2013 ANNUAL R EPOR T
VIRCO M FG. CO RP OR ATI O N
May 12, 2014
To The Stockholders of Virco Mfg. Corporation:
We achieved a number of internal operating goals in fiscal 2013. Unfortunately, continued weakness in our core K-12 public
school market failed to deliver enough revenue to fully realize the potential of these improvements.
Revenue declined 1.8% from $158,856,000 to $155,920,000. This is the longest market downturn in Virco’s 64-year corporate
history, and we believe it offers harsh evidence of the stubborn weakness in local economies across most regions of the country.
Despite last year’s modest decline in revenue, our operating results continued to improve. Gross profit grew 3.6% from
$51,552,000 to $53,432,000, a margin of 34.3%. SG&A expense was virtually unchanged at $53,312,000 vs. $53,465,000 the
prior year. EBITDA improved 47%, increasing from $1,885,000 last year to $2,778,000 this year. Cash flow reflected improved
operating results as well as the continuing favorable balance between capital expenditures and depreciation, offset by modest
gains in inventory as we prepared for 2014.
We also recently announced a reorganization of our Board of Directors, as well as the adoption of new corporate governance
guidelines. As more fully described in this year’s proxy, we believe these changes will enhance our ability to respond to future
opportunities while also offering substantial cost savings. We have also submitted a number of proposals for stockholder
consideration that, if approved, would align Virco’s governance structure and stockholder responsiveness with current best
practices at a majority of public companies.
On a hopeful note, we are beginning to see perhaps the earliest stages of a rebound in day-to-day public school spending for
furniture and equipment. The mix of revenue in last year’s fourth quarter included a higher proportion of fill-in and replacement
orders, which tend to be tax funded. Compared with orders for bond-supported new school construction, these fill-in orders
are less volatile and more evenly distributed across the country. In past recoveries, an uptick in tax-based replacement orders
has often been one of the earliest indicators that the school funding environment is improving. To support this apparent shift in
demand, we have increased our inventory of the products typically ordered as replacements.
In terms of product mix, we are also seeing a definite upward trend for products released in the last several years. We’re especially
gratified by the enthusiasm for our Healthy Movement® collection of sensory integration furniture. As a group, these designs—
including our Zuma® rocking chairs, stand-up desks, and adjustable task chairs for smaller students—have been found to reduce
what teachers and occupational therapists refer to as ‘out of seat’ behavior.
When students are able to stay on task, their performance improves and discipline issues are reduced. This also improves their
overall sense of inclusion, as described in many of the testimonials we’ve received. While Healthy Movement furniture is sometimes
thought of as being primarily for students with cognitive challenges, our growing number of case histories confirms its benefits for
all students, regardless of individual abilities or learning styles.
Another trend we’re happy to support is the re-introduction of practical skills training (formerly called shopclass or vocational
training). The Great Recession has highlighted the fact that certain kinds of hands-on skills may offer better employment
opportunities than generic ‘knowledge work.’ As we have discovered in our own U.S. factories it’s not a case of either/or—
practical skills vs. technical knowledge—but rather it’s both, intelligently combined. Many curricula now feature a blending of
technology with materials and skills training. Our new Text® and Tetra™ tables comfortably support these hybrid lesson plans with
durable steel frames, plug-and-play connectivity, as well as chemical resistant worksurfaces and replaceable ‘spoil boards’ for more
aggressive projects. As with all of our table series, these feature adjustable heights, castered legs for easy mobility, and sturdy
fixed-height stand-up units.
In short, we believe we’re finally starting to see the replacement of fully depreciated classroom furniture with modern designs that
support positive changes in curricula and classroom ergonomics. We also believe these trends will be positive for our educational
customers and the nation as a whole. We have long supported good ergonomics, inclusiveness, and the intelligent blending
of technology with hands-on skills. That our furniture reflects our beliefs should come as no surprise. That it can be of help to
students, educators, employers, and ultimately our stockholders, makes it even more rewarding.
Sincerely,
Robert A. Virtue
President, Chairman of the Board
and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
È Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
‘ Transition Report Pursuant to Section 13 or 15 (d) of the
For the fiscal year ended January 31, 2014.
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)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
2027 Harpers Way, Torrance, California
(Address of principal executive offices)
95-1613718
(IRS Employer
Identification No.)
90501
(Zip Code)
Registrant’s telephone number, including area code (310) 533-0474
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered:
Common Stock, $0.01 Par Value
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 ‘ No È
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 ‘ No È
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 È No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘
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 registrant’s 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. È
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):
Large accelerated filer ‘
Non-accelerated filer ‘ (Do not check if a smaller reporting company)
‘
Accelerated filer
Smaller reporting company È
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes ‘ No È
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on July 31,
2013, was $36 million (based upon the closing price of the registrant’s common stock on such day, as reported by the NASDAQ).
As of April 1, 2014, there were 14,718,414 shares of the registrant’s common stock ($0.01 par value) outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 2014 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
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
POWER OF ATTORNEY
EX-10.34
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
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PART I
Cautionary Statement Regarding Forward-Looking Statements
This report on Form 10-K contains a number of “forward-looking statements” that reflect Virco Mfg. Corporation's ( the
"Company" or "Virco") current views with respect to future events and financial performance, including, but not limited to,
availability of funding for educational institutions, statements regarding plans and objectives of management for future
operations, including plans and objectives relating to products, pricing, marketing, expansion, manufacturing processes, and
business strategies; the Company's 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
Company's “Assemble-To-Ship” program on earnings; market demand; the Company's ability to position itself in the market;
references to current and future investments in and utilization of infrastructure; statements relating to management's beliefs
that cash flow from current operations, existing cash reserves, and available lines of credit will be sufficient to support the
Company's 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
Company's 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 Company's ability to predict, general economic conditions, the
availability and cost of raw materials, 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, competition
and other factors included in the “Risk Factors” section of this report.
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, 2010, January 31, 2011, January 31, 2012, January 31, 2013 and
January 31, 2014 are referred to as years 2009, 2010, 2011, 2012 and 2013, respectively.
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®, Sigma®,
Metaphor®, Telos®, TEXT®, Parameter®, Sage™, Analogy™ and Civitas™. Solely for convenience, from time to time, we refer
to our trademarks in this report without the ® and ™ symbols, but such references are not intended to indicate that we will not
assert, to the fullest extent under applicable law, our rights to our trademarks. In addition, other names and brands included in
this report may be claimed by us as well or by third parties.
Item 1. Business
Introduction
Designing, producing and distributing high-value furniture for a diverse family of customers is a 64-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 manufacturer of chairs and
desks for Los Angeles-area schools, over the years, Virco has become the largest manufacturer and supplier of moveable
educational furniture and equipment for the preschool through 12th grade market in the United States. The Company 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 Series; the recently introduced Analogy and Civitas furniture collections; Metaphor and Sage Series
items for educational settings; the Ph.D. Executive seating line; and the wide-ranging Plateau Series.
Along with serving customers in the education market - which in addition to preschool through 12th grade public and private
schools includes: junior and community colleges; four-year colleges and universities; trade, technical and vocational schools -
Virco is a leading furniture and equipment supplier for convention centers and arenas; the hospitality industry with respect to
banquet and meeting facilities; government facilities at the federal, state, county and municipal levels; and places of worship.
We also sell to wholesalers, distributors, traditional retailers and catalog retailers that serve these same markets.
To meet the furniture and equipment needs of our customers, Virco operates a 560,000 sq. ft. office, manufacturing and
warehousing facility located on 23.5 acres of land in Torrance, California; this facility includes our corporate headquarters,
3
West Coast showroom, and all West Coast distribution operations. To complement our California-based operations, Virco owns
100 acres of land in Conway, Arkansas, containing 1,200,000 sq. ft. of manufacturing, warehousing, and office space. With
high-density storage systems, 70 dock doors dedicated to outbound freight, and substantial yard capacity to store and stage
trailers, this facility supports Virco's ability to handle increased sales during our peak summer delivery season and enhances the
efficiency with which orders are filled. Virco also operates two other facilities in Conway. The first is a 375,000 sq. ft. factory -
acquired in 1954, and expanded and modernized in subsequent years - where a variety of operations take place, including the
manufacture of fabricated steel components, chrome plating, and plastic injection-molding; components generated here are
transferred to other facilities for assembly into finished goods. The second is a 175,000 sq. ft. manufacturing facility where
compression-molded hard plastic components are fabricated and stored.
Because the product needs and preferences of our customers continue to evolve - and in response to competitive furniture and
equipment offerings from domestic and offshore suppliers - Virco maintains an ongoing new product development program.
We've worked with accomplished designers - such as Peter Glass, Richard Holbrook, and Bob Mills - to introduce exciting
furniture and equipment solutions for contemporary applications. Over the past three years, Virco has launched a substantial
number of new products, including the following.
In 2011, Virco introduced the Sage™ Contract and Civitas™ seating lines. Combining Virco's super-comfortable Sage shell
with a sleek, new-look frame, Sage Contract chairs are great for offices and reception areas, colleges, hospitality venues and
other adult environments. Civitas chair and stool models - available in 18”, 25” and 30” seat-heights with either a Sage, shell,
an ergonomically contoured ZUMA® Series shell, or highly sustainable ZUMAfrd™ seat and back components made of
Fortified Recycled Wood™ hard plastic - provide exceptional seating solutions for foodservice, libraries, media centers,
circulation areas and related venues. Other 2011 product releases included: 53 Series steel storage cabinets; an expanded range
of 53 Series lateral files; special versions of Virco's 543 and 546 Series desks with wire management capabilities; HWT (hinged
wire trough) technology tables for computer labs and related applications; an array of 36” wide Plateau® and 2BC Series
bookcases; adjustable-height versions of Virco's 120, 121 and 122 Series stools; and three ZUMA rocking chairs with “bump”
glides designed for environments where limited motion may be desired, such as areas for children with severe sensory
integration problems or Autism.
In 2012, to complement the recently released Civitas chair and stool collection, Virco introduced an assortment of Civitas cafe
table tops and tulip-shaped table bases. Tops are available in a variety of round, square and “squircle” shaped sizes and can be
ordered with three different eye-catching edge profiles, while bases come in three heights to coordinate with the Civitas line's
18”, 25” and 30” seat-height chair and stools. Other 2012 product releases included: a new collection of Sage rocking chairs;
53 Series wardrobe tower cabinets; new Parameter® file credenzas and additional Parameter mobile pedestals; a selection of
24” wide TEXT® seminar tables; Metaphor® sled-based chair/desk combo units; a wheelchair-accessible version of the
ZUMA cantilevered single-student desk; CT Series tables with a hand crank mechanism for top height adjustment; new oval
mobile tables with attached benches or stools; and several mobile cabinet models with a magnetic marker back.
In 2013, Virco introduced the Analogy™ classroom furniture collection. Designed for Virco by Peter Glass and Bob Mills, the
affordable, ergonomically contoured Analogy line includes fixed-height 4-leg chairs, adjustable task chairs and lab stools, steel-
frame rockers and a selection of 4-leg and sled-based chair desk combo units. New Agile Combo units - also released in 2013 -
provide an appropriate level of mobility to effectively enhance in-class collaboration. Every Agile Combo model has a hooded,
twin-wheel soft caster with a “sit-lock” compression-brake on each of its front legs. With this two-caster configuration, Agile
Combos - unlike competing units with casters on all four legs - prevent students from “rolling around” disruptively while
seated. Instead, when an instructor asks students to move their Agile Combos to facilitate a particular lesson plan, they can do
so in an orderly manner by getting out of their seats and using the convenient hand-hold near the top of the Agile Combo
backrest. For added stability when units aren’t being moved, the rear legs of Agile Combos have rubber-base swivel glides.
Agile Combo models can be ordered with a ZUMA shell, a Sage™ shell or an Analogy shell. Other 2013 product introductions
included: a selection of ZUMA and Sage chairs with integral tubular steel arms; several new Parameter desks and workstations,
including L-configuration units with curved-corner or notched-corner tops; and wheelchair-accessible ZBOOM single-student
desks that support collaborative learning; mobile Textameter™ instructor workstations; and elegant Civitas™ chairs and stools
with a contoured plywood seat and back. Products targeted for release in 2014 include: Civitas 4-leg table bases; a new table
collection for learning environments; additional oval mobile tables; a new ergonomically contoured classroom seating line, and
instructor media stations that will be made using Virco’s impressive flat metal forming capabilities.
Virco's flat metal forming and other production capabilities are further enhanced when combined with our Assemble-to-Ship
(“ATS”) strategy, which allows for the manufacture and storage of common components during the portion of the year when
demand for our product is low followed by assembly to customer-specific combinations prior to shipment. The combination of
flat metal forming and ATS enables Virco to offer various products - including an array of desks at three price points - that
provide a variety of furniture solutions for customer applications in a wide range of environments.
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As of January 31, 2014, the Company's employment force was approximately 700, manufacturing its products in 1.1 million
square feet of fabrication facilities and 1.2 million square feet of assembly and warehousing facilities in Torrance, California
and Conway, Arkansas. Additionally, the Company's 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
re-sale with Virco products - the Company is now able to provide “one-stop shopping” for all FF&E needs in the K-12 market.
The expansion of the Company's product line 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 Company's 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. Virco also serves convention centers and arenas; the hospitality industry with
respect to banquet and meeting facilities; 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. Virco's educational product line is
marketed through an extensive direct sales force, as well as through a growing dealer network. In addition, Virco has 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 Virco's 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; and product delivery, installation, and repair.
Another important element of Virco's business model is the Company's 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. Virco's physical facilities are designed to support its ATS strategy. Warehouses have
substantial staging areas combined with a large number of dock doors to support the seasonal peak in shipments during summer
months.
During the last decade, many furniture manufacturers closed their domestic manufacturing facilities and began importing
increasing quantities of furniture from international sources. During this same period, Virco elected to significantly reduce its
work force, 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 Company's 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 to be performed locally. Domestic production of
laminated wood tops and molded plastic enables the Company to market a color palette that cannot 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 Virco's ability to finance, manufacture and warehouse furniture within the relatively
narrow delivery window associated with the highly seasonal demand for education sales. In 2012 and 2013, approximately 50%
of the Company's total sales were delivered in June, July, and August 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.
5
Virco's 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 Company's 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.
Virco also has flat metal forming capabilities to enable the production of desks, returns, bookcases, filing cabinets, mobile
pedestals and related items.
Virco's principal manufactured products include:
SEATING - The ergonomically supportive ZUMA® line designed by Peter Glass and Bob Mills posted the highest initial-year
new product sales total in the Company's history. In addition to fixed-height 4-leg chairs, the ZUMA line includes cantilever
chairs; tablet arm chairs with a fixed or articulating work surface and a compact footprint; and steel-frame rockers. The
ZUMAfrd™ collection features Fortified Recycled Wood™ hard plastic seats, backrests and work surfaces. ZUMAfrd products
have up to 70% recycled content and are 98% recyclable. The Sage™ line, originally designed to serve students in college,
university and other adult education settings - and on high school campuses - now offers a 13” and a 15” 4-leg chair and a
corresponding pair of cantilever chairs for younger, smaller students; there's also a selection of Sage rockers for K-12
applications and several tablet arm units. Selected adult-height Sage models can also now be ordered with a padded,
upholstered seat. Other Virco seating choices include the Metaphor® Series - an updated sequel to Virco's 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. The Sage Contract
line is targeted for offices and reception areas, colleges, hospitality venues and other adult environments, while Civitas™ chairs
and stools are intended for foodservice, libraries, media centers, circulation areas and related on-campus areas where people
gather; and adjustable-height versions of 120, 121 and 122 Series stools. Additional Virco seating alternatives range from 120,
121 and 122 Series stools to easily-adjustable Ph.D.® task chairs and contoured I.Q.® Series classroom chairs by Richard
Holbrook; comfortable, attractive Virtuoso® chairs by Charles Perry; and new Analogy™ Series chairs by Peter Glass and Bob
Mills. 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 - Virco’s TEXT® table collection for learning environments - designed by Peter Glass and Bob Mills- features heavy-
gauge tubular steel and proven Virco construction for extended product life, and elliptical legs, swooping yokes and arched feet
for exceptional elegance. Selected TEXT models can be equipped with a variety of technology-support and storage accessories.
Lunada® tables, combining Virco's popular Lunada bi-point bases with a selection of 20 top sizes, make great choices for
seminar, conference and related settings. 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,
Virco's Core-a-Gator® models are unsurpassed. When paired with attractive, durable Virco cafe tops, Lunada bases by Peter
Glass provide eye-catching table solutions for hospitality settings. Civitas tops and bases provide excellent furniture solutions
for on-campus spaces where people gather. Virco also carries traditional folding tables, CT Series tables with a hand crank
mechanism for top height adjustment, activity tables and office tables, as well as the computer tables and mobile tables
described below.
COMPUTER FURNITURE - The TEXT table collection described in the preceding paragraph provides educators an array of
computer furniture choices for learning environments; Virco's Flip-Top Technology tables and HWT Technology tables also
deliver popular computer furniture solutions. Future Access® computer tables come with an integral wire management panel
and 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 Virco's functional computing accessories, such as keyboard mouse trays, CPU holders
and support columns for optional elevated shelves. 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.
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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, Virco's wide-ranging furniture
models can be found in thousands of America's schools. Related products include an array of tablet arm units, new Agile
Combo models and new Analogy™ Series combo chair desks. Selected models are available with durable, colorfast Martest
21® or Fortified Recycled Wood™ hard plastic components. For teachers, principals and district administrators - and for
business environments - Virco offers an extensive range of Parameter® desks, returns and credenzas designed by Peter Glass
and Bob Mills. Textameter™ mobile workstations provide additional furniture choices for educators.
ADMINISTRATIVE OFFICE FURNITURE - In addition to the Plateau® Office Solutions and Parameter® product lines,
Virco manufactures a selection of desks, returns, bookcases and other items that employ the Company's flat metal forming
capabilities. These products include 53 Series steel storage cabinets, an expanded range of 53 Series lateral files, and special
versions of 543 and 546 Series desks with wire management capabilities. Other products range from 53 Series wardrobe tower
cabinets and Parameter file credenzas to Parameter mobile pedestals and Plateau bookcases in popular 36” wide and 48” wide
models that work in classroom settings and related educational environments as well as administrative offices.
LABORATORY FURNITURE - For biology and chemistry classes, and other school- and college-based lab settings, Virco
offers a variety of steel-based science tables. Virco manufactures the table bases of these items and equips them with specialty
Chemsurf® and epoxy resin tops. Virco's ZUMA®, Sage™, Telos®, Metaphor®, I.Q.®, Classic Series™, and 3000 Series
collections include pneumatically adjustable lab stools with high-range seat-height adjustment and a steel foot-ring. Virco also
carries a selection of wood-frame science tables with Chemsurf and epoxy resin tops.
MOBILE FURNITURE - School cafeterias are perfect venues for the ever-popular Virco mobile tables - including a selection
of oval mobile tables with attached benches or stools - while classrooms benefit from the spacious storage capacity of Virco
mobile cabinets; additional mobile cabinet models with a magnetic marker back are available. An array of Virco product lines
includes 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.
Virco's wide-ranging product selection includes hundreds of furniture models that are certified according to the Greenguard®
Children & Schools Program for indoor air quality. In 2005 Virco's ZUMA and ZUMAfrd™ products earned the distinction of
being the first classroom furniture models to be certified through the Greenguard Children & Schools Program, now known as
Greenguard Gold certification. All of the models in the Company's most recently introduced product lines - including
Analogy™ furniture models and Textameter™ instructor workstations - are Greenguard-certified. Along with Virco's leadership
relative to Greenguard-certified furniture, the Company also introduced the classroom furniture industry's 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, the Company supplements Virco-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. Virco carries a complete line of
specialty furniture and equipment from Wenger® Corporation for music rooms, performance areas and related spaces; Virco
also now offers customized, space-efficient workstations by Interior Concepts™ for technology and language labs, media
centers, computer classrooms, reception areas and offices. Wenger and Interior Concepts are two of the many vendors with
which the Company partners in order to effectively position Virco as the preferred one-stop furniture and equipment source for
K-12 schools. None of the products from vendor partners accounted for more than 10% of consolidated revenues in 2013.
To complement Virco's extensive selection of furniture and equipment, we offer customers a variety of valuable services in
connection with the purchase of Virco products; revenues from these service levels are included in the purchase price of the
furniture items. In addition to giving customers the option of purchasing Virco products and making their own delivery
arrangements, Virco provides three levels of delivery service. When customers choose Standard Delivery - also known as
tailgate delivery - the delivery driver is responsible for moving the customer's goods to the tailgate of the truck only; therefore,
the customer must have personnel on hand to unload the truck. For additional charges Virco also offers Inside Delivery (no
installation), or Full-Service Delivery (delivered and installed). To assist customers involved with FF&E purchases for new
school construction projects or school renovations, Virco's PlanSCAPE® service provides room-by-room computerized layout
planning and full FF&E project management.
Customers
7
Virco's major customers include educational institutions, convention centers and arenas, hospitality providers, government
facilities, and places of worship. No customer accounted for more than 10% of Virco's consolidated revenues during 2013.
Raw Materials
Virco purchases steel, aluminum, plastic, polyurethane, polyethylene, polypropylene, plywood, particleboard, medium density
fiberboard (MDF), 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 Company's largest raw material cost is for steel, followed by plastics and
wood.
The price of these commodities, particularly steel and plastic, has been volatile. Steel and plastic prices increased significantly
in 2004 and 2005, in part due to worldwide demand of these materials, especially in China. By comparison, in 2006 and 2007
the price of these commodities was relatively stable. In 2008, steel prices increased by more than 80% during a four month
period from April to July, followed by a period of modest decline in the latter part of 2008 and relative stability in 2009 and
2010. During 2011, the Company incurred significant increases in the cost of steel during the second quarter and plastic during
the second and third quarters. During 2012 and 2013 the cost of steel, plastic, and wood were stable.
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 processes. 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 moderately during the last three years, and are expected to increase further in 2014.
