e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the fiscal year ended January 31, 2008.
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Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 1-8777
VIRCO MFG. CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE
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95-1613718 |
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.) |
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2027 Harpers Way, Torrance, California
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90501 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (310) 533-0474
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered: |
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Common Stock, $0.01 Par Value
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NASDAQ |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the issuer is a well-known seasoned issuer (as defined in Rule 405 of the
Securities Act.) Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.) Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant on July 31,
2007, was $93.8 million (based upon the closing price of the registrants common stock, as reported
by the NASDAQ).
As of March 31, 2008, there were 14,428,662 shares of the registrants common stock ($.01 par
value) outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement for its 2007 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission are incorporated by reference into Part III
of this annual report on Form 10-K as set forth herein.
TABLE OF CONTENTS
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Exhibit 21.1. List of Subsidiaries |
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Exhibit 23.1. Consent of Independent Registered Public Accounting Firm |
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Exhibit 31.1. Certifications |
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Exhibit 31.2. Certifications |
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Exhibit 32.1. Certification pursuant to 18 U.S.C. Section 1350 |
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EXHIBIT 21.1 |
EXHIBIT 23.1 |
EXHIBIT 31.1 |
EXHIBIT 31.2 |
EXHIBIT 32.1 |
1
PART I
This report on Form 10-K contains a number of forward-looking statements that reflect the
Companys current views with respect to future events and financial performance, including, but not
limited to, statements regarding plans and objectives of management for future operations,
including plans and objectives relating to products, pricing, marketing, expansion, manufacturing
processes and potential or contemplated acquisitions; new business strategies; the Companys
ability to continue to control costs and inventory levels; availability and cost of raw materials,
especially steel and petroleum-based products; the availability and cost of labor: the potential
impact of the Companys Assemble-To-Ship program on earnings; market demand; the Companys
ability to position itself in the market; references to current and future investments in and
utilization of infrastructure; statements relating to managements beliefs that cash flow from
current operations, existing cash reserves, and available lines of credit will be sufficient to
support the Companys working capital requirements to fund existing operations; references to
expectations of future revenues; pricing; and seasonality.
Such statements involve known and unknown risks, uncertainties, assumptions and other factors, many
of which are out of the Companys control and difficult to forecast, that may cause actual results
to differ materially from those which are anticipated. Such factors include, but are not limited
to, changes in, or the Companys ability to predict, general economic conditions, the markets for
school and office furniture generally and specifically in areas and with customers with which the
Company conducts its principal business activities, the rate of approval of school bonds for the
construction of new schools, the extent to which existing schools order replacement furniture,
customer confidence, and competition.
In this report, words such as anticipates, believes, expects, will continue, future,
intends, plans, estimates, projects, potential, budgets, may, could and similar
expressions identify forward-looking statements. Readers are cautioned not to place undue reliance
on forward-looking statements, which speak only as of the date hereof.
Throughout this report, our fiscal years ended January 31, 2004, January 31, 2005, January 31,
2006, January 31, 2007 and January 31, 2008 are referred to as years 2003, 2004, 2005, 2006 and
2007, respectively.
Item 1. Business
Introduction
Designing, producing and distributing high-value furniture for a diverse family of customers is a
58-year tradition at Virco Mfg. Corporation (Virco or the Company, or in the first person,
we, us and our). Virco was incorporated in California in February 1950, and reincorporated
in Delaware in April 1984. Though Virco started as a local supplier of chairs and desks for Los
Angeles-area schools, over the years, Virco has become the largest manufacturer of moveable
educational furniture and equipment for the preschool through 12th grade market in the United
States. It now manufactures a wide assortment of products, including mobile tables, mobile storage
equipment, desks, computer furniture, chairs, activity tables, folding chairs and folding tables.
Additionally, Virco has worked with accomplished designers such as Peter Glass, Richard
Holbrook, and Bob Mills to develop additional products for contemporary applications. These
include the best-selling ZUMA® and recently introduced Sage classroom furniture collection, as
well as I.Q.® Series items for educational settings; Ph.D.® and Ph.D. Executive seating lines; and
the wide-ranging Plateau® Series. In 2007, the Company introduced its newest classroom furniture lines:
Telos and Metaphor. As of January 31, 2008, the Companys employment force was approximately
1200 strong, manufacturing its products in 1.1 million square feet of fabrication facilities and
1.4 million square feet of assembly and warehousing facilities in Torrance, California and Conway,
Arkansas. Additionally, the Companys PlanSCAPE ® project management software allows its sales
representatives to provide CAD layouts of classrooms, as well as classroom-by-classroom planning
documents for the budgeting, acquisition and installation of furniture, fixtures and equipment
(FF&E). In recent years, due to budgetary pressures, many schools have reduced or eliminated
central warehouses, janitorial services, and professional purchasing functions. As a result, fewer
school districts administer their own bids, and are more likely to use regional, state, or national
contracts. A shift to site-based management combined with reductions in professional purchasing
personnel has increased the reliance of schools on suppliers that provide for a variety of needs
from one source rather than administering different vendor relationships for each item. In
response to these changes, the Company has expanded both the products and the services it provides
to its educational customers. Now, in addition to buying furniture FOB Factory, customers can
purchase furniture for delivery to warehouses and school sites, and can also purchase full-service
furniture delivery that includes the installation of the furniture in classrooms. Because the
Company has been aggressively developing new furniture lines to enhance the range of products it
manufactures and by purchasing furniture and equipment from other companies for resale with
Virco products the Company is now able to provide one-stop shopping for all furniture, fixtures
and equipment needs in the K-12 market.
The expansion of the Companys product line offerings combined with the expansion of its services
over the years, has provided Virco with the ability to serve various markets including: the
education market (the Companys primary market), which is made up of public and private schools
(preschool through 12th grade), junior and community colleges, four-year colleges and universities,
and trade, technical and vocational schools; convention centers and arenas; the hospitality
industry, with respect to banquet and meeting facilities requirements; government facilities at the
federal, state, county and municipal levels; and places of worship. In addition, the Company also
sells to wholesalers, distributors, traditional retailers and catalog retailers that serve these
same markets.
Virco serves its customers through a well-trained, nationwide sales and support team. Vircos
educational product line is marketed through an extensive direct sales force, as well as through a
growing dealer network. 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 service such customers, as they tend
to have needs that transcend the geographic boundaries established for Vircos
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local accounts. The Company also has an array of support services, including complete package
solutions for the FF&E line item on school budgets, computer-assisted layout planning,
transportation planning, product delivery, installation, and repair.
Another important element of Vircos business model is the Companys emphasis on developing and
maintaining key manufacturing, assembly, distribution, and service capabilities. For example,
Virco has developed competencies in several manufacturing processes that are important to the
markets the Company serves, such as finishing systems, plastic molding, metal fabrication and
woodworking. Vircos physical facilities are designed to support its Assemble-to-Ship (ATS)
strategy that allows for the manufacture and storage of common components during the slow portions
of the year followed by assembly to customer-specific combinations prior to shipment. Warehouses
have substantial staging areas combined with a large number of dock doors to support the seasonal
peak in shipments during the summer months.
During the early 2000s, many furniture manufacturers closed their domestic manufacturing facilities
and began to source increasing quantities of furniture from international sources. During this
same period, Virco elected to significantly reduce its workforce, but retain its domestic factory
locations. In recent years, the Company believes that its domestic manufacturing capabilities have
evolved into a significant strength. The Company has effectively used product selection, color
selection, and dependable execution of delivery and installation to customers to enhance its market
position. With increasing costs from international sources and increasing freight costs, our
factories are cost competitive for bulky educational furniture and equipment items. The Companys
ATS strategy allows for low-cube component parts to be sourced globally, with fabrication of
bulky welded steel frames, wood tops, and larger molded-plastic components performed locally.
Domestic production of laminated wood tops and molded plastic enables the Company to market a color
palette that can not be matched in a short delivery window by imported finished goods. Domestic
assembly allows the Company to use standard ATS components to assemble customer-specific product
and color combinations shortly prior to delivery and installation.
Finally, management continues to hone Vircos ability to finance, manufacture and warehouse
furniture within the relatively narrow delivery window associated with the highly seasonal demand
for education sales. In the fiscal year covered by this report, over 50% of the Companys total
sales were delivered in June, July, August and September with an even higher portion of educational
sales delivered in that period. Shipments of furniture in July and August can be six times greater
than in the seasonally slow winter months. Vircos substantial warehouse space allows the Company
to build adequate inventories to service this narrow delivery window for the education market.
Principal Products
Virco produces the broadest line of furniture for the K-12 market of any manufacturer in the United
States. By supplementing products manufactured by Virco with products from other manufacturers,
Virco provides a comprehensive product assortment that covers substantially all products and price
points that are traditionally included on the FF&E line item on a new school project or school
budget. Virco also provides a variety of products for preschool markets and has recently developed
products that are targeted for college, university, and corporate learning center environments.
The Company has an ambitious and on-going product development program featuring products developed
in-house as well as products developed with accomplished designers. The Companys primary
furniture lines are constructed of tubular metal legs and frames, combined with wood and plastic
tops, plastic seats and backs, upholstered seats and backs, and upholstered rigid polyethylene and
polypropylene shells.
Vircos principal manufactured products include:
SEATING Launched in 2004, the ergonomically supportive ZUMA® line by Peter Glass and Bob Mills
posted the highest initial-year new product sales total in the Companys history; as a follow-up to
this record-breaking launch, ZUMA sales have continued to grow. Recent additions to the ZUMA line
include two cantilever chairs with 13 and 15 seat heights; a tablet arm chair with a compact
footprint; and two rockers with 13 and 15 seat heights. The ZUMAfrd collection, introduced a
year later, features Fortified Recycled Wood hard plastic seats, backrests and worksurfaces;
ZUMAfrd products have up to 70% recycled content and are 98% recyclable. The Sage line, designed
to serve students in college, university and other adult education settings, and on high school
campuses, was introduced in late 2006. In 2007, the Company introduced the Metaphor Series an
updated sequel to Vircos best-selling Classic Series furniture with improvements in comfort,
ergonomics, stackability, and manufacturing efficiencies and the Telos Series, a wide-ranging
product line with ergonomically contoured Fortified Recycled Wood components. Other Virco seating
alternatives include easily-adjustable Ph.D.® task chairs; I.Q.® Series classroom chairs; and
comfortable, attractive Virtuoso® chairs by Charles Perry. Classic Series stack chairs and Martest
21® hard plastic seating models are popular choices in schools across America. Along with this
range of seating, Virco offers folding chairs and upholstered stack chairs, as well as additional
plastic stack chairs and upholstered ergonomic chairs.
TABLES Designed for Virco by Peter Glass, Plateau® tables bring exceptional versatility, sturdy
construction and great styling to working and learning environments. For durable, easy-to-use
lightweight folding tables, Vircos Core-a-Gator® models are unsurpassed. When paired with
attractive, durable Virco café tops, Lunada® bases by Peter Glass provide eye-catching table
solutions for hospitality settings. Virco also carries traditional folding and banquet tables,
activity tables and office tables, as well as the computer tables and mobile tables described
below.
COMPUTER FURNITURE Future Access® computer tables come with an integral wire management panel;
all rectangular models have a smooth post-formed front and rear edge. Like our Future Access
models, 8700 Series computer tables can be equipped with Vircos functional computing accessories,
such as keyboard mouse trays, CPU holders and support columns for optional elevated shelves. For
administrative settings, the Plateau Office Solutions collection offers desks and workstations with
technology-support capabilities, while the Plateau Library/Technology Solutions line has specialty
tables and other products for computing applications.
DESKS/CHAIR DESKS From the ergonomic and collaborative-learning strengths of our best-selling
ZUMA student desks to the continuing popularity of our traditional Classic Series chair desks and
combo units, Vircos wide-ranging furniture models can be found in
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thousands of Americas schools. Related products include teachers desks and tablet arm units.
Selected models are available with durable, colorfast Martest 21® or Fortified Recycled Wood hard
plastic components.
MOBILE FURNITURE School cafeterias are perfect venues for Virco mobile tables, while classrooms
benefit from the spacious storage capacity of Virco mobile cabinets. An array of Virco product
lines include mobile chairs for school settings and offices.
STORAGE EQUIPMENT For moving selected Virco chairs and folding tables, the Company carries a
wide range of handling and storage equipment. As a service to our convention center, arena, and
auditorium customers, Virco also manufactures stackable storage trucks that work with Virco
upholstered stack chairs, folding chairs and folding tables.
Vircos wide-ranging product selection includes hundreds of furniture models that are certified
according to the GREENGUARD® for Children and Schools Program for indoor air quality; in fact, in
2005 Vircos ZUMA® and ZUMAfrd products earned the distinction of being the first classroom
furniture models to be certified through the Greenguard for Children and Schools Program. Along
with Vircos leadership relative to Greenguard-certified classroom furniture, the Company also
introduced the classroom furniture industrys first Take-Back program in 2006, enabling qualifying
schools, colleges, universities, and other organizations and customers to return selected
out-of-service furniture components for recycling rather than sending these items to a landfill.
In order to provide a comprehensive product offering for the education market Virco supplements
manufactured products with items purchased for re-sale, including wood and steel office furniture,
early learning products for pre-school and Kindergarten classrooms, science laboratory furniture,
and library tables, chairs and equipment. Recent additions to these vendor-supplied items include a
complete Library Systems Furniture collection with shelving and circulation desk capabilities;
specialty storage cabinets for schools; additional carts for in-class AV use and multi-media
presentations; and a variety of early learning products. None of these products accounted for more
than 10% of consolidated revenues.
In addition to product offerings, Virco includes various levels of service and delivery. Products
can be purchased FOB factory, FOB destination (including delivery), with Virco full service
including installation in the classroom, and with full project management for the acquisition of
FF&E items for new schools or renovations of schools. These services are only offered in
connection with the purchase of Virco product. Revenues from these service levels are included in
the purchase price of the furniture items.
Please note that this report includes trademarks of Virco, including, but not limited to, the
following: ZUMA®, ZUMAfrd, Ph.D.®, I.Q.®
Virtuoso®, Classic Series, Martest 21®, Lunada®,
Plateau®, Core-a-Gator®, Future Access® and Sigma®. Other names and brands included in this report
may be claimed by Virco as well or by third parties.
Vircos major customers include educational institutions, convention centers and arenas,
hospitality providers, government facilities, and places of worship.
Raw Materials
Virco purchases steel, aluminum, plastic, polyurethane, polyethylene, polypropylene, plywood,
particleboard, cartons and other raw materials from many different sources for the manufacture of
its principal products. Management believes the Company is not more vulnerable with respect to the
sources and availability of these raw materials than other manufacturers of similar products. The
Companys largest raw material cost is for steel, followed by plastics and wood. During 2004, the
cost of steel and plastic increased significantly because of high worldwide demand for these
materials, especially in China. During 2005, the price of petroleum-related products, including
plastics, as well as fuel rates for freight and power, also increased substantially. In addition,
hurricanes affecting the Gulf Coast region in 2005 further impacted the availability, delivery, and
price of raw materials, including steel and plastic. During 2006 and 2007, raw material costs
continued to increase, but the rate of increase in raw material costs was moderate and relatively
stable compared to the prior years. For 2008, the Company anticipates increased prices and
volatility of prices for raw materials, particularly steel, plastic, and energy.
In addition to the raw materials described above, the Company purchases components used in the
fabrication and assembly of furniture from a variety of overseas locations, but primarily from
China. These components are classified as raw materials in the financial statements until such
time that the components are consumed in a fabrication or assembly process. These components are
sourced from a variety of factories, none of which are owned or operated by the Company. Costs for
these imported components increased during the last three years, and are expected to increase
further in 2008.
Due to a significant number of annual contracts with school districts, the Company is limited in
its ability to pass along increased commodity, power and transportation costs during the course of
a contract year, and unanticipated increases in costs can adversely impact operating results and
have done so during the past few years, especially 2004 and 2005. The Company benefits from any
decreases in raw material costs under these same contracts. The Company has already raised prices
under most contracts for 2008 and intends to raise prices to cover its increased costs as annual
contracts come up for renewal or bid during 2008.
Marketing and Distribution
Virco serves its customers through well-trained, nationwide sales and support team, as well as a
growing dealer network. In addition, Virco has established a Corporate Sales Group to pursue
wholesalers, mail order accounts and national chains where management believes 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 Vircos local accounts.
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Vircos educational product line is marketed through what management believes to be the largest
direct sales force of any education furniture manufacturer. The Companys approach to servicing
its customer base is very flexible, and is tailored to best meet the needs of individual customers
and regions. When considered to be most efficient, the sales force will call directly upon school
business officials, who may include purchasing agents or individual school principals where
site-based management is practiced. Where it is considered advantageous, the Company will use
large exclusive distributors and full-service dealer partners. The Companys direct sales force is
considered to be an important competitive advantage over competitors who rely primarily upon dealer
networks for distribution of their products. Significant portions of educational furniture are sold
on a bid basis.
Vircos Furniture Focus sales force and PlanSCAPE ® software for bidding educational products
offer complete package solutions for the FF&E segment of bond-funded public school construction
projects. This software enables the entire Virco sales force to prepare quotations for less
complicated projects. The Company anticipates rolling out additional functionality for the
PlanSCAPE software during 2008.
A significant portion of Vircos business is awarded through annual bids with school districts or
other buying groups used by school districts. These bids are typically valid for one year. During
the period covered by these annual contracts, the Company has very limited and in some cases has no
ability to increase selling prices. Many contracts contain penalty, performance, and debarment
provisions that can result in debarment for a number of years, a financial penalty, or calling of
performance bonds. This can adversely impact margins when raw material, conversion costs, or
distribution costs are increasing, and can benefit margins when these costs decrease, or increase
at a rate less than anticipated when the contracts are priced.
Sales of commercial and contract furniture are made throughout the United States by
distributorships and by Company sales representatives who service the distributorship network.
Virco representatives call directly upon state and local governments, convention centers,
individual hospitality installations, and mass merchants. Sales to this market include colleges
and universities, preschools, private schools, and office training facilities, which typically
purchase furniture through commercial channels.
The Company sells to thousands of customers, and, as such no single customer represents more than
10 percent of the Companys business. Significant purchases of furniture using public funds often
require annual bids or some form of authorization to purchase goods or services from a vendor.
This authorization can include state contracts, local and national buying groups, or local school
districts that piggyback on the bid of a larger district. In virtually all cases, purchase orders
and payments are processed by the individual school districts, even though the contract pricing may
be determined by a state contract, national or local buying group, or consortium of school
districts. Schools usually can purchase from more than one contract or purchasing vehicle, as they
are participants in buying groups as well as being eligible for a state contract.
Virco is the exclusive supplier of movable classroom furniture for one nationwide purchasing
organization under which many of our customers price their furniture. Sales priced under this
contract increased substantially in 2005, 2006, and 2007. Because this increase was largely
attributable to existing customers buying furniture under this contract as an alternative to
individual contracts or alternative buying groups, this did not represent significant incremental
sales. Sales priced under this contract represented approximately 40% of sales in 2007, 40% of
sales in 2006, and 30% of sales in 2005. The Company will be the exclusive supplier of moveable
classroom furniture for this purchasing organization for 2008. If Virco were unable to sell under
this contract, it would be able to sell to the vast majority of its customers under alternative
contracts.
Seasonality
The educational sales market is extremely seasonal. Over 50% of the Companys total sales are
delivered in June, July, August and September with an even higher portion of educational sales
delivered in that period. Shipments during July and August can be as great as six times the level
of shipments in the winter months.
Working Capital Requirements During the Peak Summer Season
As discussed above, the market for educational furniture and equipment is marked by extreme
seasonality, with the vast majority of sales occurring from June to September each year, which is
the Companys peak season. As a result of this seasonality, Virco builds and carries significant
amounts of inventory during the peak summer season to facilitate the rapid delivery requirements of
customers in the educational market. This requires a large up-front investment in inventory,
labor, storage and related costs as inventory is built in anticipation of peak sales during the
summer months. As the capital required for this build-up generally exceeds cash available from
operations, Virco has historically relied on bank financing to meet cash flow requirements during
the build-up period immediately preceding the high season. Currently, the Company has a line of
credit with Wells Fargo Bank to assist in meeting cash flow requirements as inventory is built for,
and business is transacted during, the peak summer season.
In addition, Virco typically is faced with a large 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 product shipments increase. Second, many customers during this
period are government institutions, which tend to pay accounts receivable more slowly than
commercial customers. Virco has historically enjoyed high levels of collectability on these
accounts receivable due to the low-credit risk associated with such customers. Nevertheless, due
to the time differential between inventory build-up in anticipation of the peak season and the
collection on accounts receivable throughout the peak season, the Company must rely on external
sources of financing.
Vircos working capital requirements during, and in anticipation of, the peak summer season require
management to make estimates and judgments that affect assets, liabilities, revenues and expenses,
and related contingent assets and liabilities. For example, management expends
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a significant amount of time in the first quarter of each year developing a stocking plan and
estimating the number of temporary summer 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, Vircos ability to meet customer orders in a timely manner 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 negatively affect the Companys results of operations. On an on-going basis,
management evaluates its estimates, including those related to market demand, labor costs, and
stocking inventory. Moreover, management continually strives to improve its ability to correctly
forecast the requirements of the Companys business during the peak season each year based in part
on annual contracts which are in place and managements experience with respect to the market.
As part of Vircos efforts to balance seasonality, financial performance and quality without
sacrificing service or market share, management has been refining an operating model called
Assemble-to-Ship (ATS). ATS is Vircos version of mass-customization, which assembles standard,
stocked components into customized configurations before shipment. The 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 inventorys versatility, delaying costly assembly until the last moment, and
reducing the amount of warehouse space needed to store finished goods. As part of the ATS stocking
program, Virco has endeavored to create a more flexible workforce. The Company has developed
compensation programs to reward employees who are willing to move from fabrication to assembly to
the warehouse as seasonal demands evolve.
Other Matters
Competition
Virco has numerous competitors in each of its markets. In the educational furniture market, Virco
manufactures furniture and sells direct to educational customers. Competitors typically fall into
two categories (1) furniture manufacturers that sell to dealers which re-sell furniture to the end
user, and (2) dealers that purchase product from these manufacturers and re-sell to educational
customers. The manufacturers that Virco competes with include Sagus International LLC (which
markets product under Artco-Bell, American Desk, and Midwest Folding Products), HNI, Royal,
Bretford, Smith Systems, Columbia, and Scholarcraft. The largest competitor that purchases and
re-sells furniture is School Specialty. In addition to School Specialty, there are numerous
smaller local education furniture dealers that sell into local markets. Competitors in contract
furniture vary depending upon the specific product line or sales market and include Falcon
Products, Inc., KI Inc., MTS and Mity Enterprises, Inc.
The educational furniture market is characterized by price competition, as many sales occur on a
bid basis. Management compensates for this market characteristic through a combination of methods
that may include, but are not expected to emphasize, direct price competition. Instead, management
expects to emphasize the value of Vircos products and product assortment, the convenience of
one-stop shopping for Equipment for Educators, the value of Vircos project management
capabilities, the value of Vircos distribution and delivery capabilities, the value of Vircos
customer support capabilities and other intangibles. In addition, management believes that the
streamlining of costs assists the Company in compensating for this market characteristic by
allowing Virco to offer a higher value product at a lower price. For example, as discussed above,
Virco has decreased distribution costs by avoiding resellers, and management believes that the
Companys large direct sales force and the Companys sizeable manufacturing and warehousing
capabilities facilitate these efforts.
Backlog
Sales order backlog at January 31, 2008, totaled $15.2 million and approximates six weeks of sales,
compared to $12.6 million at January 31, 2007, and $11.6 million at January 31, 2006.
Substantially all of the backlog will ship during 2008.
Patents and Trademarks
In the last 10 years, the United States Patent and Trademark Office (the USPTO) has issued to
Virco more than 50 patents on its various new product lines. These patents cover various design and
utility features in Ph.D.® chairs, I.Q.® Series furniture, the ZUMAfrd family of products, and the
ZUMA® family of products, among others.
Virco has a number of other design and utility patents in the United States and other countries
that provide protection for Vircos intellectual property as well. These patents expire over the
next one to 17 years. Virco maintains an active program to protect its investment in technology
and patents by monitoring and enforcing its intellectual property rights. While Vircos patents
are an important element of its success, Vircos business as a whole is not believed to be
materially dependent on any one patent.
In order to distinguish genuine Virco products from competitors products, Virco has obtained the
rights to certain trademarks and tradenames for its products and engages in advertising and sales
campaigns to promote its brands and to identify genuine Virco products. While Vircos trademarks
and tradenames play an important role in its success, Vircos business as a whole is not believed
to be materially dependent on any one trademark or tradename, except perhaps Virco, which the
Company has protected and enhanced as an emblem of quality educational furniture for over 50 years.
Virco has no franchises or concessions that are considered to be of material importance to the
conduct of its business and has not appraised or established a value for its patents or trademarks.
6
Employees
As of January 31, 2008, Virco and its subsidiaries employed approximately 1,200 full-time employees
at various locations. Of this number, approximately 1,000 are involved in manufacturing and
distribution, approximately 125 in sales and marketing and approximately 75 in administration.
Environmental Compliance
Virco is subject to numerous environmental laws and regulations in the various jurisdictions in
which it operates that (a) govern operations that may have adverse environmental effects, such as
the discharge of materials into the environment, as well as handling, storage, transportation and
disposal practices for solid and hazardous wastes, and (b) impose liability for response costs and
certain damages resulting from past and current spills, disposals or other releases of hazardous
materials. In this context, Virco works diligently to remain in compliance with all such
environmental laws and regulations as these affect the Companys operations. Moreover, Virco has
enacted policies for recycling and resource recovery that have earned repeated commendations,
including designation in 2005 and 2004 from the Waste Reduction Awards Program in California, in
2003 as a WasteWise Hall of Fame Charter Member, in 2002 as a WasteWise Partner of the Year and in
2001 as a WasteWise Program Champion for Large Businesses by the United States Environmental
Protection Agency. Additionally, all models in Vircos ZUMA® and ZUMAfrd product lines, as well
as hundreds of other furniture models have been certified according to the GREENGUARD®
Environmental Institutes stringent indoor air quality standard for children and schools.
