Virco Manufacturing - 10-K annual report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

Commission file number 1-8777

VIRCO MFG. CORPORATION
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (310) 533-0474

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to section 12(g) of the Act: None

     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 X No

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     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 or in Part III of this Form 10-K or any amendment to this Form 10-K [X].

     The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant on April 23, 2002, based on the closing price at which such stock was sold on the American Stock Exchange on that date, was approximately $116,449,000. Shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

     The number of shares of Common Stock outstanding at April 23, 2002, was 12,139,241 shares.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of registrant’s definitive proxy statement for registrant’s 2002 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A no later than 120 days after the end of the fiscal year covered by this Form are incorporated by reference into Part III of this Form 10-K Report as set forth herein. Portions of registrant’s Annual Report to Stockholders for the year ended January 31, 2002, are incorporated by reference into Part I and Part II of this Form 10-K Report as set forth herein.

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PART I

     This report on Form 10-K contains 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, statements regarding plans and objectives of management for future operations, including plans and objectives relating to products, marketing, expansion, manufacturing processes and potential or contemplated acquisitions, such as the anticipated acquisition of Furniture Focus, Inc. discussed herein; new business strategies; our ability to continue to control costs and inventory levels; the potential impact of our “Assemble-To-Ship” program on earnings; market demand; our ability to position ourselves in the market; references to current and future investments in and utilization of our 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 our 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 our 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 our ability to predict, general economic conditions, the markets for school and office furniture generally and specifically in areas and with customers with which we conduct our principal business activities, the rate of approval of school bonds for the construction of new schools, the extent to which existing schools order replacement furniture, customer confidence, and competition.

     In this report, words such as “anticipates,” “believes,” “expects,” “future,” “intends,” “plans,” “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.

Item 1. Business

Introduction

     Designing, producing and distributing high-value furniture for a diverse family of customers is a 52-year tradition at Virco Mfg. Corporation. Over the years, Virco has become the largest manufacturer of educational furniture in the United States. The Company has also become a leading supplier of tables, chairs and storage equipment for offices, convention centers, auditoriums, places of worship, hotels and related settings.

     The markets that Virco has served over the years include the education market (our primary market), which includes public and private schools (preschool through 12th grade), junior and community colleges, four-year colleges and universities, and trade, technical and vocational schools; convention centers and arenas; the hospitality industry, with respect to their banquet and meeting facilities requirements; government facilities at the federal, state, county and municipal levels; and places of worship. In addition, the Company sells to wholesalers, distributors, retailers and catalog retailers that serve these same markets.

     Although Virco got started as a local supplier of chairs and desks for Los Angeles-area schools, folding chairs and folding tables were soon added to the Company’s offerings with a resultant expansion of sales to a broadening customer base. Successive product lines were subsequently introduced, including a variety of upholstered stack chairs, banquet tables and mobile storage equipment. Products such as these have helped Virco provide complete furniture solutions for thousands of customers in the hospitality, food service, convention center and public facilities markets.

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     Virco serves its customers through a well-trained, nationwide sales and support team. Although the Company’s sales professionals were divided into two main groups in fiscal 2000, “Education” and “Commercial”, and were organized by market within those groups, management combined what had previously been the Commercial and Education sales groups into one field sales team in mid-November of 2001. Instead of having two representatives pursuing separate customers within the same geographical territory, Virco now has only one. It was increasingly clear to management that the needs of commercial and educational customers were evolving towards greater similarity, and that combining the Company’s sales efforts would allow individual representatives to plow more deeply in a smaller field. In addition, Virco also established a Corporate Accounts Group to pursue wholesalers, mail order accounts and national chains where management believes that it would be more efficient to have a single sales representative or group approach such persons, as they tend to have needs that transcend the geographic boundaries established for Virco’s local accounts.

     The Company also has an array of support services, including product delivery, installation and repair, and computer-assisted layout planning.

     In addition, Virco maintains a core marketing group, which reports to the President and is composed of representatives from sales, product development and corporate marketing. This group prepares annual plans for the allocation of resources for product development, marketing and selling expense for various sales channels, for customer service, and for the implementation of the Company’s product stocking plan.

     Virco employs approximately 2,100 people nationwide and has approximately 1.3 million square feet of manufacturing facilities and 1.2 million square feet of warehousing facilities for the production and distribution of furniture in two principal facilities which are located in Torrance, California, and Conway, Arkansas. Much of the Company’s product line can be produced in either facility, although management has chosen to produce many products and components at only one factory in consideration of space, cost or process requirements. In addition, both facilities maintain a customer service department, giving Virco the ability to provide sales support and order fulfillment services to end users from coast to coast.