With respect to the Company's annual contracts (or those contracts that have longer terms), the Company may have limited
ability to increase prices during the term of the contract. The Company has, however, negotiated increased flexibility under
many of these contracts, allowing the Company to increase prices on future orders. Nevertheless, even with respect to these
more flexible contracts, the Company does not have the ability to increase prices on orders received prior to any announced
price increases. Due to the intensely seasonal nature of our business, the Company may receive significant orders during the
first and second quarters for delivery in the second and third quarters. With respect to any of the contracts described above, if
the costs of raw materials increase suddenly or unexpectedly, the Company cannot be certain that it will be able to implement
corresponding increases in its sales prices in order to offset such increased costs. Significant cost increases in providing
products during a given contract period can adversely impact operating results and have done so during prior years, especially
in 2004, 2005, 2008, and 2011. The Company typically benefits from any decreases in raw material costs under the contracts
described above.
Marketing and Distribution
Virco serves its customers through a well-trained, nationwide sales and support team, as well as a growing dealer network. In
addition, Virco has 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 Virco's local accounts.
Virco's educational product line is marketed through what management believes to be the largest direct sales force of any
education furniture manufacturer. The Company's 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 Company's direct sales force is considered to be an important competitive advantage over
competitors who rely primarily upon dealer networks for distribution of their products.
Virco's sales force is assisted by the Company's proprietary PlanSCAPE® software and experienced PlanSCAPE managers
when preparing complete package solutions for the FF&E segment of bond-funded public school construction projects.
PlanSCAPE software also enables the entire Virco sales force to prepare quotations for less complicated projects.
A significant portion of Virco's 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. 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.
8
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 venues, and mass merchants. This market includes 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 represented more than 10 percent of the
Company's consolidated revenues in 2013. 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, if they are participants in buying groups as well as being eligible for a state
or national contract.
Virco is the exclusive supplier of movable classroom furniture for one nationwide purchasing organization under which many
of our customers price their furniture. See “Risk Factors : Approximately 50% of our sales are priced through one contract,
under which we are the exclusive supplier of classroom furniture.” Sales priced under this contract represented approximately
49% of sales in 2013, 49% of Virco's sales in 2012, and 50% of Virco's sales in 2011. In the third quarter of 2008, the
Company was awarded a three-year contract with this purchasing organization extending through 2011. In 2008 the Company
was awarded three one-year extensions extending through 2014. If Virco were unable to sell under this contract, we would be
able to sell to the vast majority of our customers under alternative contracts.
Seasonality
The educational sales market is extremely seasonal. Approximately 50% of the Company's total sales in 2013 were delivered
in June, July, and August with an even higher portion of educational sales delivered in that period. Shipments during peak
weeks in 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 majority of
shipments occurring from June to August each year, which is the Company's 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 PNC 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 three
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. Third, many summer deliveries may be “projects” where the Company provides furniture for a
new school or significant refurbishment of an existing school. Projects may require architect sign off, school board approval
prior to payment, or punch list completion, all of which can delay payment. 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.
As a result of the seasonality of our business, our manufacturing capacity is dictated by the capacity requirement during the
months of June, July, and August. Because of this seasonality, factory utilization is lower during the slow season. The
Company utilizes a variety of tactics to address this seasonal business. During the summer months, which comprise our second
and third fiscal quarters, our personnel utilization generally is at or close to full capacity. The Company utilizes temporary
labor and significant overtime to meet the seasonal requirements. During the slow portions of the year, temporary labor and
overtime are eliminated to moderate the off-season costs. Our manufacturing facility capacity utilization generally remains less
than 100% during these summer months; because physical structure capacity cannot be adjusted as readily as personnel
capacity, we have secured sufficient physical structure capacity to accommodate our current needs as well as for anticipated
future growth. Our physical structure utilization is significantly lower during the first and fourth quarters of each year than it is
during the second and third quarters.
9
The Company utilizes a comparable strategy to address warehousing and distribution requirements. During summer months,
temporary labor is hired to supplement experienced warehouse and distribution personnel. More than 90% of the Company's
freight is provided by third-party carriers. The Company has secured sufficient warehouse capacity to accommodate our
current needs as well as anticipated future growth.
Virco's 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 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, Virco's 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 have to absorb higher storage, labor and related costs, each of
which may negatively affect the Company's 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 Company's business during the peak season each year based in
part on annual contracts which are in place and management's experience with respect to the market.
As part of Virco's efforts to balance seasonality, financial performance and quality without sacrificing service or market share,
management has been refining the Company's ATS operating model. ATS is Virco's version of mass-customization, which
assembles standard, stocked components into customized configurations before shipment. The ATS program reduces the total
amount of inventory and working capital needed to support a given level of sales. It does this by increasing the inventory's
versatility, delaying assembly until the last moment, and reducing the amount of warehouse space needed to store finished
goods. As part of the ATS stocking program, Virco has endeavored to create a more flexible work force. 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 HON (HNI) which recently acquired Sagus
International LLC (which markets product under Artco-Bell, American Desk, and Midwest Folding Products), KI Inc.,
Bretford, Smith System, Columbia, Scholarcraft and VS America. Historically, our largest competitor that purchases and re-
sells furniture has been School Specialty (SCHS). In January 2013, School Specialty filed for bankruptcy under Chapter 11 of
the Bankruptcy Code and emerged in mid-2013. Contrax is a significant nationwide reseller focusing on projects. In addition
to School Specialty and Contrax, there are numerous catalogers, internet resellers, and 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., 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 include emphasizing the value of Virco's
products and product assortment, the convenience of one-stop shopping for “Equipment for Educators™”, the value of Virco's
project management capabilities, the value of Virco's distribution and delivery capabilities, and the value of Virco's 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 re-sellers, and management believes that the Company's
large direct sales force and the Company's sizeable manufacturing and warehousing capabilities facilitate these efforts.
Although management prefers to compete on the value of Virco products and services, when market conditions warrant, the
Company will compete based on direct prices and may reduce its prices to build or maintain its market share.
Backlog
Sales order backlog at January 31, 2014, totaled $13.5 million and approximated eight weeks of sales, compared to
$17.3 million at January 31, 2013, and $14.4 million at January 31, 2012. Substantially all of the backlog will ship during 2014.
Patents and Trademarks
10
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
Virco's 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 Virco's
patents are an important element of its success, Virco's business as a whole is not believed to be materially dependent on any
one patent. See “Risk Factors : An inability to protect our intellectual property could have a significant impact on our
business.”
In order to distinguish genuine Virco products from competitors' products, Virco has obtained the rights to certain trademarks
and trade names for its products and engages in advertising and sales campaigns to promote its brands and to identify genuine
Virco products. While Virco's trademarks and trade names play an important role in its success, Virco's business as a whole is
not believed to be materially dependent on any one trademark or trade name, except perhaps “Virco,” which the Company has
protected and enhanced as an emblem of quality educational furniture for over 60 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.
Employees
As of January 31, 2014, Virco and its subsidiaries employed approximately 700 full-time employees at various locations. Of
this number, approximately 530 are involved in manufacturing and distribution, approximately 105 in sales and marketing and
approximately 65 in administration. The Company also utilizes temporary workers as necessary to meet any seasonal
production, warehousing or distribution requirements that cannot be filled by its full time workforce. During 2013, the
Company employed approximately 225 temporary workers during the months of June and July, with smaller numbers
immediately preceding and following these months.
Environmental Compliance
Virco is subject to numerous federal, state, and local 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 Company's operations. Moreover, Virco has enacted policies for recycling and resource recovery that have
earned repeated commendations, including: recognition by the California Department of Resources Recycling and Recovery
(CalRecycle) in 2011 and 2010 as a Waste Reduction Awards Program (WRAP) honoree; recognition by the United States
Environmental Protection Agency 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; and recognition by the Sanitation Districts of
Los Angeles County for compliance with industrial waste water discharge guidelines in 2007 through 2010. This is only a
partial list of Virco's environmental awards and commendations; for a more complete list, go to www.virco.com and click on
the Corporate Stewardship header. In addition to these awards and commendations, Virco's ZUMA® and ZUMAfrd™ product
lines were the first classroom furniture collections to earn indoor air quality certification through the stringent
GREENGUARD® Children & Schools Program, now known as Greenguard Gold certification. As a follow-up to the
certification of ZUMA and ZUMAfrd models in 2005, hundreds of other Virco furniture items - including Analogy™ furniture
models and Textameter™ instructor workstations - have earned GREENGUARD certification. Moreover, all Virco products
covered by the Consumer Product Safety Improvement Act of 2008 are in compliance with this legislation. All affected Virco
models are also in compliance with the California Air Resources Board rule implemented on January 1, 2009, concerning
formaldehyde emissions from composite wood products. 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. 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. It is possible that the Company's operations may result in
noncompliance with, or liability for remediation pursuant to, environmental laws. Should such eventualities occur, the
Company records liabilities for remediation costs when remediation costs are probable and can be reasonably estimated. See
11
“Risk Factors : 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.
Financial Information About Industry Segment and Geographic Areas
Virco operates in a single industry segment. For information regarding the Company's revenues, gross profit and total assets
for each of the last three fiscal years, see the Company's consolidated financial statements.
During 2013, Virco derived nearly 7.5% of its revenues from customers located outside of the United States (primarily Canada
and Puerto Rico). During 2012, Virco derived nearly 10.0% of its revenues from customers located outside of the United States
(primarily Canada and Puerto Rico). During 2011, Virco derived approximately 7.0% of its revenues from customers located
outside of the United States (primarily in Canada and Panama). The Company determines sales to these markets based upon
the customers' principal place of business. During 2013, 2012 and 2011, the Company did not have any long-lived assets
outside of the United States.
Executive Officers of the Registrant
As of April 1, 2014, the executive officers of the Company, who are elected by and serve at the discretion of the Company’s
Board of Directors, were as follows:
Name
Robert A. Virtue (1)
President, Chairman of the Board and Chief Executive Officer
Office
Douglas A. Virtue (2)
Executive Vice President
J. Scott Bell (3)
Robert E. Dose (4)
Patricia Quinones (5)
D. Randal Smith (6)
Jamie Makuuchi (7)
Bassey Yau (8)
Vice President — General Manager, Conway Division
Vice President — Finance, Secretary and Treasurer
Vice President — Logistics, Marketing Services and Information
Technology
Vice President — Marketing and Corporate Stewardship
Chief Marketing Officer
Vice President — Corporate Controller, Assistant Secretary and
Assistant Treasurer
________________________
Age at
January 31, 2014
81
Has Held
Office Since
1990
55
57
57
50
65
51
55
1992
2004
1995
2004
1995
2013
2004
(1) Appointed Chairman in 1990; has been employed by the Company for 57 years and has served as the President since
1982 and Chief Executive Officer since 1988.
(2) Appointed in 1992; has been employed by the Company for 28 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.
(3) Appointed in 2004; has been employed by the Company for 25 years and has served in a variety of manufacturing,
safety, and environmental positions, and currently Vice President — General Manager, Conway Division.
(4) Appointed in 1995; has been employed by the Company for 23 years and has served as the Corporate Controller, and
currently as Vice President of Finance, Secretary and Treasurer.
(5) Appointed in 2004; has been employed by the Company for 22 years in a variety customer and marketing service
positions, and currently as Vice President of Logistics, Marketing Services and Information Technology.
(6) Appointed in 1995; has been employed by the Company for 29 years in a variety of sales and marketing positions, and
currently as Vice President of Marketing & Corporate Stewardship.
(7) Appointed in 2013; is responsible for all sales and Marketing operations.
(8) Appointed in 2004; has been employed by the Company for 17 years and has served as Corporate Controller, and
currently as Vice President Accounting, Corporate Controller, Assistant Secretary and Assistant Treasurer.
None of the Company’s officers have employment contracts.
Available Information
12
Virco files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange
Commission (“SEC”). Stockholders may read and copy this information at the SEC's Public Reference Room at 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 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 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.
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 a function of general economic conditions. If
the economy continues to remain weak or further weakens, funding for education may fail to improve or decrease
further, which would adversely affect our business and results of operations.
Our sales are significantly impacted by the level of education funding primarily in North America, which, in turn, is a function
of the general economic environment. In a weak economy, like the one currently being experienced in the United States, state
and local revenues decline, restricting funding for K-12 education spending which typically leads to a decrease in demand for
school furniture. Sustained depressions in the per-student funding levels provided for in-state and local budgets could have a
materially adverse impact on our business, financial condition and results of operations.
In addition, 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, which in turn would affect 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.
Gaps in state budgets may adversely affect our revenue and results of operations.
Virtually all states are required to balance their operating budgets either on an annual or bi-annual basis. Unlike the federal
government, states cannot maintain services during an economic downturn by running a deficit. Without federal economic
assistance, states that have not recovered from the recent recession will need to address remaining shortfalls with a combination
of spending cuts and/or tax increases. If states cut spending for education to address such budgetary shortfalls, our revenue and
results of operations will be adversely affected.
Reduced levels of spending on education may significantly impact spending on furniture and increase price competition
in the furniture market. If price competition increases, we may need to reduce our prices to build or maintain our
market share, which in turn could lower our profit margins.
The educational furniture market is characterized by price competition, as many sales occur on a bid basis. When state and
local funding for education declines, schools typically reduce spending on all budget line items prior to reducing teacher and
administrator salaries and benefits. This in turn can result in reduced demand for school furniture, which in turn can intensify
price competition in our industry. This price competition could impact our ability to implement price increases or, in some
cases, such as during an industry downturn, maintain prices. In addition, when market conditions warrant, we may need to
reduce prices to build or maintain our market share. If we are unable to increase or maintain prices for our products, our profit
margins could decline. Such decline will be compounded to the extent we are unable to maintain or reduce the cost of our
products, which may be especially difficult in the current environment given the volatility of the commodities markets.
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.
13
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. 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. 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.
The majority of our sales are generated under annual contracts, which combined with the seasonal nature of our
business, may limit our ability to raise prices on a timely basis 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. Though the Company has negotiated increased flexibility under many of these contracts that may allow the Company
to increase prices on future orders, the Company does not have the ability to raise prices on orders received prior to any
announced price increase. Due to the intensely seasonal nature of our business, the Company may receive significant orders
during the first and second quarters for delivery in the second and third quarters. With respect to any of the contracts described
above, if the costs of providing our products or services increase between the date the orders are received and the shipping date,
we may not be able to implement corresponding increases in our sales prices for such products or services in order to offset the
related increased costs. Significant cost increases in providing either the services or products during a given contract period
could therefore lower our profit margins. By way of example, in 2008, we incurred a severe increase in the price of steel. Steel
prices increased by more than 80% during a four month period from April to July. During the period from April through the
third quarter of 2008, the price of petroleum increased substantially, affecting the cost of plastic, inbound freight, freight to
customers, and other energy costs. During the third quarter of 2008, we successfully raised the sales prices under a significant
number of our annual contracts in an effort to recover margin lost to increased costs. Due to the seasonal nature of our
business, however, approximately 2/3 of orders received and approximately 75% of shipments for the year were priced prior to
the third quarter increase. During 2011, the Company incurred an increase of approximately 30% in the cost of steel during the
second quarter, and nearly a 30% increase in the cost of certain plastics over the second and third quarters. The Company
increased prices for the 2012 and 2013 years in an effort to recover these commodity cost increases and intends to increase
prices again for 2014.
We depend on outside suppliers who may be unable to meet our volume and quality requirements, and we may be
unable to obtain alternative sources.
We require substantial amounts of raw materials and components to manufacture our products, which we purchase from outside
sources. Raw materials comprised our single largest total cost for 2013, 2012, and 2011. 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. In the current economic environment, many of the Company's suppliers may experience difficulty
obtaining financing and may go out of business. The Company may have difficulty replacing these suppliers, especially if the
supplier fails as the Company is entering the seasonal summer shipping season. 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. In addition, because we purchase components from international sources, primarily China, we
are subject to fluctuations in currency exchange rates as well as the impact of natural disasters, war and other factors that may
disrupt the transportation systems or shipping lines used by our suppliers, and other uncontrollable factors such as changes in
foreign regulation or economic conditions. 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.
Increases in basic commodity, raw material and component costs could adversely affect our profitability.
Fluctuations in the price, availability and quality of the commodities, raw materials and components used in manufacturing our
products could have an adverse effect on our costs of sales, profitability and our ability to meet customers' demand. The price
of commodities, raw materials and components, including steel and plastics, our largest raw material categories, have been
volatile in recent years, and the cost, quality and availability of such commodities have been significantly affected in recent
years by, among other things, changes in global supply and demand, changes in laws and regulations (including tariffs and
14
duties), changes in exchange rates and worldwide price levels, natural disasters, labor disputes, terrorism and political unrest or
instability. These factors could lead to further price increases or supply interruptions in the future. As discussed above, in the
short term, rapid changes in raw material costs can be very difficult for us to offset with price increases because, in the case of
many of our contracts, we have committed to selling prices for goods and services for periods of one year, and occasionally
longer. Our profit margins could be adversely affected if commodity, raw material and component costs remain high or escalate
further, and, we are unable to pass along a portion of the higher costs to our customers.
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 relative to our transportation costs, the costs of petroleum-
based materials (like plastics), and the costs of operating our manufacturing facilities. Petroleum prices have fluctuated
significantly in recent years. Prices and availability of petroleum products are subject to political, economic and market factors
that are generally outside our control. Political events in petroleum-producing regions as well as hurricanes and other weather-
related events may cause petroleum prices to increase. If such prices increase, our transportation costs may be adversely
affected in the form of increased operation costs for our fleet and surcharges on freight paid to third-party carriers. If our
transportation costs continue to increase, and/or the price of petroleum-based products and cost of operating our manufacturing
facilities increase, these increases could have a negative impact on our gross margins and profitability.
Approximately 50% 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
the pricing of a significant portion of our 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 organization's 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 it
is a school, a district, or another publicly-funded agency. In addition, Virco can ship directly to the purchaser; perform
installation services at the purchaser's 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, approximately 49% of Virco's sales in 2013 and 49% of Virco's
sales in 2012 were priced under this nationwide contract/price list. In the 3rd quarter of 2008, the Company was awarded a
three-year contract with this purchasing organization extending through 2011. In addition, in 2008 the Company was awarded
three one-year extensions extending through 2014. 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 Virco's 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. In addition, there can be no assurance that the Company will meet the requirements of its financial
covenants on an ongoing basis or that should it fail to meet such covenants in the future, the agent and lender under the
Credit Agreement will agree to waivers or amendments with respect thereto.
Our credit facility, among other things, largely prevents us from incurring any additional indebtedness, limits capital
expenditures, restricts dividends and stock repurchases, and provides for seasonal variations in the maximum borrowing
amount, including a reduced maximum level of borrowing during the fourth fiscal quarter. Our credit facility also provides for
periodic financial covenants, which currently include a minimum EBITDA, a minimum tangible net worth and a minimum
fixed charge coverage ratio requirement. As a result of the foregoing, our operational and financial flexibility may be limited,
which may prevent us from engaging in transactions that might further our growth strategy or otherwise be considered
beneficial to us.
Under our credit facility, substantially all of our accounts receivable are automatically and promptly swept to repay amounts
outstanding under the credit facility upon our receipt. Due to this automatic liquidating nature, if we breach any covenant,
violate any representation or warranty or suffer a deterioration in our ability to borrow pursuant to the borrowing base
calculation contained in the credit facility, we may not have access to cash liquidity unless provided by the lender in its
discretion. 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. In
addition, certain of the covenants and representations and warranties set forth in our credit facility contain limited or no
15
materiality thresholds, and many of the representations and warranties must be true and correct in all material respects upon
each borrowing, which we expect to occur on an ongoing basis. There can be no assurance that we will be able to comply with
all such covenants and be able to continue to make such representations and warranties on an ongoing basis. Due to continued
weak demand for education furniture, the Company has been unable to satisfy its minimum tangible net worth and minimum
EBITDA covenants for numerous periods during 2012 and most recently its minimum EBITDA covenant for the relevant
period ending January 31, 2014. On each occasion, the lender under the Company's Credit Agreement has agreed to amend the
Company's credit facility and/or waive the violation. Accordingly, on April 15, 2014, the Company entered into Amendment
No. 7 to the Credit Agreement, which waived the violation of the minimum EBITDA financial covenant and the minimum
fixed charge coverage ratio financial covenant at January 31, 2014. There can be no assurance that the Company will meet the
requirements of its financial covenants on an ongoing basis or that, should it again fail to meet such covenants, the Agent and
Lender under its Credit Agreement will agree to waivers or amendments with respect thereto.
We may not be able to renew our credit facility on favorable terms, or at all, which would adversely affect our results of
operations.
We have historically relied on third-party bank financing to meet our seasonal cash flow requirements. On an annual basis, we
prepare a forecast of seasonal working capital requirements and use borrowings under our credit facility with PNC Bank to help
meet these seasonal cash flow and working capital requirements. Disruptions in the U.S. credit markets have caused the
interest rate on prospective debt financing to widen considerably and have made financing terms for borrowers less attractive,
and in certain cases have resulted in the unavailability of certain types of debt financing. Continued uncertainty in the credit
markets may negatively impact our ability to renew our credit facility upon its maturity in 2017 on favorable terms or at all. If
we are unable to renew our credit facility on favorable terms (including available borrowing line and the rate of interest charged
thereunder), or at all, our ability to fund our operations would be impaired, which would have a material adverse effect on our
results of operations.
If management does not accurately forecast the Company's requirements for the peak summer season, the Company's
results of operations could be adversely affected.
The Company's business is highly seasonal and requires significant working capital in anticipation of and during the peak
summer season. This requires management to make estimates and judgments with respect to the Company's working capital
requirements during, and in anticipation of, the peak summer season. Management expends 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 does
not accurately forecast the Company's requirements, the Company's results of operations could be adversely affected. For
example, if management underestimates any of these requirements, Virco's 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 Company's
results of operations.
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
16
products, which could adversely affect our ability to sell our original products and could also result in competitive pricing
pressures.
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 party's 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. If new environmental laws and regulations
are introduced and enforced domestically, but not implemented or enforced internationally, we will operate at a competitive
disadvantage compared to competitors who source product primarily from international sources. In addition, in the past we
have been identified as a potentially responsible party pursuant to the Comprehensive Environmental Response Compensation
and Liability Act (“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. 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.