Nevertheless, it is possible that the Companys operations may result in noncompliance with, or
liability for remediation pursuant to, environmental laws. 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 may be expected to continue to expend, significant amounts in the future
for compliance with environmental rules and regulations, for the investigation of environmental
conditions, for the installation of environmental control equipment, or remediation of
environmental contamination.
Financial Information About Geographic Areas
During the 2007, as well as during the previous two fiscal years, Virco derived approximately 4.0%
of its revenues from external customers located outside of the United States (primarily in Canada).
The Company determines sales to these markets based upon the customers principal place of
business. The Company does not have any long-lived assets outside of the United States.
Executive Officers of the Registrant
As of April 1, 2007, the executive officers of Virco Mfg. Corporation, who are elected by and serve
at the discretion of the Companys Board of Directors, were as follows:
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Age at |
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January |
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Has Held |
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31, |
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Office |
Name |
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Office |
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2008 |
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Since |
R. A. Virtue (1) |
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President, Chairman of the Board and Chief Executive Officer |
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75 |
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1990 |
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D. A. Virtue (2) |
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Executive Vice President |
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49 |
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1992 |
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S. Bell (3) |
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Vice President General Manager, Conway Division |
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51 |
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2004 |
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R. E. Dose (4) |
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Vice President Finance, Secretary and Treasurer |
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51 |
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1995 |
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A. Gamble (5) |
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Vice President Human Resources |
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39 |
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2004 |
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P. Quinones (6) |
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Vice President Logistics and Marketing Services |
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44 |
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2004 |
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D. R. Smith (7) |
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Vice President Marketing |
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59 |
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1995 |
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L. L. Swafford (8) |
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Vice President Legal Affairs |
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43 |
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1998 |
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N. Wilson (9) |
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Vice President General Manager, Torrance Division |
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60 |
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2004 |
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L. O. Wonder (10) |
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Vice President Sales |
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56 |
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1995 |
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B. Yau (11) |
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Corporate Controller, Assistant Secretary and Treasurer |
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49 |
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2004 |
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(1) |
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Appointed Chairman in 1990; has been employed by the Company for 51 years and has served as the President since 1982. |
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(2) |
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Appointed in 1992; has been employed by the Company for 22 years and has served in Production Control, as Contract Administrator, as Manager of Marketing Services, as
General Manager of the Torrance Division, and currently as Corporate Executive Vice President. |
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(3) |
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Appointed in 2004; has been employed by the Company for 19 years and has served in a variety of
manufacturing, safety, and environmental positions. |
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(4) |
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Appointed in 1995; has been employed by the Company for 17 years and has served as the Corporate Controller, and currently as Vice President-Finance, Secretary and
Treasurer. |
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(5) |
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Appointed in 2004; has been employed by the Company for 9 years and has served as Manager of Human Resources, as Director of Human Resources, currently as Vice President
of Human Resources. |
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(6) |
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Appointed in 2004; has been employed by the Company for 16 years in a variety customer and marketing service positions, currently as Vice President of Logistics and
Marketing Services. |
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(7) |
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Appointed in 1995; has been employed by the Company for 23 years in a variety of sales and marketing positions, currently as Vice President of Marketing. |
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(8) |
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Appointed in 1998; has been employed by the Company for 12 years and has served as Associate Corporate Counsel, currently as Vice President of Legal Affairs. |
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(9) |
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Appointed in 2004; has been employed by the Company for 41 years in a variety of manufacturing, warehousing, and transportation positions, currently as Vice President
General Manager, Torrance Division. |
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(10) |
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Appointed in 1995; has been employed by the Company for 30 years in a variety of sales and marketing positions, currently as Vice President of Sales. |
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(11) |
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Appointed in 2004; has been employed by the Company for 11 years and has served as Corporate Controller, currently as Corporate Controller, Assistant Secretary and
Treasurer. |
Company officers do not have employment contracts.
Available Information
Virco files annual, quarterly and special reports, proxy statements and other information with the
Securities and Exchange Commission (SEC). Stockholders may read and copy this information at the
SECs Public Reference Room at Station Place, 100 F Street, N.E., Washington, D.C. 20549.
Information on the operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. Stockholders may also obtain copies of this information by mail from the Public
Reference Room at the address set forth above, at prescribed rates.
The SEC also maintains an Internet world-wide website that contains reports, proxy statements and
other information about issuers like Virco who file electronically with the SEC. The address of
that site is www.sec.gov.
In addition, Virco makes available to its stockholders, free of charge through its Internet
world-wide website, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed, or furnished pursuant to, Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (the Exchange Act), as soon as reasonably
practicable after Virco electronically files such material with, or furnishes it to, the SEC. The
address of that site is www.virco.com.
8
Item 1A. Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should
be carefully considered. The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we presently deem less
significant may also adversely affect our business, operating results, cash flows, and financial
condition. If any of the following risks actually occur, our business, operating results, cash
flows and financial condition could be materially adversely affected.
Our product sales are significantly affected by education funding, which is outside of our control.
Our sales and/or growth in our sales would be adversely affected by a recessionary economy
characterized by decreased state and local revenues which in turn cause decreased funding for
education.
Our sales are significantly impacted by the level of education spending primarily in North America,
which, in turn, is a function of the general economic environment. In a recessionary economy,
state and local revenues decline, restricting funding for K-12 education spending which typically
leads to a decrease in demand for school furniture.
Geopolitical uncertainties, terrorist attacks, acts of war, natural disasters, increases in energy
and other costs or combinations of such factors and other factors that are outside of our control
could at any time have a significant effect on the economy, government revenues, and allocations of
government spending. The occurrence of any of these or similar events in the future could cause
demand for our products to decline or competitive pricing pressures to increase, either or both of
which would adversely affect our business, operating results, cash flows and financial condition.
We may have difficulty increasing or maintaining our prices as a result of price competition, which
could lower our profit margins. Our competitors may develop new services or product designs that
give them an advantage over us in making future sales.
Furniture companies in the education market compete on the basis of value, service, product
offering and product assortment, price, and track record of dependable delivery. Since our
competitors offer products that are similar to ours, we face significant price competition, which
tends to intensify during an industry downturn. This price competition impacts our ability to
implement price increases or, in some cases, such as during an industry downturn, maintain prices,
which could lower our profit margins. Additionally, our competitors may develop new product
designs that achieve a high level of customer acceptance, which could give them a competitive
advantage over us in making future sales.
Our efforts to introduce new products that meet customer requirements may not be successful, which
could limit our sales growth or cause our sales to decline.
To keep pace with industry trends, such as changes in education curriculum and increases in the use
of technology, and with evolving regulatory and industry requirements, including environmental,
health, safety and similar standards for the education environment and for product performance, we
must periodically introduce new products. The introduction of new products requires the
coordination of the design, manufacturing and marketing of such products, which may be affected by
factors beyond our control. The design and engineering of certain of our new products can take up
to a year or more, and further time may be required to achieve customer acceptance. Accordingly,
the launch of any particular product may be later or less successful than we originally
anticipated. Difficulties or delays in introducing new products or lack of customer acceptance of
new products could limit our sales growth or cause our sales to decline.
We may not be able to manage our business effectively if we are unable to retain our experienced
management team or recruit other key personnel.
The success of our operations is highly dependent upon our ability to attract and retain qualified
employees and upon the ability of our senior management and other key employees to implement our
business strategy. We believe there are only a limited number of qualified executives in the
industry in which we compete. The loss of the services of key members of our management team could
seriously harm our efforts to successfully implement our business strategy.
The majority of our sales are generated under annual contracts, which limit our ability to raise
prices during a given year in response to increases in costs.
We commit to annual contracts that determine selling prices for goods and services for periods of
one year, and occasionally longer. If the costs of providing our products or services increase, we
cannot be certain that we will be able to implement corresponding increases in our sales prices for
such products or services in order to offset such increased costs. Significant cost increases in
providing either the services or product during a given contract period could therefore lower our
profit margins.
We are dependent on the pricing and availability of raw materials and components, and price
increases and unavailability of raw materials and components could lower sales, increase our cost
of goods sold and reduce our profits and margins.
We require substantial amounts of raw materials and components, which we purchase from outside
sources. Raw materials comprised our single largest total cost for the years ended January 31,
2008, 2007 and 2006. Steel, plastics and wood-related materials are the main raw materials used in
the manufacture of our products. The prices of plastics are sensitive to the cost of oil, which is
used in the manufacture of plastics, and oil prices have increased significantly during 2007. The
cost and availability of steel are subject to worldwide supply and demand, and the ability to
import steel can be subject to political considerations. The cost and availability of steel has
been volatile in recent years. We purchase components from international sources, primarily China.
Fluctuations in currency exchange rates and the cost of ocean freight can impact the cost of
components. Any disruption in the ports through which we ship product to our factories can
adversely impact our supply chain.
9
Contracts with most of our suppliers are short-term. These suppliers may not continue to provide
raw materials and components to us at attractive prices, or at all, and we may not be able to
obtain the raw materials we need in the future from these or other providers on the scale and
within the time frames we require. Moreover, we do not carry significant inventories of raw
materials, components or finished goods that could mitigate an interruption or delay in the
availability of raw materials and components. Any failure to obtain raw materials and components
on a timely basis, or any significant delays or interruptions in the supply of raw materials, could
prevent us from being able to manufacture products ordered by our customers in a timely fashion,
which could have a negative impact on our reputation and could cause our sales to decline.
We are affected by the cost of energy, and increases in energy prices could reduce our margins and
profits.
The profitability of our operations is sensitive to the cost of energy through our transportation
costs, the costs of petroleum-based materials, like plastics, and the costs of operating our
manufacturing facilities. If the price of petroleum-based products, the cost of operating our
manufacturing facilities and our transportation costs continue to increase, these could have a
negative impact on our gross margins and profitability.
Approximately 40% of our sales are priced through one contract, under which we are the exclusive
supplier of classroom furniture.
A nationwide contract/price list which allows schools and school districts to purchase furniture
without bidding accounts for a significant portion of Vircos sales. This contract/price list is
sponsored by a nationwide purchasing organization that does not purchase products from the Company.
By providing a public bid specification and authorization service to publicly-funded agencies, the
organizations contract/price list enables such agencies to make authorized expenditures of
taxpayer funds. For all sales under this contract/price list, Virco has a direct selling
relationship with the purchaser, whether this is a school, a district or another publicly-funded
agency. In addition, Virco can ship directly to the purchaser; perform installation services at
the purchasers location; and finally bill directly to, and collect from, the purchaser. Although
Virco sells direct to hundreds of individual schools and school districts, and these schools and
school districts can purchase our products and services under several bids and contracts available
to them, nearly 40% of Vircos sales were priced under this nationwide contract/price list. If
Virco were to lose its exclusive supplier status under this contract/price list, and other
manufacturers were allowed to sell under this contract/price list, it could cause Vircos sales, or
growth in sales, to decline.
We operate in a seasonal business, and require significant amounts of working capital through our
existing credit facility to fund acquisitions of inventory, fund expenses for freight and
installation, and finance receivables during the summer delivery season. Restrictions imposed by
the terms of our existing credit facility may limit our operating and financial flexibility.
Our credit facility prevents us from incurring any additional indebtedness, limits capital
expenditures, restricts dividends, and requires reduced level of borrowing during the fourth
quarter. Our credit facility is also subject to quarterly covenants.
The Company violated certain debt covenants in the third quarter of 2005. The violation of
covenants was waived and the credit facility was renewed for an additional year. The credit
facility in place at January 31, 2008, includes quarterly covenants that include EBITDA
requirements.
As a result of the foregoing, we may be prevented from engaging in transactions that might further
our growth strategy or otherwise be considered beneficial to us. A breach of any of the covenants
in our credit facility could result in a default, which, if not cured or waived, may permit
acceleration of the indebtedness under the credit facility. If the indebtedness under our credit
facility were to be accelerated, we cannot be certain that we will have sufficient funds available
to pay such indebtedness or that we will have the ability to refinance the accelerated indebtedness
on terms favorable to us or at all. Any such acceleration could also result in a foreclosure on
all or substantially all of our assets, which would have a negative impact on the value of our
common stock and jeopardize our ability to continue as a going concern.
We may require additional capital in the future, which may not be available or may be available
only on unfavorable terms.
Our capital requirements depend on many factors, including capital improvements, tooling and new
product development. To the extent that our existing capital is insufficient to meet these
requirements and cover any losses, we may need to raise additional funds through financings or
curtail our growth and reduce our assets. Any equity or debt financing, if available at all, may
be on terms that are not favorable to us. Equity financings could result in dilution to our
stockholders, and the securities may have rights, preferences and privileges that are senior to
those of our common stock. If our need for capital arises because of significant losses, the
occurrence of these losses may make it more difficult for us to raise the necessary capital.
An inability to protect our intellectual property could have a significant impact on our business.
We attempt to protect our intellectual property rights through a combination of patent, trademark,
copyright and trade secret laws. Our ability to compete effectively with our competitors depends,
to a significant extent, on our ability to maintain the proprietary nature of our intellectual
property. The degree of protection offered by the claims of the various patents, trademarks and
service marks may not be broad enough to provide significant proprietary protection or competitive
advantages to us, and patents, trademarks or service marks may not be issued on our pending or
contemplated applications. In addition, not all of our products are covered by patents. It is also
possible that our patents, trademarks and service marks may be challenged, invalidated, cancelled,
narrowed or circumvented. If we are unable to maintain the proprietary nature of our intellectual
property with respect to our significant current or proposed products, our competitors may be able
to sell copies of our products, which could adversely affect our ability to sell our original
products and could also result in competitive pricing pressures.
10
If third parties claim that we infringe upon their intellectual property rights, we may incur
liability and costs and may have to redesign or discontinue an infringing product.
We face the risk of claims that we have infringed third parties intellectual property rights.
Companies operating in the furniture industry routinely seek protection of the intellectual
property for their product designs, and our principal competitors may have large intellectual
property portfolios. Our efforts to identify and avoid infringing third parties intellectual
property rights may not be successful. Any claims of intellectual property infringement, even
those without merit, could (i) be expensive and time-consuming to defend; (ii) cause us to cease
making, licensing or using products that incorporate the challenged intellectual property; (iii)
require us to redesign, reengineer, or rebrand our products or packaging, if feasible; or (iv)
require us to enter into royalty or licensing agreements in order to obtain the right to use a
third partys intellectual property. Such claims could have a negative impact on our sales and
results of operations.
We could be required to incur substantial costs to comply with environmental requirements.
Violations of, and liabilities under, environmental laws and regulations may increase our costs or
require us to change our business practices.
Our past and present ownership and operation of manufacturing plants are subject to extensive and
changing federal, state, and local environmental laws and regulations, including those relating to
discharges to air, water and land, the handling and disposal of solid and hazardous waste and the
cleanup of properties affected by hazardous substances. As a result, we are involved from time to
time in administrative and judicial proceedings and inquiries relating to environmental matters and
could become subject to fines or penalties related thereto. We cannot predict what environmental
legislation or regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions may be found to
exist. Compliance with more stringent laws or regulations, or stricter interpretation of existing
laws, may require additional expenditures by us, some of which may be material. We have been
identified as a potentially responsible party pursuant to the Comprehensive Environmental Response
Compensation and Liability Act, or CERCLA, for remediation costs associated with waste disposal
sites previously used by us. In general, CERCLA can impose liability for costs to investigate and
remediate contamination without regard to fault or the legality of disposal and, under certain
circumstances, liability may be joint and several, resulting in one party being held responsible
for the entire obligation. Liability may also include damages for harm to natural resources. The
remediation costs and our allocated share at some of these CERCLA sites are unknown. We may also
be subject to claims for personal injury or contribution relating to CERCLA sites. We reserve
amounts for such matters when expenditures are probable and reasonably estimable.
We are subject to potential labor disruptions, which could have a significant impact on our
business.
None of our workforce is represented by unions, and while we believe that we have good relations
with our workforce, we may experience work stoppages or other labor problems in the future. Any
prolonged work stoppage could have an adverse effect on our reputation, our vendor relations and
our customers.
Our insurance coverage may not adequately insulate us from expenses for product defects.
We maintain product liability and other insurance coverage that we believe to be generally in
accordance with industry practices. Our insurance coverage may not be adequate to protect us fully
against substantial claims and costs that may arise from product defects, particularly if we have a
large number of defective products that we must repair, retrofit, replace or recall.
Holders of approximately 45% of the shares of our stock have entered into an agreement restricting
the sale of the stock.
Certain shares of the Companys common stock received by the holders thereof as gifts from Julian
A. Virtue, including shares received in subsequent stock dividends, are subject to an agreement
that restricts the sale or transfer of those shares. As a result of the share ownership and
representation on the board and in management, the parties to the agreement have significant
influence on affairs and actions of the Company, including matters requiring stockholder approval
such as the election of directors and approval of significant corporate transactions. In addition,
these transfer restrictions and concentration of ownership could have the effect of impeding an
acquisition of the Company.
Our corporate documents and Delaware law contain provisions that could discourage, delay or prevent
a change in control of our company.
Provisions in our certificate of incorporation and our amended and restated bylaws may discourage,
delay or prevent a merger or acquisition involving us that our stockholders may consider favorable.
In addition, our certificate of incorporation provides for a staggered board of directors, whereby
directors serve for three-year terms, with approximately one-third of the directors coming up for
reelection each year. Having a staggered board will make it more difficult for a third party to
obtain control of our board of directors through a proxy contest, which may be a necessary step in
an acquisition of us that is not favored by our board of directors. We are also subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law. Under these
provisions, if anyone becomes an interested stockholder, we may not enter into a business
combination with that person for three years without special approval, which could discourage a
third party from making a takeover offer and could delay or prevent a change of control. For
purposes of Section 203, interested stockholder means, generally, someone owning 15% or more of
our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding
voting stock during the past three years, subject to certain exceptions as described in Section
203. Additionally, the Board of Directors entered into a Rights Agreements pursuant to which
certain preferred stock purchase rights would become exercisable when a person acquires or
commences to acquire a beneficial interest of at least 20% of our outstanding common stock.
Our stock price has historically been volatile, and investors in our common stock could suffer a
decline in value.
11
There has been significant volatility in the market price and trading volume of equity securities,
which may be unrelated to the financial performance of the companies issuing the securities. The
limited float of shares available for purchase or sale of Virco stock can magnify
this volatility. These broad market fluctuations may negatively affect the market price of our
common stock. Some specific factors that may have a significant effect on our common stock market
price include:
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actual or anticipated fluctuations in our operating results or future prospects; |
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our announcements or our competitors announcements of new products; |
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the publics reaction to our press releases, our other public announcements and our filings with the SEC; |
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strategic actions by us or our competitors, such as acquisitions or restructurings; |
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new laws or regulations or new interpretations of existing laws or regulations applicable to our business; |
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changes in accounting standards, policies, guidance, interpretations or principles; |
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changes in our growth rates or our competitors growth rates; |
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our inability to raise additional capital; |
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conditions of the school furniture industry as a result of changes in funding or general economic
conditions, including those resulting from war, incidents of terrorism and responses to such events; and |
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changes in stock market analyst recommendations or earnings estimates regarding our common stock, other
comparable companies or the education furniture industry generally. |
Item 1B. Unresolved Staff Comments
None.
12
Item 2. Properties
Torrance, California
Virco leases a 560,000 sq. ft. office, manufacturing and warehousing facility located on 23.5 acres
of land in Torrance, California. This facility is occupied under a five-year lease (with one
five-year renewal option) expiring January 2010. This facility also includes the corporate
headquarters, the West Coast showroom, and all West Coast distribution operations.
Conway, Arkansas
The Company owns 100 acres of land in Conway, Arkansas, containing 1,200,000 sq. ft. of
manufacturing, warehousing, and office space. This facility which is equipped with high-density
storage systems, features 70 dock doors dedicated to outbound freight, and has substantial yard
capacity to store and stage trailers has enabled the Company to consolidate the warehousing
function and implement the Assemble-to-Ship inventory stocking program. Management believes that
this facility supports Vircos ability to handle increased sales during the peak delivery season
and enhances the efficiency with which orders are filled.
In addition to the complex described above, the Company operates three other facilities in Conway,
Arkansas. The first is a 375,000 sq. ft. fabrication facility that was acquired in 1954, and
expanded and modernized over the subsequent 54 years. The Company manufactures fabricated steel
and injection-molded plastic components at this facility. The second is a 175,000 sq. ft.
manufacturing facility that is used to fabricate and store compression-molded components. This
building is leased under a 10-year lease expiring in March 2018. The third is a 150,000 sq. ft.
finished goods warehouse that is owned by the Company. This facility was leased to a third party
on a month-to-month basis at January 31, 2008.
Item 3. Legal Proceedings
Virco has various legal actions pending against it arising in the ordinary course of business,
which in the opinion of the Company, are not material in that management either expects that the
Company will be successful on the merits of the pending cases or that any liabilities resulting
from such cases will be substantially covered by insurance. While it is impossible to estimate with
certainty the ultimate legal and financial liability with respect to these suits and claims,
management believes that the aggregate amount of such liabilities will not be material to the
results of operations, financial position, or cash flows of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
13
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
The NASDAQ exchange is the principal market on which Virco Mfg. Corporation (VIRC) stock is traded.
As of March 30, 2007, there were approximately 346 registered stockholders according to transfer
agent records. There were approximately 754 beneficial stockholders.
Dividend Policy
It is the Board of Directors policy to periodically review the payment of cash and stock dividends
in light of the Companys earnings and liquidity. During the fourth quarter of 2007 the Company
initiated a quarterly dividend policy of $.025 per share. Actual payment of cash dividends must be
approved by the Board of Directors each quarter. No dividends were declared or paid in fiscal
2006, or 2005. The current line of credit with Wells Fargo restricts the amount of cash that can
be used for stock repurchases and paying cash dividends.
Quarterly Dividend and Stock Market Information
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Range |
|
|
|
|
|
|
Cash Dividends Declared |
|
2007 |
|
2006 |
|
|
2007 |
|
2006 |
|
High |
|
Low |
|
High |
|
Low |
|
1st Quarter |
|
$ |
|
|
|
$ |
|
|
|
$ |
9.60 |
|
|
$ |
6.34 |
|
|
$ |
6.63 |
|
|
$ |
4.40 |
|
2nd Quarter |
|
|
|
|
|
|
|
|
|
|
7.40 |
|
|
|
5.59 |
|
|
|
5.11 |
|
|
|
4.50 |
|
3rd Quarter |
|
|
|
|
|
|
|
|
|
|
11.66 |
|
|
|
4.85 |
|
|
|
6.00 |
|
|
|
4.36 |
|
4th Quarter |
|
|
.025 |
|
|
|
|
|
|
|
13.79 |
|
|
|
5.05 |
|
|
|
9.50 |
|
|
|
5.62 |
|
Stock Performance Graph
The graph set forth below compares the five-year cumulative total stockholder return of the
Companys common stock with the cumulative total stockholder return of (i) an industry peer group
index, (ii) the AMEX Market Index, and (iii) the NASDAQ Market Index. The graph assumes $100 was
invested on February 1, 2003 in the Companys common stock, the AMEX Market Index, the NASDAQ
Market Index, and the companies in the peer group and assumes the reinvestment of dividends, if
any.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
Virco Mfg. Corporation |
|
|
|
100.00 |
|
|
|
|
83.00 |
|
|
|
|
88.65 |
|
|
|
|
74.98 |
|
|
|
|
101.52 |
|
|
|
|
72.49 |
|
|
|
Hemscott Group Index |
|
|
|
100.00 |
|
|
|
|
149.10 |
|
|
|
|
160.76 |
|
|
|
|
167.44 |
|
|
|
|
196.12 |
|
|
|
|
155.05 |
|
|
|
NASDAQ Market Index |
|
|
|
100.00 |
|
|
|
|
156.95 |
|
|
|
|
156.32 |
|
|
|
|
175.75 |
|
|
|
|
188.54 |
|
|
|
|
183.03 |
|
|
|
AMEX Market Index |
|
|
|
100.00 |
|
|
|
|
140.36 |
|
|
|
|
150.39 |
|
|
|
|
182.42 |
|
|
|
|
196.71 |
|
|
|
|
201.09 |
|
|
|
The peer group includes the following companies: Cardtronics Inc., Cash Systems Inc., Coinstar
Inc., Diebold Inc., Energy Focus Inc., Franklin Electronic Publ., Herman Miller Inc., HNI
Corporation, Hypercom Corporation, Kimball International Inc. B, Knoll Inc., Lsi Industries Inc.,
14
Optimal Group Inc. Cl A, Par Technology Corporation, Pitney Bowes Inc., Steelcase Inc., Trm
Corporation, Verifone Holdings Inc, Virco Mfg. Corporation, Xerox Corporation.
Securities Authorized for Issuance Under Equity Compensation Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information |
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
remaining available |
|
|
|
|
|
|
|
|
|
|
for |
|
|
|
|
|
|
|
|
|
|
future issuance under |
|
|
Number of securities to |
|
Weighted-average |
|
equity compensation |
|
|
be issued upon exercise |
|
exercise price of |
|
plans - excluding |
|
|
of outstanding options, |
|
outstanding options |
|
securities reflected in |
|
|
warrants and rights |
|
warrants and rights |
|
column (a) |
Plan category |
|
(a) |
|
(b) |
|
(c) |
|
Equity compensation plans approved by security holders |
|
|
161,000 |
|
|
$ |
11.46 |
|
|
|
|
|
Equity compensation plans not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
161,000 |
|
|
$ |
11.46 |
|
|
|
|
|
|
On January 31, 2008, there were 724,613 shares available for grant under the 2007 Employee
Incentive Plan and on January 31, 2007, there were 109,000 shares available for grant under the
1997 Employee Incentive Plan.
Item 6. Selected Financial Data
The following tables set forth selected historical consolidated financial data for the periods
indicated. The following data should be read in conjunction with Item 8, Financial Statements and
Supplementary Data, and with Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations.