     Management’s strategy is to position Virco as the overall value supplier of moveable furniture for publicly-funded institutions 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. For one, Virco has developed what management believes to be the largest direct sales force in the education market for classroom furniture. Management believes this provides Virco with a competitive advantage over the Company’s primary competitors, who rely instead upon distributorships, by allowing Virco to cut-out the “middleman” and deal directly with end customers. Another important element of Virco’s business model is the Company’s emphasis on developing and maintaining key manufacturing 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. For more information about the Company’s business model and strategy for the future, please see the section entitled “To Our Stockholders” in Virco’s Annual Report to Stockholders for the year ended January 31, 2002.

     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 the fiscal year covered by this report, over 50% of the Company’s total sales were delivered in June, July, August and September with an even higher portion of educational sales

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delivered in that period. Virco's substantial warehouse space allows the Company to build adequate inventories to service this narrow delivery window for the education market.

     Virco was incorporated in California in February 1950, and reorganized as a Delaware corporation in April 1984.

Principal Products

     Virco offers the broadest line of furniture for the K-12 market of any company in the United States. Virco also provides a variety of products for the pre-school markets and have recently developed products that are targeted for college, university, and corporate learning center environments. 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's principal products include:

     Please note that this report includes trademarks of Virco, including, but not limited to, the following: Ph.D.™, I.Q.®, Virtuoso®, Classic Series™, Martest 21®, Lunada™, Plateau®, Core-a-Gator®, Future Access®, Mojave™, 8400 Series and 8700 Series. Other names and brands included in this report may be claimed by Virco as well or by third parties.

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     Virco’s major customers include educational institutions, convention centers and arenas, hospitality providers, government facilities, and places of worship.

Raw Materials

     The Company purchases steel, aluminum, plastic, polyurethane, polyethylene, polypropylene, plywood, particleboard, cartons and other raw materials in the manufacture of its principal products from many different sources. Management does not believe that we are more vulnerable with respect to the sources and availability of these raw materials than other manufacturers.

Marketing and Distribution

     Virco’s educational product line is marketed through what management believes to be the largest direct sales force in the education furniture industry. During the fourth quarter of 1997, Virco terminated distribution arrangements with several major educational dealerships and increased the size of its direct sales force to cover these territories. Virco has historically increased both sales and margins in territories where its direct sales force has replaced educational dealerships. The sales force calls directly upon school business officials, who can include purchasing agents or individual school principals where site based management is practiced. 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. Significant portions of educational furniture are sold on a bid basis.

     Sales of commercial and contract furniture are made throughout the United States by distributorships and by Company sales representatives who service the distributorship network. Virco representatives call directly upon state and local governments, convention centers, individual hospitality installations, and mass merchants. Sales to this market include colleges and universities, pre-schools, private schools, and office training facilities, which typically purchase furniture through commercial channels.

     Sales are made to thousands of customers, and no single customer represents a significant amount of the Company’s business.

Seasonality

     The trend in educational sales is becoming increasingly seasonal. Over 50% of total sales are delivered in June, July, August and September with an even higher portion of educational sales delivered in that period.

Working Capital Practices During the “Peak” Summer Season

     As discussed above, the market for educational furniture is marked by extreme seasonality, with the vast majority of sales occurring from June to September each year, which is the Company’s peak season. Hence, Virco builds and carries significant amounts of inventory during this peak summer season to enable us to meet 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 third party bank financing to meet cash flow requirements during the build-up period immediately preceding the high season.

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     In addition, Virco typically is faced with a large balance of accounts receivable during the peak season. This occurs for two primary reasons. First, accounts receivable balances naturally increase during the peak season as shipments of products increase. Second, many customers during this period are government institutions, which tend to pay accounts receivable more slowly than commercial customers. Virco has historically enjoyed high levels of collectability on these accounts receivable due to the low-credit risk associated with such customers. Nevertheless, due to the time differential between inventory build-up in anticipation of the peak season and the collection on accounts receivable throughout the peak season, the Company currently relies on a revolving line of credit from Wells Fargo Bank, N.A., that approximately ranges from $40,000,000 to $70,000,000, to assist us in meeting cash flow requirements as inventory is built for, and business is transacted during, the peak summer season. For more information on this financing arrangement, please see the section entitled “Liquidity” in the Management's Discussion and Analysis section contained in Virco’s Annual Report to Shareholders for the fiscal year ended January 31, 2002.