In addition to environmental laws and regulations affecting our manufacturing activities, the Company is subject to laws and
regulations related to consumer product regulation. The Company sells products that are subject to the Consumer Product
Safety Improvement Act of 2008 and the California Air Resources Board rule implemented on January 1, 2009, concerning
formaldehyde emissions from composite wood products. The Company has controls in place to insure that its products meet all
consumer product regulations, and a significant number of Virco products have been certified according to the
GREENGUARD® Environmental Institute's stringent Children & Schools Program.
The Patient Protection and Affordable Care Act may increase the cost of providing medical benefits to employees, which
could have a significant adverse impact on our results of operations.
We currently provide medical, dental, vision, and life insurance benefits to substantially all full-time employees. Recent
legislation regarding health care reform may cause the cost of providing medical insurance to our employees to increase. We
may not be able to pass the cost of increased medical costs to our customers, which could cause our costs of sales to increase
and our gross profit 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.
We are subject to potential labor disruptions, which could have a significant impact on our business.
17
None of our work force is represented by unions, and while we believe that we have good relations with our work force, 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.
Volatility in the equity markets or interest rates could substantially increase our pension costs and have a negative
impact on our operating results.
We sponsor one qualified defined benefit pension plan, the Virco Employee Retirement Plan (the “Employee Plan”), and two
nonqualified pension plans. The difference between plan obligations and assets, or the funded status of the Employee Plan,
significantly affects net periodic benefit costs of our Employee Plan and our ongoing funding requirements with respect to the
Employee Plan. The Employee Plan is funded with trust assets invested in a diversified portfolio of debt and equity securities
and other investments. Among other factors, changes in interest rates, investment returns and the market value of plan assets
can (i) affect the level of plan funding; (ii) cause volatility in the net periodic pension cost; and (iii) increase our future
contribution requirements. Because the current economic environment is characterized by declining investment returns and
interest rates, we may be required to make additional cash contributions to the Employee Plan and recognize further increases
in our net pension cost to satisfy our funding requirements. A significant decrease in investment returns or the market value of
plan assets or a significant decrease in interest rates could increase our net periodic pension costs and adversely affect our
results of operations.
Holders of approximately 40% of the shares of our stock have entered into an agreement restricting the sale of the
stock.
Certain shares of the Company's 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. For example, our certificate of incorporation
currently 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. Our board of directors intends to include a proposal in our proxy statement for our 2014
Annual Stockholder Meeting to eliminate our classified board structure. If this proposal is approved by our stockholders, it
would become easier for a potential acquirer to replace our entire board of directors in one year. Our board of directors also
intends to include a proposal in our proxy statement for our 2014 Annual Stockholder Meeting to eliminate cumulative voting.
If this proposal is approved by our stockholders, it may in turn make it more difficult for a third party to obtain control of our
board even if our stockholders approve the declassification of 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.
18
Our stock price has historically been volatile, and investors in our common stock could suffer a decline in value.
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:
•
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our operating results or future prospects;
our announcements or our competitors’ announcements of new products;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
strategic actions by us or our competitors, such as acquisitions or restructurings;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidance, interpretations or principles;
changes in our growth rates or our competitors’ growth rates;
our inability to raise additional capital;
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
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.
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 expiring on February 28, 2020. 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
Virco's 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 two 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 subsequent years. The
Company manufactures fabricated steel components, chrome plates, and fabricates injection-molded plastic components at this
facility. These components are transferred to other facilities for assembly into finished goods. 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.
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
19
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. Mine Safety Disclosures
Not applicable.
20
PART II
Item 5. Market for Registrant’s 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 26,
2014, there were approximately 217 registered stockholders according to the Company's transfer agent records. There were
approximately 874 beneficial stockholders.
Dividend Policy
Historically it has been the board of directors' policy to periodically review the payment of cash and stock dividends in light of
the Company's earnings and liquidity. During the fourth quarter of 2007, the Company initiated a quarterly dividend of $0.025
per share. Effective as of the third quarter of 2011, the board of directors suspended the quarterly cash dividend program. In
addition, pursuant to the terms of the Company's current line of credit with PNC Bank, which was entered into on
December 22, 2011, the Company is prohibited from paying dividends. Consequently, for at least as long as this covenant is
included in its credit agreement with PNC Bank, no dividends will be paid by the Company to its stockholders.
Quarterly Dividend and Stock Market Information
Cash Dividends Declared
2013
2012
Common Stock Range
2013
2012
$
— $
—
—
—
High
$2.72
2.53
2.49
2.80
—
—
—
—
Low
$1.96
1.95
1.98
2.00
High
$2.25
1.96
3.84
2.89
Low
$1.56
1.45
1.48
1.31
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Stock Repurchases
The Company did not repurchase any shares of its stock during 2013. Pursuant to the Company's credit agreement with PNC
Bank, the Company is prohibited from repurchasing any shares of its stock except in cases where a repurchase is financed by a
substantially concurrent issuance of new shares of the Company's common stock.
Stock Performance Graph
The graph set forth below compares the five-year cumulative total stockholder return of the Company's common stock with the
cumulative total stockholder return of (i) an industry peer group index, and (ii) the NASDAQ Market Index. The graph assumes
$100 was invested on February 1, 2009, in the Company's common stock, the NASDAQ Market Index and the companies in
the peer group and assumes the reinvestment of dividends, if any.
21
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG VIRCO MFG. CORPORATION, NASDAQ MARKET INDEX
AND MORNINGSTAR INDEX
Company/Market/Peer Group
Virco Mfg. Corporation
NASDAQ Market Index
Morningstar Business Equipment
1/31/2009
1/31/2010
1/31/2011
1/31/2012
1/31/2013
1/31/2014
$
$
$
100.00
100.00
100.00
$
$
$
174.04
146.91
144.14
$
$
$
156.25
186.66
189.57
$
$
$
92.94
196.55
169.72
$
$
$
139.40
222.91
157.17
$
$
$
136.79
295.12
144.82
Period Ending
The current composition of Morningstar Business Equipment Index is as follows: ACCO Brands Corp, Addmaster Corporation,
American Locker Group, Inc., Avery Dennison Corp, Azkoyen S.A., Banneker, Inc., BioAuthorize Holdings Incorporated and,
Canon Marketing Japan Inc., Canon, Inc., Comtrex Systems Corporation, Coupon Express Inc, Datalogic Spa, Document
Capture Technologies, Inc., Ennis, Inc., Ergobilt INC, Everlert, Inc., Global Payment Technologies, Inc., Gunther International,
Ltd., Herman Miller, Inc., HNI Corporation, Inscape Corporation, Inventronics Limited, Kewaunee Scientific Corp., Knoll,
Inc., Koala Corporation, Komori Corp, Konica Minolta Inc, M.POS, Inc., Marmion Industries Corporation, Neopost, Okamura
Corporation, Onyx Service & Solutions, Inc., Open Plan Systems, Inc., Pitney Bowes Inc, Reconditioned Systems, Inc., Ricoh,
Ltd., Roboserver Systems Corp, Standard Register Company, Steelcase, Inc., Takano Co Ltd, Teleconnect, Inc., Trxade Group
Inc, VeriFone Systems, Inc., and Virco Mfg. Corporation.
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, Management’s
Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10K.
22
Five Year Summary of Selected Financial Data
In thousands, except per share data
Summary of Operations
Net sales
Net (loss) income (1)
Net (loss) income per share data (a) (1)
Basic
Assuming dilution
Cash dividends declared per share
$
$
$
$
2013
2012
2011
2010
As Adjusted
2009 (1)
155,920
$
(1,730) $
158,856
$
(3,830) $
166,441
$
(13,803) $
180,995
$
(17,594) $
190,513
(725)
(0.12) $
(0.12)
— $
(0.27) $
(0.27)
— $
(0.97) $
(0.97)
0.05
$
(1.25) $
(1.25)
0.10
$
(0.05)
(0.05)
0.10
__________________________
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.
Other Financial Data
In thousands, except per share data
Total assets (1)
Working capital (1)
Current ratio (1)
Total long-term obligations
Stockholders’ equity (1)
Shares outstanding at year-end
Stockholders’ equity per share (1)
2013
2012
2011
83,344
16,983
1.7/1
33,083
27,605
14,718
1.88
$
$
$
$
$
82,163
12,526
1.5/1
30,707
27,020
14,550
1.86
$
$
$
$
$
94,225
18,598
1.7/1
36,119
30,896
14,354
2.15
$
$
$
$
$
$
$
$
$
$
2010
100,588
29,498
2.5/1
30,169
50,402
14,205
3.55
$
$
$
$
$
As Adjusted
2009 (1)
122,432
38,386
2.7/1
30,236
69,270
14,163
4.89
_______________________
(1)
The historical financial data has been modified for the results of operation and ending balance sheet for 2009 to reflect
our 2010 change in accounting principle for our method of accounting for certain of our inventory.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-
looking statements that reflect the Company's current views with respect to future events and financial performance, including,
but not limited to, availability of funding for educational institutions, economic conditions, statements regarding plans and
objectives of management for future operations, including plans and objectives relating to products, pricing, marketing,
expansion, and manufacturing processes; new business strategies; the Company's 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 Company's “Assemble-To-Ship” program on earnings; market demand; the Company's
ability to position itself in the market; references to current and future investments in and utilization of infrastructure;
statements relating to management's beliefs that cash flow from current operations, existing cash reserves, and available lines of
credit will be sufficient to support the Company's 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 outside of
the Company's 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 Company's 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, competition and other factors included in
the “Risk Factors” section of this report.
23
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
Management's 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 Company's 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. Virco also serves convention centers and arenas; the hospitality industry, with respect to their banquet and
meeting facilities; 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 Company's 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 Virco's business model is the Company's 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 needs of the K-12
education market, enabling a school to procure all of its furniture, fixtures and equipment (“FF&E”) requirements from one
source.
Virco's product offering consists primarily of items manufactured by Virco, complemented with products sourced from other
furniture manufacturers. Our product offerings are continually enhanced with an ongoing new product development program
that incorporates internally developed products as well as product lines developed with accomplished designers. Finally,
management continues to hone Virco's 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 2013 and 2012,
approximately 50% of the Company's total sales were delivered in June, July, and August 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. Virco's substantial warehouse space allows the Company to build and ship adequate inventories to
service this narrow delivery window for the education market.
The market and operating environment for school furniture, fixtures, and equipment has been challenging during the last
decade and is likely to continue to be so for at least the near future. Schools suffered significant budgetary pressures from 2001
to 2005 following the “dot com” bust, and more recently in 2008 through 2013 as a result of the recession and severe budget
deficits incurred by state and local governments. The years 2008 through 2013 were particularly challenging for the Company
and the educational furniture industry in general and conditions are likely to remain challenging for the near term. These
budgetary pressures directly impacted the demand for the Company's products, as the demand for educational furniture largely
depends upon: (1) available funding in a school's general operating fund and (2) the completion of bond-funded projects, which
is directly impacted by the amount of bond financing issued to fund new school construction, to renovate older schools, and to
fully equip new and renovated schools.
In response to the 2008 recession, passage of new bond issuances declined, and bond funded project completions have trended
down each year. Completions of new schools, additions and renovations are not anticipated to improve in 2014. School
operating budgets experienced significant strain during the same period. Approximately 80-85% of a school's operating budget
is for the salaries and benefits for school teachers and administrators. Increasing costs for medical insurance, combined with
pressures from unfunded pension obligations reduces funds available for other purposes. In response to these budgetary
pressures schools typically elect to retain teachers and spend less on repairs, maintenance, and replacement furniture, which in
turn reduces the demand for, and sales of, the Company's products.
In addition, the furniture industry in general, including the market for school furniture, has been significantly impacted by low
cost competition from China. In 2004, 2005, and 2008 commodity prices for some of the Company's primary raw materials,
particularly steel and plastic, were extremely volatile. During 2011, the Company incurred a cost increase of approximately
30% in the cost of steel during the second quarter, and nearly a 30% increase in the cost of certain plastics over the second and
third quarters. Due to recent volatility in the commodities' markets, similar volatility for the Company's raw materials is likely
to continue for the near term. Because a majority of the Company's sales are generated under annual contracts in which the
Company has limited ability to raise the price of its products during the term of the contract, if the costs of the Company's raw
materials increase suddenly or unexpectedly, the Company cannot be certain that it will be able to implement corresponding
increases in its sales prices in order to offset such increased costs. Significant cost increases in providing products during a
given contract period can adversely impact operating results and have done so during prior years. The Company typically
benefits from any decreases in raw material costs under the contracts described above.
24
During a period of robust education spending during the 1990's, the Company expanded and modernized its manufacturing and
distribution facilities at the Torrance, CA and Conway, AR locations. During the last decade, the Company has worked
continuously to significantly reduce its cost structure while concurrently expanding its product offering, expanding
manufacturing process capabilities and more fully automating its facilities. For example, headcount of permanent employees
as of January 31, 2014, was approximately 700 compared to a peak of nearly 2,950 in August 2000. Factory overhead in 2013
declined by more than 55% compared to 2000. The Company accomplished this without closing a factory and while
continuing to add new production processes, including flat metal forming, and other capabilities to support an ambitious
product development program.
During 2011, in an effort to bring the Company's cost structure in line with decreased revenues, the Company offered early
retirement and voluntary separation packages to its employees in Arkansas and California. Combined with normal attrition, the
Company reduced its workforce by approximately 205 persons (20%). During 2012, the workforce declined by an additional
65 full time positions primarily due to attrition. In 2013, a reduction in force combined with attrition reduced the workforce by
an additional 60 persons. These savings will be offset somewhat by the cost of temporary direct labor employees hired to meet
production requirements during 2014. The Company plans to maintain stringent limits on full time staffing, supplemented with
temporary labor as 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 that are utilized in operations, any increase in demand
for our products can be met without any required investment in physical infrastructure.
While the Company anticipates challenging economic conditions to continue to impact its core customer base in the near term,
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 stable compared to the volatility of school
budgets, and the related level of furniture and equipment purchases. This 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 (though it is unclear
when and to what extent that pent-up demand will be converted into a meaningful increase in purchases). 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 provide services to schools, such as project
management for new or renovated schools, delivery to individual school sites rather than truckload deliveries to central
warehouses, and installation of furniture in classrooms. Moreover, this change offers opportunities for Virco to promote its
complete product assortment which allows 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. Unlike its primary competitors, Virco has maintained and invested in
automation at its domestic manufacturing facilities, recently adding flat metal forming processes to its manufacturing
capabilities and bringing production into its factories of items formerly sourced from other suppliers. Virco's domestic factories
are a strategic resource for providing its customers with timely delivery of a broad selection of colors, finishes, laminates, and
product styles.
During 2014 the Company anticipates continued uncertainty and volatility in commodity costs, particularly with respect to
certain raw materials, transportation, and energy. The Company does not anticipate that this volatility will be as dramatic as
experienced in 2011, but it has no assurances that commodity prices will not reach or exceed the levels in 2011. The Company
may benefit from industry disruption in 2014. In 2012, a smaller domestic manufacturing competitor liquidated, and in 2013 a
significant reseller of school furniture entered Chapter 11 reorganization-from which it emerged in mid-2013. While such
events are illustrative of the challenging conditions in the Company's industry, the Company is hopeful that this disruption
presents an opportunity for Virco to expand its customer base.
Critical Accounting Policies and Estimates
This discussion and analysis of Virco's financial condition and results of operations is based upon the Company's financial
statements which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of
these financial statements requires Virco management to make estimates and judgments that affect the Company's reported
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis,
management evaluates such estimates, including those related to revenue recognition, allowance for doubtful accounts,
valuation of inventory and related 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
25
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 Annual Report on Form 10-
K. Virco's critical accounting policies are as follows:
Revenue Recognition: The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition.” Revenue is recognized when title passes
under its various shipping terms, when installation services are complete, and when collectability is reasonably assured. The
Company reports sales net of sales returns and allowances and sales taxes imposed by various government authorities, where
applicable. In most instances, the Company sells furniture on bids and contracts, which may include multiple elements. For
sales that include freight to the customer, many sales are delivered on the same day shipped, with an average delivery being in
route for 1 to 3 days. Installation, which involves carrying the furniture to the classroom and setting the desks and chairs in
place, typically occurs the day the furniture is delivered.
In accordance with ASC 605-25 (“ASC 605-25”), “Revenue Recognition - Multiple-Element Arrangements,” revenue
arrangements with multiple deliverables are generally accounted for by the Company on a combined unit of accounting as our
customers control our ability to deliver and install the furniture, and as a result the furniture delivery and installation are
generally provided at the same time. We recognize the consideration for the combined unit of accounting once the final item
has been delivered and installed.
Allowances for Doubtful Accounts: Considerable judgment is required when assessing the ultimate realization of receivables,
including assessing the probability of collection, current economic trends, historical bad debts and the current creditworthiness
of each customer. The Company maintains allowances for doubtful accounts that may result from the inability of our
customers to make required payments. Over the past five years, the Company's allowance for doubtful accounts has ranged
from approximately 0.7% to 3.0% 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 typically obtain collateral to secure credit risk.
The primary reason that Virco's allowance for doubtful accounts represents such a small percentage of accounts receivable is
that a large portion of the accounts receivable is attributable to low-credit-risk governmental entities, who often purchase the
furniture with funds provided from bond issuances, giving Virco's receivables a historically high degree of collectability.
Although many states are experiencing budgetary difficulties, it is not anticipated that Virco's credit risk will be significantly
impacted by these events. Over the next year, no significant change is expected in the Company's sales to government entities
as a percentage of total revenues.
Inventory Valuation: Inventory is valued at the lower of cost or market (determined on a first-in, first-out basis) and includes
material, labor, and factory overhead. The Company maintains allowances for estimated slow moving and obsolete inventory
to reflect the difference between the cost of inventory and the estimated market value. Allowances for slow moving and
obsolete inventory 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 expenses. 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 Company's 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 2011, 2012, and 2013 the Company was self-insured for product liability losses ranging 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. 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 risk-free discount rate ranging from 0.5%-4.5% for 2013, 2012, and 2011. 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 were funded during the insurance year and subject to retroactive loss adjustments. The
Company's 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 2014 will be comparable to the retention levels for
2013.
Warranty Reserve: The Company provides a warranty against all substantial defects in material and workmanship. The
Company's warranty is not a guarantee of service life, which depends upon events outside the Company's control and may be
different from the warranty period. 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 from February 1, 2005 through
January 31, 2014. Effective February 1, 2014 the Company modified its warranty to a limited lifetime warranty. The new
26
warranty effective February 1, 2014 is not anticipated to have a significant effect on warranty expense. The Company's
warranties generally provide 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.
Defined Benefit Obligations: The Company has three defined benefit plans, the Virco Employees Retirement Plan (the
“Employee Plan”), the Virco Important Performers Plan (the “VIP Plan”) and the Non-Employee Directors Retirement Plan
(the “Directors Plan”), which provide retirement benefits to employees and outside directors. Virco discounted the pension
obligations for the various plans using the following rates:
Employee Plan
VIP Plan
Directors Plan
2013
2012
2011
4.25%
4.75%
4.25%
4.00%
4.25%
4.00%
4.50%
4.50%
4.50%
Because the Company froze new benefit accruals for all three plans effective December 31, 2003, the assumed rate of increase
in compensation has no effect on the accounting for the plans. The Company estimated a 6.5% return on plan assets for the
Employee Plan for all three years. The VIP Plan and Directors Plan are unfunded and have no 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. In 2008, the Company incurred significant losses on investments
held in trust to fund the Employee Plan. These investment losses will cause future pension costs to increase, and will require
future cash contributions to adequately fund the Employee Plan.
In the third quarter of 2011 the Company offered an early retirement program to employees who voluntarily terminated their
employment with the Company. The incentive offered was a cash incentive and did not include additional retirement benefits,
but was heavily directed toward employees with significant years of service. Approximately 150 employees accepted this offer.
Due to the volume of lump sum payments processed during the third and fourth quarters of 2011, the Company incurred a
pension settlement cost for the Employee Plan. In the fourth quarter of 2012, as a result of cumulative retirement benefits paid
during the year, the Company incurred an additional pension settlement cost for the Employee Plan. In May of 2013, the
Company implemented a reduction in force. In the third and fourth quarters of 2013, as a result of cumulative retirement
benefits paid during the year, the Company incurred additional pension settlement costs for the Employee Plan.
Although the Company does not anticipate any change in these rates in the coming year, any moderate change should not have
a significant effect on the Company's financial position, results of operations or cash flows. 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 FASB ASC Topic 740 “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. The Company incurred a substantial operating loss for the years ended January 31, 2013, 2012, and 2011. During
the fourth quarter of the year ended January 31, 2011, based on this consideration, the Company determined the realization of a
majority of the net deferred tax assets no longer met the more likely than not criteria and a valuation allowance was recorded
against the majority of the net deferred tax assets. Valuation allowances totaled $24,210,000 and $24,601,000 at January 31,
2014 and 2013, respectively. At January 31, 2014, the Company has net operating loss carryforwards for federal and state
income tax purposes, expiring at various dates through 2033. Federal net operating losses that can potentially be carried
forward totaled approximately $24,546,000 at January 31, 2014. State net operating losses that can potentially be carried
forward totaled approximately $51,082,000 at January 31, 2014.
27
Results of Operations (2013 vs. 2012)
Financial Results and Cash Flow
The Company incurred a pre-tax loss of $2,733,000 on net sales of $155,920,000 for the fiscal year ended January 31, 2014,
compared to pre-tax loss of $4,039,000 on net sales of $158,856,000 in the fiscal year ended January 31, 2013. Net loss per
share was $0.12 for the fiscal year ended January 31, 2014, compared to net loss per share of $0.27 in the prior year. Cash flow
used in operations was $243,000 for the fiscal year ended January 31, 2014, compared to cash flow provided by operations of
$7,260,000 in the prior year.