Five Year Summary of Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per share data |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
Summary of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
229,565 |
|
|
$ |
223,107 |
|
|
$ |
214,450 |
|
|
$ |
199,854 |
|
|
$ |
191,852 |
|
Net income (loss) (a) |
|
$ |
22,219 |
|
|
$ |
7,545 |
|
|
$ |
(9,574 |
) |
|
$ |
(13,995 |
) |
|
$ |
(23,607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) per share data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.54 |
|
|
$ |
0.56 |
|
|
$ |
(0.73 |
) |
|
$ |
(1.07 |
) |
|
$ |
(1.80 |
) |
Assuming dilution |
|
$ |
1.53 |
|
|
$ |
0.55 |
|
|
$ |
(0.73 |
) |
|
$ |
(1.07 |
) |
|
$ |
(1.80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share |
|
$ |
0.025 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.040 |
|
|
|
|
(a) |
|
For fiscal 2003, an adjustment of $1.6 million of income tax expense was made to reflect tax
effect of minimum pension liability. |
|
(b) |
|
Net loss per share was calculated based on basic shares outstanding due to the anti-dilutive
effect on the inclusion of common stock equivalent shares. |
Other Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per share data |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
Total assets |
|
$ |
127,035 |
|
|
$ |
116,277 |
|
|
$ |
114,720 |
|
|
$ |
114,041 |
|
|
$ |
126,268 |
|
Working capital |
|
$ |
31,996 |
|
|
$ |
22,994 |
|
|
$ |
15,488 |
|
|
$ |
15,334 |
|
|
$ |
25,404 |
|
Current ratio |
|
|
1.9/1 |
|
|
|
1.6/1 |
|
|
|
1.4/1 |
|
|
|
1.5/1 |
|
|
|
2.0/1 |
|
Total long-term obligations |
|
$ |
20,369 |
|
|
$ |
30,101 |
|
|
$ |
38,862 |
|
|
$ |
34,090 |
|
|
$ |
37,934 |
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per share data |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
Stockholders equity |
|
$ |
72,148 |
|
|
$ |
48,878 |
|
|
$ |
39,100 |
|
|
$ |
49,265 |
|
|
$ |
62,352 |
|
Shares outstanding at year-end (2) |
|
|
14,429 |
|
|
|
14,380 |
|
|
|
13,137 |
|
|
|
13,098 |
|
|
|
13,096 |
|
Stockholders equity per share (1) |
|
$ |
5.00 |
|
|
$ |
3.40 |
|
|
$ |
2.98 |
|
|
$ |
3.76 |
|
|
$ |
4.76 |
|
|
|
|
(1) |
|
Based on number of shares outstanding at year-end after giving effect for stock dividends and stock split. |
|
(2) |
|
Adjusted for stock dividends and stock split. |
Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per share data |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
Summary of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (3) (4) |
|
$ |
229,565 |
|
|
$ |
223,107 |
|
|
$ |
214,450 |
|
|
$ |
199,854 |
|
|
$ |
191,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before change in
accounting methods |
|
$ |
22,219 |
|
|
$ |
7,545 |
|
|
$ |
(9,574 |
) |
|
$ |
(13,995 |
) |
|
$ |
(23,607 |
) |
Change in accounting methods |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,219 |
|
|
$ |
7,545 |
|
|
$ |
(9,574 |
) |
|
$ |
(13,995 |
) |
|
$ |
(23,607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (1) |
|
$ |
1.53 |
|
|
$ |
0.55 |
|
|
$ |
(0.73 |
) |
|
$ |
(1.07 |
) |
|
$ |
(1.80 |
) |
Stockholders equity |
|
|
72,148 |
|
|
|
48,878 |
|
|
|
39,100 |
|
|
|
49,265 |
|
|
|
62,352 |
|
Stockholders equity per share (2) |
|
|
5.00 |
|
|
|
3.40 |
|
|
|
2.98 |
|
|
|
3.76 |
|
|
|
4.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per share data |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
1998 |
|
Summary of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (3) (4) |
|
$ |
244,355 |
|
|
$ |
257,462 |
|
|
$ |
287,342 |
|
|
$ |
268,079 |
|
|
$ |
275,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity per share (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before change in
accounting methods |
|
$ |
282 |
|
|
$ |
246 |
|
|
$ |
4,313 |
|
|
$ |
10,166 |
|
|
$ |
17,630 |
|
Change in accounting methods |
|
|
|
|
|
|
|
|
|
|
(297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
282 |
|
|
$ |
246 |
|
|
$ |
4,016 |
|
|
$ |
10,166 |
|
|
$ |
17,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (1) |
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.29 |
|
|
$ |
0.72 |
|
|
$ |
1.20 |
|
Stockholders equity |
|
|
82,774 |
|
|
|
90,223 |
|
|
|
94,141 |
|
|
|
93,834 |
|
|
|
88,923 |
|
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 stock split. |
|
(2) |
|
Based on number of shares outstanding at year-end giving effect for stock dividends and 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. |
|
(5) |
|
For fiscal 2003, an adjustment of $1.6 million of income tax expense was made to reflect tax effect of minimum pension liability. |
16
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Managements Discussion and Analysis of Financial Condition and Results of Operations includes
a number of forward-looking statements that reflect the Companys current views with respect to
future events and financial performance, including, but not limited to, statements regarding plans
and objectives of management for future operations, including plans and objectives relating to
products, pricing, marketing, expansion, manufacturing processes and potential or contemplated
acquisitions; new business strategies; the Companys ability to continue to control costs and
inventory levels; availability and cost of raw materials, especially steel and petroleum-based
products; the availability and cost of labor: the potential impact of the Companys
Assemble-To-Ship program on earnings; market demand; the Companys ability to position itself in
the market; references to current and future investments in and utilization of infrastructure;
statements relating to managements beliefs that cash flow from current operations, existing cash
reserves, and available lines of credit will be sufficient to support the Companys working capital
requirements to fund existing operations; references to expectations of future revenues; pricing;
and seasonality.
Such statements involve known and unknown risks, uncertainties, assumptions and other factors, many
of which are out of the Companys control and difficult to forecast, that may cause actual results
to differ materially from those which are anticipated. Such factors include, but are not limited
to, changes in, or the Companys ability to predict, general economic conditions, the markets for
school and office furniture generally and specifically in areas and with customers with which the
Company conducts its principal business activities, the rate of approval of school bonds for the
construction of new schools, the extent to which existing schools order replacement furniture,
customer confidence, and competition.
In this report, words such as anticipates, believes, expects, will continue, future,
intends, plans, estimates, projects, potential, budgets, may, could and similar
expressions identify forward-looking statements. Readers are cautioned not to place undue reliance
on forward-looking statements, which speak only as of the date hereof.
Executive Overview
Managements strategy is to position Virco as the overall value supplier of educational furniture
and equipment. The markets that Virco serves include: the education market (the Companys primary
market), which is made up of public and private schools (preschool through 12th grade), junior and
community colleges, four-year colleges and universities, and trade, technical and vocational
schools; convention centers and arenas; the hospitality industry, with respect to their banquet and
meeting facilities requirements; government facilities at the federal, state, county and municipal
levels; and places of worship. In addition, the Company sells to wholesalers, distributors,
retailers and catalog retailers that serve these same markets. These institutions are frequently
characterized by extreme seasonality and/or a bid-based purchasing function. The Companys
business model, which is designed to support this strategy, includes the development of several
competencies to enable superior service to the markets in which Virco competes. An important
element of Vircos business model is the Companys emphasis on developing and maintaining key
manufacturing, warehousing, distribution, installation, project management, and service
capabilities. The Company has developed a comprehensive product offering for the furniture,
fixtures, and equipment (FF&E) needs for the K-12 education market, enabling a school to procure
all of its FF&E requirements from one source. This product offering consists primarily of items
manufactured by Virco, complemented with product sourced from other furniture manufacturers. The
product offering is continually enhanced with an ongoing new product development program that
incorporates internally developed product as well as product lines developed with accomplished
designers. Finally, management continues to hone Vircos ability to forecast, finance,
manufacture, warehouse, deliver, and install furniture within the relatively narrow delivery window
associated with the highly seasonal demand for education sales. In fiscal year 2007, over 50% of
the Companys total sales were delivered in June, July, August and September with an even higher
portion of educational sales delivered in that period. During the months of July and August,
shipments can be as great as six times the level of shipments during the winter months. Vircos
substantial warehouse space allows the Company to build adequate inventories to service this narrow
delivery window for the education market.
The market and operating environment for school furniture was turbulent during the period from 2001
through 2005. As a group, the members of BIFMA (the Business and Institutional Furniture
Manufacturers Association) recorded decreases in shipments of 3%, 19.1% and 17.4% in 2003, 2002
and 2001, respectively. The impact of the recession on the school market lagged the commercial
market and did not hit with full intensity until 2003. During this time Virco incurred sales
declines of 21.5%, 5.1%, and 10.4% in 2003, 2002, and 2001 respectively. This significant
reduction in sales was exacerbated by the unfortunate timing of a substantial plant expansion
completed in 2000. For two years in 2004 and 2005 following the recession in the furniture
markets, the Company incurred supply chain disruptions and severe cost increases in certain raw
materials, particularly steel, plastic, and energy-related costs. During 2005, the severe
hurricanes in the Gulf Coast region of the United States impacted the availability of certain raw
materials used in the production of steel; Virco also obtains plastic used in the production of
certain high-volume components from the Gulf Coast region. Both the cost and availability of
plastic were severely affected. Finally, Virco incurs significant costs relating to energy. The
most significant of the Companys energy costs are for diesel fuel, for both outbound freight and
inbound materials, though the Company also incurs significant costs for both electricity and
natural gas.
Throughout this turbulent period, the Company took corrective measures to reduce the Companys cost
structure to match the decreased sales volume and to raise prices to cover the increased cost of
raw materials. Restructuring efforts, which included significant reductions in our work force,
wage and hiring freezes, disciplined spending and carefully controlled capital expenditures have
brought the cost structure in line with our current levels of volume. The following metrics
demonstrate the improvement in our cost structure:
17
|
|
|
|
|
|
|
|
|
Metric |
|
Fiscal 2000 |
|
Fiscal 2007 |
Revenue |
|
$ |
287,342,000 |
|
|
$ |
229,565,000 |
|
|
Interest and Depreciation |
|
$ |
18,374,000 |
|
|
$ |
8,919,000 |
|
Gross Margin |
|
|
32.40 |
% |
|
|
36.40 |
% |
Headcount |
|
|
2,300 |
|
|
|
1,200 |
|
Sales per Employee |
|
$ |
125,000 |
|
|
$ |
191,000 |
|
Pre-Tax Operating Margin |
|
|
2.40 |
% |
|
|
5.30 |
% |
Capital Expenditures |
|
$ |
22,711,000 |
|
|
$ |
4,832,000 |
|
Concurrently with the implementation of our cost restructuring, Virco has been aggressively
enhancing its product and service offerings. The Company has prioritized new product development,
utilizing internal resources in addition to outside designers. For products or processes that we
do not manufacture, we have partnered with other furniture and equipment manufacturers and have
become authorized re-sellers of their product. Virco can now supply every need on the Furniture,
Fixture, and Equipment (FF&E) line item of a school budget. We have added and enhanced project
management capabilities with our PlanSCAPE® software and related training of our sales force.
During the turbulent restructuring of the furniture industry in the early 2000s, many manufacturers
closed their domestic factories and purchased furniture and components from less expensive overseas
locations. During this same period Virco reduced its headcount and reduced the fixed cost of the
factories through disciplined capital expenditures, but retained and enhanced our domestic
manufacturing capabilities through rigorous maintenance programs and acquisition of select
production processes in a weak equipment market. Although the Company still sources significant
quantities of components from international sources, we are slowly beginning to bring production of
certain components back to the United States as the variable costs of domestic production are less
than the costs of global sourcing. Furthermore, our domestic factories are a strategic resource
for providing our customers with timely delivery of a broad selection of colors, finishes,
laminates, and product styles.
The Company anticipates that demand for furniture in the education markets may decline in the
coming year. Spending for replacement furniture is typically funded out of a schools operating
budget, as are salaries and benefits for teachers and administrators. Management anticipates
reduced demand for replacement furniture due to the significant financial pressures placed on
school operating budgets. We anticipate a continued strong market in bond-funded projects, with
project completions being slightly less than 2007.
We have already raised prices on our most significant contracts for 2008, and will increase prices
as contracts renew during the year. We believe that our price increases will be adequate to
substantially mitigate increases in commodity and energy costs.
Actual volume shipped during 2008 will be impacted by the behavior of our competitors in response
to anticipated reductions in demand and increased input costs. We will maintain our core workforce
at current levels for the near future, supplemented with temporary labor as considered necessary in
order to produce, warehouse, deliver, and install furniture during the coming summer. Because the
Company has not closed any manufacturing or distribution facilities, any increase in demand for our
product can be met without any required investment in physical infrastructure.
Critical Accounting Policies and Estimates
This discussion and analysis of Vircos financial condition and results of operations is based upon
the Companys financial statements which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of these financial statements requires Virco
management to make estimates and judgments that affect the Companys reported assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going
basis, management evaluates such estimates, including those related to revenue recognition,
allowance for doubtful accounts, valuation of inventory including LIFO and obsolescence reserves,
self-insured retention for products and general liability insurance, self-insured retention for
workers compensation insurance, provision for warranty, liabilities under defined benefit and other
compensation programs, and estimates related to deferred tax assets and liabilities. Management
bases its estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. This forms the basis of judgments about the carrying value
of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. Factors that could cause or
contribute to these differences include the factors discussed above under Item 1, Business, and
elsewhere in this report on Form 10-K. Vircos critical accounting policies are as follows:
Revenue Recognition: The Company recognizes revenue in accordance with Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition, as revised by SAB No. 104. Sales are recorded when title
passes and collectability is reasonably assured under its various shipping terms. The Company
reports sales as net of sales returns and allowances and sales taxes imposed by various government
authorities.
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 Companys allowance for doubtful accounts
has ranged from approximately 0.7% to 1.4% of accounts receivable at year-end. The allowance is
evaluated using historic experience combined with a detailed review of past due accounts. The
Company does not
18
typically obtain collateral to secure credit risk. The primary reason that Vircos allowance for
doubtful accounts represents such a small percentage of accounts receivable is that a large portion
of the accounts receivable is attributable to low-credit-risk governmental entities, giving Vircos
receivables a historically high degree of collectability. Although many states are experiencing
budgetary difficulties, it is not anticipated that Vircos credit risk will be significantly
impacted by these events. Over the next year, no significant change is expected in the Companys
sales to government entities as a percentage of total revenues.
Inventory Valuation: Inventory is valued at the lower of cost or market. The Company uses the LIFO
(last-in, first-out) method of accounting for the material component of inventory. The Company
maintains allowances for estimated obsolete inventory to reflect the difference between the cost of
inventory and the estimated market value. Valuation allowances are determined through a physical
inspection of the product in connection with a physical inventory, a review of slow-moving product,
and consideration of active marketing programs. The market for education furniture is
traditionally driven by value, not style, and the Company has not typically incurred significant
obsolescence expense. If market conditions are less favorable than those anticipated by
management, additional allowances may be required.
Due to reductions in sales volume in the past years, the Companys manufacturing facilities are
operating at reduced levels of capacity. The Company records the cost of excess capacity as a
period expense, not as a component of capitalized inventory valuation.
Self-Insured Retention: For 2005 the Company was self-insured for product liability losses up to
$500,000 per occurrence. For 2006, and 2007, the Company was self-insured for product liability
losses ranging from $250,000 $500,000 per occurrence. For 2005, 2006, and 2007 the Company was self-insured for
workers compensation losses up to $250,000 per occurrence and for auto liability up to $50,000 per
occurrence. The Company obtains annual actuarial valuations for the self-insured retentions.
Product liability, workers compensation, and auto reserves for known and unknown incurred but not
reported (IBNR) losses are recorded at the net present value of the estimated losses using a
discount rate ranging from 5.75 6.00% for 2007, 2006, and 2005. Given the relatively short term
over which the IBNR losses are discounted, the sensitivity to the discount rate is not significant.
Estimated workers compensation losses are funded during the insurance year and subject to
retroactive loss adjustments. The Companys exposure to self-insured retentions varies depending
upon the market conditions in the insurance industry and the availability of cost-effective
insurance coverage. Self-insured retentions for 2008 will be comparable to the retention levels
for 2007.
Warranty Reserve: The Company provides a product warranty on most products. The standard warranty
offered on products sold through January 31, 2005, is five years. Effective February 1, 2005, the
standard warranty was increased to 10 years on products sold after February 1, 2005. It generally
warranties that customers can return a defective product during the specified warranty period
following purchase in exchange for a replacement product or that the Company can repair the product
at no charge to the customer. The Company determines whether replacement or repair is appropriate
in each circumstance. The Company uses historic data to estimate appropriate levels of warranty
reserves. Because product mix, production methods, and raw material sources change over time,
historic data may not always provide precise estimates for future warranty expense. Warranty
expense for 2005 was higher than normal due to a recurring cosmetic complaint relating to a
high-volume component. In 2005, the Company made appropriate engineering modifications to correct
this condition, but may still incur warranty-related costs for components produced and sold in
prior years.
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
discounted the pension obligations under the plans using a 6.00% discount rate in 2007, a 5.75%
discount rate in 2006, and a 6.5% discount rate in 2005. The Company utilized a 5.0% assumed rate
of increase in compensation rates, and estimated a 6.5% return on plan assets. These rate
assumptions can vary due to changes in interest rates, the employment market, and expected returns
in the stock market. In prior years, the discount rate and the anticipated rate of return on plan
assets have decreased by several percentage points, causing pension expense and pension obligations
to increase. Although the Company does not anticipate any change in these rates in the coming
year, any moderate change should not have a significant effect on the Companys financial position,
results of operations or cash flows. Effective December 31, 2003, the Company froze new benefit
accruals under all three plans. The effect of freezing future benefit accruals minimizes the
impact of future raises in compensation, but introduces a new assumption related to the plan
freeze. It is the Companys intent to resume some form of a retirement benefit when the
profitability and the financial condition of the Company allow, and the actuarial valuations assume
the plans will be frozen for one additional year. If the assumption is modified to a permanent
freeze, the Company would be required to immediately recognize any prior service cost / benefit.
If the Company had assumed a permanent freeze, pension expense for 2007, 2006 and 2005 would have
increased by $64,000, $75,000 and $9,000, respectively. The Company obtains annual actuarial
valuations for all three plans.
Deferred Tax Assets and Liabilities: The Company recognizes deferred income taxes under the asset
and liability method of accounting for income taxes in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred income
taxes are recognized for differences between the financial statement and tax basis of assets and
liabilities at enacted statutory tax rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date. In assessing the realizability of deferred tax
assets, the Company considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income or reversal of deferred tax liabilities
during the periods in which those temporary differences become deductible. The Company considers
the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies
in making this assessment. Due to operating losses, the Company established a valuation
allowance against the net deferred tax assets in 2003. For the year ended January 31, 2007,
based on this consideration, the
Company anticipated that it is more likely than not that the net deferred tax assets would not be
realized, and a valuation allowance was recorded against the net deferred tax assets. During the
fiscal year ended January 31, 2008, the results of operations of the Company were such that the
Company determined that is was more likely than not that all of the deferred tax asset would be
realized, and a $10,700,000 favorable
19
adjustment to the valuation allowance was recorded in the third quarter ended October 31, 2007.
This was a non-cash benefit, resulting in a $10,700,000 net adjustment to deferred tax assets
recorded in the third quarter.
At January 31, 2008, the Company
had net operating losses carried forward for federal and state
income tax purposes, expiring at various dates through 2027 if not utilized. Federal net operating
losses that can potentially be carried forward totaled approximately $3,202,000 at January 31,
2008. State net operating losses that can potentially be carried forward totaled approximately
$21,019,000 at January 31, 2008.
Industry Overview
As discussed above, the commercial furniture markets, including Vircos core school markets,
suffered from the economic downturn in the early 2000s. The financial difficulties experienced by
our core education customers derive primarily from budgetary pressures and shortfalls at state and
local government levels. The state and local budgets improved during 2005, 2006, and 2007, but
still remained pressured by costs related to teacher and administrator salaries, medical care and
unfunded pension obligations.
Funding for school furniture comes from two primary sources. The first source is from bonds issued
to fund new school construction, make major renovations of older schools, and fully equip new and
renovated schools. Funding from bond financing has been relatively stable during the past years,
and is anticipated to be stable through 2008. The second source is the general operating fund,
which is a primary source of replacement furniture. The decline in Vircos sales in the early
2000s was primarily attributable to sharp reductions in replacement furniture purchased from the
general fund. Approximately 80-85% of a schools budget is spent on salaries and benefits for
teachers and administrators. In times of budget shortfalls, schools traditionally attempt to
retain teachers and spend less on repairs, maintenance, and replacement furniture. The Company
anticipates that the level of replacement furniture purchased during 2008 could be adversely
impacted by current economic conditions.
While the short-term economic conditions impacting our core customer base are not positive, there
are certain underlying demographics, customer responses, and changes in the competitive landscape
that provide opportunities. First, the underlying demographics of the student population are very
stable compared to the volatility of school budgets, and the related level of furniture and
equipment purchases. The student population grows slowly. The volatility is attributable to the
financial health of the school systems. Virco management believes that there is a pent-up demand
for quality school furniture. Second, management believes that parents and voters will demand that
we educate our children and make this an ongoing priority for future government spending. Third,
many schools have responded to the budget strains by reducing their support infrastructure. School
districts historically have operated central warehouses and professional purchasing departments in
a central business office. In order to retain teaching staff, many school districts have shut down
the warehouses and reduced their purchasing departments and janitorial staffs. This change
provides opportunities to sell services to schools, such as project management for new or renovated
schools, delivery to individual school sites rather than truckload deliveries to central
warehouses, installation of furniture in classrooms, and opportunity to provide a complete product
assortment allowing one-stop shopping as opposed to sourcing furniture needs from a variety of
suppliers. Fourth, many suppliers have shut down or dramatically curtailed their domestic
manufacturing capabilities, making it difficult for competitors to provide custom colors or
finishes during a tight seasonal summer delivery window when they are reliant upon a supply chain
extending to China. Finally, the financial health of the competition, both manufacturers and
dealers, has been adversely impacted by the downturn in the school furniture business, creating
opportunities for suppliers that can provide dependable delivery of quality product and services.
The current credit environment may make it difficult for competitors to finance the significant
seasonal nature of school furniture and equipment deliveries.
Virco Response to the Industry Environment
In response to robust industry growth during the mid to late 1990s, Virco built and equipped a
large new furniture manufacturing and distribution facility in Conway, Arkansas, that initiated
operations in 1999 and 2000. In addition to that significant capital expansion of physical
capacity, the Company implemented an SAP ERP system in 1999 in response to Y2K concerns coupled
with limitations to its legacy computer system. The timing of these large capital investments was
unfortunate, as the economic downturn discussed above initiated approximately one year after this
new capacity came on line.
In response to the sharp decline in sales in the early 2000s, many furniture manufacturers
responded by shutting down significant portions of their manufacturing capacity and laying off
thousands of workers, incurring large restructuring charges in the process. Virco responded with a
different approach designed to preserve the Companys manufacturing and distribution infrastructure
and save the jobs of many of Vircos trained workforce. The Company did make substantial
reductions in work force, implemented wage and hiring freezes, and pursued more creative measures
that addressed the unique demands of a highly seasonal business, including programs to encourage
workforce flexibility. Capital expenditures were severely curtailed. Capital expenditures were
reduced to a range of 25% to 40% of annual depreciation from 2001 through 2006. While expenditures
on capital equipment have been curtailed, aggressive maintenance programs and opportunistic
purchases of good quality used equipment have enhanced the Companys productive capabilities. The
Company embraced its ATS operating model, which facilitated reductions in inventory levels and
improved levels of customer service.
The cumulative result of these years of cost reductions has been significant. Vircos headcount of
permanent employees has declined from a peak of nearly 2,950 in August 2000 to a total of
approximately 1,200 permanent employees at January 31, 2008. Factory overhead, which peaked at
over $72 million in fiscal year ended January 31, 2001, was less than $48 million in each of the
last two fiscal years. For the last two fiscal years, factory overhead as a percentage of sales
is less than it was prior to the significant capital expenditures in 1998, 1999, and 2000, despite
the reduction in sales volume. Virco has accomplished this without closing factories and without
closing any of the primary
20
distribution facilities. Selling, general, and administrative expenses,
which do not fluctuate as significantly with volume have declined by approximately $15 million from
their peak and currently represent a lower percentage of sales as in 2000, despite our reduced
sales volume.
In addition to significant cost reductions, the Company has made several investments in both
product and process to strengthen its competitive position. During the last six years, Virco has
completed three modest acquisitions, all within the constrained capital expenditure budgets
discussed above. The first acquisition was Furniture Focus, a reseller of FF&E that was a former
Virco customer. The acquisition of Furniture Focus included their proprietary PlanSCAPE® software,
used to bid and manage projects to furnish all items in the FF&E budget category of a new school
project. Over the past six years, Furniture Focus has been integrated into Virco, and at the
February 2006 sales meeting, a new release of the PlanSCAPE software was rolled out to the entire
Virco sales force. Virco has embraced the relationships Furniture Focus had developed with other
furniture manufacturers that provide FF&E not manufactured by Virco. Virco has incorporated these
items into our product offering, enabling Virco to provide one-stop shopping for FF&E needs.
In addition to Furniture Focus, Virco has acquired assets from two furniture component
manufacturers. While the production of many furniture components has moved to low-cost locations
such as China, many components are too bulky to import on a cost-effective basis. In 2003, Virco
purchased assets and intellectual property of Corex Products, Inc., a component manufacturer of
compression-molded parts. The acquired equipment was integrated into our existing
compression-molding facility in Conway, Arkansas. In 2005, Virco purchased substantial
injection-molding capacity from a former supplier, allowing Virco to bring the production of
certain high-volume components in house. In 2006 and 2007 the Company acquired capacity for
processes historically outsourced and developed tooling for significant new product launches.
