Notes to Financial Statements
December 31, 2016
1. Plan Description
The following description of the Virco Mfg. Corporation 401(k) Plan provides only general information. Participants should refer to the Plan document for a more complete description of the Plan's provisions.
General
Virco Mfg. Corporation (the “Company” or “Virco”) established the Virco Mfg. Corporation Employee Stock Ownership Plan (“ESOP”) effective as of April 1, 1993, as a leveraged employee stock ownership plan. In January 2002, the Company amended and renamed the ESOP as the Virco Mfg. Corporation 401(k) Plan (the “Plan”). Under the amended Plan, the leverage feature that allowed the Plan to obtain advances from the bank to purchase Company common stock was discontinued. While the Plan continues to offer the Company common stock as one of the investment options, the amended Plan no longer operates as a leveraged employee stock ownership plan.
The Plan is designed to comply with section 401(a) of the Internal Revenue Code (the “IRC”) as a profit sharing plan, and is subject to the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Plan is designed to enable employees to save for retirement and defer payment of income taxes on the amount invested and earnings thereon. A Plan committee comprising of at least two persons appointed by the Company's Board of Directors administers the Plan.
The trustee, Reliance Trust Company ("Reliance Trust") invests the Plan's assets at the direction of the participants and makes distributions to participants.
Eligibility
Employees of the Company excluding leased employees, non-resident aliens, certain part-time or seasonal employees, or employees covered by a collective bargaining agreement not expressly providing inclusion in the Plan, are eligible to participate in the Plan if they have attained at least 18 years of age and have completed six months of eligible service.
Contributions
Eligible employees may defer from up to 75% of eligible compensation on a before-tax basis, limited to $18,000 in 2016 as prescribed by the IRC. Participants who have attained age 50 before the end of the Plan year are eligible to make additional catch-up contributions.
The Company may, at its sole discretion, make a matching contribution as a percentage of annual elective deferrals made by participants who are employed on the last day of the Plan year. The Company may also make an employer contribution to the Plan at its sole discretion. Any contribution may be made in cash or in shares of Company common stock. The total amount of Company contributions cannot exceed the amount deductible by the Company for federal income tax purposes.
Participant Accounts
Participants can direct their account balances into a variety of investments offered by Reliance Trust, including shares of Virco Unitized Stock. The Virco Unitized Stock is a unitized investment which consists of Virco common stock and investment in a money market fund. Investment election changes may be made on a daily basis. Individual accounts are maintained for each of the Plan's participants to reflect the participant's contributions, the Company's contributions, if any, and an allocation of the Plan's earnings (losses) and expenses. The benefit to which a participant is currently entitled is the benefit that can be provided from the participant's vested account.
Payment of Benefits
Upon reaching retirement age, termination of service or death, a participant/beneficiary may elect to receive a lump-sum amount equal to the participant's vested account balance. Additionally, participants still employed by the Company who have reached 59 ½ years of age may take an in-service distribution from their elective deferrals made to the Plan. Company stock held in the participant's account may be distributed in stock unless the participant requests the distribution in cash in lieu of stock. Participants eligible for distributions may elect that their vested balance be rolled over into another eligible retirement plan. Account balances less than $1,000 can be distributed in a single lump-sum cash payment to the participant or beneficiary at the discretion of the Company.
Hardship Withdrawals
Upon certain conditions, participants, while still employed by the Company, are permitted to withdraw, in a single sum, a portion of their vested account as a result of an immediate and heavy financial need. These conditions include unreimbursed medical expenses, the purchase of the participant's principal residence, the payment of post-secondary education tuition, the payment of burial or funeral costs of immediate family members, the payment of natural disaster clean-up on the participant's principal residence or to prevent eviction or foreclosure from the participant's principal residence. A participant's right to make deferrals to the Plan will be suspended for six months after the receipt of a hardship withdrawal.
Vesting
The participant is immediately 100% vested in the value of his or her contributions and earnings thereon. Additionally, a participant is automatically 100% vested in the value of all employer contributions on the participant's 65th birthday, death, or if the participant becomes permanently disabled while still employed by the Company. However, if employment terminates before the age of 65 for a reason other than death or disability, the participant's vesting in the value of any matching or other Company contributions will be based upon the participant's years of vesting service and in accordance with the following schedule:
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Years of Service
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Vested Interest
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Less than 2
|
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0
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%
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2
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20
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%
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3
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40
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%
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4
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60
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%
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5
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80
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%
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6 or more
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100
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%
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The amount to which the participant is not vested is subject to forfeiture in accordance with the provisions of the Plan. Forfeitures may be used to pay administrative expenses or to reduce matching contributions. At December 31, 2016 and 2015, forfeitures of
approximately $0 and $64,000, respectively, were available to offset future employer contributions or Plan expenses.