Sales
Virco's sales decreased by 1.8% in 2013 to $155,920,000 compared to $158,856,000 in 2012. The decrease in sales was caused
by continued unfavorable economic conditions that had an adverse impact on budgets for school spending and by a reduction in
completions of bond-funded projects.
Volume declined by approximately $6 million, partially offset by increases in price. Sales of Virco's new products, including
Zuma®, Civitas™ and Sage™ increased by nearly $1.3 million in 2013 compared to 2012, but were offset by reductions in
older product lines. Sales for project orders declined by approximately $0.5 million in 2013 compared to project orders in 2012
as a result of reduced construction completions of bond-funded projects. Orders rates were more volatile and more intensely
seasonal in the current year than in prior years, with a shift to a greater percentage of orders received in the summer months.
Orders in 2013 decreased 24% in the first quarter, increased 6% in the seasonally high second quarter, increased by 2% in the
third quarter, and decreased by 15% in the fourth quarter, in each case as compared to the comparable period in 2012. Reduced
fourth quarter orders contributed to a $3.8 million decrease in backlog at January 31, 2014 compared to January 31, 2013.
For 2014 the Company anticipates that the persistent budgetary challenges for state and local governments combined with an
anticipated reduction in completions of bond-funded projects may cause the amount of school furniture sold to be comparable
to or perhaps less than 2013. As we have throughout this recession, the Company continues to focus on strategies to develop
and strengthen its brand with an aggressive product development campaign. We will continue to use our domestic factories to
provide greater flexibility for custom specifications such as laminates, colors, and on-time delivery. As discussed below, the
Company significantly reduced its workforce through an early retirement program in 2011. In 2012, the Company's workforce
declined by an additional 65 full time staff, primarily through attrition. In 2013, the Company's workforce was further reduced
by an additional 60 full time staff through a reduction in force and attrition. This significant reduction in force largely spared
our direct sales force. The Company will continue to emphasize the value, design and color selections of its products, the value
of its distribution, delivery, installation, and project management capabilities, and the value of timely deliveries during the peak
seasonal delivery period. In order to increase or maintain market share during 2014, when market conditions warrant, the
Company will compete based on direct prices and may reduce its prices to build or maintain its market share.
Cost of Sales
Cost of sales was 65.7% of sales in 2013 and 67.6% of sales in 2012. This decrease was due to an increase in selling prices and
reduced factory spending . The Company benefited from stable material costs during 2013.
As a percentage of sales, raw material costs were 0.2% lower than in 2012. The Company increased selling prices at the
beginning of the year in effort to improve gross margins. The cost of raw materials was stable during the year, resulting in raw
material costs declining as a percentage of sales. Direct labor costs as a percentage of sales were unchanged in 2013 compared
to 2012. The impact of increasing selling prices was offset by a slight deterioration in efficiency due to the increased seasonal
peak of both orders and sales in 2013 compared to 2012. Manufacturing overhead as a percentage of sales decreased by 1.2%
in 2013 from 2012. This decrease was primarily attributable to a small decrease in factory spending combined with a very
slight (<1%) increase in production hours and the related impact on factory utilization.
The Company is beginning 2014 with approximately $2.5 million more inventory than in 2013, but $0.1 million less inventory
than in 2012, $7.6 million less than in 2011, and $16.0 million less than 2010. Due to the controlled levels of inventory at
January 31, 2014, production levels and related factory overhead absorption, which vary depending upon selling volumes, are
anticipated in 2014 to be equal to or higher than 2013 levels. As discussed above, the Company significantly reduced its
workforce during 2011, 2012 and 2013. The Company intends to build inventory earlier in the year, and hire temporary
workers as necessary during 2014 to meet any seasonal production, warehousing or distribution requirements that cannot be
filled by the remaining full-time workforce.
During 2014 the Company anticipates continued uncertainty and volatility in commodity costs, particularly with respect to
certain raw materials, transportation, and energy. The Company does not anticipate that this volatility will be as dramatic in
28
2014 as experienced in 2011, but that it could be more volatile than in 2012. For more information, please see the section
below entitled “Inflation and Future Change in Prices.”
Selling, General and Administrative and Other Expenses
Selling, general and administrative and other expenses for the fiscal year ended January 31, 2014, increased by approximately
$0.8 million compared to the prior year, and were 35.2% of sales as compared to 34.0% in the prior year.
The primary reason for this increase was $1.4 million of restructuring costs in 2013 related to a reduction in force as compared
to $0.8 million in 2012. No comparable expense was incurred in 2012. Because the majority of the employees accepting the
offer were long-term employees with vested pension benefits, the Company incurred nearly $1.0 million of pension settlement
costs during the third and fourth quarters on 2013. The reduction in employees was evenly distributed between direct labor and
other overhead, sales support, and G&A positions.
Warehousing, freight and installation costs were flat in dollars and increased by 0.2% as a percentage of sales. Selling costs
declined due to a reduction in volume and decreased by 0.1% as a percentage of sales. G&A spending decreased slightly, but
increased slightly as a percentage of sales due to an increase in litigation expenses. The Company expended funds in 2013 to
protect patents on certain products. There was no comparable expense in the prior year.
Interest expense was $254,000 less in 2013 compared to 2012 as a result of decreased costs related to an asset based loan, and
decreased accretion expense for certain liabilities.
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 ASC Topic 740, “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.
During 2013, 2012, 2011 and 2010 the Company incurred operating losses. The Company has incurred a cumulative operating
loss for the last four years. While the Company has taken significant measures to return to profitability, the short-term outlook
for the school furniture market is challenging. Based on these considerations, at January 31, 2014 and January 31, 2013, the
Company determined the realization of a majority of the net deferred tax assets no longer met the more likely than not criteria,
and a valuation allowance was recorded against the majority of the net deferred tax assets. The Company has determined that it
is more likely than not that some portion of the state net operating loss and credit carryforwards will be realized and has not
provided a valuation allowance on a portion of the state net operating loss and credit carryforwards. At January 31, 2014, the
Company had net operating losses carried forward for federal and state income tax purposes, expiring at various dates through
2033 if not utilized. Federal net operating losses that can potentially be carried forward totaled approximately $24,546,000 at
January 31, 2014. State net operating losses that can potentially be carried forward totaled approximately $51,082,000 at
January 31, 2014.
The primary component of the income tax benefit for the current year related to the gain related to AOCI, not operating loss.
Because the Company has recorded a valuation allowance for the majority of deferred tax assets, the effective tax rate for 2014
may be low, with income tax being primarily income and franchise taxes as required by various states.
Results of Operations (2012 vs. 2011)
Financial Results and Cash Flow
The Company incurred a pre-tax loss of $4,039,000 on net sales of $158,856,000 for the fiscal year ended January 31, 2013,
compared to pre-tax loss of $13,748,000 on net sales of $166,441,000 in the fiscal year ended January 31, 2012. Net loss per
share was $0.27 for the fiscal year ended January 31, 2013, compared to net loss per share of $0.97 in the prior year. Cash flow
provided by operations was $7,260,000 for the fiscal year ended January 31, 2013, compared to cash flow used by operations
of $784,000 in the prior year. As more fully discussed below, during 2011 the Company offered a voluntary retirement
program to all employees. It was estimated that the annual expense reduction from this program could be approximately $9 to
$10 million, offset by the cost of temporary employees hired during the summer months. The Company's spending on salaries,
29
wages and other employee benefit costs for full time employees for 2012 was nearly $8 million less than 2011. In addition a
variety of other employee related expenses such as travel declined, allowing the Company to reduce its operating loss by $9.7
million on a reduction in sales volume.
Sales
Virco's sales decreased by 4.5% in 2012 to $158,856,000 compared to $166,441,000 in 2011. The decrease in sales was caused
by continued unfavorable economic conditions that had an adverse impact on budgets for school spending and by a reduction in
completions of bond-funded projects.
Volume declined by approximately $16 million, offset by increases in price. Sales of Virco's new products, including
Parameter®, Civitas™ and Text® increased by nearly $1.5 million in 2012 compared to 2011, but were offset by reductions in
older product lines. Sales for project orders declined by more than $6 million in fiscal 2012 compared to project orders in
fiscal 2011 as a result of reduced construction completions of bond-funded projects. The reduction in order rates occurred
primarily in the third quarter, with the reduction in shipments occurring in the fourth quarter of 2012. Order rates for the fourth
quarter increased slightly compared to the comparable period in 2011, resulting in a $2.9 million increase in backlog at January
31, 2013 compared to January 31, 2012.
Cost of Sales
Cost of sales was 67.6% of sales in 2012 and 71.1% of sales in 2011. This decrease was due to an increase in selling prices and
reduced factory spending partially offset by a reduction in factory utilization. The Company benefited from stable material
costs during 2012.
As a percentage of sales, raw material costs were 1.2% lower in 2012 than in 2011. The Company increased selling prices at the
beginning of 2012 in effort to improve gross margins. The cost of raw materials was stable during 2012, resulting in raw
material costs declining as a percentage of sales. Direct labor costs as a percentage of sales were unchanged in 2012 compared
to 2011. The impact of increasing selling prices was offset by a slight deterioration in efficiency due to the increased utilization
of temporary labor in 2012 compared to 2011. Manufacturing overhead as a percentage of sales decreased by 2.3% in 2012
from 2011. This decrease was primarily attributable to a decrease in factory spending offset in part by a reduction production
hours and the related impact on factory utilization. Production hours, which decreased by nearly 8% compared to the prior
year, were reduced in response to a reduction in sales combined with an effort to reduce inventory at year end.
Selling, General and Administrative and Other Expenses
Selling, general and administrative and other expenses for the fiscal year ended January 31, 2013, decreased by approximately
$6.7 million compared to the prior year, and were 34.1% of sales as compared to 36.4% in the prior year. The primary reason
for this decrease was the $4.6 million reduction of severance costs in 2012 compared to 2011. In 2011, the Company offered an
early retirement program to all employees. Approximately 150 employees, or 15% of the Company's workforce, accepted the
offer. When combined with normal attrition of employees that were not replaced, at January 31, 2012, the Company reduced
the number of full-time employees by approximately 205, or 20% of the workforce at January 31, 2011. In 2012 attrition and
normal retirements allowed the Company to reduce headcount by an additional 65 persons. The early retirement program was a
cash payment to employees that was based upon years of service. Virco disbursed nearly $2.6 million to severed employees
under this program in 2011. Because the majority of the employees accepting the offer were long-term employees with vested
pension benefits, the Company incurred nearly $2.0 million of pension settlement costs during the third and fourth quarters in
2011 and an additional $760,000 of pension settlement costs in the fourth quarter of 2012. The reduction in employees was
evenly distributed between direct labor and other overhead, sales support, and G&A positions.
Warehousing, freight and installation costs decreased in dollars and by 0.5% as a percentage of sales. Selling costs declined
due to a reduction in volume but increased by less than 0.1% as a percentage of sales. G&A spending decreased slightly, but
increased slightly as a percentage of sales due to an increase in retirement plan expense.
Interest expense was $434,000 more in 2012 compared to 2011 as a result of increased levels of borrowing, increased costs
related to an asset based loan, and increased accretion expense for certain liabilities.
Provision for Income Taxes
During 2012, 2011 and 2010 the Company incurred significant operating losses. The Company has incurred a cumulative
operating loss for the last three years. While the Company has taken significant measures to return to profitability, the short-
term outlook for the school furniture market is challenging. Based on these considerations, at January 31, 2013 and January 31,
30
2012, the Company determined the realization of a majority of the net deferred tax assets no longer met the more likely than
not criteria, and a valuation allowance was recorded against the majority of the net deferred tax assets. The Company has
determined that it is more likely than not that some portion of the state net operating loss and credit carryforwards will be
realized and has not provided a valuation allowance on a portion of the state net operating loss and credit carryforwards. At
January 31, 2013, the Company had net operating losses carried forward for federal and state income tax purposes, expiring at
various dates through 2033 if not utilized. Federal net operating losses that can potentially be carried forward totaled
approximately $23,563,000 at January 31, 2013. State net operating losses that can potentially be carried forward totaled
approximately $49,635,000 at January 31, 2013.
Because the Company has recorded a valuation allowance for the majority of deferred tax assets, the effective tax rate for 2013
may be low, with income tax being primarily income and franchise taxes as required by various states.
Inflation and Future Change in Prices
We commit to annual contracts that determine selling prices for goods and services for periods of one year, and occasionally
longer. Though the Company has negotiated flexibility under many of these contracts that may allow the Company to increase
prices on future orders, the Company does not have the ability to raise prices on orders received prior to any announced price
increase. Due to the intensely seasonal nature of our business, the Company may receive significant orders during the first and
second quarters for delivery in the second and third quarters. With respect to any of the contracts described above, if the costs
of providing our products or services increase between the date the orders are received and the shipping date, we may not be
able to implement corresponding increases in our sales prices for such products or services in order to offset the related
increased costs. During 2013 and 2012, the costs for raw materials purchased by the Company were stable. These years
contrast with 2011, when the Company incurred an increase of approximately 30% in the cost of steel during the second
quarter, and nearly a 30% increase in the cost of certain plastics over the second and third quarters. These cost increases
adversely impacted gross margins in 2011 for products shipped during the summer season.
For 2014, the Company anticipates continued volatility in costs, particularly with respect to certain raw materials,
transportation, and energy. Anticipated volatility for 2014 is not expected to be as severe as experienced in 2011. There is
continued uncertainty with respect to steel and other raw material costs, especially of plastics, that are affected by the price of
oil. Transportation costs may 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.
The Company has renewed health insurance contracts for its employees through December 2014, but costs subsequent to that
date may be adversely impacted by current legislation. 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 Virco's products in 2013, 2012 and
2011. Due to current economic conditions, the Company anticipates continued significant price competition in 2014, and may
not be able to raise prices without risk of losing market share. The Company anticipates that the volatility of commodity costs
will not be as significant in 2014 as experienced in 2011. As a significant portion of Virco's business is obtained through
competitive bids, the Company is carefully considering material and transportation costs as part of the bidding process. Total
material costs for 2014, as a percentage of sales, could be higher than in 2013. 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.
Liquidity and Capital Resources
Working Capital Requirements
Virco addresses liquidity and working capital requirements in the context of short-term seasonal requirements and long-term
capital requirements of the business. The Company's core business of selling furniture to publicly funded educational
institutions is extremely seasonal. The seasonal nature of this business permeates most of Virco's operational, capital, and
financing decisions.
The Company's working capital requirements during and in anticipation of the peak summer season oblige management to
make estimates and judgments that affect Virco's assets, liabilities, revenues and expenses. Management expends a significant
amount of time during the year, and especially in the first quarter, developing a stocking plan and estimating the number of
employees, the amount of raw materials, and the types of components and products that will be required during the peak
season. If management underestimates any of these requirements, Virco's ability to 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
31
may be required to absorb higher storage, labor and related costs, each of which may affect profitability. On an ongoing basis,
management evaluates such estimates, including those related to market demand, labor costs, and inventory levels, and
continually strives to improve Virco's ability to correctly forecast business requirements during the peak season each year.
As part of Virco's efforts to address seasonality, financial performance and quality without sacrificing service or market share,
management has been refining the Company's ATS operating model. ATS is Virco's version of mass-customization, which
assembles standard, stocked components into customized configurations before shipment. The Company's ATS program
reduces the total amount of inventory and working capital needed to support a given level of sales. It does this by increasing
the inventory's versatility, delaying assembly until the last moment, and reducing the amount of warehouse space needed to
store finished goods. In order to provide “one stop shopping” for all FF&E needs, Virco purchases and re-sells certain finished
goods from other furniture manufacturers. When practical, these furniture items are drop shipped from the Company's supplier.
Where cost effective, the Company will bring the item into the Virco warehouse and the third party products will be shipped
along with product manufactured by Virco. The Company did not carry material amounts of vendor inventory during the fiscal
years ended January 31, 2014, 2013, or 2012.
In addition, Virco finances its largest balance of accounts receivable during the peak season. This occurs for three 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. Third, many summer deliveries may be “projects” where the Company provides furniture for a
new school or significant refurbishment of an existing school. Projects may require architect sign off, school board approval
prior to payment, or punch list completion, all of which can delay payment.
As a result of the seasonality of our business, our manufacturing and distribution capacity is dictated by the capacity
requirement during the months of June, July, and August. Because of this seasonality, factory utilization is lower during the
slow season. The Company utilizes a variety of tactics to address the seasonality of its business. During the summer months,
which comprise our second and third fiscal quarters, our personnel utilization generally is at or close to full capacity. The
Company utilizes temporary labor and significant overtime to meet the seasonal requirements. During the slow portions of the
year, temporary labor and overtime are eliminated to moderate the off-season costs. Our manufacturing facility capacity
utilization generally remains less than 100% during these summer months; because physical structure capacity cannot be
adjusted as readily as personnel capacity, we have secured sufficient physical structure capacity to accommodate our current
needs as well as for anticipated future growth. Our physical structure utilization is significantly lower during the first and
fourth quarters of each year than it is during the second and third quarters.
The Company utilizes a comparable strategy to address warehousing and distribution requirements. During summer months,
temporary labor is hired to supplement experienced warehouse and distribution personnel. More than 90% of the Company's
freight is provided by third-party carriers. The Company has secured sufficient warehouse capacity to accommodate our
current needs as well as anticipated future growth.
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. On December 22, 2011 (the “Closing Date”), the
Company and Virco Inc., a wholly owned subsidiary of the Company (“Virco” and, together with the Company, the
“Borrowers”) entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National
Association, as administrative agent and lender (“PNC”). On June 15, 2012, the Borrowers entered into Amendment No. 1
(“Amendment No. 1”) to the Credit Agreement which, among other things, increased the borrowing availability thereunder by
$3,000,000 for the period from May 1 through July 14 of each year. On July 27, 2012, the Borrowers entered into Amendment
No. 2 (“Amendment No. 2”) to the Credit Agreement which, among other things, reduced the minimum EBITDA financial
covenant contained therein for the five consecutive months ending June 2012 from $1,600,000 to $300,000. On September 12,
2012, the Borrowers entered into Amendment No. 3 (“Amendment No. 3”) to the Credit Agreement which, among other things,
modified the minimum EBITDA covenant for the balance of the fiscal year. On December 6, 2012, the Borrowers entered into
Amendment No. 4 (“Amendment No. 4”) to the Credit Agreement which, among other things, waived the violation of the
minimum EBITDA and minimum tangible net worth covenants at October 31, 2012 and eliminated the minimum EBITDA
covenant at November 30, 2012. On March 1, 2013, the Borrowers entered into Amendment No. 5 (“Amendment No. 5”) to
the Credit Agreement, which among other things modified the minimum tangible net worth covenant for the periods from
January 31, 2013 to January 31, 2014, modified the minimum EBIDTA covenant for certain periods to January 31, 2014 and
waived the violation of the minimum EBITDA covenant for the twelve consecutive fiscal month period ending December 31,
2012. On January 9, 2014 the Borrowers entered into Amendment No. 6 (“Amendment No. 6”) to the Credit Agreement,
which, among other things, amended the definition of “Peak Season” and increased the peak season borrowing capacity. On
April 15, 2014 the Borrowers entered into Amendment No. 7 (“Amendment No. 7”) to the Credit Agreement, which, among
other things, extended the maturity date of the Credit Agreement for three years until December 22, 2017, reduced the
32
maximum availability under the Credit Agreement by $10,000,000 to $50,000,000, waived the violation of the minimum
EBITDA covenant at January 31, 2014, waived the violation of the minimum fixed charge coverage ratio covenant at January
31, 2014, included levels for the minimum tangible net worth financial covenant and the minimum EBITDA financial covenant
for fiscal year 2014 and the minimum fixed charge coverage ratio until the maturity date of the Credit Agreement.
The Credit Agreement provides the Borrowers with a secured revolving line of credit (the “Revolving Credit Facility”) of up to
$50,000,000, with seasonal adjustments to the credit limit and subject to borrowing base limitations, and includes a sub-limit of
up to $3,000,000 for issuances of letters of credit. The Revolving Credit Facility is an asset-based line of credit that is subject
to a borrowing base limitation and generally provides for advances of up to 85% of eligible accounts receivable, plus a
percentage equal to the lesser of 60% of the value of eligible inventory or 85% of the liquidation value of eligible inventory,
plus an amount ranging from $6,000,000 to $12,000,000 from March 1 through July 31 of each year, minus undrawn amounts
of letters of credit and reserves. The Revolving Credit Facility is secured by substantially all of the Borrowers' personal
property and certain of the Borrowers' real property. The principal amount outstanding under the Credit Agreement and any
accrued and unpaid interest is due no later than December 22, 2017, and the Revolving Credit Facility is subject to certain
prepayment penalties upon earlier termination of the Revolving Credit Facility. Prior to the maturity date, principal amounts
outstanding under the Credit Agreement may be repaid and reborrowed at the option of the Borrowers without premium or
penalty, subject to borrowing base limitations, seasonal adjustments and certain other conditions.
On the Closing Date, the Borrowers drew down approximately $9,800,000 under the Revolving Credit Facility to repay in full
all indebtedness outstanding under its prior revolving facility governed by the Second Amended and Restated Credit Agreement
dated as of March 12, 2008, as amended, by and between the Company and Wells Fargo Bank, National Association, and to pay
fees and expenses related to the Credit Agreement. The Company intends to utilize the Revolving Credit Facility for liquidity
and working capital purposes.
The Revolving Credit Facility bears interest, at the Borrowers' option, at either the Alternate Base Rate (as defined in the Credit
Agreement) or the Eurodollar Currency Rate (as defined in the Credit Agreement), in each case plus an applicable margin. The
applicable margin for Alternate Base Rate loans is a percentage within a range of 0.75% to 1.75%, and the applicable margin
for Eurodollar Currency Rate loans is a percentage within a range of 1.75% to 2.75%, in each case based on the EBITDA of the
Borrowers at the end of each fiscal quarter, and may be increased at PNC's option by 2.0% during the continuance of an event
of default. Accrued interest with respect to principal amounts outstanding under the Credit Agreement is payable in arrears on
a monthly basis for Alternative Base Rate loans, and at the end of the applicable interest period but at most every three months
for Eurodollar Currency Rate loans.