These machines have been integrated into our Conway, Arkansas facility.
Finally, during these years of cost reductions, Virco has continued to invest in new products,
including our successful ZUMA® and Sage lines of education furniture. In 2007 the Company
introduced two new classroom furniture collections: Metaphor and Telos. Initiatives to improve
product and service quality have been successful, and the Company has improved its track record for
dependable on-time delivery of product during the tight summer delivery window.
The Companys significant improvement in operating results in 2007 and 2006 reflected the
cumulative effect of three years of price increases to recover increased commodity costs. In 2006,
the Company introduced tiered pricing under its most significant contracts to improve the
profitability of small orders. For 2008, the Company has raised prices on its major contracts, and
will raise prices on other contracts as they are renewed. The Company is hopeful that these price
increases will substantially offset anticipated increases in commodity costs during 2008.
Results of Operations (2007 vs. 2006)
Financial Results and Cash Flow
For the year ended January 31, 2008, the Company earned pre-tax income of $12,192,000 on net sales
of $229,565,000 compared to pre-tax income of $7,991,000 on net sales of $223,107,000 in the same
period last year. The current year was significantly impacted by a $10,700,000 favorable
adjustment to the valuation allowance for deferred income taxes. The net income was $1.54 per
share for the year ended January 31, 2008, compared to net income of $0.56 per share in the prior
year. Cash flow from operations was $16,884,000 compared to $10,915,000 in the prior year.
Sales
Vircos sales increased by nearly 3.0% in 2007 to $229,565,000 compared to $223,107,000 in 2006.
The increased sales volume was attributable to increased prices, offset by a slight decline in unit
volume. The Company benefited from increased project sales. Sales of Vircos new ZUMA® and Sage
product lines increased, but were offset by reductions in older product lines.
For 2008 the Company has raised selling prices for its more significant contracts and will raise
prices on contracts as they renew. The Company anticipates that the price increases will
substantially mitigate anticipated increases in raw material and energy prices. The Company
continues to emphasize the value, design and color selections of Vircos products, the value of
Vircos distribution, delivery, installation, and project management capabilities, and the value of
timely deliveries during the peak seasonal delivery period.
Cost of Sales
Cost of sales was 64% of sales in 2007 and 65% of sales for 2006. This improvement was achieved by
increased selling prices combined with moderate growth in material costs and controlled spending on
manufacturing costs. At the beginning of 2007, the Company raised prices with the intent of
covering the anticipated increased cost of raw materials. The Company was successful in raising
prices, and achieved that goal while incurring a modest reduction in unit volume, primarily in
older commodity items that sell for lower prices.
In 2008, the Company intends to maintain the improved overhead cost structure attained through
controlled capital expenditures and restructurings. Because the Company has improved its financial
strength, we are able to finance our production of inventory for summer delivery earlier in the
year. This allows a larger portion of annual production to be by permanent employees, who tend to
be more efficient and produce better quality than temporary labor.
The Company intends to more tightly integrate the ATS model with our marketing programs, product
development programs, and product stocking plan. This anticipated improvement in execution of ATS
should allow the Company to offer a wide variety of product while improving on-time delivery
performance. The Company is beginning the year with more inventory; production levels, which will
vary
21
depending upon selling volumes, are anticipated to be slightly lower than 2007. The Company
is slowly bringing production of certain items in house that were formerly acquired from outside
parties, which may offset a portion of any reduction in required output.
The Company anticipates continued uncertainty and upward pressure on costs, particularly in the
areas of certain raw materials, transportation, energy, and employee benefits in the coming year.
Raw material costs, especially for steel and plastic, are experiencing volatility and price
pressure. For more information, please see the section below entitled Inflation and Future Change
in Prices.
Selling, General and Administrative and Others
Selling, general and administrative expenses for the year ended January 31, 2008, increased by
approximately $2.4 million, and were 30.1% as a percentage of sales as compared to 29.9% in the
prior year. Freight costs decreased both in dollars and as a percentage of sales. Installation
costs increased in both dollars and as a percentage of sales due to increased project orders, and
selling expenses increased in dollars and as a percentage of sales due to expanded selling efforts.
For 2008, the Company intends to raise selling prices to cover anticipated increased raw material
costs as well as maintaining tiered pricing to increase prices on smaller orders and orders
requiring full service. If successful, this may cause freight and installation costs to decline as
a percentage of sales in 2008, but there can be no assurance of attaining a reduction due to
volatility in fuel and freight rates as well as fluctuations in the portion of business requiring
full service.
Interest expense was $1,516,000 less than the prior year as a result of borrowing levels and
interest rates being lower than the prior year.
Results of Operations (2006 vs. 2005)
Financial Results and Cash Flow
For the year ended January 31, 2007, the Company earned net income of $7,545,000 on net sales of
$223,107,000 compared to a net loss of $9,574,000 on net sales of $214,450,000 in the same period
in the prior year. Net income was $0.56 per share for the year ended January 31, 2007, compared to
a net loss of $0.73 per share in the prior year. Cash flow from operations was $10,915,000
compared to $304,000 in the prior year.
Sales
Vircos sales increased by 4.0% in 2006 to $223,107,000 compared to $214,450,000 in 2005. The
increased sales volume was attributable to increased prices, offset by a slight decline in unit
volume. The Company benefited from increased project sales and increased sales through commercial
channels. Sales of Vircos new ZUMA® product line increased, but were offset by reductions in
older product lines.
Cost of Sales
Cost of sales was 65% of sales in 2006 and 70% of sales for 2005. This significant improvement was
achieved by increased prices combined with moderate growth in material costs and controlled
spending on manufacturing costs. At the beginning of 2006, the Company raised prices with the
intent of covering the increased cost of raw materials experienced in 2005 and 2004. The Company
was successful in raising prices, and achieved that goal while incurring a modest reduction in unit
volume, primarily in older commodity items that sell for lower prices.
Selling, General and Administrative and Others
Selling, general and administrative expenses for the year ended January 31, 2007, excluding
severance costs, decreased by approximately $3 million, and were 29.9% as a percentage of sales as
compared to 32.8% in 2005 (excluding severance costs). Freight costs decreased both in dollars and
as a percentage of sales. Installation costs increased in both dollars and as a percentage of
sales due to increased project orders, and selling expenses decreased in dollars and as a
percentage of sales.
Interest expense was nearly $534,000 more than the prior year. Borrowing levels were slightly
higher than the prior year, and interest rates were higher.
Provision for Income Taxes
The Company recognizes deferred income taxes under the asset and liability method of accounting for
income taxes in accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. Deferred income taxes are recognized for
differences between the financial statement and tax basis of assets and liabilities at enacted
statutory tax rates in effect for the years in which the differences are expected to reverse. The
effect on deferred taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. In assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income or reversal of deferred tax liabilities during the periods in
which those temporary differences become deductible. The Company considers the scheduled reversal
of deferred tax liabilities, projected future taxable income, and tax planning strategies in making
this assessment.
22
Based on these considerations, at January 31, 2007, the Company believed that it was more likely
than not that the net deferred tax assets would not be realized, and a 100% valuation allowance was
recorded against the net deferred tax assets at January 31, 2007. During the year ended January
31, 2008, the operating results of the Company demonstrated the second consecutive year of
significantly improved pre-tax operating results. A significant portion of the net deferred tax
asset relating to NOL carryforwards was realized, and at the third quarter ending October 31, 2007,
the Company determined that it was more likely than not that the net deferred tax assets would be
realized. In the third quarter, the Company recorded a $10.7 million favorable adjustment to the
valuation allowance against the net deferred tax assets.
Because the Company benefited from NOL carryforwards for both 2007 and 2006, the effective income
tax expense was very low, with income tax expense being primarily attributable to alternative
minimum taxes combined with income and franchise taxes as required by various states. The tax
rates experienced during the past two years, and the significant adjustment to the valuation
allowance in 2007, are not expected to recur in 2008. The Company has a modest amount of NOL
carryforward for federal income tax purposes, after which the Company anticipates an effective
federal income tax rate of 34-35%. State income taxes will continue to benefit from NOL
carryforwards, offset by state alternative minimum taxes combined with income and franchise taxes.
At January 31, 2008, the Company had net operating losses carried forward for federal and state
income tax purposes, expiring at various dates through 2026 if not utilized. Federal net operating
losses that can potentially be carried forward totaled approximately $3,202,000 at January 31,
2008. State net operating losses that can potentially be carried forward totaled approximately
$21,019,000 at January 31, 2008. The Company also had determined that it is more likely than not
that some portion of the state net operating loss carryforwards will not be realized and had
provided a valuation allowance of $841,000 on the deferred tax assets at January 31, 2008. In June 2006, the Financial Accounting Standards Board (the FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be measured based on
the largest benefit that has a greater than fifty percent likelihood of being realized upon
ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and
penalties on income taxes, and accounting in interim periods and requires increased disclosures.
The Company adopted the provisions of FIN 48 on February 1, 2007, the beginning of fiscal
2007. There was no material impact as a result of the implementation of FIN 48.
Liquidity and Capital Resources
Working Capital Requirements
Virco addresses liquidity and capital requirements in the context of short-term seasonal
requirements and long-term capital requirements of the business. The Companys core business of
selling furniture to publicly funded educational institutions is extremely seasonal. The seasonal
nature of this business permeates most of Vircos operational, capital, and financing decisions.
The Companys working capital requirements during and in anticipation of the peak summer season
oblige management to make estimates and judgments that affect Vircos 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, Vircos ability to fill customer
orders on a timely basis or to provide adequate customer service may be diminished. If management
overestimates any of these requirements, the Company may be required to absorb higher storage,
labor and related costs, each of which may affect profitability. On an ongoing basis, management
evaluates such estimates, including those related to market demand, labor costs, and inventory
levels, and continually strives to improve Vircos ability to correctly forecast business
requirements during the peak season each year.
As part of Vircos efforts to address seasonality, financial performance and quality without
sacrificing service or market share, management has been refining the Companys ATS operating
model. ATS is Vircos version of mass-customization, which assembles standard, stocked components
into customized configurations before shipment. The Companys 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 inventorys 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 the 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 (19 years) relationship with its primary lender,
Wells Fargo Bank. On an annual basis, the Company prepares a forecast of seasonal working capital
requirements, and renews its revolving line of credit. For fiscal 2008, Virco has entered into a
revolving credit facility with Wells Fargo Bank, amended and restated March 18, 2008, which
provides a secured revolving line of credit. Available borrowing under the line ranges from
$20-$65 million depending upon the period of the seasonal business cycle. The interest rate paid
under the loan adjusts quarterly depending upon rolling 12 month EBITDA. The Company can elect
either LIBOR or Prime-based rate. The revolving line has a 23-month maturity.
The line of credit is secured by the Companys accounts receivable, inventories, and equipment and
property. The credit facility with Wells Fargo Bank is subject to various financial covenants and
places certain restrictions on capital expenditures, new operating leases, dividends and
23
the
repurchase of the Companys common stock. In addition, there is a clean down provision that
requires the Company to reduce borrowings under the line to less than $10 million for a period of
30 days each fiscal year. The Company believes that normal operating cash flow will allow it to
meet the clean down requirement with no adverse impact of the Companys liquidity. Approximately
$19,074,000 was available for borrowing as of January 31, 2008.
During 2007 and 2006 the Company strengthened its balance sheet and increased liquidity through
three primary methods. First, the Company earned an after-tax profit of approximately $22.2
million in 2007 and $7.5 million in 2006. The 2007 results included a $10,700,000 adjustment to
deferred tax assets, but despite this large non-cash item, the Company still recorded $16,884,000
of operating cash flow. Second, in 2006 the Company raised
approximately $4.8 million through a
private placement of equity. Third, our continued disciplines over capital expenditures resulted
in depreciation expense in excess of capital expenditures by approximately $1.8 million in 2007 and
$3.6 million in 2006. This improved financial strength allowed the Company to run the factories at
increased levels of production during the fourth quarter. It is the Companys intent to run
production at a more level rate building for the summer of 2008. This will allow us to use our
permanent work force to build component inventory early in the year, relying less on relatively
inefficient temporary labor to increase production rates closer to the summer.
During fiscal year 2005, the Company incurred operating losses, yet managed to have positive cash
flow from operations. This was accomplished through the following actions. In 2005, the Company
spent $3.5 million on capital expenditures compared to $8.8 million of depreciation expense.
Increases in inventory were substantially financed by increases in vendor credit. The Company is
budgeting for capital expenditures to be slightly less than depreciation for fiscal year 2008.
As a result of the increased material costs previously described, the Company violated debt
covenants related to the line of credit with Wells Fargo at the end of the third quarter of 2005.
The violation of covenants was waived at the end of the quarter, and the Company re-negotiated its
line of credit with the bank effective December 6, 2005.
Management believes cash generated from operations and from the previously described sources will
be adequate to meet its capital requirements in the next 12 months.
Long-Term Capital Requirements
In addition to short-term liquidity considerations, the Company continually evaluates long-term
capital requirements. From 1997 through 2000, the Company completed two large capital projects,
which have had significant effects on cash flow for the past six years. The first project was the
implementation of the SAP enterprise resources planning system. The second project was the
expansion and re-configuration of the Conway, Arkansas, manufacturing and distribution facility.
Upon completion of these projects, the Company dramatically reduced capital spending. During
2001-2005 capital expenditures ranged from 25%-40% of depreciation expense. Management intends
to limit future capital spending until growth in sales volume fully utilizes the new plant and
distribution capacity. Capital expenditures will continue to focus on new product development
along with the tooling and new processes required to produce new products. The Company has
established a goal of limiting capital spending to less than $6,000,000 for 2008, which is slightly
less than anticipated depreciation expense.
Asset Impairment
In 2002, Virco acquired certain assets of Furniture Focus, including its proprietary PlanSCAPE®
software. As part of this acquisition, the Company recorded goodwill of $2,200,000. During the
period from 2003 to 2005, the Company rolled out the Furniture Focus package business nationwide
and expended significant effort training the sales force in package selling. In 2006, Virco
released the next generation of PlanSCAPE software and for 2008 the Company anticipates several
enhancements to PlanSCAPE. Virco evaluates the impairment of goodwill at least annually, or when
indicators of impairment occur. As of January 31, 2008, there has been no impairment to the
goodwill recorded.
In December 2003, Virco acquired certain assets of Corex Products, Inc., a manufacturer of
compression-molded components, for approximately $1 million. The assets have been transferred to
the Companys Conway, Arkansas, location where they have been integrated with Vircos existing
compression-molding operation. In connection with this acquisition, Virco acquired certain patents
and other intangible assets. As of January 31, 2008, there has been no impairment to the intangible
assets recorded.
Virco made substantial investments in its infrastructure in 1998, 1999, and 2000. The investments
included a new factory, new warehouse, and new production and distribution equipment. The factory,
warehouse, and equipment acquired are used to produce, store, and ship a variety of product lines,
and the use of any one piece of equipment is not dependent on the success or volume of any
individual product. New products are designed to use as many common or existing components as
practical. As a result, both our ATS inventory components and the machines used to produce them
become more versatile. Virco evaluates the potential for impaired assets on a quarterly basis. As
of January 31, 2008, there has been no impairment to the long-term assets of the Company.
Contractual Obligations
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
24
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 Torrance
manufacturing and distribution facility is leased under an operating lease through 2010. The
Company has one five-year option to extend the lease. The Company does not have any lease
obligations or purchase commitments in excess of normal recurring obligations. Leasehold
improvements and tenant improvement allowances are depreciated over the lesser of the expected life
of the asset or the lease term.
Contractual Obligations
Payments Due by Period
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Less than 1 |
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|
More than 5 |
(In thousands) |
|
Total |
|
year |
|
1-3 years |
|
3-5 years |
|
years |
|
Long-Term debt obligations |
|
$ |
3,727 |
|
|
$ |
12 |
|
|
$ |
3,680 |
|
|
$ |
24 |
|
|
$ |
11 |
|
Interest on long-term debt
obligations |
|
|
447 |
|
|
|
1 |
|
|
|
442 |
|
|
|
3 |
|
|
|
1 |
|
Capital lease obligations |
|
|
119 |
|
|
|
62 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
15,622 |
|
|
|
6,791 |
|
|
|
6,748 |
|
|
|
1,666 |
|
|
|
417 |
|
Purchase obligations |
|
|
15,910 |
|
|
|
15,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,825 |
|
|
$ |
22,776 |
|
|
$ |
10,927 |
|
|
$ |
1,693 |
|
|
$ |
429 |
|
|
|
|
We may be required to make significant cash outlays related to our unrecognized tax benefits.
However, due to the uncertainty of the timing of future cash flows associated with our unrecognized
tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement,
if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits of $760,000
as of January 31, 2008, have been excluded from the contractual obligations table above. For
further information related to unrecognized tax benefits, see Note 6, Income Taxes, to the
consolidated financial statements included in this report.
Vircos 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, 2008, the Company had bonds outstanding valued at approximately
$3,800,000. To the best of managements knowledge, in over 58 years of selling to schools, Virco
has never had a bid or performance bond called.
The Company provides a warranty against all substantial defects in material and workmanship. In
2005 the Company extended its standard warranty from five years to 10 years. The Companys
warranty is not a guarantee of service life, which depends upon events outside the Companys
control and may be different from the warranty period. The Company accrues an estimate of its
exposure to warranty claims based upon both product sales data, and an analysis of actual warranty
claims incurred. At the current time, management cannot reasonably determine whether warranty
claims for the upcoming fiscal year will be less than, equal to, or greater than warranty claims
incurred in 2007. The following is a summary of the Companys warranty-claim activity during 2007
and 2006.
|
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|
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
Beginning balance |
|
$ |
1,750 |
|
|
$ |
1,500 |
|
|
|
|
|
Provision |
|
|
938 |
|
|
|
1,154 |
|
|
|
|
|
Costs incurred |
|
|
(938 |
) |
|
|
(904 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,750 |
|
|
$ |
1,750 |
|
|
|
|
|
|
|
|
Retirement Obligations
The Company provides retirement benefits to employees and non-employee directors under three
defined benefit retirement plans; the Virco Employees 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.
Accounting policy regarding pensions requires management to make complex and subjective estimates
and assumptions relating to amounts which are inherently uncertain. Three primary economic
assumptions influence the reported values of plan liabilities and pension costs. The Company takes
the following factors into consideration.
The discount rate represents an estimate of the rate at which retirement plan benefits could
effectively be settled. The Company obtains data on several reference points when setting the
discount rate including current rates of return available on longer term high-grade bonds and
changes in rates that have occurred over the past year. This assumption is sensitive to movements
in market rates that have occurred since the preceding
25
valuation date, and therefore, may change from year to year. For 2007, the Company used a 6.00%
discount rate. For 2006 the Company used a 5.75% discount rate. For 2005 the Company used a 6.5%
discount rate.
Because the Company froze future benefit accruals for all three defined benefit plans, the
compensation increase assumption had no impact on pension expense, accumulated benefit obligation
or projected benefit obligation for the period ended January 31, 2008 or 2007.
The assumed rate of return on plan assets represents an estimate of long-term returns available to
investors who hold a mixture of stocks, bonds, and cash equivalent securities. When setting its
expected return on plan asset assumptions, the Company considers long-term rates of return on
various asset classes (both historical and forecasted, using data collected from various sources
generally regarded as authoritative) in the context of expected long-term average asset allocations
for its defined benefit pension plan. For 2007, 2006 and 2005 the Company used a 6.5% expected
return on plan assets.
Effective December 31, 2003, benefit accruals were frozen for all three plans. Employees can
continue to vest under the benefits earned to date, but no covered participants will earn
additional benefits under the plan freeze. In 2003, as a result of the freeze, the projected
benefit obligation decreased by approximately $7,500,000. The plan freeze is not intended to be
permanent. It is managements intention to restore some form of a retirement benefit, in the form
of a 401(k) match or restoration of the pension, when the Companys profitability and cash flow
allow. During 2007, 2006, and 2005, the Companys results of operations and financial position did
not allow for a retirement benefit to be restored. Benefit accruals under the plans have remained
frozen.
It is the Companys intent to maintain the funded status of the qualified plan at a target of 90%
of the current liability as determined by the plans actuaries. The Company contributed $3.1
million to the trust in 2007 and made no contributions to the pension trust during 2006 or 2005.
Contributions during 2008 will depend upon actual investment results and benefit payments, but are
anticipated to be approximately $3 million. During 2007, 2006, and 2005, the Company paid
approximately $370,000, $255,000, and $255,000 per year under the non-qualified plans. It is
anticipated that contributions to non-qualified plans will be approximately $526,000 for 2008.
During 2006, the Company implemented SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans. The implementation of this standard did not impact pension
expense for the year. As a result of implementing SFAS No. 158, accrued pension liability
increased by approximately $1.9 million, offset by an increase in other comprehensive loss. At
January 31, 2008, accumulated other comprehensive loss of approximately $6.1 million ($5.1 million
net of tax) is attributable to the pension plans.
The Company does not anticipate making any significant changes to the pension assumptions in the
near future. If the Company were to have used different assumptions in the fiscal year ended
January 31, 2008, a 1% reduction in investment return would have increased expense by approximately
$100,000, a 1% change in the rate of compensation increase would had no impact, and a 1% reduction
in the discount rate would have increased expense by $225,000. A 1% reduction in the discount rate
would have increased the PBO by approximately $3.6 million. If Virco elected to make the plan
freeze permanent, pension expense would increase by approximately $64,000. Refer to Note 4 to the
consolidated financial statements for additional information regarding the pension plans and
related expenses.
Stockholders Equity
Prior to 2003, Virco had established a track record of paying cash dividends to its stockholders
for more than 20 consecutive years. As a result of operating losses, the Company
discontinued paying dividends in the second quarter of 2003. The Company initiated a $0.025 per
share quarterly cash dividend in the fourth quarter of 2007. The Board of Directors intends to
continue payment of a quarterly cash dividend as long as the results of operations and cash flow
allow. The Board must approve each quarterly dividend payment. The Companys current line of
credit with Wells Fargo Bank restricts funds used for cash dividends and stock repurchases to a
maximum of $5 million. The Company did not repurchase any shares of stock during 2007, 2006 and
2005.
Virco issued a 10% stock dividend or 3/2 stock split every year beginning in 1982 through 2002.
Although the stock dividend has no cash consequences to the Company, the accounting methodology
required for 10% dividends has affected the equity section of the balance sheet. When the Company
records a 10% stock dividend, 10% of the market capitalization of the Company on the date of the
declaration is reclassified from retained earnings to additional paid-in capital. During the
period from 1982 through 2002, the cumulative effect of the stock dividends has been to reclassify
over $122 million from retained earnings to additional paid-in capital. The equity section of the
balance sheet on January 31, 2008, reflects additional paid-in capital of approximately $114
million and deficit retained earnings of approximately $37 million. Other than the losses incurred
during 2003, 2004, and 2005, the retained deficit is a result of the accounting reclassification,
and is not the result of accumulated losses.
On June 6, 2006, the Company sold 1,072,041 shares of its common stock (the Shares), and warrants
to purchase 268,010 shares of its common stock, to WEDBUSH, Inc. and clients of Wedbush Morgan
Securities, Inc. for an aggregate purchase price of $5 million, or $4.66 per Share.
On June 26, 2006, the Company entered into a follow-on investment agreement with
certain directors and members of management. The investment with directors and management was made
under substantially the same terms but at a higher price, for the issuance of 57,455 shares of
common stock and 14,363 warrants, yielding proceeds of approximately $288,000. The investment with
directors and managers was completed in the fourth quarter of 2006. The Company incurred
approximately $481,000 in closing costs which were netted against the proceeds received from the
sale of shares. The cash received from the shares of stock was used to strengthen the balance
sheet and finance seasonal business activities.
26
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 the
2005 and 2004 California Waste Reduction Awards Program, designation in 2003 as a Charter Member of
the WasteWise Hall of Fame, in 2002 as a WasteWise Partner of the Year, and in 2001 as a WasteWise
Program Champion for Large Businesses by the United States Environmental Protection Agency.
Despite these significant accomplishments, environmental laws have changed rapidly in recent years,
and Virco may be subject to more stringent environmental laws in the future. The Company has
expended, and expects to continue to spend, significant amounts in the future to comply with
environmental laws. Normal recurring expenses relating to operating our factories in a manner that
meets or exceeds environmental laws are matched to the cost of producing inventory. Despite our
significant dedication to operating in compliance with applicable laws, there is a risk that the
Company could fail to comply with a regulation or that applicable laws and regulations could
change. Should such eventualities occur, the Company records liabilities for remediation costs
when remediation costs are probable and can be reasonably estimated.
In 2007 and 2006, the Company was self-insured
for product and general liability losses ranging from $250,000-$500,000 per
occurrence, for workers compensation losses up to $250,000 per occurrence, and for auto liability
up to $50,000 per occurrence. In prior years the Company has been self-insured for workers
compensation, automobile, product, and general liability losses. The Company has purchased
insurance to cover losses in excess of the self-insured retention or deductible up to a limit of
$30,000,000. For the insurance year beginning April 1, 2008, the Company will be self-insured for
product liability losses up to $250,000 per occurrence, for workers compensation losses up to
$250,000 per occurrence, and for auto liability up to $50,000 per occurrence. In future years, the
Companys exposure to self-insured retentions will vary depending upon the market conditions in the
insurance industry and the availability of cost-effective insurance coverage.
During the past 10 years the Company has aggressively pursued a program to improve product quality,
reduce product liability claims and losses, and to more aggressively litigate product liability
cases. This program has continued through 2008 and has resulted in reductions in product liability
claims and litigated product liability cases. In addition, the Company has active safety programs
to improve plant safety and control workers compensation losses. Management does not anticipate
that any related settlement, after consideration of the existing reserves for claims and potential
insurance recovery, would have a material adverse effect on the Companys financial position,
results of operations, or cash flows.