Voting Rights
All shares of Company common stock allocated to participant accounts are voted by Reliance Trust in accordance with the participant's instructions. Allocated shares not voted by participants are voted pro rata by Reliance Trust based on votes actually cast by participants.
Notes Receivable from Participants
Participants may borrow the lesser of $50,000 or 50% of their vested account balance, subject to a $1,000 minimum and certain other restrictions. Loans are secured by the vested account balance of the participant. Loans are repayable through payroll deductions over periods ranging up to five years, unless the loan is used to acquire a principal residence, in which case the loan term may be extended to ten years. Participant loans, when initiated, bear interest at the prime rate plus 1% per annum collateralized by the participant's vested interest. The interest rate on outstanding loans at December 31, 2016 ranged from 4.25% to 4.5% per annum, and loans mature through 2022.
2. Summary of Significant Accounting Policies
Basis of Accounting
The accompanying financial statements have been prepared on an accrual basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management of the Plan to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Investment Valuation and Income Recognition
Investments are reported at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 4 for discussion of fair value measurements.
Net appreciation in fair value of investments consists of the net change in unrealized gains or losses during the year and the realized gain or loss on investments sold during the year.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis, and dividends are recorded on the ex-dividend date.
Notes Receivable from Participants
Notes receivable from participants are recorded at their unpaid principal balance plus accrued but unpaid interest.
Payment of Benefits
Benefits are recorded when paid.
Revenue Credits
During 2014, the Plan entered into an agreement with the trustee whereby the trustee shares certain revenue generated by the Plan in excess of their fees. These deposits are included in other income on the statement of changes in net assets available for benefits and are available to pay for Plan expenses or to be reallocated to participants. During 2016, revenue credits of approximately $62,000 were deposited into the Plan.
Administrative Expenses
Substantially all direct expenses of the Plan are paid by the Plan Sponsor. Certain indirect expenses are included in the transaction prices of the investments bought and sold and are not separately identified in the statement of changes in net assets available for benefits.
New Accounting Pronouncements
In May 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-07,
Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).
ASU 2015-07 amended Accounting Standards Codification 820, Fair Value Measurements and Disclosures, to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value ("NAV") per share practical expedient. The amendment also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient. ASU 2015-07 is effective for fiscal years beginning after December 15, 2015 and should be applied retrospectively.
The Plan adopted this standard retrospectively effective December 31, 2016. The adoption of this standard did not have a significant impact on the financial statements.
3. Investments
Plan assets are held by Reliance Trust at December 31, 2016 and 2015. Upon enrollment in the Plan, a participant may direct employee contributions among any or all of the investment options.
Participants may change investment choices any business day by transferring a percentage from one investment alternative to another effective as of the end of any business day. The investments in shares of the investment are valued at the closing net asset value per share as determined by the appropriate fund portfolio on a daily basis.
The MetLife Reliance Stable Value Fund (the “SVF”) is a common collective trust investing primarily in certain MetLife group annuity contracts offered by Metropolitan Life Insurance Company. The SVF is valued at fair value based on the NAV of the underlying investments. The NAV per unit is computed by dividing the total assets of the SVF, less its liabilities, by the total number of units outstanding at the time of such computation.
Certain events limit the ability of the Plan to transact at NAV (contract value) with the issuer. Such events include but may not be limited to the following: (1) the complete or partial termination of the Plan (2) bankruptcy of the Plan sponsor or other Plan sponsor events (for example, divestitures or spin-offs of a subsidiary) that cause a significant withdrawal from the Plan, or (3) the failure of the trust to qualify for exemption from federal income taxes or any required prohibited transaction exemption under ERISA. The Plan Administrator does not believe that any of the events which could limit the Plan’s ability to transact at contract value with participants are probable of occurring.
4. Fair Value Measurements
Accounting Standards Codification (“ASC”) 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:
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Level 1 -
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Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Plan has the ability to access.
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Level 2 -
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Inputs to the valuation methodology include:
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•
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Quoted prices for similar assets or liabilities in active markets;
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•
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Quoted prices for identical or similar assets or liabilities in inactive markets;
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•
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Inputs other than quoted prices that are observable for the asset or liability;
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•
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Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
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Level 3 -
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Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
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The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2016 and 2015.
Money market funds:
Valued at the NAV of the fund at year end. NAV is also the quoted market price as of the reporting date.
Common collective trusts:
Investments in common collective trusts are valued at NAV, which is based on the aggregate current fair values of the underlying assets in relation to the total number of units outstanding. The common collective trusts have no unfunded commitments as of December 31, 2016, and can be redeemed daily with no redemption notice period or other redemption restrictions.
Mutual funds:
Valued at the NAV of shares held by the Plan at year end. NAV represents the sum of the underlying investments and represents the price at which the funds are traded on active markets.