The Credit Agreement contains a covenant that forbids the Company from issuing dividends or making payments with respect
to the Company's capital stock, and contains numerous other covenants that limit under certain circumstances the ability of the
Borrowers and their subsidiaries to, among other things, merge with or acquire other entities, incur new liens, incur additional
indebtedness, repurchase stock, sell assets outside of the ordinary course of business, enter into transactions with affiliates, or
substantially change the general nature of the business of the Borrowers, taken as a whole. The Credit Agreement also requires
the Company to maintain the following financial maintenance covenants: (1) a minimum tangible net worth amount, (2) a
minimum fixed charge coverage ratio, and (3) a minimum EBITDA amount, in each case as of the end of the relevant monthly,
quarterly or annual measurement period. As of January 31, 2014 the Credit Agreement required the Company to maintain: (1)
a minimum tangible net worth of at least $22,365,000 for the fiscal quarter ending January 31, 2014, (2) a minimum fixed
charge coverage ratio of at least 1.00 to 1.00 for the four consecutive fiscal quarters ending January 31, 2014, and (3) a
minimum EBITDA amount of $5,593,000 for the twelve consecutive fiscal months ending January 31, 2014. The actual results
of the Company with respect to the foregoing financial covenants for the period ending January 31, 2014 were as follows: (1)
the Company maintained a tangible net worth of $27,605,000 for the fiscal year ending January 31, 2014, (2) the Company
maintained a fixed charge coverage ratio of less than 0.00 to 1.00 for the four consecutive fiscal quarters ended January 31,
2014, and (3) the Company achieved EBITDA of $3,301,000 for the twelve consecutive fiscal months ending January 31, 2014.
Therefore the Company was in violation of its minimum fixed charge coverage ratio and minimum EBITDA covenants for the
relevant period ending January 31, 2014. However, as noted above, on April 15, 2014 the Company entered into Amendment
No. 7, which waived the violation of the minimum EBITDA covenant at January 31, 2014, waived the violation of the
minimum fixed charge coverage ratio covenant at January 31, 2014, included levels for the minimum tangible net worth
financial covenant and the minimum EBITDA financial covenant for fiscal year 2014 and the minimum fixed charge coverage
ratio until the maturity date of the Credit Agreement
In addition, the Credit Agreement contains a clean down provision that requires the Company to reduce borrowings under the
line to less than $6,000,000 for a period of 60 consecutive 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 on the Company's liquidity. Other than as
noted above with respect to the minimum EBITDA covenant and the minimum tangible net worth covenant, the Company was
in compliance with its covenants at January 31, 2014.
33
Events of default (subject to certain cure periods and other limitations) under the Credit Agreement include, but are not limited
to, (i) non-payment of principal, interest or other amounts due under the Credit Agreement, (ii) the violation of terms,
covenants, representations or warranties in the Credit Agreement or related loan documents, (iii) any event of default under
agreements governing certain indebtedness of the Borrowers and certain defaults by the Borrowers under other agreements that
would materially adversely affect the Borrowers, (iv) certain events of bankruptcy, insolvency or liquidation involving the
Borrowers, (v) judgments or judicial actions against the Borrowers in excess of $250,000, subject to certain conditions, (vi) the
failure of the Company to comply with Pension Benefit Plans (as defined in the Credit Agreement), (vii) the invalidity of loan
documents pertaining to the Credit Agreement, (viii) a change of control of the Borrowers and (ix) the interruption of
operations of any of the Borrowers' manufacturing facilities for five consecutive days during the peak season or fifteen
consecutive days during any other time, subject to certain conditions.
Pursuant to the Credit Agreement, substantially all of the Borrowers' accounts receivable are automatically and promptly swept
to repay amounts outstanding under the Revolving Credit Facility upon receipt by the Borrowers. Due to this automatic
liquidating nature of the Revolving Credit Facility, if the Borrowers breach any covenant, violate any representation or
warranty or suffer a deterioration in their ability to borrow pursuant to the borrowing base calculation, the Borrowers may not
have access to cash liquidity unless provided by PNC at its discretion. In addition, certain of the covenants and representations
and warranties set forth in the Credit Agreement contain limited or no materiality thresholds, and many of the representations
and warranties must be true and correct in all material respects upon each borrowing, which the Borrowers expect to occur on
an ongoing basis. There can be no assurance that the Borrowers will be able to comply with all such covenants and be able to
continue to make such representations and warranties on an ongoing basis.
The Company's line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer
season. The Company believes that the Revolving Credit Facility will provide sufficient liquidity to meet its capital
requirements in the next 12 months. Approximately $10,919,000 was available for borrowing as of January 31, 2014.
The descriptions set forth herein of the Credit Agreement, Amendment No. 1, Amendment No. 2, Amendment No. 3,
Amendment No. 4, Amendment No. 5, Amendment No. 6 and Amendment No. 7 are qualified in their entirety by the terms of
such agreements, each of which has been filed with the Securities and Exchange Commission.
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 subsequent effects on cash
flow. 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, and has remained below depreciation since that time.
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 automation, both in the factory and software applications, and 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 $3,000,000 for 2014, which is less than anticipated depreciation
expense.
Asset Impairment
The Company 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. Much of the tooling, machinery, and equipment
acquired at this time is now fully or substantially depreciated. 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. The Company
evaluates the potential for impaired assets on a quarterly basis. As of January 31, 2014, there has been no impairment to the
long-lived assets of the Company.
The Company has no intangible assets on its Consolidated Balance Sheet at January 31, 2014 or January 31, 2013.
Contractual Obligations
34
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. 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 that expires on February 28, 2020. 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
In thousands
Long-term debt obligations
Interest on long-term debt
Operating lease obligations
Purchase obligations
Total
Less than 1
year
1-3 years
3-5 years
$
8,248
$
2,248
$
6,000
$
More than 5
years
—
— $
—
26,507
9,010
—
5,773
9,010
—
7,357
—
—
8,817
—
$
43,765
$
17,031
$
13,357
$
8,817
$
—
4,560
—
4,560
We may be required to make 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
$52,000 as of January 31, 2014, have been excluded from the contractual obligations table above. For further information
related to unrecognized tax benefits, see Note 7, “Income Taxes,” to the consolidated financial statements included in this
Annual Report on Form 10-K.
Virco's largest market is publicly funded school districts. A significant portion of this business is awarded on a bid basis.
Many school districts require that a bid bond be posted as part of the bid package. In addition to bid bonds, many districts
require a performance bond when the bid is awarded. At January 31, 2014, the Company had bonds outstanding valued at
approximately $870,000. To the best of management's knowledge, in over 64 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. Effective February 1, 2014, the Company will offer a limited lifetime
warranty. The Company does not believe that the new warranty policy will have a significant impact on warranty expense.
The Company's warranty is not a guarantee of service life, which depends upon events outside the Company's 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 2013. The following is a summary of the Company's warranty-claim activity during 2013 and 2012.
In thousands
Beginning balance
Provision for current year
Provision for prior year
Costs incurred
Ending balance
Retirement Obligations
January 31,
2014
2013
1,000
$
600
(220)
(380)
1,000
$
1,400
630
(490)
(540)
1,000
$
$
The Company provides retirement benefits to employees and non-employee directors under three defined benefit retirement
plans; the Employee Plan, the VIP Plan, and the Directors Plan. The Employee Plan is a qualified retirement plan that is
35
funded through a trust held at Wells Fargo Bank (Trustee). The other two plans are non-qualified retirement plans. Benefits
payable under the VIP Plan are secured by life insurance policies held in a rabbi trust and the Directors Plan is not funded. The
Company obtains annual actuarial valuations for all three plans.
Effective December 31, 2003, benefit accruals were frozen for all three plans. Employees continued to vest under the benefits
earned to date, but no covered participants earned additional benefits after the plan freeze. At January 31, 2014, all active
participants under the plans were fully vested.
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: discount rate, assumed rate of return
and assumed rate of increases in compensation.
The discount rate represents an estimate of the rate of return on a portfolio of high-quality fixed-income securities that would
provide cash flows that match the expected benefit payment stream from the plans. When setting the discount rate, the
Company utilizes a spot-rate yield curve developed from high-quality bonds currently available which reflects 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. Virco discounted the pension obligations for the various
plans using the following rates:
Employee Plan
VIP Plan
Directors Plan
2013
2012
2011
4.25%
4.75%
4.25%
4.00%
4.25%
4.00%
4.50%
4.50%
4.50%
Because the Company froze future benefit accruals for all three defined benefit plans in 2003, the compensation increase
assumption had no impact on pension expense, accumulated benefit obligation or projected benefit obligation for the period
ended January 31, 2014 or 2013.
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 the 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 2013, 2012 and 2011 the Company used a 6.5% expected return on plan assets, net of expenses.
During 2011 two events significantly impacted the pension plans. The first event was a reduction in the discount rate utilized to
calculate pension plan obligations. The reduction in discount rate caused the liability for pension obligations to increase by
approximately $3.7 million, $1.4 million, and $26,000 for the Employee Plan, the VIP Plan, and the Directors Plan,
respectively. The increase in liability resulted in a comparable increase to Accumulated Other Comprehensive Income (AOCI).
The second event was a $2.0 million settlement charge for the Employee Plan. As part of a restructuring plan, the Company
offered early retirement benefits to all employees who voluntarily severed their employment with the Company. Although the
early retirement benefit was paid in cash and did not include any additional benefits payable from a retirement plan, the benefit
formula was structured to reward employees with significant years of service, the same employees who would have earned
retirement benefits prior to the plan freeze in 2003. The pension trust made significant lump sum distributions to participants in
the latter part of the year, resulting in settlement charges in the third and fourth quarters. Because the VIP Plan and Director
Plan do not allow lump sum payments, there was no similar settlement charge required.
During 2012 the pension plans were impacted by the same events of 2011, but to a lesser extent. A reduction in the discount
rate caused the liability for pension obligations to increase by approximately $2.0 million, $0.3 million, and $10,000 for the
Employee Plan, the VIP Plan, and the Directors Plan, respectively. The increase in liability resulted in a comparable increase to
Accumulated Other Comprehensive Income (AOCI). As a result of large distributions paid from the Employee Plan, a
$760,000 settlement charge for the Employee Plan was recorded.
During 2013 the pension plans were impacted by a reduction in force. Although the severance benefits was paid in cash and
did not include any additional benefits payable from a retirement plan, the severance included employees with vested pension
benefits. The pension trust made significant lump sum distributions to participants in the latter part of the year, resulting in
settlement charges in the third and fourth quarters. During 2013, the pension liability decreased due to increased discount rates,
offset by an increase in liability due to the adoption of a new mortality table.
It is the Company's policy to contribute adequate funds to the trust accounts to cover benefit payments under the VIP Plan and
Directors Plan and to maintain the funded status of the Employee Plan at a level which is adequate to avoid significant
36
restrictions to the Employee Plan under the Pension Protection Act of 2006. The Company contributed $1.8 million, $2.0
million, and $1.9 million, to the trust in 2013, 2012, and 2011, respectively. Contributions during 2014 will depend upon actual
investment results and benefit payments, but are anticipated to be approximately $2.5 million. During 2013, 2012, and 2011,
the Company paid approximately $564,000, $561,000, and $451,000, respectively, in benefits per year under the non-qualified
plans. It is anticipated that contributions to non-qualified plans will be approximately $710,000 for 2014. At January 31, 2014,
accumulated other comprehensive loss of approximately $16.4 million ($14.0 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, 2014, a 1% reduction in investment
return would have increased expense by approximately $165,000, a 1% change in the rate of compensation increase would
have no impact, and a 1% reduction in the discount rate would have increased expense by $305,000. A 1% reduction in the
discount rate would have increased the pension benefit obligations by approximately $6.1 million.
Stockholders' Equity
The Company initiated a $0.025 per share quarterly cash dividend in the fourth quarter of 2007 and continued to pay the $0.025
quarterly dividend through the second quarter of 2011. The cash dividend was suspended after the second quarter of 2011 as a
result of operating losses. In addition, the Company's new credit facility with PNC Bank prohibits the Company from paying
dividends and repurchasing any shares of its stock except in cases where a repurchase is financed by a substantially concurrent
issuance of new shares of the Company's common stock. Consequently, commencing December 22, 2011 and for at least as
long as this covenant is included in the Company's credit facility, no dividends will be paid by the Company to its stockholders.
During 2011 the Company paid cash dividends of $710,000.
Virco issued a 10% stock dividend or 3/2 stock split every year beginning in 1982 through 2002. Although the stock dividend
had 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, 2014 reflects additional paid-in
capital of approximately $116 million and deficit retained earnings of approximately $75 million. Other than the losses
incurred during 2003-2005, 2010-2013 the retained deficit is a result of the accounting reclassification, and is not the result of
accumulated losses.
Environmental and Contingent Liabilities
Environmental Compliance
Virco is subject to numerous federal, state, and local 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 Company's operations. Moreover, Virco has enacted policies for recycling and resource recovery that have
earned repeated commendations, including: recognition by the California Department of Resources Recycling and Recovery
(CalRecycle) in 2011 and 2010 as a Waste Reduction Awards Program (WRAP) honoree; recognition by the United States
Environmental Protection Agency 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; and recognition by the Sanitation Districts of
Los Angeles County for compliance with industrial waste water discharge guidelines in 2007 through 2010. This is only a
partial list of Virco's environmental awards and commendations; for a more complete list, go to www.virco.com and click on
the Corporate Stewardship header.
In addition to these awards and commendations, Virco's ZUMA and ZUMAfrd product lines were the first classroom furniture
collections to earn indoor air quality certification through the stringent GREENGUARD® Children & Schools Program, now
known as Greenguard Gold certification. As a follow-up to the certification of ZUMA and ZUMAfrd models in 2005,
hundreds of other Virco furniture items - including Analogy furniture models and Textameter instructor workstations - have
earned GREENGUARD certification. Moreover, all Virco products covered by the Consumer Product Safety Improvement Act
of 2008 are in compliance with this legislation. All affected Virco models are also in compliance with the California Air
Resources Board rule implemented on January 1, 2009, concerning formaldehyde emissions from composite wood products.
Environmental laws have changed rapidly in recent years, and Virco may be subject to more stringent environmental laws in
37
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. 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. It
is possible that the Company's operations may result in noncompliance with, or liability for remediation pursuant to,
environmental laws. Should such eventualities occur, the Company records liabilities for remediation costs when remediation
costs are probable and can be reasonably estimated. See “Risk Factors : 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.
In 2013 and 2012, the Company was self-insured for product and general liability losses of 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 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, 2014, the Company will be self-insured for product and general 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 Company's exposure to self-insured retentions will vary depending upon the market
conditions in the insurance industry and the availability of cost-effective insurance coverage.
The Company has aggressively pursued a program to improve product quality, reduce product liability claims and losses, and to
aggressively defend product liability cases. This program has continued through 2013 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
Company's 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 2013 fiscal year, nor did the Company
have any material off-balance sheet arrangements outstanding at January 31, 2014.
New Accounting Pronouncements
In June 2011, the FASB issued accounting guidance updating the presentation format of comprehensive income. The guidance
provided two options for presenting net income and other comprehensive income. The total of comprehensive income, the
components of net income and the components of other comprehensive income may be presented in either a single continuous
statement of comprehensive income or in two separate but consecutive statements. The Company adopted the new guidance
beginning February 1, 2013. The guidance did not have a material impact on the Company's financial statements.
In January 2013, the FASB issued accounting guidance clarifying the scope of disclosures about offsetting assets and liabilities.
This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those
annual periods. The Company does not expect the adoption to have a material impact on its fiscal 2013 financial statements.
In February 2013, the FASB issued accounting guidance intended to improve the reporting classifications out of accumulated
other comprehensive income of various components. This guidance was effective for annual periods, and interim periods within
those periods, beginning after December 15, 2012. The Company adopted the new guidance beginning February 1, 2013, the
beginning of the Company's 2013 fiscal year.
In July 2013, the FASB issued accounting guidance on the financial statement presentation of an unrecognized tax benefit when
a net operating loss carryforward, or similar tax loss, or a tax carryforward exists. The guidance is effective for annual reporting
periods beginning on or after December 15, 2013, and interim periods within those annual periods. The Company does not expect
the adoption to have a material impact on its fiscal 2014 financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to interest rate risk related to its seasonal borrowings used to finance additional inventory and
receivables. Rising interest rates may adversely affect the Company's results of operations and cash flows related to its
variable-rate bank borrowings under its credit line with PNC. Accordingly, a 100 basis point upward fluctuation in PNC's base
rate would have caused the Company to incur additional interest charges of approximately $139,000 for the twelve months
38
ended January 31, 2014. 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, 2014 and 2013, the Company had no derivative
instruments.
The Company's business is subject to changes in the price of raw materials used to manufacture its products, such as steel,
plastic, wood, aluminum, polyethylene, polypropylene, plywood, particleboard, and cartons, as well as the price of petroleum,
which not only affects the cost of plastic, but also the Company's transportation costs and costs of operating its manufacturing
facilities. With respect to the Company's annual contracts (or those contracts that have longer terms), the Company may have
limited ability to increase prices during the term of the contract. The Company has, however, negotiated increased flexibility
under many of these contracts allowing the Company to increase prices on future orders. Nevertheless, even with respect to
these more flexible contracts, the Company does not have the ability to increase prices on orders received prior to any
announced price increases. Due to the intensely seasonal nature of its business, the Company may receive significant orders
during the first and second quarters for delivery in the second and third quarters. With respect to any of the contracts described
above, if the costs of raw materials increase suddenly or unexpectedly, the Company cannot be certain that it will be able to
implement corresponding increases in its sales prices in order to offset such increased costs. Significant cost increases in
providing products during a given contract period can adversely impact operating results and have done so during prior years,
especially 2008, and 2011. The Company typically benefits from any decreases in raw material costs under the contracts
described above.
39
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 31, 2014 and 2013
Consolidated Statements of Operations for the Years Ended January 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Loss for the Years Ended January 31, 2014, 2013 and 2012
Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended January 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts and Reserves for the Years Ended January 31, 2014, 2013 and 2012
Page
numbers
41
42
43
45
46
47
48
49
72
40
MANAGEMENT’S 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 Company’s 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 Company’s 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
Company’s 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 Company’s management and directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s
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 Company’s annual financial statements, management of the Company has
undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of January 31,
2014, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Management’s assessment included an
evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness
of the Company’s internal control over financial reporting.
Based on this assessment, management did not identify any material weakness in the Company’s internal control over
financial reporting, and management has concluded that the Company’s internal control over financial reporting was effective
as of January 31, 2014.
41
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, 2014 and 2013,
and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the
three years in the period ended January 31, 2014. 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 Company’s 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. We were not engaged to perform an audit of the Company’s internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and 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, 2014 and 2013, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended January 31, 2014, 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, presents fairly in all material respects the information set forth therein.
Los Angeles, California
April 25, 2014
/s/ Ernst & Young LLP
42
Virco Mfg. Corporation
Consolidated Balance Sheets
Assets
Current assets
Cash
Trade accounts receivables (net of allowance for doubtful accounts of $200 and $275 at
January 31, 2014 and 2013)
Other receivables
Income tax receivable
Inventories
Finished goods, net
Work in process, net
Raw materials and supplies, net
Deferred tax assets, net
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment
Land
Land improvements
Buildings and building improvements
Machinery and equipment
Leasehold improvements
Less accumulated depreciation and amortization
Net property, plant and equipment
Deferred tax assets, net
Other assets
Total assets
See accompanying notes.
January 31,
2014
2013
(In thousands)
$
1,051
$
853
8,468
52
290
7,237
11,116
9,427
27,780
203
1,795
39,639
1,671
1,185
47,271
115,667
2,328
168,122
131,817
36,305
611
6,789
8,760
108
259
4,968
11,041
9,308
25,317
—
1,665
36,962
1,671
1,213
47,703
119,407
2,452
172,446
135,564
36,882
1,484
6,835
$
83,344
$
82,163
43
Virco Mfg. Corporation
Consolidated Balance Sheets
Liabilities
Current liabilities
Accounts payable
Accrued compensation and employee benefits
Current portion of long-term debt
Deferred tax liabilities
Other accrued liabilities
Total current liabilities
Non-current liabilities
Accrued self-insurance retention
Accrued pension expenses
Income tax payable
Long-term debt, less current portion
Other accrued liabilities
Total non-current liabilities
Commitments and contingencies
Stockholders’ equity
Preferred stock:
January 31,
2014
2013
(In thousands, except share data)
$
12,355
$
11,864
3,594
2,248
—
4,459
22,656
2,025
23,951
69
6,000
1,038
33,083
3,426
4,053
572
4,521
24,436
2,585
26,385
142
—
1,595
30,707
Authorized 3,000,000 shares, $.01 par value; none issued or outstanding
—
—
Common stock:
Authorized 25,000,000 shares, $.01 par value; issued and outstanding 14,718,414 shares in
2013 and 14,550,371 shares in 2012
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes.
147
115,978
(74,540)
(13,980)
27,605
146
115,670
(72,810)
(15,986)
27,020
$
83,344
$
82,163
44
Virco Mfg. Corporation
Consolidated Statements of Operations
Net sales
Costs of goods sold
Gross profit
Selling, general and administrative expenses
(Gain) loss on sale of property, plant & equipment
Restructuring expense
Interest expense, net
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Dividend declared:
Cash
Net loss per common share (a):
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
$
$
$
$
$
Year ended January 31,
2014
2013
2012
(In thousands, except per share data)
$
155,920
102,488
53,432
53,465
(10)
1,408
1,302
(2,733)
(1,003)
(1,730) $
$
158,856
107,304
51,552
53,312
(37)
760
1,556
(4,039)
(209)
(3,830) $
166,441
118,283
48,158
56,215
(1)
4,570
1,122
(13,748)
55
(13,803)
— $
— $
0.05
(0.12) $
(0.12) $
(0.27) $
(0.27) $
(0.97)
(0.97)
14,620
14,620
14,387
14,387
14,235
14,235
_______________
(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.