Off-Balance Sheet Arrangements
The Company did not enter into any material off-balance sheet arrangements during its 2007 fiscal
year, nor did the Company have any material off-balance sheet arrangements outstanding at January
31, 2008.
New Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. This Interpretation is effective for
fiscal years beginning after December 15, 2006. The Company adopted the provision of FIN 48 on
February 1, 2007, the beginning of fiscal 2007. See Note 6 Income Taxes for additional
information.
In February 2006, the Financial Accounting Standards Board (the FASB) issued Statement of
Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS
155). SFAS 155 establishes, among other things, the accounting for certain derivatives embedded in
other financial instruments. This statement permits fair value remeasurement for any hybrid
financial instrument containing an embedded derivative that would otherwise require bifurcation. It
also requires that beneficial interests in securitized financial assets be accounted for in
accordance with SFAS No. 133. SFAS 155 is effective for fiscal years beginning after September 15,
2006. The Company adopted SFAS 155 on February 1, 2007, the beginning of fiscal 2007. It did not
have a material impact on the Companys financial operations or financial positions.
In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements (SFAS No. 157). This
statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157
was scheduled to be effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB
delayed the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for
all non-financial assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis. The Company is currently
evaluating the impact on its financial statements, if any, from the adoption of this standard.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). This
standard requires recognition of the funded status of a benefit plan in the statement of financial
position. The standard also requires recognition in other comprehensive income of certain gains and
losses that arise during the period but are deferred under pension accounting rules, as well as
modifies the timing of reporting and adds certain disclosures. SFAS No. 158 provides recognition
and disclosure elements to be effective as of the end of the fiscal after December 15, 2006, and
measurement elements to be effective for fiscal years ending after December 15, 2008. The Company
adopted the recognition provisions of
27
SFAS No. 158 and applied them to the funded status of the
defined benefit plans resulting in a decrease in Shareholders Equity of $1,900,000.
In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently required to be measured at
fair value. The objective of SFAS 159 is to improve financial reporting by providing entities with
the opportunity to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting provisions. This
statement is effective as of the beginning of any fiscal year beginning after November 15,
2007. The Company is currently evaluating the impact to its financial statements, if any, from the
adoption of this standard.
In December 2007, the FASB issued SFAS No. 141 (Revised), Business Combinations (SFAS No.
141(R)), replacing SFAS No. 141, Business Combinations (SFAS No. 141), and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements An Amendment of ARB No. 51 (SFAS
No. 160). SFAS No. 141(R) retains the fundamental requirements of SFAS No. 141, broadens its
scope by applying the acquisition method to all transactions and other events in which one entity
obtains control over one or more other businesses, and requires, among other things, that assets
acquired and liabilities assumed be measured at fair value as of the acquisition date, that
liabilities related to contingent considerations be recognized at the acquisition date and
remeasured at fair value in each subsequent reporting period, that acquisition-related costs be
expensed as incurred, and that income be recognized if the fair value of the net assets acquired
exceeds the fair value of the consideration transferred. SFAS No. 160 establishes accounting and
reporting standards for noncontrolling interests (i.e., minority interests) in a subsidiary,
including changes in a parents ownership interest in a subsidiary and requires, among other
things, that noncontrolling interests in subsidiaries be classified as a separate component of
equity. Except for the presentation and disclosure requirements of SFAS No. 160, which are to be
applied retrospectively for all periods presented, SFAS No. 141 (R) and SFAS No. 160 are to be
applied prospectively in financial statements issued for fiscal years beginning after December 15,
2008. The Company does not anticipate any material impact to its financial statements from the
adoption of SFAS No. 160.
In October 2006, the FASB ratified EITF 06-4, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This
statement is effective for years beginning after December 15, 2007. This statement clarifies that
FASB 106, Employers Accounting for Post-Retirement Benefits other than Pensions, applies to
endorsement split-dollar life insurance arrangements. The Company anticipates recording a liability
of approximately $2,060,000 at that time. The Company has purchased life insurance on the lives of
the participants that will pay death benefits of in excess of the amount promised to participants.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Inflation and Future Change in Prices
Inflation rates had a modest impact on the Company in 2007 and 2006, and a significant impact on
the results of operations for 2005 and 2004. During 2007 and 2006, raw material prices increased,
but the rate of increase and volatility of pricing was substantially more moderate when compared to
the prior two years. During 2005 and 2004 the Company faced substantial increases in the cost of
raw materials and energy, particularly steel, plastic, and diesel fuel. For 2008, the Company
anticipates continued upward pressure on costs, particularly in the areas of certain raw materials,
transportation, energy and employee benefits. The prices of steel, plastic and energy have been
more volatile in the first quarter of 2008 than in the prior two years. There is continued
uncertainty on raw material costs that are affected by the price of oil, especially plastics.
Transportation costs are also expected to be adversely affected by increased oil prices, in the
form of increased operation costs for our fleet, and surcharges on freight paid to third-party
carriers. Virco expects to incur continued pressure on employee benefit costs. Virco has
aggressively addressed these costs by reducing headcount, freezing pension benefits, passing on a
portion of increased medical costs to employees, and hiring temporary workers who are not eligible
for benefit programs.
To recover the cumulative impact of increased costs, the Company raised the list prices for Vircos
products in 2005, 2006, and 2007. The Company has raised prices on its more significant contracts
for 2008, and will raise prices on other contracts as they are renewed. As a significant portion
of Vircos business is obtained through competitive bids, the Company is carefully considering
increased material costs in addition to increased transportation costs as part of the bidding
process. Total material costs for 2008, as a percentage of sales, could be higher than in 2007,
but it is the Companys intention to raise selling prices enough so that material costs, as a
percentage of sales, will be comparable to the prior year. However, no assurance can be given that
the Company will experience stable, modest or substantial increases in prices in 2008. 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. Through 2001-2007, the Company significantly reduced its
expenditures for capital assets, but in the previous three fiscal years (1998, 1999, and 2000) the
Company made the significant fixed-asset acquisitions described above. The assets acquired result
in higher depreciation charges, but due to technological advances should result in operating cost
savings and improved product quality. In addition, some depreciation charges were offset by a
reduction in lease expense. The Company is also subject to interest rate risk related to its
$3,700,000 of borrowings as of January 31, 2008, and any seasonal borrowings used to finance
additional inventory and receivables. Rising interest rates may adversely affect the Companys
results of operations and cash flows related to its variable-rate bank borrowings. Accordingly, a
100 basis point upward fluctuation in the lenders base rate would have caused the Company to incur
additional interest charges
28
of approximately $192,000 for the 12 months ended January 31, 2008. The
Company would have benefited from a similar interest savings if the base rate were to have
fluctuated downward by a like amount.
The Company has used 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, 2008 and 2007, the Company had no derivative instruments.
29
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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32 |
|
|
|
|
|
33 |
|
|
|
|
|
34 |
|
|
|
|
|
35 |
|
|
|
|
|
36 |
|
|
|
|
|
37 |
|
|
|
|
|
38 |
|
|
|
|
|
39 |
|
30
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Virco Mfg. Corporation (the Company) is responsible for establishing and
maintaining adequate internal control over financial reporting and for the assessment of the
effectiveness of internal control over financial reporting. As defined by the Securities and
Exchange Commission, internal control over financial reporting is a process designed by, or
supervised by, the Companys principal executive and principal financial officers, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements in accordance with generally accepted accounting principles.
The Companys internal control over financial reporting is supported by written policies and
procedures, that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the Companys assets; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of the Companys
management and directors; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of the Companys annual financial statements, management of
the Company has undertaken an assessment of the effectiveness of the Companys internal control
over financial reporting as of January 31, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Managements assessment included an evaluation of the design of the Companys internal
control over financial reporting and testing of the operational effectiveness of the Companys
internal control over financial reporting.
Based on this assessment, management did not identify any material weakness in the Companys
internal control, and management has concluded that the Companys internal control over financial
reporting was effective as of January 31, 2008.
Ernst & Young LLP, the independent registered public accounting firm that audited the
Companys financial statements, has issued a report on internal control over financial reporting, a
copy of which is included in this Annual Report.
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The Board of Directors and Stockholders of Virco Mfg. Corporation
We have audited Virco Mfg. Corporations internal control over financial reporting as of January
31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Virco Mfg.
Corporations management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Virco Mfg. Corporation maintained, in all material respects, effective internal
control over financial reporting as of January 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Virco Mfg. Corporation as of January 31,
2008 and 2007, and the related consolidated statements of operations, stockholders equity, and
cash flows for each of the three years in the period ended January 31, 2008 of Virco Mfg.
Corporation and our report dated April 15, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
April 15, 2008
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Virco Mfg. Corporation
We have audited the accompanying consolidated balance sheets of Virco Mfg. Corporation as of
January 31, 2008 and 2007, and the related consolidated statements of operations, stockholders
equity and cash flows for each of the three years in the period ended January 31, 2008. Our audits
also included the financial statement schedule listed in the Index at Items 15. These financial
statements and schedule are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (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, 2008 and
2007, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended January 31, 2008, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly in all material
respects the information set for the therein.
As discussed in Notes 1 and 5 to the consolidated financial statements, on February 1, 2006, the
Company changed its method of accounting for share-based payments in accordance with Statement of
Financial Accounting Standards No. 123(R).
Additionally, as discussed in Notes 1 and 4 to the consolidated financial statements, on January
31, 2007, the Company changed its method of accounting for defined benefit pension plans in
accordance with Statement of Financial Accounting Standards No. 158.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Virco Mfg. Corporations internal control over financial reporting as of
January 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 15,
2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
April 15, 2008
33
Virco Mfg. Corporation
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
January 31 |
|
|
2008 |
|
2007 |
|
|
(In thousands) |
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash |
|
$ |
2,066 |
|
|
$ |
1,892 |
|
Trade accounts receivables (net of allowance for
doubtful accounts of $200 in 2007 and 2006) |
|
|
15,474 |
|
|
|
18,596 |
|
Other receivables |
|
|
284 |
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
|
|
|
|
|
|
Finished goods, net |
|
|
14,564 |
|
|
|
11,651 |
|
Work in process, net |
|
|
20,653 |
|
|
|
19,690 |
|
Raw materials and supplies, net |
|
|
7,791 |
|
|
|
6,496 |
|
|
|
|
|
|
|
43,008 |
|
|
|
37,837 |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net |
|
|
4,189 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
1,493 |
|
|
|
1,479 |
|
|
|
|
Total current assets |
|
|
66,514 |
|
|
|
60,032 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
Land and land improvements |
|
|
3,612 |
|
|
|
3,596 |
|
Buildings and building improvements |
|
|
49,558 |
|
|
|
49,555 |
|
Machinery and equipment |
|
|
114,286 |
|
|
|
109,730 |
|
Leasehold improvements |
|
|
1,475 |
|
|
|
1,323 |
|
|
|
|
|
|
|
168,931 |
|
|
|
164,204 |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization |
|
|
122,598 |
|
|
|
116,116 |
|
|
|
|
Net property, plant and equipment |
|
|
46,333 |
|
|
|
48,088 |
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets |
|
|
2,350 |
|
|
|
2,350 |
|
Less accumulated amortization |
|
|
52 |
|
|
|
39 |
|
|
|
|
Net goodwill and other intangible assets |
|
|
2,298 |
|
|
|
2,311 |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net |
|
|
5,652 |
|
|
|
|
|
Other assets |
|
|
6,238 |
|
|
|
5,846 |
|
|
|
|
Total assets |
|
$ |
127,035 |
|
|
$ |
116,277 |
|
|
|
|
See accompanying notes.
34
Virco Mfg. Corporation
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
January 31 |
|
|
2008 |
|
2007 |
|
|
(In thousands, except per share data) |
Liabilities |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Checks released but not yet cleared bank |
|
$ |
4,163 |
|
|
$ |
2,563 |
|
Accounts payable |
|
|
14,313 |
|
|
|
14,463 |
|
Accrued compensation and employee benefits |
|
|
7,762 |
|
|
|
8,094 |
|
Income tax payable |
|
|
610 |
|
|
|
989 |
|
Current portion of long-term debt |
|
|
74 |
|
|
|
5,074 |
|
Other accrued liabilities |
|
|
7,596 |
|
|
|
5,855 |
|
|
|
|
Total current liabilities |
|
|
34,518 |
|
|
|
37,038 |
|
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
|
|
|
Accrued self-insurance retention and other |
|
|
3,848 |
|
|
|
3,962 |
|
Accrued pension expenses |
|
|
12,749 |
|
|
|
15,949 |
|
Long-term debt, less current portion |
|
|
3,772 |
|
|
|
10,190 |
|
|
|
|
Total non-current liabilities |
|
|
20,369 |
|
|
|
30,101 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
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
14,428,662 shares in 2007 and 14,379,506 shares in 2006 |
|
|
144 |
|
|
|
143 |
|
Additional paid-in capital |
|
|
114,318 |
|
|
|
113,737 |
|
Accumulated deficit |
|
|
(37,224 |
) |
|
|
(59,082 |
) |
Accumulated comprehensive loss |
|
|
(5,090 |
) |
|
|
(5,920 |
) |
|
|
|
Total stockholders equity |
|
|
72,148 |
|
|
|
48,878 |
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
127,035 |
|
|
$ |
116,277 |
|
|
|
|
See accompanying notes.
35
Virco Mfg. Corporation
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended January 31 |
|
|
2008 |
|
2007 |
|
2006 |
|
|
(In thousands, except per share data) |
Net sales |
|
$ |
229,565 |
|
|
$ |
223,107 |
|
|
$ |
214,450 |
|
Costs of goods sold |
|
|
145,901 |
|
|
|
144,495 |
|
|
|
149,785 |
|
|
|
|
Gross profit |
|
|
83,664 |
|
|
|
78,612 |
|
|
|
64,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
69,213 |
|
|
|
66,828 |
|
|
|
70,271 |
|
Separation costs |
|
|
|
|
|
|
|
|
|
|
742 |
|
Interest expense, net |
|
|
2,276 |
|
|
|
3,792 |
|
|
|
3,258 |
|
(Gain) loss on sale of assets, net |
|
|
(17 |
) |
|
|
1 |
|
|
|
77 |
|
|
|
|
Income (loss) before income taxes |
|
|
12,192 |
|
|
|
7,991 |
|
|
|
(9,683 |
) |
Income tax (benefit) expense |
|
|
(10,027 |
) |
|
|
446 |
|
|
|
(109 |
) |
|
|
|
Net income (loss) |
|
$ |
22,219 |
|
|
$ |
7,545 |
|
|
$ |
(9,574 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share (a) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.54 |
|
|
$ |
0.56 |
|
|
$ |
(0.73 |
) |
Diluted |
|
$ |
1.53 |
|
|
$ |
0.55 |
|
|
$ |
(0.73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
14,401 |
|
|
|
13,590 |
|
|
|
13,114 |
|
Diluted |
|
|
14,539 |
|
|
|
13,611 |
|
|
|
13,114 |
|
|
|
|
(a) |
|
Net loss per share was calculated based on basic shares outstanding due to the anti-dilutive
effect on the inclusion of common stock equivalent shares. |
See accompanying notes.
36
Virco Mfg. Corporation
Consolidated Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Comprehensive |
|
|
|
|
In thousands, except share data |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Loss |
|
|
Total |
|
|
Balance at January 31, 2005;
as previously reported |
|
|
13,098,364 |
|
|
$ |
131 |
|
|
$ |
107,883 |
|
|
$ |
(55,407 |
) |
|
|
|
|
|
$ |
(3,342 |
) |
|
$ |
49,265 |
|
Adjustment to beginning
balances to reflect tax effect
of minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,646 |
) |
|
|
|
|
|
|
1,646 |
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,574 |
) |
|
$ |
(9,574 |
) |
|
|
|
|
|
|
(9,574 |
) |
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(851 |
) |
|
|
(851 |
) |
|
|
(851 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,425 |
) |
|
|
|
|
|
|
|
|
Stock issued under option plans |
|
|
38,924 |
|
|
|
|
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260 |
|
|
|
|
Balance at January 31, 2006 |
|
|
13,137,288 |
|
|
|
131 |
|
|
|
108,143 |
|
|
|
(66,627 |
) |
|
|
|
|
|
|
(2,547 |
) |
|
|
39,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,545 |
|
|
|
7,545 |
|
|
|
|
|
|
|
7,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,462 |
) |
|
|
(1,462 |
) |
|
|
(1,462 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,083 |
|
|
|
|
|
|
|
|
|
Stock based payments under
stock compensation plans |
|
|
112,722 |
|
|
|
|
|
|
|
754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
754 |
|
Stock issued under private
placement |
|
|
1,129,496 |
|
|
|
12 |
|
|
|
4,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,852 |
|
Adoption of
SFAS No. 158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,911 |
) |
|
|
(1,911 |
) |
|
|
|
Balance at January 31, 2007 |
|
|
14,379,506 |
|
|
|
143 |
|
|
|
113,737 |
|
|
|
(59,082 |
) |
|
|
|
|
|
|
(5,920 |
) |
|
|
48,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,219 |
|
|
|
22,219 |
|
|
|
|
|
|
|
22,219 |
|
Minimum pension liability, net
of tax effect of $553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
830 |
|
|
|
830 |
|
|
|
830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,049 |
|
|
|
|
|
|
|
|
|
Stock based payments under
stock compensation plans |
|
|
49,156 |
|
|
|
1 |
|
|
|
581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
582 |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(361 |
) |
|
|
|
|
|
|
|
|
|
|
(361 |
) |
|
|
|
Balance at January 31, 2008 |
|
|
14,428,662 |
|
|
$ |
144 |
|
|
$ |
114,318 |
|
|
$ |
(37,224 |
) |
|
|
|
|
|
$ |
(5,090 |
) |
|
$ |
72,148 |
|
|
|
|
See accompanying notes.
37
Virco Mfg. Corporation
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31 |
|
|
2008 |
|
2007 |
|
2006 |
|
|
(In thousand, except share data) |
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
22,219 |
|
|
$ |
7,545 |
|
|
$ |
(9,574 |
) |
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation and amortization |
|
|
6,643 |
|
|
|
7,199 |
|
|
|
8,844 |
|
Provision for doubtful accounts |
|
|
53 |
|
|
|
72 |
|
|
|
(2 |
) |
(Gain) loss on sale of property, plant and equipment |
|
|
(17 |
) |
|
|
1 |
|
|
|
77 |
|
Deferred income taxes |
|
|
(10,654 |
) |
|
|
260 |
|
|
|
|
|
Stock based compensation |
|
|
678 |
|
|
|
754 |
|
|
|
408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
trade accounts receivable |
|
|
3,070 |
|
|
|
(1,399 |
) |
|
|
(1,271 |
) |
Other receivables |
|
|
(56 |
) |
|
|
149 |
|
|
|
(212 |
) |
Inventories |
|
|
(5,171 |
) |
|
|
(6,220 |
) |
|
|
(5,570 |
) |
Income taxes |
|
|
(379 |
) |
|
|
142 |
|
|
|
2,126 |
|
Prepaid expenses and other current assets |
|
|
(290 |
) |
|
|
14 |
|
|
|
(153 |
) |
Accounts payable and accrued liabilities |
|
|
788 |
|
|
|
2,398 |
|
|
|
5,576 |
|
Other |
|
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
Net cash provided by operating activities |
|
|
16,884 |
|
|
|
10,915 |
|
|
|
304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(4,832 |
) |
|
|
(3,622 |
) |
|
|
(3,470 |
) |
Proceeds from sale of property, plant and equipment |
|
|
17 |
|
|
|
|
|
|
|
15 |
|
Net investment in life insurance |
|
|
(116 |
) |
|
|
(167 |
) |
|
|
109 |
|
|
|
|
Net cash used in investing activities |
|
|
(4,931 |
) |
|
|
(3,789 |
) |
|
|
(3,346 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
3,582 |
|
|
|
|
|
|
|
3,330 |
|
Repayment of long-term debt |
|
|
(15,000 |
) |
|
|
(11,475 |
) |
|
|
|
|
Proceeds from issuance of common stock |
|
|
|
|
|
|
4,752 |
|
|
|
9 |
|
Cash dividend paid |
|
|
(361 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(11,779 |
) |
|
|
(6,723 |
) |
|
|
3,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
174 |
|
|
|
403 |
|
|
|
297 |
|
Cash at beginning of year |
|
|
1,892 |
|
|
|
1,489 |
|
|
|
1,192 |
|
|
|
|
Cash at end of year |
|
$ |
2,066 |
|
|
$ |
1,892 |
|
|
$ |
1,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of amounts capitalized |
|
$ |
2,276 |
|
|
$ |
3,792 |
|
|
$ |
3,258 |
|
Income tax, net |
|
|
1,006 |
|
|
|
44 |
|
|
|
(2,235 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash activities |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued asset retirement obligations |
|
$ |
669 |
|
|
$ |
626 |
|
|
$ |
583 |
|
Assets acquired under capital leases |
|
|
|
|
|
|
186 |
|
|
|
|
|
See accompanying notes
38
VIRCO MFG. CORPORATION
Notes to Financial Statements
January 31, 2008
1. Summary of Business and Significant Accounting Policies
Business
Virco Mfg. Corporation (the Company), which operates in one business segment, is engaged in the
design, production and distribution of quality furniture for the commercial and education markets.
Over 58 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.
The Company operates in a seasonal business, and requires significant amounts of working capital
through the existing credit facility to fund acquisitions of inventory and finance receivables
during the summer delivery season. Restrictions imposed by the terms of the existing credit
facility may limit the Companys operating and financial flexibility. However, management believes
that its existing cash and amounts available under the credit facility, and any cash generated from
operations will be sufficient to fund its working capital requirements, capital expenditures and
other obligations through the next 12 months.
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.
Management Use of Estimates
Preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Significant estimates made by management include, but
are not limited to, valuation of: inventory; deferred tax assets and liabilities; useful lives of
property, plant, and equipment; intangible assets; liabilities under pension, warranty, self-insurance, and
environmental claims; and the ultimate collection of accounts receivable. Actual results could
differ from these estimates.
Fiscal Year End
Fiscal years 2007, 2006 and 2005, refer to the years ended January 31, 2008, 2007 and 2006,
respectively.
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. Sales to the Companys recurring
customers are generally made on open account with terms consistent with the industry. Credit is
extended based on an evaluation of the customers financial condition and payment history. Past
due accounts are determined based on how recently payments have been made in relation to the terms
granted. Amounts are written off against the allowance in the period that the Company determines
that the receivable is not collectable. The Company purchases insurance on receivables from
certain commercial customers to minimize the Companys credit risk. The Company does not typically
obtain collateral to secure credit risk. Customers with inadequate credit are required to provide
cash in advance or letters or credit. The Company does not assess interest on receivable balances.
A substantial percentage of the Companys receivables comes from low-risk government entities. No
customers exceeded 10% of the Companys sales for each of the three years in the period ended
January 31, 2008. Foreign sales were less than 5% for the period ended January 31, 2008, and each
of the prior two fiscal years.
No single customer accounted for more than 10% of the Companys accounts receivable at January 31,
2008 or 2007. Because of the short time between shipment and collection, the net carrying value
approximates the fair value for these assets.
Fair
Values of Financial Instruments
The fair
values of our cash, accounts receivable, and
accounts payable approximate their carrying amounts due to their
short-term nature.
Derivatives
The Company has used 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, 2008 and 2007, the Company had no derivative instruments.
39
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. The Company uses LIFO as it results in a better
matching of costs and revenues. The Company records the cost of excess capacity as a period
expense, not as a component of capitalized inventory valuation.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation and
amortization are 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
|
|
shorter of lease or useful life |
The Company did not capitalize interest costs as part of the acquisition cost of property,
plant and equipment for the years ended January 31, 2008, 2007 and 2006. The Company capitalizes
the cost of significant repairs that extend the life of an asset. Repairs and maintenance that do
not extend the life of an asset are expensed as incurred. Depreciation and amortization expense was
$6,643,000, $7,199,000 and $8,844,000 for fiscal year ended January 31, 2008, 2007 and 2006,
respectively.
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. At January 31,
2008 and 2007, the Company had no capitalized software.
The Company leases certain computer equipment under a capital lease. The cost and accumulated
depreciation are included in the property, plant, and equipment
accounts. Depreciation expense was $61,000, $61,000 and $51,000 for fiscal year ended
January 31, 2008, 2007 and 2006, respectively. Assets acquired under
capital leases totaled approximately $0, $180,000, and $0 in fiscal 2007, 2006, and 2005
respectively. Future minimum lease payments under capital leases as of January 31, 2008 are
$62,000 and $57,000 in fiscal 2008 and 2009 respectively.
The Company subleases space at one of its facilities on a month to month basis. Rental income for
fiscal 2007, 2006, and 2005 was $379,000, $330,000, and $36,000 respectively.
The Company has established asset retirement obligations related to leased manufacturing facilities
in accordance with Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for
Asset Retirement Obligations. Accrued asset retirement obligations are recorded at net present
value and discounted over the life of the lease. Asset retirement obligations, included in other
non-current liabilities were $669,000 and $626,000 at January 31, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
Asset |
|
Depreciation |
|
Liability |
|
|
|
Beginning balance at January 31, 2007 |
|
$ |
540,000 |
|
|
$ |
(216,000 |
) |
|
$ |
(626,000 |
) |
Additional obligation |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense |
|
|
|
|
|
|
(109,000 |
) |
|
|
|
|
Accretion expense |
|
|
|
|
|
|
|
|
|
|
(43,000 |
) |
|
|
|
Ending balance at January 31, 2008 |
|
$ |
540,000 |
|
|
$ |
(325,000 |
) |
|
$ |
(669,000 |
) |
|
|
|
Impairment of Long-Lived Assets
An impairment loss is recognized in the event facts and circumstances indicate the carrying amount
of an asset may not be recoverable, and an estimate of future undiscounted cash flows is less than
the carrying amount of the asset. Impairment is recorded based on the excess of the carrying amount
of the impaired asset over the fair value. Generally, fair value represents the Companys expected
future cash flows from the use of an asset or group of assets, discounted at a rate commensurate
with the risks involved. The Company has not recorded an impairment of assets at January 31, 2008
or 2007.
Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net loss by the weighted-average number
of common shares outstanding. Diluted net loss per share is calculated by dividing net loss 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 income (loss) per
share:
40
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per share data |
|
2007 |
|
2006 |
|
2005 |
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
22,219 |
|
|
$ |
7,545 |
|
|
$ |
(9,574 |
) |
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares basic |
|
|
14,401 |
|
|
|
13,590 |
|
|
|
13,114 |
|
|
Common equivalent shares from common stock options and warrants |
|
|
138 |
|
|
|
21 |
|
|
|
|
|
|
|
|
Weighted-average shares diluted |
|
|
14,539 |
|
|
|
13,611 |
|
|
|
13,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share (a) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.54 |
|
|
$ |
0.56 |
|
|
$ |
(0.73 |
) |
Diluted |
|
|
1.53 |
|
|
|
0.55 |
|
|
|
(0.73 |
) |
|
|
|
(a) |
|
For the period ended January 31, 2006, approximately 253,000 shares of unvested stock awards
and incentive stock options were excluded in the computation of diluted net income per share,
as the effect would have been anti-dilutive. |
Goodwill and Other Intangible Assets
The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No.
142, goodwill and intangible assets deemed to have an indefinite life are not amortized but are
subject to annual impairment tests. Impairment tests are prepared in the fourth quarter of each
fiscal year. Other intangible assets are amortized on a straight line basis over their useful lives
(3-17 years).
Information regarding the Companys goodwill and other intangible assets are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
In thousands |
|
Gross Amount |
|
Amortization |
|
Net Amount |
|
Gross Amount |
|
Amortization |
|
Net Amount |
|
|
|
Goodwill (not amortized) |
|
$ |
2,200 |
|
|
$ |
|
|
|
$ |
2,200 |
|
|
$ |
2,200 |
|
|
$ |
|
|
|
$ |
2,200 |
|
Intangible assets |
|
|
150 |
|
|
|
52 |
|
|
|
98 |
|
|
|
150 |
|
|
|
39 |
|
|
|
111 |
|
|
|
|
|
|
|
|
$ |
2,350 |
|
|
$ |
52 |
|
|
$ |
2,298 |
|
|
$ |
2,350 |
|
|
$ |
39 |
|
|
$ |
2,311 |
|
|
|
|
|
|
The Company anticipates that amortization expense will
be approximately $13,000 for 2009 and $7,000 for the next 4 years. The Company does not have amortization
expense other than related to intangible assets.
Environmental Costs
The Company is subject to numerous environmental laws and regulations in the various jurisdictions
in which it operates that (a) govern operations that may have adverse environmental effects, such
as the discharge of materials into the environment, as well as handling, storage, transportation
and disposal practices for solid and hazardous wastes, and (b) impose liability for response costs
and certain damages resulting from past and current spills, disposals or other releases of
hazardous materials. Normal, recurring expenses related to operating the factories in a manner that
meets or exceeds environmental laws and regulations are matched to the cost of producing inventory.
Despite our efforts to comply with existing laws and regulations, compliance with more stringent
laws or regulations, or stricter interpretation of existing laws, may require additional
expenditures by us, some of which may be material. We reserve amounts for such matters when
expenditures are probable and reasonably estimable.
Costs incurred to investigate and remediate environmental waste are expensed, unless the
remediation extends the useful life of the assets employed at the site. At January 31, 2008 and
2007, the Company had not capitalized any remediation costs and had not recorded any amortization
expense in fiscal years 2007, 2006 and 2005.
Advertising Costs
Advertising costs are expensed in the period in which they occur. Selling, general and
administrative expenses include advertising costs of $1,883,000 in 2007, $1,506,000 in 2006 and
$1,826,000 in 2005. Prepaid advertising costs reported as an asset on the balance sheet at January
31, 2008 and 2007, were $418,000 and $352,000, respectively.
Product Warranty Expense
The Company provides a product warranty on most products. The standard warranty offered on products
sold through January 31, 2005, is five years. Effective February 1, 2005, the standard warranty was
increased to 10 years on products sold after February 1, 2005. It generally warranties that
customers can return a defective product during the specified warranty period following purchase in
exchange for a replacement product or that the Company can repair the product at no charge to the
customer. The Company determines whether replacement or repair is appropriate in each circumstance.
The Company uses historic data to estimate appropriate levels of warranty reserves. Because product
mix, production methods, and raw material sources change over time, historic data may not always
provide precise estimates for future warranty expense. The Company recorded warranty reserves of
$1,750,000 as of January 31, 2008 and 2007, respectively.
41
Self-Insurance
In 2007 and 2006, the Company was self-insured for
product and general liability losses ranging from $250,000 to $500,000 per
occurrence, for workers compensation losses up to $250,000 per occurrence, and for auto liability
up to $50,000 per occurrence. In prior years the Company had been self-insured for workers
compensation, automobile, product, and general liability losses. Actuaries assist the Company in
determining its liability for the self-insured component of claims, which have been discounted to
their net present value utilizing a discount rate of 5.75%.
Stock-Based Compensation Plans
The Company has two stock-based compensation plans, which are described more fully in Note 5,
Stock-Based Compensation. Effective February 1, 2006, the Company adopted FASB Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (FAS 123 (R)) using
the modified prospective application method for transition for its two stock-based compensation
plans. Accordingly, prior year amounts have not been restated.
Reclassifications
Certain reclassifications have been made to the prior year balance sheet to conform to the current
year presentation.
Revenue Recognition
The Company recognizes all sales when title passes under its various shipping terms and when
collectability is reasonably assured. The Company reports sales net of sales returns and allowances
and sales tax imposed by various government authorities.
Shipping and Installation Fees
Revenues related to shipping and installation are included as revenue in net sales. Costs related
to shipping and installations are included in operating expenses. For the years ended January 31,
2008, 2007 and 2006, shipping and installation costs of approximately $23,612,000, $22,579,000 and
$23,745,000, respectively, were included in selling, general and administrative expenses.
Accounting for Income Taxes
The Company recognizes deferred income taxes under the asset and liability method of accounting for
income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes.
Deferred income taxes are recognized for differences between the financial statement and tax basis
of assets and liabilities at enacted statutory tax rates in effect for the years in which the
differences are expected to reverse. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation allowance against
deferred tax assets is recorded when it is determined to be more likely than not that the asset
will not be realized.
Accounting for Pensions and Other Postretirement Plans
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). This
standard requires recognition of the funded status of a benefit plan in the statement of financial
position. The standard also requires recognition in other comprehensive income, net of tax, of
certain gains and losses that arise during the period but are deferred under pension accounting
rules, as well as modifies the timing of reporting and adds certain disclosures. SFAS No. 158
provides recognition and disclosure elements to be effective as of the end of the fiscal after
December 15, 2006, and measurement elements to be effective for fiscal years ending after December
15, 2008. The Company adopted the recognition provisions of SFAS No. 158 and applied them to the
funded status of its defined benefit plans resulting in a decrease in Shareholders Equity of
$1,900,000 as of January 31, 2007.
During the year ended January 31, 2008, the Company discovered a misstatement in its previously
issued consolidated financial statements for the year ended January 31, 2004. The misstatement
relates to the establishment of a valuation allowance against the Companys deferred tax assets for
its minimum pension liability, and resulted in an understatement of income tax expense for the year
ended January 31, 2004, in the amount of $1,650,000. Accumulated other comprehensive loss has also
been misstated by an equal amount of $1,650,000 since the year ended January 31, 2004. Management has evaluated this
prior period error and does not believe that the misstatement is material to its financial results
for the year ended January 31, 2004, or in any year since that time. The Company has adjusted its 2004 beginning
balances presented in the accompanying consolidated statements of stockholders equity to
correctly present accumulated deficit and accumulated other comprehensive loss with no impact to shareholders equity.
42
New Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with SFAS No. 109, Accounting for Income Taxes.
FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. This Interpretation is effective for fiscal years
beginning after December 15, 2006. The Company adopted the provision of FIN 48 on February 1, 2007,
the beginning of fiscal 2007. See Note 6 Income Taxes footnote for additional information.
In February 2006, the Financial Accounting Standards Board (the FASB) issued Statement of
Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS
155). SFAS 155 establishes, among other things, the accounting for certain derivatives embedded in
other financial instruments. This statement permits fair value remeasurement for any hybrid
financial instrument containing an embedded derivative that would otherwise require bifurcation. It
also requires that beneficial interests in securitized financial assets be accounted for in
accordance with SFAS No. 133. SFAS 155 is effective for fiscal years beginning after September 15,
2006. The Company adopted SFAS 155 on February 1, 2007, the beginning of fiscal 2007. It did not
have a material impact on the Companys financial operations or financial positions.
In September 2006, the FASB issues SFAS No. 157, Fair Value Measurements (SFAS No. 157). This
statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157
was scheduled to be effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB
delayed the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for
all non-financial assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis. The Company is currently evaluating
the impact on its financial statements, if any, from the adoption of this standard.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). This
standard requires recognition of the funded status of a benefit plan in the statement of financial
position. The standard also requires recognition in other comprehensive income of certain gains and
losses that arise during the period but are deferred under pension accounting rules, as well as
modifies the timing of reporting and adds certain disclosures. SFAS No. 158 provides recognition
and disclosure elements to be effective as of the end of the fiscal after December 15, 2006, and
measurement elements to be effective for fiscal years ending after December 15, 2008. The Company
adopted the recognition provisions of SFAS No. 158 and applied them to the funded status of the its
defined benefit plans resulting in a decrease in Shareholders Equity of $1,900,000.
In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159) which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently required to be measured at
fair value. The objective of SFAS 159 is to improve financial reporting by providing entities with
the opportunity to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting provisions. This statement
is effective as of the beginning of any fiscal year beginning after November 15, 2007. The Company
is currently evaluating the impact to its financial statements, if any, from the adoption of this
standard.
In December 2007, the FASB issued SFAS No. 141 (Revised), Business Combinations (SFAS No.
141(R)), replacing SFAS No. 141, Business Combinations (SFAS No. 141), and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements An Amendment of ARB No. 51
(SFAS No. 160). SFAS No. 141(R) retains the fundamental requirements of SFAS No. 141, broadens
its scope by applying the acquisition method to all transactions and other events in which one
entity obtains control over one or more other businesses, and requires, among other things, that
assets acquired and liabilities assumed be measured at fair value as of the acquisition date, that
liabilities related to contingent considerations be recognized at the acquisition date and
remeasured at fair value in each subsequent reporting period, that acquisition-related costs be
expensed as incurred, and that income be recognized if the fair value of the net assets acquired
exceeds the fair value of the consideration transferred. SFAS No. 160 establishes accounting and
reporting standards for noncontrolling interests (i.e., minority interests) in a subsidiary,
including changes in a parents ownership interest in a subsidiary and requires, among other
things, that noncontrolling interests in subsidiaries be classified as a separate component of
equity. Except for the presentation and disclosure requirements of SFAS No. 160, which are to be
applied retrospectively for all periods presented, SFAS No. 141 (R) and SFAS No. 160 are to be
applied prospectively in financial statements issued for fiscal years beginning after December 15,
2008. The Company does not anticipate any material impact to its financial statements from the
adoption of SFAS No. 160 and 141(R).
In October 2006, the FASB ratified EITF 06-4, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This
statement is effective for years beginning after December 15, 2008. This statement clarifies FASB
106, Employers Accounting for Post-Retirement Benefits other than Pensions, that applies to
endorsement split-dollar life insurance arrangements. The Company anticipates recording a liability
of approximately $2,060,000 at that time. The Company has purchased life insurance on the lives of
the participants that will pay death benefits of in excess of the amounts promised to participants.
2. Inventories
The current material cost for inventories exceeded LIFO cost by $7,193,000 and $7,357,000 at
January 31, 2008 and 2007, respectively. Liquidation of prior year LIFO layers due to a reduction
in certain inventories increased income by $54,000, $75,000 and $60,000 in the years ended January
31, 2008, 2007 and 2006, respectively.
43
Details of inventory amounts, including the material portion of inventory which is valued at LIFO,
at January 31, 2008 and 2007, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008 |
|
|
Material |
|
|
|
|
|
Labor, |
|
|
|
|
Content at |
|
LIFO |
|
Overhead |
|
|
|
|
FIFO |
|
Reserve |
|
and Other |
|
Total |
|
|
|
Finished goods |
|
$ |
10,176 |
|
|
$ |
(1,849 |
) |
|
$ |
6,237 |
|
|
$ |
14,564 |
|
Work in process |
|
|
14,402 |
|
|
|
(2,912 |
) |
|
|
9,163 |
|
|
|
20,653 |
|
Raw materials and supplies |
|
|
10,210 |
|
|
|
(2,432 |
) |
|
|
13 |
|
|
|
7,791 |
|
|
|
|
Total |
|
$ |
34,788 |
|
|
$ |
(7,193 |
) |
|
$ |
15,413 |
|
|
$ |
43,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2007 |
|
|
Material |
|
|
|
|
|
Labor, |
|
|
|
|
Content at |
|
LIFO |
|
Overhead |
|
|
|
|
FIFO |
|
Reserve |
|
and Other |
|
Total |
|
|
|
Finished goods |
|
$ |
8,559 |
|
|
$ |
(1,616 |
) |
|
$ |
4,708 |
|
|
$ |
11,651 |
|
Work in process |
|
|
13,974 |
|
|
|
(3,306 |
) |
|
|
9,022 |
|
|
|
19,690 |
|
Raw materials and supplies |
|
|
8,931 |
|
|
|
(2,435 |
) |
|
|
|
|
|
|
6,496 |
|
|
|
|
Total |
|
$ |
31,464 |
|
|
$ |
(7,357 |
) |
|
$ |
13,730 |
|
|
$ |
37,837 |
|
|
|
|
3. Debt
Outstanding balances (in thousands) for the Companys long-term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31, |
In thousands, except per share data |
|
2008 |
|
2007 |
|
Revolving credit line with Wells Fargo Bank |
|
$ |
3,656 |
|
|
$ |
|
|
Term note with Wells Fargo Bank |
|
|
|
|
|
|
15,000 |
|
Other |
|
|
190 |
|
|
|
264 |
|
|
|
|
|
|
|
3,846 |
|
|
|
15,264 |
|
Less current portion |
|
|
74 |
|
|
|
5,074 |
|
|
|
|
|
|
$ |
3,772 |
|
|
$ |
10,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding stand-by letters of credit |
|
$ |
329 |
|
|
$ |
329 |
|
At
January 31, 2007, the Company had a term loan of $15,000,000
outstanding, with interest at the banks prime rate +0.5%. The
loan was to mature in February 2008, but was extended to February
2009 by an amendment to the loan agreement in March 2007. During the
year ended January 31, 2008, the Company paid off the loan in
its entirety.
At January 31, 2008, the Company borrowed
under an asset based line of credit. The revolving line typically
provided for advances of 80% on eligible accounts receivable and 20%
60% on eligible inventory. The advance rates fluctuated
depending on the time of year and the types of assets. The agreement
had an unused commitment fee of 0.375%. Interest was at prime or LIBOR +2.5%. Availability under the line was
$19,074,000 at January 31, 2008.
Effective as of March 18, 2008, Virco Mfg. Corporation (the Company) entered into the Second
Amended and Restated Credit Agreement (the Agreement), dated as of March 12, 2008, with Wells
Fargo Bank, National Association (the Lender) and a related Revolving Line of Credit Note (the
Note), dated as of March 12, 2008, in favor of the Lender. The Agreement provides the Company
with an increased secured revolving line of credit (the Revolving Credit) of up to $65,000,000,
with seasonal adjustments to the credit limit, and includes a sub-limit of up to $10,000,000 for
the issuance of letters of credit. The Revolving Credit is secured by the maintenance by the Lender
of a first priority perfected security interest in certain of the personal and real property of the
Company and its subsidiaries.
The Revolving Credit will mature in February 1, 2010,
with interest payable monthly at a fluctuating
rate equal to the Wells Fargo Banks prime rate or LIBOR plus a fluctuating margin. The agreement
has an unused commitment fee of 0.25%.
The Revolving Credit with Wells Fargo Bank is subject to various financial covenants including a
liquidity requirement, a leverage requirement, a cash flow coverage requirement and profitability
requirements. The agreement also places certain restrictions on capital expenditures, new operating
leases, dividends and the repurchase of the Companys common stock. The revolving credit facility
is secured by the Companys accounts receivable, inventories, equipment and property. The Company
was in compliance with its covenants at January 31, 2008. Long-term debt repayments are
approximately as follows (in thousands):
44
|
|
|
|
|
Year ending January 31, |
|
|
|
|
2009 |
|
$ |
74 |
|
2010 |
|
|
3,725 |
|
2011 |
|
|
12 |
|
2012 |
|
|
12 |
|
2013 |
|
|
12 |
|
Thereafter |
|
|
11 |
|
Management believes that the carrying value of debt approximated fair value at January 31,
2008 and 2007, as all of the long-term debt bears interest at variable rates based on prevailing
market conditions.
4. Retirement Plans
The Company maintains three defined benefit pension plans, the Virco Employees Retirement Plan, the
VIP Retirement Plan, and the Non-Employee Directors Retirement Plan. The annual measurement dates
for the plans is December 31. Effective December 31, 2003, the Company
froze all future benefit accruals under the plans. Employees can continue to vest under the
benefits earned to date, but no covered participants will earn additional benefits under the plan
freeze.
Accounting policy regarding pensions requires management to make complex and subjective estimates
and assumptions relating to amounts which are inherently uncertain. Three primary economic
assumptions influence the reported values of plan liabilities and pension costs. The Company takes
the following factors into consideration.
The discount rate represents an estimate of the rate at which retirement plan benefits could
effectively be settled. The Company obtains data on several reference points when setting the
discount rate including current rates of return available on longer term high-grade bonds and
changes in rates that have occurred over the past year. This assumption is sensitive to movements
in market rates that have occurred since the preceding valuation date, and therefore, may change
from year to year.
Because the Company froze future benefit accruals for all three defined benefit plans, the
compensation increase assumption had no impact on pension expense, accumulated benefit obligation
or projected benefit obligation for the period ended January 31, 2008 or 2007.
The assumed rate of return on plan assets represents an estimate of long-term returns available to
investors who hold a mixture of stocks, bonds, and cash equivalent securities. When setting its
expected return on plan asset assumptions, the Company considers long-term rates of return on
various asset classes (both historical and forecasted, using data collected from various sources
generally regarded as authoritative) in the context of expected long-term average asset allocations
for its defined benefit pension plan.
Two of the Companys defined benefit pension plans (the VIP Plan and the Non-Employee Directors
Plan) are executive benefit plans that are not funded and are subject to the Companys creditors.
Because these plans are not funded, the assumed rate of return has no impact on pension expense or
the funded status of the plans.
The Company maintains a trust and funds the pension obligations for the Virco Mfg. Corporation
Employees Pension. The Board of Directors appoints a Retirement Plan Committee that establishes a
policy for investment and funding strategies. Approximately 75% of the trust assets are managed by
investment advisors and held in common trust funds with the balance managed by the Retirement Plan
Committee. The Committee has established target asset allocations to its investment advisors, who
invest the trust assets in a variety of institutional collective trust funds. The long-term asset
allocation target provided to the investment advisors is 85% stock and 15% bond, with maximum
allocations of 80% large cap stocks, 30% small cap stocks, and 30% international stock. The Company
has established a custom benchmark derived from a variety of stock and bond indices that are
weighted to approximate the asset allocation provided to the investment advisors. The investment
advisors performance is compared to the custom index as part of the evaluation of the investment
advisors performance. The Committee receives monthly reports from the investment advisors and
meets periodically with them to discuss investment performance.
At December 31, 2007 and 2006, the amount of the plan assets invested in bond or short-term
investment funds was 1% and 1%, respectively, and the balance in equity funds or investments. The
trust does not hold any Company stock. It is the Companys policy to contribute adequate funds to
the trust accounts to cover benefit payments under the VIP and Non-Employee Director Plans and to
maintain the funded status of the Virco Mfg. Corporation Employees Pension at approximately of 90%
of the current liability as determined by the plan actuaries. It is anticipated that the Company
will be required to contribute approximately $526,000 to the non-qualified plans during the fiscal
year ending January 31, 2009.
Payments from the qualified plan pension trust to plan participants are estimated to be $837,000
during the fiscal year ending January 31, 2009. It is anticipated that the Company will have to
contribute approximately $3.0 million to the trust if the Company elects to maintain the 90% funded
status. Actual contributions will depend upon investment return on the plan assets.
Payments made under the qualified plan are made from the trust fund. Payments made under the VIP
Plan and Non-Employee Directors Plan are made by the Company. Estimated payments under the plans
are as follows:
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified |
|
|
|
|
|
Directors |
|
|
Plan Year |
|
Plan |
|
VIP Plan |
|
Plan |
|
Total |
|
|
|
(In thousands)
|
2008 |
|
$ |
837 |
|
|
$ |
526 |
|
|
$ |
0 |
|
|
$ |
1,363 |
|
2009 |
|
|
856 |
|
|
|
517 |
|
|
|
51 |
|
|
|
1,424 |
|
2010 |
|
|
877 |
|
|
|
495 |
|
|
|
48 |
|
|
|
1,420 |
|
2011 |
|
|
993 |
|
|
|
478 |
|
|
|
62 |
|
|
|
1,533 |
|
2012 |
|
|
991 |
|
|
|
457 |
|
|
|
58 |
|
|
|
1,506 |
|
2013 - 2017 |
|
|
6,355 |
|
|
|
2,027 |
|
|
|
234 |
|
|
|
8,616 |
|
Qualified Pension Plan
The Company and its subsidiaries cover all employees under a non-contributory 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 Companys general funding policy is to
contribute enough to maintain a funded status of approximately 90% of the current liability as
determined by the Plan actuaries. As a result of implementing the recognition provisions of SFAS No. 158,
the Company recorded an adjustment to Comprehensive Loss of $1,910,000 during the year ended
January 31, 2007. At January 31, 2006 and 2005, a full valuation allowance was recorded against the
net deferred tax assets. At January 31, 2008, there was no valuation allowance against the net deferred tax assets.
Accumulated comprehensive loss at January 31, 2008 and 2007, was composed of minimum pension
liability adjustments. 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, 2007
and 2006:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
12/31/2007 |
|
12/31/2006 |
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
24,079 |
|
|
$ |
22,284 |
|
Service cost |
|
|
|
|
|
|
165 |
|
Interest cost |
|
|
1,293 |
|
|
|
1,382 |
|
Plan participants contributions |
|
|
|
|
|
|
|
|
Amendments |
|
|
|
|
|
|
424 |
|
Actuarial (gains) losses |
|
|
(344 |
) |
|
|
3,013 |
|
Benefits paid |
|
|
(834 |
) |
|
|
(3,189 |
) |
|
|
|
Benefit obligation at end of year |
|
$ |
24,194 |
|
|
$ |
24,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
Fair value at beginning of year |
|
$ |
13,911 |
|
|
$ |
14,812 |
|
Actual return on plan assets |
|
|
1,457 |
|
|
|
2,288 |
|
Company contributions |
|
|
2,800 |
|
|
|
|
|
Benefits paid |
|
|
(834 |
) |
|
|
(3,189 |
) |
|
|
|
Fair value at end of year |
|
$ |
17,334 |
|
|
$ |
13,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status |
|
|
|
|
|
|
|
|
Unfunded status of plan |
|
$ |
(6,860 |
) |
|
$ |
(10,167 |
) |
|
|
|
Accrued benefit cost |
|
$ |
(6,860 |
) |
|
|
(10,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in Statements of Financial Position |
|
|
|
|
|
|
|
|
Accrued benefit liability |
|
|
(6,860 |
) |
|
|
(10,167 |
) |
Accumulated other comprehensive loss |
|
|
6,650 |
|
|
|
8,459 |
|
|
|
|
Net amount recognized |
|
$ |
(210 |
) |
|
$ |
(1,708 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Items not yet Recognized as a Component of Net Periodic Pension Expense: |
|
|
|
|
|
|
|
|
Unrecognized net actuarial losses |
|
$ |
4,357 |
|
|
$ |
5,670 |
|
Unamortized prior service costs |
|
|
2,293 |
|
|
|
2,804 |
|
Net initial asset recognition |
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
$ |
6,650 |
|
|
$ |
8,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary Data |
|
|
|
|
|
|
|
|
Projected benefit obligation |
|
$ |
24,194 |
|
|
$ |
24,079 |
|
Accumulated benefit obligation |
|
|
24,194 |
|
|
|
24,079 |
|
Fair value of plan assets |
|
|
17,334 |
|
|
|
13,911 |
|
46
|
|
|
|
|
|
|
|
|
|
|
12/31/2007 |
|
12/31/2006 |
Components of Net Cost |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
|
|
|
$ |
165 |
|
Interest cost |
|
|
1,293 |
|
|
|
1,382 |
|
Expected return on plan assets |
|
|
(801 |
) |
|
|
(896 |
) |
Amortization of transition amount |
|
|
(15 |
) |
|
|
(37 |
) |
Amortization of prior service cost |
|
|
510 |
|
|
|
469 |
|
Recognized net actuarial loss |
|
|
313 |
|
|
|
196 |
|
|
|
|
Benefit cost |
|
$ |
1,300 |
|
|
$ |
1,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Benefit Payments |
|
|
|
|
|
|
|
|
FYE 01-31-2009 |
|
|
837 |
|
|
|
|
|
FYE 01-31-2010 |
|
|
856 |
|
|
|
|
|
FYE 01-31-2011 |
|
|
877 |
|
|
|
|
|
FYE 01-31-2012 |
|
|
993 |
|
|
|
|
|
FYE 01-31-2013 |
|
|
991 |
|
|
|
|
|
FYE 01-31-2014 to 2018 |
|
|
6,355 |
|
|
|
|
|
|
|
|
Total |
|
$ |
10,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2007 |
|
12/31/2006 |
Weighted Average Assumptions |
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.00 |
% |
|
|
5.75 |
% |
Expected return on plan assets |
|
|
6.50 |
% |
|
|
6.50 |
% |
Rate of compensation increase |
|
|
N/A |
|
|
|
N/A |
|
VIP Retirement Plan
The Company also provides a supplementary retirement plan for certain key employees, the VIP
Retirement Plan (VIP Plan). The VIP Plan provides a benefit up to 50% of average compensation for
the last five years in the VIP Plan, offset by benefits earned under the Virco Employees
Retirement Plan. The VIP Plan benefits are secured by a life insurance program. The cash surrender
values of the policies securing the VIP Plan were $2,633,000 and $2,488,000 at January 31, 2008 and
2007, respectively. These cash surrender values are included in other assets in the consolidated
balance sheets.
