 31, 1997 ranged from
$4.525 to $15.375. The weighted-average remaining contractual life of those
options is five years.
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, 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 now 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
31
21
VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 of Series A Junior Participating Cumulative Preferred
Stock reserved for issuance upon exercise of the Rights.
7. PROVISION FOR INCOME TAXES
The Company utilizes 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
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Statutory 34.0% 34.0% 34.0%
State taxes (net of federal tax) 2.4 1.5 2.9
Jobs tax credit - - (0.4)
Nondeductible expenses 1.6 2.5 1.2
---------------------------------
38.0% 38.0% 37.7%
=================================
Significant components of the provision for income taxes (in thousands) are as
follows:
January 31
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Current:
Federal $ 4,910 $ 2,121 $ 3,414
State 741 288 450
-----------------------------------
5,651 2,409 3,864
Deferred:
Federal 65 694 (748)
State 12 101 (93)
-----------------------------------
77 795 (841)
-----------------------------------
$ 5,728 $ 3,204 $ 3,023
===================================
Significant components of the Company's deferred tax assets and liabilities (in
thousands) are as follows:
January 31
1997 1996
- -------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 40 $ 40
Accrued vacation and sick leave 613 441
Retirement plans 1,430 1,290
Insurance reserves 419 422
Inventory 407 204
----------------------
2,909 2,397
----------------------
Deferred tax liabilities:
Tax in excess of book depreciation 2,569 2,066
Other 120 34
----------------------
2,689 2,100
----------------------
Net deferred tax asset $ 220 $ 297
======================
32
22
8. COMMITMENTS
The Company has long-term leases on real property and equipment which expire at
various dates. Certain leases contain renewal and 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, 1997 are as follows:
Year ending January 31,
- -------------------------------------------------------------------------------------------------------------
1998 $ 6,736
1999 5,421
2000 4,656
2001 4,488
2002 3,404
Thereafter 9,674
--------
$ 34,379
========
Rent expense relating to operating leases was as follows (in thousands):
Year ending January 31,
- -------------------------------------------------------------------------------------------------------------
1997 $ 7,849
1996 7,545
1995 5,505
The Company leases $6.4 million of machinery and equipment from GECC under true
tax leases with terms ranging from five to ten years. The Company has the
option of buying out the leases three years into the lease period.
In 1994, in order to consolidate West Coast operations, the Company leased a
combined manufacturing and distribution facility under a 10 year lease. The
Company has two five-year renewal options at fair market value. In 1994, in
connection with this move, the Company leased a company-owned former
warehousing facility to an outside party under a five year lease. In June 1996,
the Company leased the former Los Angeles production facility to an outside
party under a 15 year lease.
Minimum future lease receipts (in thousands) for leases relating to properties
owned or subleased as of January 31, 1997, are as follows:
Year ending January 31,
- -------------------------------------------------------------------------------------------------------------
1998 $ 1,169
1999 1,175
2000 1,153
2001 378
2002 378
Thereafter 3,308
--------
$ 7,561
========
9. 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.
In connection with its plans to dispose of certain real estate, the Company
must investigate environmental conditions, and may be required to take certain
corrective action prior or pursuant to any such disposition. At January 31,
1997 and 1996, there are no required reserves for environmental contingencies
and the Company does not expect the cost of any such corrective action to have
a significant effect on the Company's financial position, results of
operations, or upon the net realizable value of assets. The Company carries no
insurance for environmental liabilities.
The Company has a self-insured retention for product and general liability
losses up to $100,000 per occurrence. The Company has purchased insurance to
cover losses in excess of $100,000 up to a limit of $20,000,000. The Company
has obtained an actuarial estimate of, and recorded the net present value of
its total expected future losses for liability claims ($2.5 million before
discount, $2.2 million after discount at January 31, 1997), based upon the
Company's estimated payout period of four years using a 10% discount rate.
Workers' compensation, automobile, general and product liability claims may be
asserted in the future for events not currently known by management. Management
does not anticipate that any related settlement, after consideration of the
existing reserve for claims incurred and potential insurance recovery, would
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
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VIRCO MFG. CORPORATION 1996 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company has received a $1,000,000 claim from the General Services
Administration regarding price reductions relating to $6,400,000 of sales made
during the period August 1984 through June 1987. The Company has established a
reserve to cover any ultimate liability under this claim. It is the opinion of
management that the ultimate payment, if any, under this claim will not be
material to the Company's financial position or results of operations.
10. FOREIGN OPERATION
The Company has a manufacturing operation in San Luis, Mexico, which is a
supplier of components and finished products for the Company's other divisions.
Total revenues of this operation, consisting primarily of transfers between
geographic areas of the Company, were $11,735,000, $30,042,000 and $36,598,000
for the years ended January 31, 1997, 1996 and 1995, respectively. Transfers
are accounted for at actual manufacturing costs. The operation's identifiable
assets were $4,844,000 and $6,386,000 at January 31, 1997 and 1996,
respectively.
11. ASSETS HELD FOR SALE
In October 1994, the Company's Board of Directors authorized management to
investigate the sale of its Virsan manufacturing facility in Mexico. The
Company signed a letter of intent with a U.S. based manufacturing company to
sell this facility; a formal agreement is expected to be signed by May 1997.
Assets held for sale consist of land, buildings, machinery and equipment, and
leasehold improvements which had a net book value of approximately $1,990,000
and $2,550,000 at January 31, 1997 and 1996, respectively. Inventory will be
transferred to other plant locations which manufacture the same product line.
Under the proposed terms of the sale, it is anticipated that there will be no
significant gain or loss from the sale of Virsan.
Property held for sale also includes a manufacturing facility in North Carolina
which is currently used to warehouse finished goods. The net book value of this
property was $1,124,000 and $1,258,000 at January 31, 1997 and 1996,
respectively. All assets held for sale are classified as non-current assets in
the consolidated balance sheets.
12. QUARTERLY RESULTS (UNAUDITED)
The Company's unaudited quarterly results for the years ended January 31, 1997
and 1996 are summarized as follows (in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------
Year ended January 31, 1997:
Net sales $ 36,745 $ 72,538 $ 79,834 $ 47,160
Gross profit 9,379 21,106 25,032 14,467
Net income (loss) (1,439) 3,348 5,097 2,320
Net income (loss) per share (.24) .56 .85 .39
Year ended January 31, 1996:
Net sales $ 36,925 $ 66,197 $ 74,613 $ 46,614
Gross profit 9,457 17,553 19,180 14,431
Net income (loss) (1,515) 1,713 2,748 2,263
Net income (loss) per share (.25) .29 .46 .38
Earnings per share has been adjusted to reflect 10% stock dividends declared in
August 1996 and August 1995.
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