     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 be required to absorb higher storage, labor and related costs, each of which may affect the bottom line. 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.

     As part of Virco’s efforts to balance seasonality, financial performance and quality without sacrificing service or market share, management has been refining an operating model called Assemble-to-Ship (ATS). ATS is 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 costly assembly until the last moment, and reducing the amount of warehouse space needed to store finished goods.

Developments During 2001

     For a discussion of the general developments of Virco’s business during the period covered by this report, please see the section entitled “To Our Stockholders” in the Company’s Annual Report to Stockholders for the year ended January 31, 2002.

Other Matters

     Competition

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     Backlog

     Patents and Trademarks

     Employees

     Environmental Compliance

     Financial Information About Geographic Areas

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Executive Officers of the Registrant

     As of April 23, 2002, the executive officers of Virco Mfg. Corporation, who are elected by and serve at the discretion of our Board of Directors, were as follows:

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     The information required by this Item regarding Directors will be contained in Virco's Proxy Statement to be filed within 120 days after the end of the Company's most recent fiscal year and is incorporated herein by this reference.

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 ten-year lease (with two five-year renewal options) expiring January 2005. This facility also includes the corporate headquarters, the West Coast showroom, and all West Coast distribution operations. In April 2000, Virco sold a 200,000 sq. ft. warehouse, which was held as rental property, located on 8.5 acres of land in Torrance, California.

Los Angeles, California

     Virco owns a 160,000 sq. ft. manufacturing facility located on 8 acres of land in Gardena, California. This manufacturing facility is held as rental property and is currently being marketed for either sale or lease. Management currently expects to be in a position to close either a lease or a sale of this property in the second quarter of 2002.

Conway, Arkansas

     In August 1997, the Board of Directors authorized an expansion and re-configuration of Virco’s Conway, Arkansas, manufacturing and distribution facilities. In late 1997 and early 1998, the Company acquired approximately 100 acres of land in Conway, which can support up to 1,700,000 sq. ft. of manufacturing, warehousing, office, and showroom facilities. Phase one of the project consisted of a 400,000 sq. ft. manufacturing plant and was completed in March 1999. This plant replaced an existing 150,000 sq. ft. facility, providing an additional 250,000 sq. ft., which was earmarked for new manufacturing processes to support product development efforts, as well as future growth in sales. This plant utilizes a manufacturing cell concept, which has proved successful in our Torrance, California facility. The Conway manufacturing facility contains

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new equipment, which was selected to improve manufacturing efficiency and flexibility, as well as improve product quality. In March 1999, substantially all of the production equipment from the existing 150,000 sq. ft. facility was transferred to the new plant. New processes and equipment are being brought on line, as capacity and process requirement demand. The 150,000 sq. ft. facility, which is adjacent to the main factory in Conway, was converted to a finished goods warehouse.

     Phase two of the Conway project consists of an 800,000 sq. ft. assembly, warehouse and distribution facility. Construction on the first 400,000 sq. ft. segment of this facility began in March 1999 and was completed and fully operational in December 1999. The Company vacated two rental facilities in late 1999 with the completion of this first segment, as management no longer deemed them necessary. The second segment was substantially completed in July 2000. With the completion of the second segment, the Company vacated two additional rental facilities in November 2000, as well as a building which was sold subsequent to that fiscal year end, and a building in Newport, Tennessee, which is leased to a third party. The final stage of this consolidation will occur when we sell a 150,000 sq. ft. manufacturing plant located in Conway. Management converted this plant to a finished goods warehouse in 1999 and expects to store finished goods at this location until the building is sold.

     This new production and manufacturing complex will enable Virco to pursue manufacturing strategies which are expected to support growth in sales volume without a proportional increase in inventory. In addition, it will allow all finished goods manufactured at the Conway facility to be stored in one location, which management expects will substantially reduce costs related to material handling. The new warehouse facility in Conway has been equipped with high-density storage systems, features over 70 dock doors dedicated to out-bound freight, and has substantial yard capacity for storing and staging trailers. Management believes that this facility will significantly improve Virco's ability to support increased sales during the peak delivery season and enhance the efficiency with which orders are filled.

     Capital spending at this location was approximately $3,979,000 in 2001, $15,974,000 in 2000, $29,200,000 in 1999 and $20,600,000 in 1998. For a discussion of how this expansion project impacts Virco's results of operations, please refer to the Management’s Discussion and Analysis section of the Company’s 2001 Annual Report to Stockholders.