Common stock:
Valued at the closing price reported in the active market.
The following table sets forth by level, within the fair value hierarchy, the Plan's investment assets at fair value as of December 31, 2016 and 2015:
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Investment Assets at Fair Value as of December 31, 2016
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Level 1
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Level 2
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Level 3
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Total
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Virco Mfg. Corporation common stock
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$
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2,564,655
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$
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—
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$
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—
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$
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2,564,655
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Cash and money market fund held by Virco Unitized Stock
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60,658
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—
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—
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60,658
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Mutual funds
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4,001,473
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—
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—
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4,001,473
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Common collective trusts
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—
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16,002,004
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—
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16,002,004
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Total investment assets at fair value
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$
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6,626,786
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$
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16,002,004
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$
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—
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$
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22,628,790
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Investment Assets at Fair Value as of December 31, 2015
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Level 1
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Level 2
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Level 3
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Total
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Virco Mfg. Corporation common stock
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$
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2,111,576
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$
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—
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$
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—
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$
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2,111,576
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Money market fund held by Virco Unitized Stock
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65,949
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—
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—
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65,949
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Mutual funds
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3,509,972
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—
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—
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3,509,972
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Common collective trusts
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—
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14,559,330
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—
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14,559,330
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Total investment assets at fair value
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$
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5,687,497
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$
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14,559,330
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$
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—
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$
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20,246,827
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The shares of Virco Unitized Stock are valued on a unitized basis and hold Virco common stock and a money market fund. Unitization of the investment allows for daily trades and the value of a unit reflects the combined value of the Virco common stock and the money market fund held in the fund. At December 31, 2016 and 2015, this investment held 596,328 shares and 634,003 shares of Virco common stock, respectively.
5. Risks and Uncertainties
The Plan's assets are invested in a variety of investments. Investment securities, in general, are exposed to various risks, such as interest rate, credit, foreign currency and overall market volatility risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statements of net assets available for benefits, and therefore participant account balances.
6. Related Party Transactions
Certain Plan investments are managed by Reliance Trust as of December 31, 2016 and 2015. Reliance Trust is the trustee as defined by the Plan and, therefore, these investments and investment transactions qualify as party-in-interest transactions.
Additionally, the Plan sponsor, Virco Mfg. Corporation, is a party-in-interest to the Plan; however, there were no transactions with the Plan Sponsor other than the funding of contributions to the Plan and payment of certain administrative expenses of the Plan.
7. Income Tax Status
Effective May 1, 2014, the Plan was restated utilizing the Automatic Data Processing (“ADP”) Flexible Defined Contribution Prototype Plan and Trust Nonstandardized 401(k) Plan document. ADP received an opinion letter dated March 31, 2008, in which the Internal Revenue Service ("IRS") stated that as of that date the Plan document was designed in compliance with the applicable requirements of the IRC. The Plan has been amended since that date, however, the Plan Administrator believes the Plan continues to be operated in compliance with the applicable requirements of the IRC and, therefore, believes that the Plan, as amended, is qualified and the related trust is tax exempt.
Assuming it meets certain initial and ongoing requirements, the Plan is generally exempt from federal and state income taxes. However, generally accepted accounting principles (“GAAP”) requires Plan management to evaluate tax positions taken by the
Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. The Plan Administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2016, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
8. Plan Termination
Although it has not expressed any intention to do so, the Company reserves the right to change or discontinue the Plan at any time subject to the provisions of ERISA. In the event of Plan termination, the participants will become fully vested in their accounts.
9. Reconciliation to Form 5500
The following is a reconciliation of net assets available for benefits per the Plan's financial statements to amounts included in the Plan's Form 5500:
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December 31
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2016
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2015
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Net assets available for benefits per the Plan’s financial statements
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$
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23,684,453
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$
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21,210,437
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Add refund of excess contribution payable at end of year
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—
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6,658
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Add fair market value adjustment for the fully benefit-responsive investment contract
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—
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(1,988
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)
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Less participants deemed distributed loans
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(2,367
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)
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(2,217
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)
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Net assets available for benefits per the Plan’s Form 5500
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$
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23,682,086
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$
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21,212,890
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The following is a reconciliation of changes in net assets available for benefits per the Plan’s financial statements to amounts included in the Plan’s Form 5500:
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Year ended December, 31
2016
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Changes in net assets available for benefits per the Plan’s financial statements
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$
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2,474,016
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Less refund of excess contribution payable at beginning of year
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(6,658
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)
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Less fair market value adjustment for the fully benefit-responsive investment contract at beginning of year
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1,988
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Change in participants deemed distributed loans at end of year
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(150
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)
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Change in net assets available for benefits per the Plan’s Form 5500
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$
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2,469,196
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