The Company maintains a rabbi trust to hold assets related to the VIP Retirement Plan.
Substantially all assets securing the VIP Plan are held in the rabbi trust.
The following table sets forth (in thousands) the funded status of the VIP Plan at December 31,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified Pension |
|
|
12/31/2007 |
|
12/31/2006 |
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
5,764 |
|
|
$ |
5,675 |
|
Service cost |
|
|
|
|
|
|
202 |
|
Interest cost |
|
|
324 |
|
|
|
360 |
|
Plan participants contributions |
|
|
|
|
|
|
|
|
Amendments |
|
|
|
|
|
|
(424 |
) |
Actuarial losses |
|
|
102 |
|
|
|
207 |
|
Benefits paid |
|
|
(370 |
) |
|
|
(256 |
) |
|
|
|
Benefit obligation at end of year |
|
$ |
5,820 |
|
|
$ |
5,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
Company contributions |
|
|
370 |
|
|
|
256 |
|
Benefits paid |
|
|
(370 |
) |
|
|
(256 |
) |
|
|
|
Fair value at end of year |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status |
|
|
|
|
|
|
|
|
Unfunded status of plan |
|
$ |
(5,820 |
) |
|
$ |
(5,764 |
) |
|
|
|
Accrued benefit cost |
|
$ |
(5,820 |
) |
|
$ |
(5,764 |
) |
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified Pension |
|
|
12/31/2007 |
|
12/31/2006 |
Amounts Recognized in Statements of Financial Position |
|
|
|
|
|
|
|
|
Accrued benefit liability |
|
|
(5,820 |
) |
|
|
(5,764 |
) |
Accumulated other comprehensive loss |
|
|
(238 |
) |
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(6,058 |
) |
|
$ |
(5,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Items not yet Recognized as a Component of Net Periodic Pension Expense: |
|
|
|
|
|
|
|
|
Unrecognized net actuarial losses |
|
$ |
1,992 |
|
|
$ |
2,034 |
|
Unamortized prior service costs |
|
|
(2,230 |
) |
|
|
(2,729 |
) |
|
|
|
|
|
$ |
(238 |
) |
|
$ |
(695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary Data |
|
|
|
|
|
|
|
|
Projected benefit obligation |
|
$ |
5,820 |
|
|
$ |
5,764 |
|
Accumulated benefit obligation |
|
|
5,820 |
|
|
|
5,764 |
|
Fair value of plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Net Cost |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
|
|
|
$ |
202 |
|
Interest cost |
|
|
324 |
|
|
|
360 |
|
Amortization of prior service cost |
|
|
(499 |
) |
|
|
(535 |
) |
Recognized net actuarial loss |
|
|
144 |
|
|
|
119 |
|
|
|
|
Benefit cost |
|
$ |
(31 |
) |
|
$ |
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Benefit Payments |
|
|
|
|
|
|
|
|
FYE 01-31-2009 |
|
|
526 |
|
|
|
|
|
FYE 01-31-2010 |
|
|
517 |
|
|
|
|
|
FYE 01-31-2011 |
|
|
495 |
|
|
|
|
|
FYE 01-31-2012 |
|
|
478 |
|
|
|
|
|
FYE 01-31-2013 |
|
|
457 |
|
|
|
|
|
FYE 01-31-2014 to 2018 |
|
|
2,027 |
|
|
|
|
|
|
|
|
Total |
|
$ |
4,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Assumptions |
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.00 |
% |
|
|
5.75 |
% |
Expected return on plan assets |
|
|
N/A |
|
|
|
N/A |
|
Rate of compensation increase |
|
|
N/A |
|
|
|
N/A |
|
Non-Employee Directors Retirement Plan
In April 2001, the Board of Directors established a non-qualified plan for non-employee directors
of the Company. The plan provides a lifetime annual retirement benefit equal to the directors
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,
2008, the plan did not hold any assets.
The following table sets forth (in thousands) the funded status of the Non-Employee Directors
Retirement Plan at December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified Outside |
|
|
Directors |
|
|
12/31/2007 |
|
12/31/2006 |
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
471 |
|
|
$ |
419 |
|
Service cost |
|
|
28 |
|
|
|
26 |
|
Interest cost |
|
|
27 |
|
|
|
27 |
|
Actuarial (gains) |
|
|
(56 |
) |
|
|
(1 |
) |
Benefits paid |
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
$ |
470 |
|
|
$ |
471 |
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified Outside |
|
|
Directors |
|
|
12/31/2007 |
|
12/31/2006 |
Funded Status |
|
|
|
|
|
|
|
|
Unfunded status of plan |
|
$ |
(470 |
) |
|
$ |
(471 |
) |
|
|
|
Accrued benefit cost |
|
$ |
(470 |
) |
|
$ |
(471 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in Statements of Financial Position |
|
|
|
|
|
|
|
|
Accrued benefit liability |
|
$ |
(470 |
) |
|
$ |
(471 |
) |
Accumulate other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(470 |
) |
|
$ |
(471 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Items not
yet Recognized as a Component of Net Periodic Pension Expense: |
|
|
|
|
|
|
|
|
Unrecognized net actuarial gain |
|
$ |
(230 |
) |
|
$ |
(198 |
) |
Unamortized prior service costs |
|
|
|
|
|
|
|
|
Net initial asset recognition |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(230 |
) |
|
|
(198 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary Data |
|
|
|
|
|
|
|
|
Projected benefit obligation |
|
$ |
470 |
|
|
$ |
471 |
|
Accumulated benefit obligation |
|
|
470 |
|
|
|
471 |
|
Fair value of plan assets |
|
|
|
|
|
|
|
|
|
Components of
Net Cost |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
28 |
|
|
$ |
26 |
|
Interest cost |
|
|
27 |
|
|
|
27 |
|
Amortization of prior service cost |
|
|
|
|
|
|
23 |
|
Recognized net actuarial loss |
|
|
(25 |
) |
|
|
(28 |
) |
|
|
|
Benefit cost |
|
$ |
30 |
|
|
$ |
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Benefit Payments |
|
|
|
|
|
|
|
|
FYE 01-31-2009 |
|
|
|
|
|
|
|
|
FYE 01-31-2010 |
|
|
51 |
|
|
|
|
|
FYE 01-31-2011 |
|
|
48 |
|
|
|
|
|
FYE 01-31-2012 |
|
|
62 |
|
|
|
|
|
FYE 01-31-2013 |
|
|
58 |
|
|
|
|
|
FYE 01-31-2014 to 2017 |
|
|
234 |
|
|
|
|
|
|
|
|
Total |
|
$ |
453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Assumptions |
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.00 |
% |
|
|
5.75 |
% |
Expected return on plan assets |
|
|
N/A |
|
|
|
N/A |
|
Rate of compensation increase |
|
|
N/A |
|
|
|
N/A |
|
Implementation of SFAS No. 158
The Company adopted the recognition provisions of SFAS No. 158 and initially applied them to the
funded status its defined benefit plans as of December 31, 2006. The initial recognition of the
funded status of its defined benefit plans resulted in a decrease in Shareholders Equity of
$1,900,000.
49
The amounts in accumulated other comprehensive (loss) that are expected to be recognized
as components of net periodic pension expense during 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified |
|
VIP |
|
Directors |
In thousands |
|
Plan |
|
Plan |
|
Plan |
|
Actuarial (gain)/loss recognition |
|
$ |
190 |
|
|
$ |
143 |
|
|
$ |
(32 |
) |
Prior service cost recognition |
|
|
510 |
|
|
|
(318 |
) |
|
|
|
|
Net initial obligation/(asset) recognition |
|
|
|
|
|
|
|
|
|
|
|
|
The
incremental effect of applying SFAS No. 158 on individual lines of the Consolidated Balance Sheet
at January 31, 2007 was (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before |
|
Effect of |
|
After |
|
|
SFAS No. |
|
SFAS No. |
|
SFAS No. |
In thousands |
|
158 |
|
158 |
|
158 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets |
|
$ |
2,804 |
|
|
$ |
(2,804 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension expenses |
|
$ |
16,842 |
|
|
$ |
893 |
|
|
$ |
15,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated comprehensive loss |
|
$ |
50,789 |
|
|
$ |
(1,911 |
) |
|
$ |
48,878 |
|
401(k) Retirement Plan
The Companys retirement plan, which covers all U.S. employees, allows participants to defer from
1% to 50% of their eligible compensation through a 401(k) retirement program. Through December 31,
2001, the plan included an employee stock ownership component. The plan continues to include Virco
stock as one of the investment options. At January 31, 2008 and 2007, the plan held 494,478 shares
and 512,783 shares of Virco stock, respectively. For the fiscal years ended January 31, 2008, 2007
and 2006, there was no employer match and therefore no compensation cost to the Company.
Life Insurance
The Company provided current and post-retirement life insurance to certain salaried employees with
split-dollar life insurance policies under the Dual Option Life Insurance Plan. Effective January
2004, the Company terminated this plan for active employees. Cash surrender values of these
policies, which are included in other assets in the consolidated balance sheets, were $3,070,000
and $2,946,000 at January 31, 2008 and 2007 respectively. The Company maintains a rabbi trust to
hold assets related to the Dual Options Life Insurance Plan. Substantially all assets securing
this plan are held in the rabbi trust.
In the first quarter of fiscal year ending January 31, 2009, the Company will implement EITF 06-04
which requires the Company record a liability equal to the present value of death benefits promised
to participants. The Company anticipates recording a liability of approximately $2,060,000 at that
time. The Company has purchased life insurance on the lives of the participants that will pay
death benefits of approximately $5,950,000.
5. Stock Based Compensation and Stockholders Rights
Stock Incentive Plans
The Companys two stock plans are the 2007 Employee Incentive Plan (the 2007 Plan) and the 1997
Employee Incentive Stock Plan (the 1997 Plan). Under the 2007 Plan, the Company may grant an
aggregate of 1,000,000 shares to its employees and non-employee directors in the form of stock
options or awards. Restricted stock or stock units awarded under the 2007 Plan is expensed ratably
over the vesting period of the awards. The Company granted 275,387 awards during fiscal 2007. As
of January 31, 2008, there were approximately 724,613 shares available for future issuance under
the 2007 Plan.
The 1997 Plan expired in 2007 and had 161,433 unexercised options outstanding. There was no stock
option grant for the fiscal year ended January 31, 2008, under the 1997 Plan. Stock options
awarded to employees under the 1997 Plan must be at exercise prices equal to the fair market value
of the Companys common stock on the date of grant. Stock options generally have a maximum term of
10 years and generally become exercisable ratably over a five-year period.
The shares of common stock issued upon exercise of a previously granted stock option are considered
new issuances from shares reserved for issuance upon adoption of the various plans. While the
Company does not have a formal written policy detailing such issuance, it requires that
50
the option
holders provides a written notice of exercise to the stock plan administrator and payment for the
shares prior to issuance of the shares.
Accounting for the Plans
Prior to February 1, 2006, the Company accounted for incentive stock plans in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25),
and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock Based
Compensation. No stock based employee compensation was reflected in net income, as all options
granted under those plans had an exercise price equal to the fair value of the underlying common
stock on the date of grant. Effective February 1, 2006, the Company adopted the fair value
recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using the modified
prospective-transition. The modified prospective method was applied to those unvested options
issued prior to the Companys adoption that have historically been accounted for under the
Intrinsic Value Method. All outstanding options were 100% vested prior to the adoption and no
options were granted during fiscal 2007. Accordingly, no compensation expense was recorded on the
Companys options during the twelve months ended January 31, 2008. At January 31, 2008, the
Company had no unrecognized compensation expense relating to options.
The following table illustrates the impact on net earnings and earnings per common share if the
fair value method had been applied for all periods presented.
|
|
|
|
|
|
|
Year ended January 31, |
|
in thousands except per share data |
|
2006 |
|
|
Net loss, as reported |
|
$ |
(9,574 |
) |
Deduct: Total stock-based employee compensation expense
determined under the fair value based method for all awards,
net of tax effects |
|
|
(51 |
) |
|
|
|
|
Net loss, pro forma |
|
$ |
(9,625 |
) |
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
Net income loss, as reported |
|
$ |
(0.73 |
) |
Net income loss, pro forma |
|
|
(0.73 |
) |
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
Net income loss, as reported |
|
$ |
(0.73 |
) |
Net income loss, pro forma |
|
|
(0.73 |
) |
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
Expected life |
|
5 years |
Risk-free interest rate |
|
|
4.5 |
% |
Expected volatility |
|
|
0.26 |
|
Expected dividend yield |
|
|
0 |
% |
The Company has estimated the fair value of all stock option awards as of the date of grant by
applying the Black-Scholes pricing valuation model. The application of this valuation model
involves assumptions that are judgmental and sensitive in the determination of compensation
expense. Historical information was the primary basis for the selection of the expected volatility
and life of the option. The risk-free interest rate was selected based upon the yield of the U.S.
Treasury issue with a term equal to the expected life of the option being valued.
A summary of the Companys stock option activity, and related information for the years ended
January 31, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Options |
|
|
Exercise Price |
|
|
Options |
|
|
Exercise Price |
|
|
Options |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
Outstanding at beginning of year |
|
|
234,594 |
|
|
$ |
12.53 |
|
|
|
292,571 |
|
|
$ |
11.56 |
|
|
|
367,888 |
|
|
$ |
11.39 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,000 |
|
|
|
7.20 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,922 |
) |
|
|
2.91 |
|
Forfeited |
|
|
(73,161 |
) |
|
|
14.89 |
|
|
|
(57,977 |
) |
|
|
7.66 |
|
|
|
(86,395 |
) |
|
|
9.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
161,433 |
|
|
|
11.46 |
|
|
|
234,594 |
|
|
|
12.53 |
|
|
|
292,571 |
|
|
|
11.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
161,433 |
|
|
|
11.46 |
|
|
|
234,594 |
|
|
|
12.53 |
|
|
|
292,571 |
|
|
|
11.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of
options granted during the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.78 |
|
51
The data included in the above table have been retroactively adjusted, if applicable, for stock
dividends.
Information regarding stock options outstanding as of January 31, 2008, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Contractual |
|
|
|
|
Price |
|
Number of Shares |
|
Life |
|
Number of Shares |
|
Price |
|
|
|
$8.82 |
|
|
12,100 |
|
|
|
3.55 |
|
|
|
12,100 |
|
|
$ |
8.82 |
|
$11.06 |
|
|
90,769 |
|
|
|
1.47 |
|
|
|
90,769 |
|
|
$ |
11.06 |
|
$12.64 |
|
|
58,564 |
|
|
|
0.70 |
|
|
|
58,564 |
|
|
$ |
12.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$11.46 |
|
|
161,433 |
|
|
|
1.35 |
|
|
|
161,433 |
|
|
$ |
11.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As all options had vested prior to February 1, 2007, there was no effect on the statement of
operations or cash flows due to the adoption of FASB Statement No. 123(R).
Restricted Stock Unit Awards
On June 30, 2004, the Company granted a total of 270,000 restricted stock units, with an estimated
fair value of $6.92 per unit and exercise price of $0.01 per unit, to eligible employees under the
1997 Plan. Interests in such restricted stock units vest ratably over five years, with such units
vesting 20% at each anniversary date. At such time that the restricted stock units vest, they
become exchangeable for shares of common stock. Compensation expense is recognized based on the
estimated fair value of restricted stock units and vesting provisions. Compensation expense
incurred in connection with this award was $353,000 for the fiscal year ended January 31, 2008 and
2007; and $367,000 for the fiscal year ended January 31, 2006. As of January 31, 2008, there was
approximately $500,000 of unrecognized compensation cost related to non-vested restricted stock
unit awards, which is expected to be recognized through June 30, 2009.
On January 13, 2006, the Company granted a total of 73,881 restricted stock units, with an
estimated fair value of $5.21 per unit and exercise price of $0.01 per unit, to non-employee
directors under the 1997 Plan. Interests in such restricted stock units vested 100% on July 5,
2006. Compensation expense is recognized based on the estimated fair value of restricted stock
units and vesting provisions. For the twelve months ended January 31, 2007, compensation expense
incurred in connection with this award was $343,000. As of January 31, 2008, there was no
recognized or unrecognized compensation cost related to this award.
On June 20, 2006, the Company granted a total of 17,640 shares of restricted stock, with an
estimated fair value of $4.96 per unit and exercise price of $0.01 per unit, to non-employee
directors under the 1997 Plan. Interests in such restricted stock vested 100% on June 19, 2007.
Compensation expense is recognized based on the estimated fair value of restricted stock and
vesting provisions. Compensation expense incurred in connection with this award was $29,000 for
the fiscal year ended January 31, 2008 and $58,000 for the fiscal year ended January 31, 2007. As
of January 31, 2008, there was no unrecognized compensation cost related to non-vested restricted
stock awards. As the compensation cost for the restricted stock units was measured using the
estimated fair value on the date of grant and recognized over the vesting period, there was no
effect on the statements of operations due to the adoption of FASB Statement No. 123(R). At
February 1, 2006, the Company recorded a reclassification of $247,000 from current liabilities to
additional paid-in capital.
On June 19, 2007, the Company granted a total of 12,887 shares of restricted stock, with an
estimated fair value of $6.79 per unit and exercise price of $0.01 per unit, to non-employee
directors under the 2007 Plan. Compensation expense is recognized based on the estimated fair
value of restricted stock units and vesting provisions. Compensation expense incurred in
connection with this award was $58,000 for the fiscal year ended January 31, 2008. As of
January 31, 2008, there was approximately $29,000 of unrecognized compensation cost related to
non-vested restricted stock awards, which is expected to be recognized through June 18, 2008.
On June 19, 2007, the Company also granted a total of 262,500 restricted stock units, with an
estimated fair value of $6.79 per unit and exercise price of $0.01 per unit, to eligible employees
under the 2007 Plan. Interests in such restricted stock units vest ratably over five years, with
such units vesting 20% at each anniversary date. At such time that the restricted stock units
vest, they become exchangeable for shares of common stock. Compensation expense is recognized
based on the estimated fair value of restricted stock units and vesting provisions. Compensation
expense incurred in connection with this award was $238,000 for the fiscal year ended January 31,
2008. As of January 31, 2008, there was approximately $1,542,000 of unrecognized compensation cost
related to non-vested restricted stock unit awards, which is expected to be recognized through June
18, 2012.
52
A summary of the Companys restricted stock unit awards activity, and related information for the
following years ended January 31, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
average fair |
|
|
|
|
|
average fair |
|
|
|
|
|
average fair |
|
|
|
|
|
|
value of |
|
|
|
|
|
value of |
|
|
|
|
|
value of |
|
|
Restricted |
|
restricted |
|
Restricted |
|
restricted |
|
Restricted |
|
restricted |
|
|
stock units |
|
stock units |
|
stock units |
|
stock units |
|
stock units |
|
stock units |
|
|
|
|
|
|
|
Outstanding at beginning
of year |
|
|
153,000 |
|
|
$ |
6.91 |
|
|
|
277,881 |
|
|
$ |
6.91 |
|
|
|
270,000 |
|
|
$ |
6.92 |
|
Granted |
|
|
275,387 |
|
|
|
6.79 |
|
|
|
17,640 |
|
|
|
4.96 |
|
|
|
73,881 |
|
|
|
5.21 |
|
Vested |
|
|
(63,887 |
) |
|
|
6.64 |
|
|
|
(142,521 |
) |
|
|
4.99 |
|
|
|
(54,000 |
) |
|
|
6.80 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,000 |
) |
|
|
6.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
364,500 |
|
|
|
6.82 |
|
|
|
153,000 |
|
|
|
6.91 |
|
|
|
277,881 |
|
|
|
6.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair
value of restricted stock
units granted during the
year |
|
|
|
|
|
$ |
6.79 |
|
|
|
|
|
|
$ |
4.96 |
|
|
|
|
|
|
$ |
5.21 |
|
Stockholders Rights
On October 15, 1996, the Board of Directors declared a dividend of one preferred stock purchase
right (the Rights) for each outstanding share of the Companys common stock. Each of the Rights
entitles a stockholder to purchase for an exercise price of $50.00 ($20.70, as adjusted for stock
splits and stock dividends), subject to adjustment, one one-hundredth of a share of Series A Junior
Participating Cumulative Preferred Stock of the Company, or under certain circumstances, shares of
common stock of the Company or a successor company with a market value equal to two times the
exercise price. The Rights are not exercisable, and would only become exercisable for all other
persons when any person has acquired or commences to acquire a beneficial interest of at least 20%
of the Companys outstanding common stock. The Rights have no voting privileges, and may be
redeemed by the Board of Directors at a price of $.001 per Right at any time prior to the
acquisition of a beneficial ownership of 20% of the outstanding common shares. There are 200,000
shares (483,153 shares as adjusted by stock splits and stock dividends) of Series A Junior
Participating Cumulative Preferred Stock reserved for issuance upon exercise of the Rights. On
July 31, 2007, the Company and Mellon Investor Services LLC entered into an amendment to the Rights
Agreement governing the Rights. The amendment, among other things, extended the term of the Rights
issued under the Rights Agreement to October 25, 2016, removed the dead-hand provisions from the
Rights Agreement, and formally replaced the former Rights Agent, The Chase Manhattan Bank, with its
successor-in-interest, Mellon Investor Services LLC.
6. Income Taxes
The income (benefit) expense for the last three years is reconciled to the statutory federal income
tax rate using the liability method as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended January 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
Statutory |
|
$ |
4,145 |
|
|
$ |
2,717 |
|
|
$ |
(3,292 |
) |
State taxes (net of federal tax) |
|
|
458 |
|
|
|
272 |
|
|
|
(329 |
) |
Change in valuation allowance |
|
|
(14,750 |
) |
|
|
(2,432 |
) |
|
|
3,721 |
|
Other |
|
|
120 |
|
|
|
(111 |
) |
|
|
(209 |
) |
|
|
|
|
|
$ |
(10,027 |
) |
|
$ |
446 |
|
|
$ |
(109 |
) |
|
|
|
Significant components of the (benefit) expense for income taxes (in thousands) attributed to
continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
284 |
|
|
$ |
220 |
|
|
$ |
|
|
State |
|
|
343 |
|
|
|
(34 |
) |
|
|
(109 |
) |
|
|
|
|
|
|
627 |
|
|
|
186 |
|
|
|
(109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
3,927 |
|
|
|
2,205 |
|
|
|
(3,502 |
) |
State |
|
|
169 |
|
|
|
487 |
|
|
|
(219 |
) |
|
|
|
|
|
|
4,096 |
|
|
|
2,692 |
|
|
|
(3,721 |
) |
Valuation allowance |
|
|
(14,750 |
) |
|
|
(2,432 |
) |
|
|
3,721 |
|
|
|
|
|
|
|
(10,654 |
) |
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(10,027 |
) |
|
$ |
446 |
|
|
$ |
(109 |
) |
|
|
|
53
Deferred tax assets and liabilities (in thousands) are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
2008 |
|
|
2007 |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Accrued vacation and sick leave |
|
$ |
1,232 |
|
|
$ |
979 |
|
Retirement plans |
|
|
5,213 |
|
|
|
6,517 |
|
Insurance reserves |
|
|
1,256 |
|
|
|
1,060 |
|
Inventory |
|
|
989 |
|
|
|
858 |
|
Warranty |
|
|
665 |
|
|
|
655 |
|
Net operating loss carry forwards |
|
|
2,517 |
|
|
|
6,872 |
|
|
|
|
|
|
|
11,872 |
|
|
|
16,941 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Tax in excess of book depreciation |
|
|
(985 |
) |
|
|
(1,407 |
) |
Other |
|
|
(205 |
) |
|
|
(204 |
) |
|
|
|
|
|
|
(1,190 |
) |
|
|
(1,611 |
) |
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(841 |
) |
|
|
(15,591 |
) |
|
|
|
Net deferred tax asset (liability) |
|
$ |
9,841 |
|
|
$ |
(260 |
) |
|
|
|
In June 2006, the Financial Accounting Standards Board (the FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be measured based on
the largest benefit that has a greater than fifty percent likelihood of being realized upon
ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and
penalties on income taxes, and accounting in interim periods and requires increased disclosures.
The Company adopted the provisions of FIN 48 on February 1, 2007, the beginning of fiscal
2007. There was no material impact as a result of the implementation of FIN 48. The following
table summarizes the activity related to our gross unrecognized tax benefits from February 1, 2007
to January 31, 2008 (in thousands):
|
|
|
|
|
Balance as of February 1, 2007 |
|
$ |
525,000 |
|
Increases related to prior year tax positions |
|
|
90,000 |
|
Decreases related to prior year tax positions |
|
|
(150,000 |
) |
Increases related to current year tax positions |
|
|
60,000 |
|
Decreases related to settlements with taxing authorities |
|
|
|
|
Decreases related to lapsing of statue of limitations |
|
|
|
|
|
|
|
|
Balance as of January 31, 2008 |
|
$ |
525,000 |
|
|
|
|
|
Our total unrecognized tax benefits that, if recognized, would affect our effective tax rate were
$346,000 as of February 1, 2007 and January 31, 2008.