45
Virco Mfg. Corporation
Consolidated Statements of Comprehensive Income (Loss)
Net income (loss)
Other comprehensive income (loss) :
Pension adjustments, net of tax
Comprehensive income (loss)
See accompanying notes.
Years ended January 31,
2014
2013
2012
(In thousands)
(1,730) $
(3,830) $
(13,803)
2,006
276
$
(658)
(4,488) $
(5,586)
(19,389)
$
$
46
Virco Mfg. Corporation
Consolidated Statements of Stockholders’ Equity
In thousands, except share data
Balance at January 31, 2011
Net loss
Pension adjustments, net of tax effect $0
Shares vested
Stock compensation expense
Stock repurchased
Cash dividends
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholder's
Equity
14,204,998
$
142
$
114,467
$
(54,465) $
(9,742) $
50,402
—
—
149,048
—
—
—
—
—
2
—
—
—
—
—
(142)
735
—
—
(13,803)
—
(13,803)
—
(2)
—
—
(710)
(5,586)
—
—
—
—
(5,586)
(142)
735
—
(710)
Balance at January 31, 2012
14,354,046
$
144
$
115,060
$
(68,980) $
(15,328) $
30,896
Net loss
Pension adjustments, net of tax effect $0
Shares vested and others
Stock compensation expense
Cash dividends
Balance at January 31, 2013
Net loss
Pension adjustments , net of tax effect of
$1,078
Shares vested and others
Stock compensation expense
Balance at January 31, 2014
See accompanying notes.
—
—
196,325
—
—
—
—
2
—
—
—
—
(88)
698
—
(3,830)
—
(3,830)
—
—
—
—
(658)
—
—
—
(658)
(86)
698
—
14,550,371
$
146
$
115,670
$
(72,810) $
(15,986) $
27,020
—
—
168,043
—
—
—
1
—
—
—
(215)
523
(1,730)
—
(1,730)
—
—
—
2,006
—
—
2,006
(214)
523
14,718,414
$
147
$
115,978
$
(74,540) $
(13,980) $
27,605
47
Virco Mfg. Corporation
Consolidated Statements of Cash Flows
Year Ended January 31,
2014
2013
2012
(In thousands)
$
(1,730) $
(3,830) $
(13,803)
4,209
4,368
(6)
(10)
97
523
924
376
56
(2,464)
(105)
(58)
(2,055)
(243)
(75)
(37)
66
698
760
4,057
293
2,475
(930)
567
(1,152)
7,260
5,021
196
(1)
228
735
1,992
(2,476)
(233)
7,579
(369)
(31)
378
(784)
(3,632)
(2,050)
(2,159)
19
(25)
53
244
2
170
(3,638)
(1,753)
(1,987)
28,851
(24,656)
(116)
—
4,079
198
853
28,422
(35,876)
(97)
—
(7,551)
(2,044)
2,897
1,051
$
853
$
1,302
$
1,556
$
74
12
29,263
(24,287)
(126)
(710)
4,140
1,369
1,528
2,897
1,122
32
— $
— $
(100)
$
$
$
Operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization
Provision for doubtful accounts
(Gain) loss on sale of property, plant and equipment
Deferred income taxes
Stock-based compensation
Pension settlement
Changes in operating assets and liabilities:
Trade accounts receivable
Other receivables
Inventories
Income taxes
Prepaid expenses and other current assets
Accounts payable and accrued liabilities
Net cash provided by (used in) operating activities
Investing activities
Capital expenditures
Proceeds from sale of property, plant and equipment
Net investment in life insurance
Net cash provided by (used in) investing activities
Financing activities
Proceeds from long-term debt
Repayment of long-term debt
Common stock repurchased
Cash dividend paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest
Income tax, net
Non-cash investing activities :
Decrease in accrued asset retirement obligations
See accompanying notes.
48
VIRCO MFG. CORPORATION
Notes to Consolidated Financial Statements
January 31, 2014
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 64 years of manufacturing operations have
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 under its credit facility to
fund acquisitions of inventory and finance receivables during the summer delivery season. Restrictions imposed by the terms of
the Company’s credit facility may limit the Company’s operating and financial flexibility. However, management believes that
its existing cash and available borrowings under its 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; liabilities under
pension, warranty, self-insurance, and environmental claims, revenue recognition; and the accounts receivable allowance for
doubtful accounts. Actual results could differ from these estimates.
Fiscal Year End
Fiscal years 2013, 2012 and 2011, refer to the fiscal years ended January 31, 2014, 2013 and 2012, 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 Company’s recurring customers are generally made on open account with terms consistent with the industry.
Credit is extended based on an evaluation of the customer’s 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 Company’s 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 of credit. The Company does not assess interest on receivable balances. A substantial percentage of the Company’s
receivables come from low-risk government entities. No customer exceeded 10% of the Company’s sales for each of the three
years ended January 31, 2014. Foreign sales were approximately 7.5%, 10.0% and 7.0% of the Company’s sales for fiscal years
2013, 2012 and 2011, respectively.
No single customer accounted for more than 10% of the Company’s accounts receivable at January 31, 2014 or 2013. Because
of the short time between shipment and collection, the net carrying value of receivables approximates the fair value for these
assets.
49
Fair Values of Financial Instruments
The fair values of the Company’s cash, accounts receivable, and accounts payable approximate their carrying amounts due to
their short-term nature.
Financial assets and liabilities measured at fair value on a recurring basis are classified in one of the three following categories,
which are described below:
Level 1 — Valuations based on unadjusted quoted prices for identical assets in an active market.
Level 2 — Valuations based on quoted prices in markets where trading occurs infrequently or whose values are based on
quoted prices of instruments with similar attributes in active markets.
Level 3 — Valuations based on inputs that are unobservable and involve management judgment and our own assumptions
about market participants and pricing.
Inventories
Inventory is valued at the lower of cost or market (determined on a first-in, first-out basis) and includes material, labor, and
factory overhead. The Company maintains allowances for estimated slow moving and obsolete inventory to reflect the
difference between the cost of inventory and the estimated market value. Allowances for slow moving and obsolete inventory
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 expenses. 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 Company’s 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.
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
Buildings and building improvements
Machinery and equipment
Leasehold improvements
5 to 25 years
5 to 40 years
3 to 10 years
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, 2014, 2013 and 2012. 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. Repair and maintenance expense was
$1,691,000, $1,681,000 and $1,610,000 for fiscal years ended January 31, 2014, 2013 and 2012, respectively. Depreciation
and amortization expense was $4,209,000, $4,368,000 and $5,021,000 for the fiscal years ended January 31, 2014, 2013 and
2012, respectively.
The Company subleased space at one of its facilities on a month-to-month basis during 2013, 2012 and 2011. Rental income
was $40,000 for fiscal 2013, 2012, and 2011.
The Company has established asset retirement obligations related to leased manufacturing facilities in accordance with
Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 410, “Asset Retirement and
Environmental 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 $563,000 and $554,000 at January 31,
2014 and 2013, respectively.
50
Balance at beginning of period
Decrease in obligation
Accretion expense
Balance at end of period
Impairment of Long-Lived Assets
January 31,
2014
554,000
—
9,000
563,000
$
$
2013
545,000
—
9,000
554,000
$
$
An impairment loss is recognized in the event facts and circumstances indicate the carrying amount of a long-lived asset may
not be recoverable, and an estimate of future undiscounted cash flows is less than the carrying amount of the asset. Impairment
is recorded based on the excess of the carrying amount of the impaired asset over the fair value. Generally, fair value represents
the Company’s expected future cash flows from the use of an asset or group of assets, discounted at a rate commensurate with
the risks involved.
Net Loss per Share
Basic net 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 loss per
share:
In thousands, except per share data
Numerator
Net loss
Denominator
Weighted-average shares — basic
Common equivalent shares from common stock options and warrants
Weighted-average shares — diluted (1)
Net loss per common share
Basic
Diluted
2013
2012
2011
$
(1,730) $
(3,830) $
(13,803)
14,620
—
14,620
14,387
—
14,387
14,235
—
14,235
$
(0.12) $
(0.12)
(0.27) $
(0.27)
(0.97)
(0.97)
___________________
(1)
For the years ended January 31, 2014, 2013 and 2012, approximately 180,000, 119,000 and 56,000 shares of common
stock equivalents, respectively, were excluded in the computation of diluted net income per share, as the effect would be
anti-dilutive.
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 Company's 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, 2014 and 2013, the Company had not capitalized any remediation costs and had
not recorded any amortization expense in fiscal years 2013, 2012 and 2011.
Advertising Costs
51
Advertising costs are expensed in the period during which the advertising space is run. Selling, general and administrative
expenses include advertising costs of $1,246,000 in 2013, $1,103,000 in 2012, and $1,395,000 in 2011. Prepaid advertising
costs reported as an asset on the balance sheet at January 31, 2014 and 2013, were $242,000 and $248,000, 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. Effective February 1, 2014 the Company modified its warranty to a limited lifetime warranty. The new
warranty effective February, 1, 2014 is not anticipated to have a significant effect on warranty expense. The Company generally
provides 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 $1,000,000
and $1,000,000 as of January 31, 2014 and 2013, respectively.
Self-Insurance
In 2013 and 2012, the Company was self-insured for product and general 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 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 0.50% in 2013 and 0.50% in 2012.
Stock-Based Compensation Plans
The Company recognizes stock-based compensation cost for shares that are expected to vest, on a straight-line basis, over the
requisite service period of the award.
Reclassifications
Certain reclassifications have been made to the prior year balance sheet to conform to the current year presentation.
Reclassifications did not have a material impact to the balance sheet or results of operations.
The Company reclassified $760,000 in pension settlement costs in 2012 from Selling, General and Administrative expenses to
Restructuring expenses on the Statement of Operations to conform to the current year presentation and to maintain
comparability among the periods presented. In 2011 and 2013 the Company incurred severance costs as well as pension
settlement costs which have also been classified as Restructuring expenses.
Accumulated Other Comprehensive Income (Loss), Net of Tax
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the year ended
January 31, 2014:
52
Balance as of January 31, 2013
Amounts reclassified from AOCI, net of tax
Balance as of January 31, 2014
The reclassification out of AOCI for the year ended January 31, 2014:
Amortization of defined benefit pension and postretirement plan items:
Amortization prior service cost
Expected return on plan assets
Actuarial Gain / (Loss)
Amortization of net actuarial loss
Pension adjustments
Total before tax
Tax effect
Net of tax
Revenue Recognition:
Pension and Post-
retirement Benefits
(15,986)
2,006
(13,980)
Amount reclassified
from AOCI
—
(391) See Note 4
1,003 See Note 4
1,548 See Note 4
924 See Note 4
3,084
(1,078)
2,006
$
$
$
$
The Company recognizes revenue in accordance with FASB ASC Topic 605, “Revenue Recognition.” Revenue is recognized
when title passes under its various shipping terms, when installation services are complete, and when collectability is
reasonably assured. The Company reports sales net of sales returns and allowances and sales taxes imposed by various
government authorities, where applicable. In most instances, the Company sells furniture on bids and contracts, which may
include multiple elements. For sales that include freight to the customer, many sales are delivered on the same day shipped,
with an average delivery being in route for 1 to 3 days. Installation, which involves carrying the furniture to the classroom and
setting the desks and chairs in place, typically occurs the day the furniture is delivered.
In accordance with ASC 605, 25, “Revenue Recognition - Multiple-Element Arrangements,” revenue arrangements with
multiple deliverables are generally accounted for by the Company on a combined unit of accounting as our customers control
our ability to deliver and install the furniture, and as a result the furniture delivery and installation are generally provided at the
same time. We recognize the consideration for the combined unit of accounting once the final item has been delivered and
installed.
Shipping and Installation Fees
Revenues related to shipping and installation are included in net sales. For the fiscal years ended January 31, 2014, 2013 and
2012, shipping and installation costs of approximately $14,576,000, $15,040,000 and $15,804,000, 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 FASB ASC Topic 740, “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.
2. New Accounting Pronouncements
In June 2011, the FASB issued accounting guidance updating the presentation format of comprehensive income. The guidance
provided two options for presenting net income and other comprehensive income. The total of comprehensive income, the
components of net income and the components of other comprehensive income may be presented in either a single continuous
53
statement of comprehensive income or in two separate but consecutive statements. The Company adopted the new guidance
beginning February 1, 2013. The guidance did not have a material impact on the Company's financial statements.
In January 2013, the FASB issued accounting guidance clarifying the scope of disclosures about offsetting assets and liabilities.
This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those
annual periods. The Company does not expect the adoption to have a material impact on its fiscal 2013 financial statements.
In February 2013, the FASB issued accounting guidance intended to improve the reporting classifications out of accumulated
other comprehensive income of various components. This guidance was effective for annual periods, and interim periods within
those periods, beginning after December 15, 2012. The Company adopted the new guidance beginning February 1, 2013, the
beginning of the Company's 2013 fiscal year.
In July 2013, the FASB issued accounting guidance on the financial statement presentation of an unrecognized tax benefit when
a net operating loss carryforward, or similar tax loss, or a tax carryforward exists. The guidance is effective for annual reporting
periods beginning on or after December 15, 2013, and interim periods within those annual periods. The Company does not expect
the adoption to have a material impact on its fiscal 2014 financial statements.
3. Debt
Outstanding balances (in thousands) for the Company’s long-term debt were as follows:
In thousands, except per share data
Revolving credit line
Other
Total debt
Less current portion
Non-current portion
January 31,
2014
2013
$
$
8,248
$
—
8,248
2,248
6,000
$
4,053
—
4,053
4,053
—
On December 22, 2011 (the Closing Date), the Company and Virco Inc., a wholly owned subsidiary of the Company (Virco
and, together with the Company, the Borrowers) entered into a Revolving Credit and Security Agreement (the Credit
Agreement) with PNC Bank, National Association, as administrative agent and lender (PNC). On June 15, 2012, the
Borrowers entered into Amendment No. 1 (Amendment No. 1) to the Credit Agreement which, among other things, increased
the borrowing availability thereunder by $3,000,000 for the period from May 1 through July 14 of each year. On July 27, 2012,
the Borrowers entered into Amendment No. 2 (Amendment No. 2) to the Credit Agreement which, among other things, reduced
the minimum EBITDA financial covenant contained therein for the five consecutive months ending June 2012 from $1,600,000
to $300,000. On September 12, 2012, the Borrowers entered into Amendment No. 3 (Amendment No. 3) to the Credit
Agreement which, among other things, modified the minimum EBITDA covenant for the balance of the fiscal year. On
December 6, 2012, the Borrowers entered into Amendment No. 4 (Amendment No. 4) to the Credit Agreement which, among
other things, waived the violation of the minimum EBITDA and minimum tangible net worth covenants at October 31, 2012
and eliminated the minimum EBITDA covenant at November 30, 2012. On March 1, 2013, the Borrowers entered into
Amendment No. 5 (Amendment No. 5) to the Credit Agreement, which among other things modified the minimum tangible net
worth covenant for the periods from January 31, 2013 to January 31, 2014, modified the minimum EBIDTA covenant for
certain periods to January 31, 2014 and waived the violation of the minimum EBITDA covenant for the eleven consecutive
fiscal month period ending December 31, 2012. On January 9, 2014 the Borrowers entered into Amendment No. 6
(Amendment No. 6) to the Credit Agreement, which, among other things, amended the definition of “Peak Season” and
increased the peak season borrowing capacity. On April 15, 2014 the Borrowers entered into Amendment No. 7 (Amendment
No. 7) to the Credit Agreement, which, among other things, extended the maturity date of the Credit Agreement for three years
until December 22, 2017, reduced the maximum availability under the Credit Agreement by $10,000,000 to $50,000,000,
waived the violation of the minimum EBITDA covenant at January 31, 2014, waived the violation of the fixed charge coverage
ratio covenant at January 31, 2014, included levels for the minimum tangible net worth financial covenant and a minimum
EBITDA financial covenant for fiscal year 2014 and the minimum fixed charge coverage ratio until the maturity date of the
Credit Agreement.
54
The Credit Agreement provides the Borrowers with a secured revolving line of credit (the Revolving Credit Facility) of up to
$50,000,000, with seasonal adjustments to the credit limit and subject to borrowing base limitations, and includes a sub-limit of
up to $3,000,000 for issuances of letters of credit. The Revolving Credit Facility is an asset-based line of credit that is subject
to a borrowing base limitation and generally provides for advances of up to 85% of eligible accounts receivable, plus a
percentage equal to the lesser of 60% of the value of eligible inventory or 85% of the liquidation value of eligible inventory,
plus an amount ranging from $6,000,000 to $12,000,000 from March 1 through July 31 of each year, minus undrawn amounts
of letters of credit and reserves. The Revolving Credit Facility is secured by substantially all of the Borrowers' personal
property and certain of the Borrowers' real property. The principal amount outstanding under the Credit Agreement and any
accrued and unpaid interest is due no later than December 22, 2017, and the Revolving Credit Facility is subject to certain
prepayment penalties upon earlier termination of the Revolving Credit Facility. Prior to the maturity date, principal amounts
outstanding under the Credit Agreement may be repaid and reborrowed at the option of the Borrowers without premium or
penalty, subject to borrowing base limitations, seasonal adjustments and certain other conditions.
On the Closing Date, the Borrowers drew down approximately $9,800,000 under the Revolving Credit Facility to repay in full
all indebtedness outstanding under its prior revolving facility governed by the Second Amended and Restated Credit Agreement
dated as of March 12, 2008, as amended, by and between the Company and Wells Fargo Bank, National Association, and to pay
fees and expenses related to the Credit Agreement. The Company intends to utilize the Revolving Credit Facility for liquidity
and working capital purposes.
The Revolving Credit Facility bears interest, at the Borrowers' option, at either the Alternate Base Rate (as defined in the Credit
Agreement) or the Eurodollar Currency Rate (as defined in the Credit Agreement), in each case plus an applicable margin. The
applicable margin for Alternate Base Rate loans is a percentage within a range of 0.75% to 1.75%, and the applicable margin
for Eurodollar Currency Rate loans is a percentage within a range of 1.75% to 2.75%,%, in each case based on the EBITDA of
the Borrowers at the end of each fiscal quarter, and may be increased at PNC's option by 2.0% during the continuance of an
event of default. Accrued interest with respect to principal amounts outstanding under the Credit Agreement is payable in
arrears on a monthly basis for Alternative Base Rate loans, and at the end of the applicable interest period but at most every
three months for Eurodollar Currency Rate loans.
The Credit Agreement contains a covenant that forbids the Company from issuing dividends or making payments with respect
to the Company's capital stock, and contains numerous other covenants that limit under certain circumstances the ability of the
Borrowers and their subsidiaries to, among other things, merge with or acquire other entities, incur new liens, incur additional
indebtedness, repurchase stock, sell assets outside of the ordinary course of business, enter into transactions with affiliates, or
substantially change the general nature of the business of the Borrowers, taken as a whole. The Credit Agreement also requires
the Company to maintain the following financial maintenance covenants: (1) a minimum tangible net worth amount, (2) a
minimum fixed charge coverage ratio, and (3) a minimum EBITDA amount, in each case as of the end of the relevant monthly,
quarterly or annual measurement period. As of January 31, 2014 the Credit Agreement required the Company to maintain: (1)
a minimum tangible net worth of at least $22,365,000 for the fiscal quarter ending January 31, 2014, (2) a minimum fixed
charge coverage ratio of at least 1.00 to 1.00 for the four consecutive fiscal quarters ending January 31, 2014, and (3) a
minimum EBITDA amount of $5,593,000 for the twelve consecutive fiscal months ending January 31, 2014. The actual results
of the Company with respect to the foregoing financial covenants for the period ending January 31, 2014 were as follows: (1)
the Company maintained a tangible net worth of $27,605,000 for the fiscal year ending January 31, 2014, (2) the Company
maintained a fixed charge coverage ratio of less than 0.00 to 1.00 for the four consecutive fiscal quarters ended January 31,
2014, and (3) the Company achieved EBITDA of $3,301,000 for the twelve consecutive fiscal months ending January 31, 2014.
Therefore the Company was in violation of its minimum fixed charge coverage ratio and minimum EBITDA covenants for the
relevant period ending January 31, 2014. However, as noted above, on April 15, 2014 the Company entered into Amendment
No. 7, which waived the violation of the minimum EBITDA covenant at January 31, 2014, waived the violation of the
minimum fixed charge coverage ratio covenant at January 31, 2014, included levels for the minimum tangible net worth
financial covenant and the minimum EBITDA financial covenant for fiscal year 2014 and the minimum fixed charge coverage
ratio until the maturity date of the Credit Agreement
In addition, the Credit Agreement contains a clean down provision that requires the Company to reduce borrowings under the
line to less than $6,000,000 for a period of 60 consecutive 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 on the Company's liquidity. Other than as
noted above with respect to the minimum EBITDA covenant and the minimum tangible net worth covenant, the Company was
in compliance with its covenants at January 31, 2014.
Events of default (subject to certain cure periods and other limitations) under the Credit Agreement include, but are not limited
to, (i) non-payment of principal, interest or other amounts due under the Credit Agreement, (ii) the violation of terms,
covenants, representations or warranties in the Credit Agreement or related loan documents, (iii) any event of default under
agreements governing certain indebtedness of the Borrowers and certain defaults by the Borrowers under other agreements that
55
would materially adversely affect the Borrowers, (iv) certain events of bankruptcy, insolvency or liquidation involving the
Borrowers, (v) judgments or judicial actions against the Borrowers in excess of $250,000, subject to certain conditions, (vi) the
failure of the Company to comply with Pension Benefit Plans (as defined in the Credit Agreement), (vii) the invalidity of loan
documents pertaining to the Credit Agreement, (viii) a change of control of the Borrowers and (ix) the interruption of
operations of any of the Borrowers' manufacturing facilities for five consecutive days during the peak season or fifteen
consecutive days during any other time, subject to certain conditions.