Newport, Tennessee

     Virco owns a 55,000 sq. ft. manufacturing facility located on 3.5 acres of land in Newport, Tennessee, which was previously used to manufacture melamine plastic seats, backs and table tops for classroom furniture. This factory was leased under a 10-year lease that expires in 2011. The new tenant at this facility has the option to purchase the property during the first three years of the lease.

Item 3. Legal Proceedings

     Virco has various legal actions pending against it which in the opinion of management are not material in that management either expects to be successful on the merits of the pending cases or that any liabilities resulting from such cases will be substantially covered by insurance. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to these suits and claims, management believes that the aggregate amount of such liabilities will not be material to the results of operations, financial position, or cash flows of the Company.

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Item 4. Submission of Matters to a Vote of Security Holders

     None.

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PART II

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters

     Incorporated herein by reference is the information appearing under the caption “Supplemental Stockholders’ Information” which appears in Virco’s Annual Report to Stockholders for the year ended January 31, 2002. As of April 23, 2002, there were approximately 350 Registered Stockholders according to transfer agent records. There were approximately 1,500 Beneficial Stockholders.

     Dividend Policy

     It is the Board of Directors’ policy to periodically review the payment of cash and stock dividends in light of the Company’s earnings and liquidity. In each of the fiscal years ending January 31, 2001, and January 31, 2002, Virco declared a $0.02 per quarter cash dividend and an annual 10% stock dividend.

Item 6. Selected Financial Data

     Incorporated herein by reference is the Selected Financial Data Information appearing in Virco’s Annual Report to Stockholders for the year ended January 31, 2002. This data should be read in conjunction with Item 8, Financial Statements and Supplementary Data thereto, and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This information is incorporated herein by reference to the “Management’s Discussion and Analysis and Results of Operations” section included in Virco’s Annual Report to Stockholders for the year ended January 31, 2002.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

     This information is incorporated herein by reference to the “Inflation and Future Change in Prices” section of “Management’s Discussion and Analysis and Results of Operations” included in Virco’s Annual Report to Stockholders for the year ended January 31, 2002.

     On February 22, 2000, Virco entered into an interest rate swap agreement with Wells Fargo Bank. The initial notional swap amount was $30,000,000 for the period February 22, 2000, through February 29, 2001. The notional swap amount then decreased to $20,000,000 until the end of the swap agreement, March 3, 2003. The swap agreement is in consideration for a fixed rate at 7.23% plus a fluctuating margin of 1.25% to 1.50%.

     As of January 31, 2002, Virco has borrowed $22,414,000 under the Wells Fargo credit facilities, of which $20,000,000 is subject to the interest rate swap agreement as described above and the remaining contain variable interest rates. Accordingly, a 100 basis point upward fluctuation in the interest rate would have caused the Company to incur additional interest charges of approximately $476,000 for the fiscal year ended January 31, 2002. Virco would have benefited from a similar interest savings if the base rate were to fluctuate downward by the same amount.

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Item 8. Financial Statements and Supplementary Data

     The report of independent auditors and consolidated financial statements included in the Annual Report to Stockholders for the year ended January 31, 2002, are incorporated herein by reference.

     Unaudited quarterly results in Note 10 of the financial statements included in the Annual Report to Stockholders for the year ended January 31, 2002, are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

     None.

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PART III

Item 10. Directors and Executive Officers of the Registrant

     The information required by this Item is incorporated by reference to information set forth in the definitive Proxy Statement to be filed within 120 days after the end of the Company’s most recent fiscal year and in Part I of this report under the heading “Executive Officers of the Registrant.”

Item 11. Executive Compensation

     The information required by this Item will be contained in the Company’s Proxy Statement to be filed within 120 days after the end of the Company’s most recent fiscal year and is incorporated herein by this reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The information required by this Item will be contained in the Company’s Proxy Statement to be filed within 120 days after the end of the Company’s most recent fiscal year and is incorporated herein by this reference.

Item 13. Certain Relationships and Related Transactions

     The information required by this Item will be contained in the Company’s Proxy Statement to be filed within 120 days after the end of the Company’s most recent fiscal year and is incorporated herein by this reference.

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PART IV

Item 14. Financial Statements, Financial Statement Schedules, Exhibits, and Reports on Form 8-K

     None.

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Torrance, and State of California, on the 30th of April, 2002.

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.

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VIRCO MFG. CORPORATION

EXHIBITS TO FORM 10-K ANNUAL REPORT
For the Year Ended January 31, 2002

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