The Company recognized interest accrued related to unrecognized tax benefits in interest expense
and penalties in operating expenses which is consistent with the recognition of these items in
prior reporting. The Company had recorded a liability for interest and penalties related to
unrecognized tax benefits of $240,000 at January 31, 2008 and 2007. The Internal Revenue Service
(the IRS) has completed the examination of all federal income tax returns through 2004 with no
issues pending or unresolved. The years 2005 through 2007 remain open for examination by the
IRS.
The specific timing of when the resolution of each tax position will be reached is uncertain. As of
January 31, 2008, we do not believe that there are any positions for which it is reasonably
possible that the total amount of unrecognized tax benefits will significantly increase or decrease
within the next 12 months.
54
In assessing the realizability of deferred tax assets, the Company considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income or reversal of deferred tax liabilities during the periods in which those temporary
differences become deductible. The Company considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in making this
assessment. Based on this consideration, the Company anticipates that it is more likely than not
that the net of certain deferred tax assets will be realized, and a
$14,750,000 valuation allowance
previously recorded against certain of the net deferred tax assets at January 31, 2007 was released
at October 31, 2007. The Company also had determined that it is more likely than not that some
portion of the state net operating loss carryforwards will not be realized and had provided a
valuation allowance of $841,000 on the deferred tax assets at January 31, 2008.
At January 31, 2008,
the Company had net operating losses carried forward for federal and state
income tax purposes, expiring at various dates through 2027. Federal net operating losses that can
potentially be carried forward total approximately $3,202,000 at January 31, 2008. State net
operating losses that can potentially be carried forward total approximately $21,019,000 at
January 31, 2008. The Company also had determined that it is more likely than not that some
portion of the state net operating loss carryforwards will not be realized and had provided a
valuation allowance of $841,000 on the deferred tax assets at January 31, 2008.
7. Commitments
The Company has operating leases on real property and equipment, which expire at various dates.
The Torrance manufacturing and distribution facility is leased under a 5-year operating lease that
expires at the end of 2010. The Company leases machinery and equipment under a 10-year operating
lease arrangement. The Company has the option of buying out the leases three to five years into
the lease period. The Company leases trucks, automobiles, and forklifts under operating leases
that include certain fleet management and maintenance services. 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, 2008,
are as follows:
|
|
|
|
|
Year ending January 31, |
|
|
|
|
2009 |
|
$ |
6,791 |
|
2010 |
|
|
5,607 |
|
2011 |
|
|
1,141 |
|
2012 |
|
|
934 |
|
2013 |
|
|
732 |
|
Thereafter |
|
|
417 |
|
Rent expense relating to operating leases was as follows (in thousands):
|
|
|
|
|
Year ended January 31, |
|
|
|
|
2008 |
|
$ |
7,491 |
|
2007 |
|
|
8,019 |
|
2006 |
|
|
9,457 |
|
The Company has issued purchase commitments for raw materials at January 31, 2008, of approximately
$15,910,000. There were no commitments in excess of normal operating requirements. All purchase
commitments will be settled in the fiscal year ending January 31, 2009.
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 expects to continue to spend, significant amounts in the future to comply with
environmental laws. Normal recurring expenses relating to operating our factories in a manner that
meets or exceeds environmental laws are matched to the cost of producing inventory. Despite our
significant dedication to operating in compliance with applicable laws, there is a risk that the
Company could fail to comply with a regulation or that applicable laws and regulations change. On
these occasions, the Company records liabilities for remediation costs when remediation costs are
probable and can be reasonably estimated.
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.
We have been identified as a potentially responsible party pursuant to the Comprehensive
Environmental Response Compensation and Liability Act, or CERCLA, for remediation costs associated
with waste disposal sites previously used by us. In general, CERCLA can impose liability for costs
to investigate and remediate contamination without regard to fault or the legality of disposal and,
under certain circumstances, liability may be joint and several, resulting in one party being held
responsible for the entire obligation. We reserve amounts for such matters when expenditures are
probable and reasonably estimable. At January 31, 2008 and 2007, the Company had reserves of
approximately $100,000 for such environmental contingencies. An estimate of liability in excess of
this amount cannot be made.
The Company has a self-insured retention for product and general liability losses ranging from
$250,000 to $500,000 per occurrence, workers compensation liability losses up to $250,000 and
automobile liability losses up to $50,000 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
55
expected future losses for liability claims and recorded a
liability equal to the net present value of $3,450,000 and $2,835,000 at January 31, 2008 and 2007,
respectively, based upon the Companys estimated payout period of four years using a 5.75% 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 Companys financial position,
results of operations or cash flows. Estimated payments under the self-insurance programs are as
follows (in thousands):
|
|
|
|
|
Year ending January 31, |
|
|
|
|
2009 |
|
$ |
750 |
|
2010 |
|
|
750 |
|
2011 |
|
|
750 |
|
2012 |
|
|
750 |
|
2013 |
|
|
750 |
|
|
|
|
|
Total |
|
|
3,750 |
|
Discount to net present value |
|
|
(300 |
) |
|
|
|
|
Thereafter |
|
$ |
3,450 |
|
|
|
|
|
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, in consultation with
legal counsel, that the ultimate outcome of all such matters will not materially affect the
Companys 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 Companys products
sold through January 31, 2006, carry a five-year warranty. Effective February 1, 2006, the Company
extended its standard warranty period to 10 years. 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
sheets.
Changes in the Companys warranty liability were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
2008 |
|
2007 |
|
|
|
Beginning balance |
|
$ |
1,750 |
|
|
$ |
1,500 |
|
Provision |
|
|
938 |
|
|
|
1,154 |
|
Costs incurred |
|
|
(938 |
) |
|
|
(904 |
) |
|
|
|
Ending balance |
|
$ |
1,750 |
|
|
$ |
1,750 |
|
|
|
|
10. Other Financing Activities
On June 6, 2006, WEDBUSH, Inc. and Wedbush Morgan Securities, Inc. (together with WEDBUSH, Inc.,
the Purchasers), entered into a stock purchase agreement (the Agreement) with the Company.
Pursuant to the Agreement, (a) the Purchasers purchased from the Company shares (the Shares) of
the Companys common stock yielding gross proceeds to the Company of $5,000,000 at a purchase price
per share of $4.66 (the Per Share Purchase Price) and (b) the Company issued warrants to the
Purchasers exercisable for 268,010 shares of common stock pursuant to which the Purchasers will
have the right to acquire the 268,010 shares at an exercise price of 120% of the Per Share Purchase
Price during the first three years following the closing of the transaction and at 130% of the Per
Share Purchase Price during the fourth and fifth years following the closing of the transaction.
The Company filed a Registration Statement on Form S-3 registering the resale of the Shares on
July 6, 2006, and amended that registration statement on August 17, 2006. The Registration
Statement became effective on September 18, 2006. Wedbush Morgan holds the securities purchased
pursuant to the Agreement as nominee on behalf those of its clients which purchased the securities.
On June 26, 2006, certain members of management and certain Directors (the Follow-on Purchasers)
entered into a stock purchase agreement with the Company to purchase shares of common stock and
warrants. On August 29, 2007, this agreement was rescinded and replaced with a similar agreement
for the purchase of 57,455 shares at a purchase price per share of $5.02 (the Follow-on Per Share
Purchase Price) yielding gross proceeds to the Company of approximately $288,000. Additionally
the Company issued warrants to the Follow-on Purchasers exercisable for 14,364 shares of common
stock pursuant to which the Follow-on Purchasers will have the right to acquire the 14,364 shares
at an exercise price of 120% of the Follow-on Per Share Purchase Price during the first three years
following the closing of the transaction and at 130% of the Follow-on Per Share Purchase Price
during the fourth and fifth years following the closing of the transaction. The transaction closed
during the third quarter ended October 31, 2006.
56
The securities sold to the Purchasers and Follow-on Purchasers were issued pursuant to the
exemption from the registration requirements of the Securities Act of 1933, as amended (the
Securities Act), afforded by Section 4(2) of the Securities Act and Rule 506 of Regulation D
thereunder, as a transaction to accredited and sophisticated investors not involving a public
offering. The proceeds from the sale of the Shares were used for general corporate purposes, and
the proceeds, if any, received from the exercise of the warrant agreements will be used to reduce
outstanding indebtedness and for general corporate purposes. The Company incurred $537,000 in
closing costs, which were netted against the proceeds received.
11. Quarterly Results (Unaudited)
The Companys quarterly results for the years ended January 31, 2008 and 2007, are summarized as
follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30 |
|
July 30 |
|
October 31 |
|
January 31 |
|
|
|
Year ended January 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
31,122 |
|
|
$ |
88,931 |
|
|
$ |
76,977 |
|
|
$ |
32,535 |
|
Gross profit |
|
|
11,550 |
|
|
|
33,716 |
|
|
|
27,939 |
|
|
|
10,459 |
|
Net (loss) income |
|
|
(2,980 |
) |
|
|
11,611 |
|
|
|
16,738 |
|
|
|
(3,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.21 |
) |
|
$ |
0.81 |
|
|
$ |
1.16 |
|
|
$ |
(0.22 |
) |
Assuming dilution |
|
|
(0.21 |
) |
|
|
0.80 |
|
|
|
1.15 |
|
|
|
(0.22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended January 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
34,515 |
|
|
$ |
78,595 |
|
|
$ |
73,678 |
|
|
$ |
36,319 |
|
Gross profit |
|
|
11,494 |
|
|
|
28,383 |
|
|
|
27,092 |
|
|
|
11,643 |
|
Net (loss) income |
|
|
(3,267 |
) |
|
|
7,832 |
|
|
|
5,833 |
|
|
|
(2,853 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.25 |
) |
|
$ |
0.58 |
|
|
$ |
0.41 |
|
|
$ |
(0.20 |
) |
Assuming dilution |
|
|
(0.25 |
) |
|
|
0.58 |
|
|
|
0.41 |
|
|
|
(0.20 |
) |
|
|
|
(1) |
|
Per common share amounts for the quarters and full years have each been calculated
separately. Accordingly, quarterly amounts may not add to the annual amounts because of
differences in the average common shares outstanding during each period and with regard to
diluted per common share amounts only, because of the effect of potentially dilutive
securities only in the periods in which the effect would have been dilutive. |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports filed with the Commission pursuant to the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the
Commissions rules and forms, and that such information is accumulated and communicated to the
Companys management, including its President and Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure. Assessing the
costs and benefits of such controls and procedures necessarily involves the exercise of judgment by
management, and such controls and procedures, by their nature, can provide only reasonable
assurance that managements objectives in establishing them will be achieved.
Virco carried out an evaluation, under the supervision and with the participation of the Companys
management, including its President and Chief Executive Officer along with its Chief Financial
Officer, of the effectiveness of the design and operation of disclosure controls and procedures as
of the end of the period covered by this Annual Report pursuant to Exchange Act Rule 13a-15. Based
upon the foregoing, the Companys President and Chief Executive Officer along with the Companys
Chief Financial Officer concluded that Vircos disclosure controls and procedures are effective in
ensuring that (i) information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms and (ii) information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
57
accumulated and
communicated to the Companys management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
Internal Control Over Financial Reporting
There was no change in the Companys internal control over financial reporting during the fourth
fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting. See Managements Report on Internal Control
Over Financial Reporting and Report of Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting on pages 32 and 33, respectively.
Item 9B. Other Information
None.
58
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item regarding directors shall be incorporated by reference to
information set forth in the Companys definitive Proxy Statement to be filed within 120 days after
the end of the Companys fiscal year end of January 31, 2008, and in Part I of this report under
the heading Executive Officers of the Registrant.
The Company has adopted a Code of Conduct and Ethics for Directors, Officers and Employees
applicable to its directors and officers (including its Chief Executive Officer, Chief Financial
Officer, and Corporate Controller). The Companys Code of Conduct and Ethics is available on the
Companys website at www.virco.com, or will be provided free of charge upon request. The
Company intends to disclose waivers under this Code of Ethics, or amendments thereto, that apply to
the persons listed above on the Companys website at www.virco.com or in a report on Form 8-K as
required.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to information set forth in the
Companys definitive Proxy Statement to be filed within 120 days after the end of the Companys
fiscal year end of January 31, 2008.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item is incorporated by reference to information set forth in the
Companys definitive Proxy Statement to be filed within 120 days after the end of the Companys
fiscal year end of January 31, 2008.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to information set forth in the
Companys definitive Proxy Statement to be filed within 120 days after the end of the Companys
fiscal year end of January 31, 2008.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference to information set forth in the
Companys definitive Proxy Statement to be filed within 120 days after the end of the Companys
fiscal year end of January 31, 2008.
59
PART IV
Item 15. Exhibits, Financial Statement Schedules
|
|
|
1.
|
|
The following consolidated financial statements of Virco Mfg. Corporation are set forth in Item 8 of this report. |
|
|
|
|
|
Report of Independent Registered Public Accounting Firm. |
|
|
Consolidated balance sheets January 31, 2008 and 2007. |
|
|
Consolidated statements of operations Years ended January 31, 2008, 2007, and 2006. |
|
|
Consolidated statements of stockholders equity Years ended January 31, 2008, 2007, and 2006. |
|
|
Consolidated statements of cash flows Years ended January 31, 2008, 2007, and 2006. |
|
|
Notes to consolidated financial statements January 31, 2008. |
|
|
|
2.
|
|
The following consolidated financial statement schedule of Virco Mfg. Corporation is included in Item 15: |
60
VIRCO MFG. CORPORATION AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED JANUARY 31, 2008, 2007 AND 2006
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Col. A |
|
Col. B |
|
Col. C |
|
Col. E |
|
Col. F |
|
|
|
|
|
|
Charged to |
|
Deductions from |
|
|
|
|
Beginning Balance |
|
Expenses |
|
Reserves |
|
Ending Balance |
|
|
|
Allowance for doubtful accounts for the period ended: |
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008 |
|
$ |
200 |
|
|
$ |
53 |
|
|
$ |
53 |
|
|
$ |
200 |
|
January 31, 2007 |
|
$ |
200 |
|
|
$ |
72 |
|
|
$ |
72 |
|
|
$ |
200 |
|
January 31, 2006 |
|
$ |
225 |
|
|
$ |
|
|
|
$ |
25 |
|
|
$ |
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory valuation reserve for the period ended: |
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008 |
|
$ |
1,400 |
|
|
$ |
250 |
|
|
$ |
|
|
|
$ |
1,650 |
|
January 31, 2007 |
|
$ |
1,400 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,400 |
|
January 31, 2006 |
|
$ |
1,400 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty reserve for the period ended: |
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008 |
|
$ |
1,750 |
|
|
$ |
938 |
|
|
$ |
938 |
|
|
$ |
1,750 |
|
January 31, 2007 |
|
$ |
1,500 |
|
|
$ |
1,154 |
|
|
$ |
904 |
|
|
$ |
1,750 |
|
January 31, 2006 |
|
$ |
1,500 |
|
|
$ |
900 |
|
|
$ |
900 |
|
|
$ |
1,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product, workers compensation and automobile liability
reserves
for the period ended: |
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008 |
|
$ |
2,835 |
|
|
$ |
470 |
|
|
$ |
|
|
|
$ |
3,305 |
|
January 31, 2007 |
|
$ |
1,620 |
|
|
$ |
1,215 |
|
|
$ |
|
|
|
$ |
2,835 |
|
January 31, 2006 |
|
$ |
2,400 |
|
|
$ |
|
|
|
$ |
780 |
|
|
$ |
1,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance for the period ended: |
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008 |
|
$ |
15,591 |
|
|
$ |
|
|
|
$ |
14,750 |
|
|
$ |
841 |
|
January 31, 2007 |
|
$ |
16,640 |
|
|
$ |
|
|
|
$ |
1,049 |
|
|
$ |
15,591 |
|
January 31, 2006 |
|
$ |
12,919 |
|
|
$ |
3,721 |
|
|
$ |
|
|
|
$ |
16,640 |
|
All other schedules for which provision is made in the applicable accounting regulation of the
Securities and Exchange Commission are not required under the related instructions, are
inapplicable, or are included in the Financial Statements or Notes thereto, and therefore are not
required to be presented under this Item.
See Index to Exhibits. The exhibits listed in the accompanying Index to Exhibits are
filed as part of this report.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
VIRCO MFG. CORPORATION
|
|
Date: April 15, 2008 |
By: |
/s/ Robert A. Virtue
|
|
|
|
Robert A. Virtue |
|
|
|
Chairman of the Board and
Chief Executive Officer |
|
62
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Robert A. Virtue and Robert E. Dose his/her true and lawful attorney-in-fact and agent,
with full power of substitution and, for him/her and in his/her name, place and stead, in any and
all capacities to sign any and all amendments to this report on Form 10-K, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do
and perform each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he/she might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his/her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant in the capacities and on the dates
indicated.
|
|
|
|
|
SIGNATURE |
|
TITLE |
|
DATE |
|
|
|
|
|
/s/ Robert A. Virtue
|
|
Chairman of the Board, Chief Executive |
|
|
Robert A. Virtue
|
|
Officer, President and Director (Principal Executive Officer)
|
|
April 15, 2008 |
|
|
|
|
|
/s/ Douglas A. Virtue
|
|
Director
|
|
April 15, 2008 |
Douglas A. Virtue |
|
|
|
|
|
|
|
|
|
/s/ Robert E. Dose
|
|
Vice President Finance, Secretary and |
|
|
Robert E. Dose
|
|
Treasurer (Principal Financial Officer)
|
|
April 15, 2008 |
|
|
|
|
|
/s/ Bassey Yau
|
|
Corporate Controller |
|
|
Bassey Yau
|
|
(Principal Accounting Officer)
|
|
April 15, 2008 |
|
|
|
|
|
/s/ Donald S. Friesz
|
|
Director
|
|
April 15, 2008 |
Donald S. Friesz |
|
|
|
|
|
|
|
|
|
/s/ Thomas J. Schulte
|
|
Director
|
|
April 15, 2008 |
Thomas J. Schulte |
|
|
|
|
|
|
|
|
|
/s/ Robert K. Montgomery
|
|
Director
|
|
April 15, 2008 |
Robert K. Montgomery |
|
|
|
|
|
|
|
|
|
/s/ Albert J. Moyer
|
|
Director
|
|
April 15, 2008 |
Albert J. Moyer |
|
|
|
|
|
|
|
|
|
/s/ Glen D. Parish
|
|
Director
|
|
April 15, 2008 |
Glen D. Parish |
|
|
|
|
|
|
|
|
|
/s/ Donald A. Patrick
|
|
Director
|
|
April 15, 2008 |
Donald A. Patrick |
|
|
|
|
|
|
|
|
|
/s/ James R. Wilburn
|
|
Director
|
|
April 15, 2008 |
James R. Wilburn |
|
|
|
|
63
VIRCO MFG. CORPORATION
EXHIBITS TO FORM 10-K ANNUAL REPORT
For the Year Ended January 31, 2008
|
|
|
Exhibit |
|
|
Number |
|
Description |
3.1
|
|
Certificate of Incorporation of the Company dated April 23, 1984, as amended (incorporated by reference to
Exhibit 4.4 to the Companys Form S-8 Registration Statement (Commission File No. 33-65098), filed with the
Commission on June 25, 1993). |
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Company dated September 10, 2001 (incorporated by reference to
Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q (Commission File No. 001-08777), filed with the
Commission on September 14, 2001). |
|
|
|
4.1
|
|
Rights Agreement dated as of October 18, 1996, by and between the Company and Mellon Investor Services (as
assignee of The Chase Manhattan Bank), as Rights Agent incorporated by reference to Exhibit 1 to the
Companys Form S-8 Registration Statement (Commission File No. 001-08777), filed with the Commission on
October 25, 1996. |
|
|
|
4.2
|
|
Amendment dated as of April 30, 2007 by and between the Company and Mellow Investor Services LLC to the
Rights Agreement by and between the Company and The Chase Manhattan Bank dated as of October 18, 1996, as
incorporated by reference to Exhibit 4.1 to the Companys Quarterly Report on Form 10-Q filed with the
Commission on June 8, 2007. |
|
|
|
10.1
|
|
Form of Virco Mfg. Corporation Employee Stock Ownership Plan (the ESOP) (incorporated by reference to
Exhibit 4.1 to the Companys Form S-8 Registration Statement (Commission File No. 33-65098), filed with the
Commission on June 25, 1993). |
|
|
|
10.2
|
|
Trust Agreement for the ESOP (incorporated by reference to Exhibit 4.2 to the Companys Form S-8
Registration Statement (Commission File No. 33-65098), filed with the Commission on June 25, 1993). |
|
|
|
10.3
|
|
Form of Registration Rights Agreement for the ESOP (incorporated by reference to Exhibit 4.3 to the
Companys Form S-8 Registration Statement (Commission File No. 33-65098), filed with the Commission on
June 25, 1993). |
|
|
|
10.5
|
|
1993 Stock Incentive Plan of the Company (incorporated by reference to Exhibit 4.1 to the Companys
Form S-8 Registration Statement (Commission File No. 33-65098), filed with the Commission on June 1993). |
|
|
|
10.6
|
|
Lease dated February 1, 2006, between FHL Group, a California Corporation, as landlord and Virco Mfg.
Corporation, a Delaware Corporation, as tenant (incorporated by reference to Exhibit 99.1 to the Companys
Current Report on Form 8-K filed with the Commission on February 3, 2006). |
|
|
|
10.7
|
|
Amended and Restated Credit Agreement dated as of January 27, 2004, between the Company and Wells Fargo
Bank, National Association (incorporated by reference to Exhibit 99.2 to the Companys Current Report on
Form 8-K filed with the Commission on January 30, 2004). |
|
|
|
10.8
|
|
Amendment No. 2 to Amended and Restated Credit Agreement dated as of January 21, 2006, between the Company
and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 99.2 to the Companys
Current Report on Form 8-K filed with the Commission on January 27, 2006). |
|
|
|
10.9
|
|
Subsidiary Guaranty dated as of January 27, 2004, by Virco Mgmt. Corporation in favor of Wells Fargo Bank,
National Association (incorporated by reference to Exhibit 99.3 to the Companys Current Report on Form 8-K
filed with the Commission on January 30, 2004). |
|
|
|
10.10
|
|
Subsidiary Guaranty dated as of January 27, 2004, by Virco, Inc. in favor of Wells Fargo Bank, National
Association (incorporated by reference to Exhibit 99.4 to the Companys Current Report on Form 8-K filed
with the Commission on January 30, 2004). |
|
|
|
10.11
|
|
Amended and Restated Security Agreement dated as of January 27, 2004, among the Company, Virco Mgmt.
Corporation, Virco, Inc. and Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 99.7 to the Companys Current Report on Form 8-K filed with the Commission on January 30, 2004). |
|
|
|
10.12
|
|
Revolving Line of Credit Note dated March 26, 2007, between the Company and Wells Fargo Bank, National
Association. (incorporated by reference to Exhibit 10.12 to the Companys Form 10-K filed
with the Commission on April 16, 2007). |
|
|
|
10.13
|
|
Term Note dated March 26, 2007 between the Company and Wells Fargo Bank, National Association.
(incorporated by reference to Exhibit 10.13 to the Companys Form 10-K filed with the
Commission on April 16, 2007). |
64
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.14
|
|
Amendment No. 4 to Amended and Restated Credit
Agreement dated as of March 26, 2007, between the Company
and Wells Fargo Bank, National Association. (incorporated by
reference to Exhibit 10.4 to the Companys
Form 10-K filed with the Commission on April 16, 2007). |
|
|
|
10.15
|
|
Stock Purchase Agreement dated
June 6, 2006, between the Company and Wedbush, Inc. and Wedbush Morgan
Securities, Inc. (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
filed with the Commission on June 8, 2006). |
|
|
|
10.16
|
|
Warrant Agreement dated June 6, 2006, between the Company and Wedbush, Inc. (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K filed with the Commission on June 8, 2006). |
|
|
|
10.17
|
|
Warrant Agreement dated June 6, 2006, between the Company and Wedbush Morgan Securities, Inc. (incorporated
by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed with the Commission on
June 8, 2007). |
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10.18
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Amended Stock Purchase Agreement dated August 29, 2006, between the Company and Steve Presley, Ed Gyenes,
Nick Wilson, Scotty Bell, Patty Quinones, Eric Nordstrom, Larry Maddox, James Simms, Bassey Yau, Robert
Virtue, Doug Virtue and Evan Gruber (incorporated by reference to Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q filed with the Commission on
December 11, 2006). |
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10.19
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Design Agreement dated January 21, 2008, between the Company and Peter Glass Design, LLC, and Hedgehog
Design, LLC. (incorporated by reference to Exhibit 10.1 and 10.2 to the Companys Current Report on
Form 8-K filed with the Commission on January 25, 2008). |
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10.20
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Second Amended and Restated Credit Agreement, dated as of March 12, 2008 between Virco Mfg. Corporation and
Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed with the Commission on March 24, 2008). |
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10.21
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Revolving Line of Credit Note, dated as of March 12, 2008, by Virco Mfg. Corporation in favor of Wells
Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 to the Companys Current Report
on Form 8-K filed with the Commission on March 24, 2008). |
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10.22
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Master Reaffirmation Agreement, dated as of March 12, 2008, among Virco Mfg. Corporation, Virco Mgmt.
Corporation, Virco Inc. and Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 10.3 to the Companys Current Report on Form 8-K filed with the Commission on March 24, 2008). |
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10.23
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Amended and Restated Mortgage, dated as of March 12, 2008, by Virco Mfg. Corporation in favor of Wells
Fargo Bank, National Association (incorporated by reference to Exhibit 10.4 to the Companys Current Report
on Form 8-K filed with the Commission on March 24, 2008). |
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21.1
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List of All Subsidiaries of Virco Mfg. Corporation. |
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23.1
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Consent of Independent Registered Public Accounting Firm. |
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31.1
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Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities and Exchange
Act of 1934, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities and Exchange
Act of 1934, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
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