Pursuant to the Credit Agreement, substantially all of the Borrowers' accounts receivable are automatically and promptly swept
to repay amounts outstanding under the Revolving Credit Facility upon receipt by the Borrowers. Due to this automatic
liquidating nature of the Revolving Credit Facility, if the Borrowers breach any covenant, violate any representation or
warranty or suffer a deterioration in their ability to borrow pursuant to the borrowing base calculation, the Borrowers may not
have access to cash liquidity unless provided by PNC at its discretion. In addition, certain of the covenants and representations
and warranties set forth in the Credit Agreement contain limited or no materiality thresholds, and many of the representations
and warranties must be true and correct in all material respects upon each borrowing, which the Borrowers expect to occur on
an ongoing basis. There can be no assurance that the Borrowers will be able to comply with all such covenants and be able to
continue to make such representations and warranties on an ongoing basis.
The Company's line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer
season. The Company believes that the Revolving Credit Facility will provide sufficient liquidity to meet its capital
requirements in the next 12 months. Approximately $10,919,000 was available for borrowing as of January 31, 2014.
The descriptions set forth herein of the Credit Agreement, Amendment No. 1, Amendment No. 2, Amendment No. 3,
Amendment No. 4, Amendment No. 5, Amendment No. 6 and Amendment No. 7 are qualified in their entirety by the terms of
such agreements, each of which has been filed with the Securities and Exchange Commission.
As of January 31, 2014, long-term debt repayments are approximately as follows (in thousands):
Year ending January 31,
2015
2016
2017
2018
2019
Thereafter
$
2,248
6,000
—
—
—
—
Management believes that the carrying value of debt approximated fair value at January 31, 2014 and 2013, as all of the long-
term debt bears interest at variable rates based on prevailing market conditions.
4. Retirement Plans
Pension Plans
The Company maintains three defined benefit pension plans, the Virco Employees Retirement Plan (“Employee Plan”), the
Virco Important Performers Retirement Plan (“VIP Plan”), and the Non-Employee Directors Retirement Plan (“Directors
Plan”). The Company and its subsidiaries cover all employees under the Employee Plan, which is a qualified noncontributory
defined benefit retirement plan. Benefits under the Employee Plan are based on years of service and career average earnings.
Benefit accruals under the Employee Plan were frozen effective December 31, 2003.
The Company also provides a supplementary retirement plan for certain key employees, the 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 Employee
Plan. The VIP Plan benefits are secured by a life insurance program. The cash surrender values of the policies securing the VIP
Plan were $3,238,000 and $3,008,000 at January 31, 2014 and 2013, 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 and a Split $ Life Insurance Plan. Substantially all assets securing the VIP Plan are held in the rabbi trust.
Benefit accruals under the VIP Plan were frozen effective December 31, 2003.
In April 2001, the board of directors established the Directors Plan, a non-qualified plan for non-employee directors of the
Company. The Directors Plan provides a lifetime annual retirement benefit equal to the director’s annual retainer fee for the
56
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, 2014, the Directors Plan did not hold any assets. Benefit accruals under the Directors
Plan were frozen effective December 31, 2003.
The annual measurement date for all plans for the fiscal years ended January 31, 2014, 2013, and 2012 is January 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: discount rate, assumed rate of return
and rate of increase in compensation.
The discount rate represents an estimate of the rate of return on a portfolio of high-quality fixed-income securities that would
provide cash flows that match the expected benefit payment stream from the plans. When setting the discount rate, the
Company utilizes a spot-rate yield curve developed from high-quality bonds currently available which reflects 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, 2014, 2013 or 2012.
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 Company's defined benefit pension plans (the VIP Plan and the Directors Plan) are executive
benefit plans that are not funded and are subject to the Company's 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 for and funds the pension obligations for the Employee Plan. The board of directors appoints a
Retirement Plan Committee that establishes a policy for investment and funding strategies. Approximately 70% 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 Retirement Plan Committee has established target asset allocations for 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 80% stock and 20% 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 Retirement Plan
Committee receives monthly reports from the investment advisors and meets periodically with them to discuss investment
performance.
At January 31, 2014 and 2013, the amount of the plan assets invested in bond or short-term investment funds was 12% and 8%,
respectively, and the balance of the trust was held in equity funds or investments. The trust does not hold any Company stock.
During 2011, two events significantly impacted the pension plans. The first event was a reduction in the discount rate utilized
to calculate pension plan obligations. The reduction in discount rate caused the liability for pension obligations to increase by
approximately $3.7 million, $1.4 million, and $26,000 for the Employee Plan, the VIP Plan, and the Directors Plan,
respectively. The increase in liability resulted in a comparable increase to Accumulated Other Comprehensive Income
(“AOCI”). The second event was a $2.0 million settlement charge for the Employee Plan. As part of a restructuring plan, the
Company offered early retirement benefits to all employees who voluntarily severed their employment with the Company.
Although the early retirement benefit was paid in cash and did not include any additional benefits payable from a retirement
plan, the benefit formula was structured to reward employees with significant years of service, the same employees who would
have earned retirement benefits prior to the Employee Plan freeze in 2003. The pension trust made significant lump sum
distributions to participants in the latter part of the year, resulting in settlement charges in the third and fourth quarters.
Because the VIP Plan and Director Plan do not allow lump sum payments, there was no similar settlement charge required.
During 2012 the pension plans were impacted by the same events of 2011, but to a lesser extent. A reduction in the discount
rate caused the liability for pension obligations to increase by approximately $2.0 million, $0.3 million, and $10,000 for the
Employee Plan, the VIP Plan, and the Directors Plan, respectively. The increase in liability resulted in a comparable increase to
57
AOCI. As a result of large distributions paid from the Employee Plan, a $760,000 settlement charge for the Employee Plan was
recorded in the fourth quarter.
During 2013 the pension plans were impacted by a reduction in force. Although the severance benefits was paid in cash and
did not include any additional benefits payable from a retirement plan, the severance included employees with vested pension
benefits. The pension trust made significant lump sum distributions to participants in the latter part of the year, resulting in
settlement charges in the third and fourth quarters. During 2013, the pension liability decreased due to increased discount rates,
offset by an increase in liability due to the adoption of a new mortality table.
It is the Company's policy to contribute adequate funds to the trust accounts to cover benefit payments under the VIP Plan and
Directors Plan and to maintain the funded status of the Employee Plan at a level which is adequate to avoid significant
restrictions to the Employee Plan under the Pension Protection Act of 2006. The Company contributed $1.8 million, $2.0
million, and $1.9 million, to the trust in 2013, 2012, and 2011, respectively. Contributions during 2014 will depend upon actual
investment results and benefit payments, but are anticipated to be approximately $2.4 million. During 2013, 2012, and 2011,
the Company paid approximately $564,000, $561,000 and $451,000 respectively, in benefits per year under the non-qualified
plans. It is anticipated that contributions to non-qualified plans will be approximately $710,000 for 2014. At January 31, 2014,
accumulated other comprehensive loss of approximately $16.4 million ($14.0 million net of tax) is attributable to the pension
plans.
58
The following tables sets forth (in thousands) the funded status of the Company’s pension plans at January 31, 2014, and 2013:
Employee Plan
VIP Plan
Directors Plan
1/31/2014
1/31/2013
1/31/2014
1/31/2013
1/31/2014
1/31/2013
Change in Benefit Obligation
Benefit obligation at beg. of year
Service cost
Interest cost
Participant contributions
Amendments
Actuarial losses (gains)
Plan settlement
Benefits paid
Benefit obligation at end of year
Change in Plan Assets
Fair value at beg. of year
Actual return on plan assets
Company contributions
Settlements
Benefits paid
Fair value at end of year
Funded Status
Unfunded status of the plan
Amounts Recognized in Statement of
Financial Position
Current liabilities
Non-current liabilities
Accrued benefit cost
Amounts Recognized in Statement of
Financial Position and Operations
Accrued benefit liability
Accumulated other comp. loss (gain)
Net amount recognized
Items not yet Recognized as a Component of
Net Periodic Pension Expense, Included in
AOCI
Unrecognized net actuarial loss (gain)
Unamortized prior service costs
Net initial asset recognition
$
$
$
$
$
$
$
$
$
$
32,840
$
29,583
$
8,054
$
8,079
$
468
$
—
1,312
—
—
596
(2,148)
(531)
32,069
16,875
2,122
1,850
(2,148)
(531)
$
$
—
1,299
—
—
3,951
(1,477)
(516)
32,840
14,808
2,035
2,025
(1,477)
(516)
$
$
—
330
—
—
(176)
—
(546)
—
352
—
—
175
—
(552)
—
18
—
—
(29)
—
(18)
7,662
$
8,054
$
439
$
— $
— $
— $
—
546
—
(546)
—
552
—
(552)
—
18
—
(18)
— $
18,168
$
16,875
$
— $
— $
480
—
20
—
—
(23)
—
(9)
468
—
—
9
—
(9)
—
(13,901) $
(15,965) $
(7,662) $
(8,054) $
(439) $
(468)
—
—
(13,901)
(15,965)
(584)
(7,078)
(570)
(7,484)
(66)
(373)
(13,901) $
(15,965) $
(7,662) $
(8,054) $
(439) $
(13,901) $
(15,965) $
(7,662) $
(8,054) $
(439) $
14,235
16,906
2,259
2,656
(75)
334
$
941
$
(5,403) $
(5,398) $
(514) $
14,235
$
16,906
$
2,259
$
2,656
$
(75) $
—
—
—
—
—
—
—
—
—
—
14,235
$
16,906
$
2,259
$
2,656
$
(75) $
(61)
(407)
(468)
(468)
(61)
(529)
(61)
—
—
(61)
59
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
Employee Plan
VIP Plan
Directors Plan
1/31/2014
1/31/2013
1/31/2014
1/31/2013
1/31/2014
1/31/2013
$
(407)
$
2,895
$
(176)
$
—
(2,264)
—
—
—
(2,184)
—
—
(222)
—
—
175
—
(205)
—
—
$
(29)
$
(23)
—
14
—
—
—
—
—
—
(2,671)
$
711
$
(398)
$
(30)
$
(15)
$
(23)
Net loss (gain)
Prior service cost
Amortization of (loss) gain
Amortization of prior service cost (credit)
Amortization of initial asset
Total recognized in other comprehensive
income
Items to be Recognized as a Component of
2013 Periodic Pension Cost
Prior service cost
Net actuarial loss (gain)
Supplemental Data
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Components of Net Cost
Service cost
Interest cost
Expected return on plan assets
Amortization of transition amount
Recognized (gain) loss due to curtailments
Amortization of prior service cost
Recognized net actuarial loss
Benefit cost
Estimated Future Benefit Payments
FYE 01-31-2015
FYE 01-31-2016
FYE 01-31-2017
FYE 01-31-2018
FYE 01-31-2019
FYE 01-31-2020 to 2024
Total
$
$
$
$
$
$
$
$
21,270
Weighted Average Assumptions to Determine
Benefit Obligations at
Year-End
Discount rate
Rate of compensation increase
Weighted Average Assumptions to Determine
Net Periodic Pension Cost
Discount rate
Expected return on plan assets
Rate of compensation increase
4.25%
N/A
4.00%
6.50%
N/A
4.00%
N/A
4.50%
6.50%
N/A
60
— $
— $
— $
— $
— $
$
$
1,136
1,136
32,069
32,069
18,168
$
$
1,397
1,397
32,840
32,840
16,875
$
$
178
178
7,662
7,662
—
$
$
222
222
8,054
8,054
—
$
$
(31)
(31)
439
439
—
— $
— $
— $
— $
— $
1,299
(979)
—
—
—
2,184
2,504
$
1,312
(1,119)
—
—
—
2,264
2,457
4,862
1,963
2,456
1,475
1,879
8,635
$
$
$
330
—
—
—
—
222
552
584
345
329
313
336
1,796
3,703
4.75%
N/A
4.25%
N/A
N/A
352
—
—
—
—
205
557
$
$
$
$
4.25%
N/A
4.50%
N/A
N/A
18
—
—
—
—
(14)
4
$
66
60
55
49
44
148
422
4.25%
N/A
4.00%
N/A
N/A
—
(14)
(14)
468
468
—
—
20
—
—
—
—
—
20
4.00%
N/A
4.50%
N/A
N/A
Fair Value Measurements of Plan Assets
Employee Plan
Level 1 Measurement
Cash & Cash Equivalents
Common Stock
Total Level 1
Level 2 Measurement
Bond Index Fund
Core Bond CIT Fund
US Aggregate Bond Index Fund
Large Cap Growth Index Fund
Large Cap Value Index Fund
Russell 2000 Index Fund
International Equity Index Fund
Managed Investment Fund
Vanguard MSCI Emerging Markets Fund
Total Level 2
Level 3 Measurement
None
401(k) Retirement Plan
1/31/2014
1/31/2013
$
$
$
$
$
$
372
5,085
5,457
354
1,172
355
3,758
2,765
1,602
1,359
938
408
268
4,376
4,644
162
973
229
3,809
3,039
1,461
1,179
773
606
$
12,711
$
12,231
N/A
N/A
The Company’s 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, 2014 and
2013, the plan held 771,070 shares and 783,154 shares of Virco stock, respectively. For the fiscal years ended January 31, 2014,
2013 and 2012, 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
$3,076,000 and $3,069,000 at January 31, 2014 and 2013, respectively. The Company maintains a rabbi trust to hold assets
related to the Dual Option Life Insurance Plan. Substantially all assets securing this plan are held in the rabbi trust. As of
January 31, 2014 and 2013, the Company has purchased life insurance on the lives of the participants that will pay death
benefits of approximately $5,990,000 and $5,870,000, respectively.
The following sets forth the Company's change in death benefits payable during the years ended January 31, 2014 and 2013:
Liability beginning of year
Accretion expense
Present value of death benefits paid
Liability end of year
5. Stock-Based Compensation and Stockholders’ Rights
Stock Incentive Plans
61
1/31/2014
1/31/2013
$
$
2,316,000
85,000
—
2,401,000
$
$
2,074,000
292,000
(50,000)
2,316,000
The Company's two stock plans are the 2011 Employee Stock Incentive Plan (the “2011 Plan”) and the 2007 Employee
Incentive Stock Plan (the “2007 Plan”). Under the 2011 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 2011 Plan are expensed ratably over the vesting period of the awards. The Company determines the fair value of its
restricted stock unit awards and related compensation expense as the difference between the market value of the awards on the
date of grant less the exercise price of the awards granted. The Company granted 99,430 awards during fiscal 2013. As of
January 31, 2014, there were approximately 349,320 shares available for future issuance under the 2011 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 are expensed ratably over the
vesting period of the awards. The Company determines the fair value of its restricted stock unit awards and related
compensation expense as the difference between the market value of the awards on the date of grant less the exercise price of
the awards granted. The Company granted 0 awards during fiscal 2013. As of January 31, 2014, there were approximately
13,075 shares available for future issuance under the 2007 Plan.
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 the option holders provide 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
A summary of the Company’s stock option activity, and related information for the years ended January 31, is as follows:
2014
2013
2012
Outstanding at beginning of year
Options
— $
Granted
Exercised
Forfeited
Outstanding at end of year
Exercisable at end of year
—
—
—
—
—
Weighted-
Average
Exercise
Price
—
—
—
—
—
—
Weighted-
Average
Exercise
Price
—
—
—
—
—
—
Weighted-
Average
Exercise
Price
Options
12,100
$
8.82
—
—
(12,100)
—
—
—
—
—
—
—
Options
— $
—
—
—
—
—
The data included in the above table has been retroactively adjusted, if applicable, for stock dividends.
62
Restricted Stock Unit Awards
The following table presents a summary of restricted stock and stock unit awards:
Date of Grants
Units Granted
2011 Stock Incentive Plan
12/3/2013
12/3/2013
6/25/2013
6/19/2012
6/19/2012
2007 Stock Incentive Plan
6/19/2012
3/21/2012
6/21/2011
6/8/2010
6/16/2009
6/19/2007
Totals for the period
10,000
18,000
71,430
31,250
520,000
78,125
40,000
68,960
56,455
382,500
262,500
Terms of
Vesting
1 year
5 year
1 year
1 year
5 year
1 year
Immediate
1 year
1 year
5 year
5 year
Expense for 12 months ended
Unrecognized
Compensation
Cost at
1/31/2014
1/31/2013
1/31/2012
1/31/2014
$
6,000
$
— $
— $
1,000
100,000
17,000
160,000
41,000
—
—
—
198,000
—
—
—
33,000
111,000
82,000
80,000
67,000
—
226,000
99,000
—
—
—
—
—
—
133,000
58,000
235,000
309,000
13,000
36,000
50,000
—
523,000
—
—
—
—
62,000
—
$
523,000
$
698,000
$
735,000
$
684,000
A summary of the Company’s restricted stock unit awards activity, and related information for the following years ended
January 31, is as follows:
2014
2013
2012
Outstanding at beginning of year
743,375
$
Granted
Vested
Forfeited
Outstanding at end of year
Weighted-average fair value of
restricted stock units granted during
the year
99,430
(260,375)
(38,000)
544,430
Weighted-
average fair
value of
restricted
stock units
Restricted
stock units
Weighted-
average fair
value of
restricted
stock units
3.80
1.62
3.63
3.50
1.89
Restricted
stock units
290,960
$
669,375
(204,960)
(12,000)
743,375
Weighted-
average fair
value of
restricted
stock units
4.19
2.89
4.29
4.31
3.80
Restricted
stock units
467,455
$
68,960
(178,455)
(67,000)
290,960
1.89
2.07
2.01
2.00
1.87
$
2.07
$
1.62
$
2.89
The aggregate fair value of restricted stock unit awards vested during fiscal years 2013, 2012 and 2011 was $523,000,
$744,000 and $766,000, respectively.
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 Company’s 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 Company’s 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 stock. 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
63
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 tax expense (benefit) for the last three years is reconciled to the statutory federal income tax rate using the liability
method as follows (in thousands):
Statutory
State taxes (net of federal tax)
Change in valuation allowance
State rate adjustment
Change in unrecognized tax benefits
Other
Year ended January 31,
2014
2013
2012
$
$
(929) $
(47)
(253)
82
(32)
176
(1,003) $
(1,373) $
(124)
1,480
49
(246)
5
(209) $
(4,674)
(799)
6,043
(288)
(164)
(63)
55
Significant components of the expense (benefit) for income taxes (in thousands) attributed to continuing operations are as
follows:
Current
Federal
State
Deferred
Federal
State
Change in Valuation Allowance
Year ended January 31,
2014
2013
2012
$
$
$
1
(24)
(23)
(753)
23
(730)
(250)
(980)
(1,003) $
— $
(275)
(275)
(1,192)
(223)
(1,415)
1,481
66
(209) $
—
(173)
(173)
(4,581)
(1,235)
(5,816)
6,044
228
55
64
Deferred tax assets and liabilities (in thousands) are comprised of the following:
Deferred tax assets
Accrued vacation and sick leave
Retirement plans
Insurance reserves
Warranty
Net operating loss carryforwards
Intangibles
Inventory
Other
Deferred tax liabilities
Tax in excess of book depreciation
Other
Valuation allowance
Net deferred tax asset
Reported as:
Current deferred tax assets
Current deferred tax liabilities
Long-term deferred tax assets
Year ended January 31,
2014
2013
913
8,960
956
481
12,494
207
1,590
907
26,508
$
$
(1,407) $
(76)
(1,483) $
(24,210)
815
$
203
$
— $
611
830
10,343
1,193
451
12,072
272
723
1,250
27,134
(1,540)
(81)
(1,621)
(24,601)
912
—
(572)
1,484
$
$
$
$
$
$
$
The following table summarizes the activity related to our gross unrecognized tax benefits from February 1, 2012 to
January 31, 2014 (in thousands):
Balances as of February 1,
Increases related to prior year tax positions
Decreases related to prior year tax positions
Increases related to current year tax positions
Decreases relating to settlements with taxing authorities
Decreases related to lapsing of statute of limitations
Balance as of January 31,
January 31,
2014
2013
$
106
$
—
(9)
5
(19)
(31)
52
$
$
271
56
—
8
—
(229)
106
At January 31, 2014, the Company’s unrecognized tax benefits associated with uncertain tax positions were $52,000, of which
$34,000 if recognized, would favorably affect the effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense
which is consistent with the recognition of the items in prior reporting. The Company had recorded a liability for interest and
penalties related to unrecognized tax benefits of $16,000 at January 31, 2014, and $36,000 at January 31, 2013. The Company
closed its IRS examination for its tax return for the year ended January 31, 2011 with no changes. The years ended January 31,
2010, January 31, 2012 through January 31, 2014 remain open for examination by the IRS. The fiscal years ended January 31,
2010 through January 31, 2014 remain open for examination by state tax authorities. The Company is not currently under state
examination.
During 2014 and 2013, the Company completed Texas income tax examinations of the tax years ending January 31, 2008 and
2009, respectively. The examination did not materially impact the Consolidated Statements of Operations.
The specific timing of when the resolution of each tax position will be reached is uncertain. As of January 31, 2014, it is
reasonably possible that unrecognized tax benefits will decrease by $26,000 within the next 12 months due to the expiration of
the statute of limitations.
65
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. A valuation allowance was recorded against the
majority of the net deferred tax assets totaling $24,210,000 and $24,601,000 at January 31, 2014 and 2013, respectively. At
January 31, 2014, the Company had net operating loss carryforwards for federal and state income tax purposes, expiring at
various dates through 2033. Federal net operating losses that can potentially be carried forward totaled approximately
$24,546,000 at January 31, 2014. State net operating losses that can potentially be carried forward totaled approximately
$51,082,000 at January 31, 2014.
7. Commitments
The Company has operating leases on real property and equipment that expire at various dates. The Torrance, CA
manufacturing and distribution facility is leased under a 5-year operating lease that expires on February 28, 2020. One of the
Conway, AR manufacturing facilities is leased under a 10-year operating lease that expires on March 31, 2018. The Company
leases machinery and equipment under a 5-year operating lease arrangement. The Company has the option of buying out the
assets at the end of 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 or purchase options and require
payment for property taxes and insurance. The Company records rent expense on a straight-line basis based on contractual
lease payments. Allowances from lessors for tenant improvements have been included in the straight-line rent expense for
applicable locations. Tenant improvements are capitalized and depreciated over the remaining life of the applicable lease.
Minimum future lease payments (in thousands) for operating leases in effect as of January 31, 2014, are as follows:
Year ending January 31,
2015
2016
2017
2018
2019
Thereafter
Total minimum lease payments
Less sublease revenues
Rent expense relating to operating leases was as follows (in thousands):
Year ended January 31,
2014
2013
2012
$
$
$
5,773
3,248
4,109
4,590
4,227
4,560
26,507
(73)
26,434
6,555
6,629
6,619
The Company has issued purchase commitments for raw materials at January 31, 2014, of approximately $9,010,000. There
were no commitments in excess of normal operating requirements.
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 the Company factories in a manner that meets or
exceeds environmental laws are matched to the cost of producing inventory. Despite the Company’s 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.
66
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.
The Company has a self-insured retention for product and general liability losses up to $250,000 per occurrence, workers’
compensation liability losses up to $250,000 per occurrence, and for 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 expected future losses for liability claims and recorded a liability equal to the net
present value of $2,425,000 and $2,985,000 at January 31, 2014 and 2013, respectively, based upon the Company’s estimated
payout period of five years using a 0.5% and 0.5% discount rate, respectively.
Workers’ compensation, automobile, general and product liability claims may be asserted in the future for events not currently
known by management. Management does not anticipate that any related settlement, after consideration of the existing reserve
for claims incurred and potential insurance recovery, would have a material adverse effect on the Company’s financial position,
results of operations or cash flows. Estimated payments under the self-insurance programs are as follows (in thousands):
Year ending January 31,
2014
2015
2016
2017
2018
Thereafter
Total
Discount to net present value
$
$
400
510
510
510
510
—
2,440
(15)
2,425
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 Company’s financial position, results of operations or cash flows.
9. Warranty
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. Effective February 1, 2014 the Company modified its warranty to a limited
lifetime warranty. The new warranty effective February 1, 2014 is not anticipated to have a significant effect on warranty
expense. The Company’s warranty is not a guarantee of service life, which depends upon events outside the Company’s 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. Warranty expense increased during 2011 and
2012 due to the Company’s decision to replace a component on a certain style of chair. These replacements were completed at a
cost less than originally anticipated as the Company was able to perform field repairs at a favorable cost rather than incurring
replacement costs. The repair / replacement of this component was not related to the safety of the product and has no exposure
relating to product liability reserves. 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 2013. The following is a
summary of the Company’s warranty-claim activity during 2013 and 2012.
(In thousands)
Beginning balance
Provision for current year
Provision for (benefits from) prior year
Costs incurred
Ending balance
January 31,
2014
2013
$
$
1,000
$
600
(220)
(380)
1,000
$
1,400
630
(490)
(540)
1,000
67
10. Subsequent Events
The Company has evaluated events subsequent to January 31, 2014, to assess the need for potential recognition or disclosure in
this report. Such events were evaluated through the date these financial statements were issued. Based upon this evaluation, it
was determined that no subsequent events occurred that require recognition or additional disclosure in the financial statements
except for Amendment No. 7, dated April 15, 2014 to the Revolving Credit and Security Agreement, dated as of December 22,
2011, which is disclosed in the notes to the consolidated financial statements.
11. Quarterly Results (Unaudited)
The Company’s quarterly results for the years ended January 31, 2014 and 2013, as adjusted, are summarized as follows (in
thousands, except per share data):
Year ended January 31, 2014
Net sales
Gross profit
Net (loss) income
Per common share
Net (loss) income (a)
Basic
Assuming dilution
Year ended January 31, 2013
Net sales
Gross profit
Net (loss) income
Per common share
Net (loss) income (a)
Basic
Assuming dilution
Q1
Q2
Q3
Q4
$
$
$
$
$
19,890
6,409
(4,447)
(0.31) $
(0.31)
$
23,668
6,967
(4,833)
56,933
21,586
6,210
0.43
0.42
60,392
22,867
7,053
(0.34) $
(0.34)
0.49
0.49
$
$
$
$
$
$
$
$
59,454
21,161
3,408
0.23
0.23
56,642
19,318
2,908
0.20
0.20
19,643
4,276
(6,901)
(0.47)
(0.47)
18,154
2,400
(8,958)
(0.62)
(0.62)
______________________________
(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.
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 Commission’s rules and forms, and that such information is accumulated and
communicated to the Company’s 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 management’s objectives in establishing them will be achieved.
Virco carried out an evaluation, under the supervision and with the participation of the Company’s 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 Company’s President and Chief Executive Officer along with the Company’s Chief
Financial Officer concluded that Virco’s 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,
68
summarized and reported, within the time periods specified in the SEC’s 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 accumulated and communicated to
the Company’s management, including its principal executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting during the fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. See
“Management’s Report on Internal Control over Financial Reporting.”
Item 9B. Other Information
None.
69
PART III
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance
Except for the information disclosed in Part 1 under the heading “Executive Officers” of the Registrant, the information
required by this Item regarding directors shall be incorporated by reference to information set forth in the Company’s definitive
Proxy Statement to be filed within 120 days after the end of the Company’s fiscal year end of January 31, 2014.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to information set forth in the Company’s definitive Proxy
Statement to be filed within 120 days after the end of the Company’s fiscal year end of January 31, 2014.
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 Company’s definitive Proxy
Statement to be filed within 120 days after the end of the Company’s fiscal year end of January 31, 2014.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference to information set forth in the Company’s definitive Proxy
Statement to be filed within 120 days after the end of the Company’s fiscal year end of January 31, 2014.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference to information set forth in the Company’s definitive Proxy
Statement to be filed within 120 days after the end of the Company’s fiscal year end of January 31, 2014.
70
Item 15. Exhibits, Financial Statement Schedules
PART IV
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, 2014 and 2013
Consolidated Statements of Operations - Years Ended January 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Loss - Years Ended January 31, 2014, 2013 and 2012
Consolidated Statements of Stockholders' Equity - Years Ended January 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows - Years Ended January 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements - January 31, 2014
Page numbers
42
43
45
46
47
48
49
71
2. The following consolidated financial statement schedule of Virco Mfg. Corporation is included in Item 15:
VIRCO MFG. CORPORATION AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED JANUARY 31, 2014, 2013 AND 2012
(In Thousands)
Col. A
Col. B
Beginning Balance
Col. C
Charged to
(Reduced from)
Expenses
Col. E
Deductions from
Reserves
Col. F
Ending Balance
Allowance for doubtful accounts for the
period ended:
January 31, 2014
January 31, 2013
January 31, 2012
Inventory valuation reserve for the period
ended:
January 31, 2014
January 31, 2013
January 31, 2012
Warranty reserve for the period ended:
January 31, 2014
January 31, 2013
January 31, 2012
Product, general, workers’ compensation and
automobile liability reserves for the period
ended:
January 31, 2014
January 31, 2013
January 31, 2012
Deferred tax valuation allowance for the
period ended:
January 31, 2014
January 31, 2013
January 31, 2012
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
275
350
200
3,425
3,900
3,750
1,000
1,400
2,300
2,985
2,915
2,770
24,601
22,859
14,548
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3
75
187
$
$
$
— $
— $
150
380
$
$
140
$
(64) $
— $
70
145
$
$
— $
1,742
8,311
$
$
78
150
37
100
475
$
$
$
$
$
— $
380
540
836
$
$
$
560
$
— $
— $
391
$
— $
— $
200
275
350
3,325
3,425
3,900
1,000
1,000
1,400
2,425
2,985
2,915
24,210
24,601
22,859
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.
3. Exhibits
See Index to Exhibits. The exhibits listed in the accompanying Index to Exhibits are filed as part of this report.
72
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.
SIGNATURES
Date: April 23, 2014
By:
/s/ Robert A. Virtue
Robert A. Virtue
Chairman of the Board and Chief Executive Officer
VIRCO MFG. CORPORATION
73
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
Robert A. Virtue
/s/ Douglas A. Virtue
Douglas A. Virtue
/s/ Robert E. Dose
Robert E. Dose
/s/ Bassey Yau
Bassey Yau
/s/ Donald S. Friesz
Donald S. Friesz
/s/ Thomas J. Schulte
Thomas J. Schulte
/s/ Mike DiGregorio
Mike DiGregorio
/s/ Glen D. Parish
Glen D. Parish
/s/ James R. Wilburn
James R. Wilburn
William L. Beer
Robert K. Montgomery
April 23, 2014
April 23, 2014
April 23, 2014
April 23, 2014
April 23, 2014
April 23, 2014
April 23, 2014
April 23, 2014
April 23, 2014
Chairman of the Board, Chief Executive Officer,
President and Director (Principal Executive Officer),
Director
Executive Vice President, Director
Vice President, Finance, Secretary and Treasurer
(Principal Financial Officer)
Vice President, Accounting, Corporate Controller,
Assistant Secretary and Assistant Treasurer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
74
VIRCO MFG. CORPORATION
EXHIBITS TO FORM 10-K ANNUAL REPORT
for the Year Ended January 31, 2014
Description
Certificate of Incorporation of the Company dated April 23, 1984, as amended (incorporated by reference to Exhibit 1 to the
Company’s Form 8-A12B (Commission File No. 001-08777), filed with the Commission on June 18, 2007).
Amended and Restated Bylaws of the Company dated September 10, 2001 (incorporated by reference to Exhibit 3.2 to the
Company’s Quarterly Report on Form 10-Q (Commission File No. 001-08777), filed with the Commission on
September 14, 2001).
First Amendment to Amended and Restated Bylaws of the Company dated October 25, 2007 (incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K (Commission File No. 001-08777), filed with the Commission
on October 31, 2007).
Second Amendment to Amended and Restated Bylaws of the Company dated February 15, 2011 (incorporated by reference
to Exhibit 3.1 to the Company’s Current Report on Form 8-K (Commission File No. 001-08777), filed with the Commission
on February 22, 2011).
Third Amendment to Virco Mfg. Corporation's Amended and Restated Bylaws, effective June 19, 2012 (incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Commission on June 21, 2012).
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 Company’s Form S-8
Registration Statement (Commission File No. 001-08777), filed with the Commission on October 25, 1996).
Amendment dated as of April 30, 2007, by and between the Company and Mellon Investor Services LLC to the Rights
Agreement by and between the Company and The Chase Manhattan Bank dated as of October 18, 1996 (incorporated by
reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on June 8, 2007).
Form of Virco Mfg. Corporation Employee Stock Ownership Plan (the “ESOP”) (incorporated by reference to Exhibit 4.1 to
the Company’s Form S-8 Registration Statement (Commission File No. 33-65098), filed with the Commission on June 25,
1993).
Trust Agreement for the ESOP (incorporated by reference to Exhibit 4.2 to the Company’s Form S-8 Registration Statement
(Commission File No. 33-65098), filed with the Commission on June 25, 1993).
Form of Registration Rights Agreement for the ESOP (incorporated by reference to Exhibit 4.3 to the Company’s Form S-8
Registration Statement (Commission File No. 33-65098), filed with the Commission on June 25, 1993).
1993 Stock Incentive Plan of the Company (incorporated by reference to Exhibit 4.1 to the Company’s Form S-8
Registration Statement (Commission File No. 33-65098), filed with the Commission on June 1993).
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 Company’s Current Report on Form 8-K
filed with the Commission on February 3, 2006).
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 Company’s Current Report on Form 8-K filed with the Commission on
June 8, 2006).
Warrant Agreement dated June 6, 2006, between the Company and Wedbush, Inc. (incorporated by reference to Exhibit 10.2
to the Company’s Current Report on Form 8-K filed with the Commission on June 8, 2006).
Warrant Agreement dated June 6, 2006, between the Company and Wedbush Morgan Securities, Inc. (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on June 8, 2007).
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 Company’s Quarterly Report on Form 10-Q filed
with the Commission on December 11, 2006).
Exhibit
Number
3.1
3.2
3.3
3.4
3.5
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
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 Company’s Current Report on Form 8-K filed with the
Commission on January 25, 2008).
75
Exhibit
Number
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Description
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 Company’s Current Report on Form 8-K
filed with the Commission on March 24, 2008).
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 Company’s Current Report on Form 8-K filed with
the Commission on March 24, 2008).
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 Company’s Current
Report on Form 8-K filed with the Commission on March 24, 2008).
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 Company’s Current Report on Form 8-K filed with
the Commission on March 24, 2008).
Amendment No. 1 to the Second Amended and Restated Credit Agreement, dated as of July 31, 2008, between Virco Mfg.
Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10Q filed with the Commission on September 9, 2008).
Amendment No. 2 to Second Amended and Restated Credit Agreement, dated as of March 27, 2009, by Virco Mfg.
Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.25 to the Company’s
Annual Report on Form 10K filed with the Commission on April 16, 2009).
Lease amendment dated August 14, 2008, between AMB Property, L.P., a Delaware Limited Partnership, as landlord and
Virco Mfg. Corporation, a Delaware Corporation, as tenant (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10Q filed with the Commission on September 9, 2008).
Third Amendment to Lease Agreement, entered into as of December 20, 2013, by and between Starboard Distribution
Center, LLC, a Delaware limited liability company, successor in interest to AMB Property, L.P., a Delaware limited
Partnership and Virco Mfg. Corporation (incorporated by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed with the Commission on December 20, 2013.
Amendment No. 3 to Second Amended and Restated Credit Agreement, dated as of March 27, 2009, by Virco Mfg.
Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.25 to the Company’s
Annual Report on Form 10-K filed with the Commission on April 16, 2009).
Amendment No. 4 to Second Amended and Restated Credit Agreement, dated as of April 28, 2011, by Virco Mfg.
Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10Q filed with the Commission on June 7, 2011).
Amendment No. 5 to Second Amended and Restated Credit Agreement, dated as of July 30, 2011, by Virco Mfg.
Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10Q filed with the Commission on September 10, 2011).
Amendment No. 6 to Second Amended and Restated Credit Agreement, dated as of October 29, 2011, by Virco Mfg.
Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10Q filed with the Commission on December 9, 2011).
Amendment No. 7 to Second Amended and Restated Credit Agreement, dated as of January 31, 2011, by Virco Mfg.
Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.31 to the Company’s
Annual Report on Form 10K filed with the Commission on April 15, 2011).
Amendment No. 8 to Second Amended and Restated Credit Agreement, dated as of May 31, 2011, by Virco Mfg.
Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10Q filed with the Commission on June 9, 2011).
Separation Agreement and General Release of Claims between Virco Mfg. Corporation and Larry O. Wonder, dated May 24,
2011 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10Q filed with the
Commission on June 9, 2011).
Virco Mfg. Corporation 2011 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8K filed with the Commission on June 27, 2011).
76
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34*
10.35
21.1*
23.1*
31.1*
31.2*
Separation Agreement between Virco Mfg. Corporation and Lori Swafford, dated September 22, 2011 (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10Q filed with the Commission on December 15,
2011).
Revolving Credit and Security Agreement dated as of December 22, 2011 by and among Virco Mfg. Corporation and Virco
Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative agent (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8K filed with the Commission on December 22, 2011).
First Amendment to Revolving Credit and Securities Agreement, dated as of June 15, 2012, by and among Virco Mfg.
Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative agent
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the Commission on
September 14, 2012).
Second Amendment to Revolving Credit and Security Agreement, dated as of July 27, 2012, by and among Virco Mfg.
Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative agent
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on
July 31, 2012).
Third Amendment to Revolving Credit and Security Agreement, dated as of September 12, 2012, by and among Virco Mfg.
Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative agent
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the Commission on
September 14, 2012).
Fourth Amendment to Revolving Credit and Security Agreement, dated as of December 6, 2012, by and among Virco Mfg.
Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative agent
(incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed with the Commission on
December 7, 2012).
Fifth Amendment to Revolving Credit and Security Agreement, dated as of March 1, 2013, by and among Virco Mfg.
Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative agent
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on
March 1, 2013).
Sixth Amendment to Revolving Credit and Security Agreement, dated as of January 9, 2014, by and among Virco Mfg.
Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative agent.
Seventh Amendment to Revolving Credit and Security Agreement, dated as of April 15, 2014, by and among Virco Mfg.
Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative agent.
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on
April 16, 2014).
List of All Subsidiaries of Virco Mfg. Corporation.
Consent of Independent Registered Public Accounting Firm.
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.
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.
32.1*
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
______________________
Filed herewith.
*
77
Exhibit 21.1
LIST OF SUBSIDIARIES
Virco Inc.
2027 Harpers Way
Torrance, CA 90501
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-32539) pertaining to the Virco Mfg. Corporation 1997 Stock Incentive Plan,
(2) Registration Statement (Form S-8 No. 333-51717) pertaining to the Virco Mfg. Corporation Employee Stock
Ownership Plan,
(3) Registration Statement (Form S-8 No. 333-74832) pertaining to the Virco Mfg. Corporation 401(K) Savings Plan,
(4) Registration Statement (Form S-8 No. 333-143874) pertaining to the Virco Mfg. Corporation 2007 Stock Incentive
Plan,
(5) Registration Statement (Form S-8 No. 333-175638) pertaining to the Virco Mfg. Corporation 2011 Stock Incentive
Plan, and
(6) Registration Statement (Form S-3 No. 333-135618) of Virco Mfg. Corporation pertaining to the resale of Virco Mfg.
Corporation’s common stock by certain selling security holders;
of our report dated April 25, 2014, with respect to the consolidated financial statements and schedule of Virco Mfg. Corporation
included in this Annual Report (Form 10-K) for the year ended January 31, 2014.
Los Angeles, California
April 25, 2014
/s/ Ernst & Young LLP
Exhibit 31.1
I, Robert A. Virtue, certify that:
1. I have reviewed this Form 10-K of Virco Mfg. Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: April 23, 2014
/s/ Robert A. Virtue
Robert A. Virtue
President, Chief Executive Officer and Chairman of the
Board (Principal Executive Officer)
Exhibit 31.2
I, Robert E. Dose, certify that:
1. I have reviewed this Form 10-K of Virco Mfg. Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: April 23, 2014
/s/ Robert E. Dose
Robert E. Dose
Vice President — Finance, Secretary and Treasurer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
Each of the undersigned hereby certifies, in his capacity as an officer of Virco Mfg. Corporation (the “Company”), for purposes
of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his own knowledge:
•
•
The Annual Report of the Company on Form 10-K for the period ended January 31, 2014, fully complies with
the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
The information contained in such report fairly presents, in all material respects, the financial condition and
results of operation of the Company.
Dated: April 23, 2014
/s/ Robert A. Virtue
Robert A. Virtue
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
/s/ Robert E. Dose
Robert E. Dose
Vice President — Finance, Secretary and Treasurer
(Principal Financial Officer)
A signed original of this written statement required by Section 906 has been provided to Virco Mfg. Corporation and will be
retained by Virco Mfg. Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
Annual Meeting
Supplemental Stockholders’ Information
The Annual Meeting of Virco stockholders will be held on Tuesday, June 24, 2014, at 10:00 a.m., at 2027 Harpers Way, Torrance, CA
90503. The record date for this meeting is May 9, 2014. The Proxy Statement and Proxy pertaining to this meeting will be mailed on or
about May 23, 2014.
SEC Form 10-K
A copy of the annual report to the Securities and Exchange Commission on Form 10-K may be obtained without charge upon written
request to:
Corporate Secretary
Virco Mfg. Corporation
2027 Harpers Way
Torrance, CA 90501
www.virco.com
Virco Common Stock
The NASDAQ is the principal market on which Virco Mfg. Corporation (VIRC) stock is traded. As of May 9, 2014, there were
approximately 216 registered stockholders according to the transfer agent records. There are approximately 650 beneficial stockholders.
Stockholder Records
Records pertaining to stockholdings and dividends are maintained by Computershare. Inquiries with respect to these matters, as well
as notices of address changes, should be directed to:
Computershare Phone #: (877) 261-9278
Address:
Computershare Trust Company, N.A.
P.O. Box 30170
College Station, TX 77842
Private Couriers/Registered Mail:
Computershare Trust Company, N.A.
211 Quality Circle, Suite 210
College Station, TX 77845
Questions & Inquiries via our Website: http://www.computershare.com
Hearing Impaired #: TDD: 1-800-952-9245
If a stock certificate is lost or mutilated, immediately communicate with Computershare at the above addresses.
Additional Services for Stockholders
Information about the Company is now available to stockholders at the Company’s website (www.virco.com). A brief description of
Virco’s product line is offered together with illustrations showing a sampling of our furniture.
Quarterly Dividend and Stock Market Information
Cash Dividends Declared
2013
2012
Common Stock Range
2013
2012
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$
$
—
—
—
—
High
Low
High
Low
$
—
—
—
—
$
2.72
2.53
2.49
2.80
$
1.96
1.95
1.98
2.00
$
2.25
3.43
2.73
1.87
1.56
2.35
1.35
1.31
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Officers, Facilities
Officers
Robert A. Virtue
President, Chairman of the Board
and Chief Executive Officer
Douglas A. Virtue
Executive Vice President
J. Scott Bell
Vice President – General Manager,
Conway Division
Robert E. Dose
Vice President – Finance,
Secretary and Treasurer
Jamie Makuuchi
Vice President – Chief Marketing Officer
Patricia Quinones
Vice President – Logistics, Marketing Services
and Information Technology
D. Randal Smith
Vice President – Marketing &
Corporate Stewardship
Bassey Yau
Vice President – Corporate
Controller, Assistant Secretary
and Assistant Treasurer
Independent Registered Public
Accounting Firm
Ernst & Young LLP
725 South Figueroa Street,
Suite 500
Los Angeles, CA 90017
Corporate Headquarters
2027 Harpers Way
Torrance, California 90501
(310) 533-0474
Major Facilities
Torrance Division
2027 Harpers Way
Torrance, California 90501
Conway Division
Highway 65, South
Conway, Arkansas 72032
2013 ANNUAL REPO R T
VIRCO MFG. CO RPO RATI ON
20 27 HARPERS WAY
T ORR ANCE, CA 90501
HIGHWAY 65, SOUTH
CONWAY, AR 72032
PH ONE: 800-448-4726
WE B: www.virco.com
Printed in U.S.A.
REF #14088