1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-Q FOR QUARTER ENDED JULY 31, 1997 COMMISSION FILE NUMBER 1-8777 ------------- ------ VIRCO MFG. CORPORATION - ------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-1613718 ------------------------------- -------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2027 HARPERS WAY, TORRANCE, CA 90501 --------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 533-0474 -------------- NO CHANGE - ------------------------------------------------------------------------------- FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT. 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 --- ---- The number of shares outstanding of each of the issuer's classes of common stock, as of September 3, 1997. Common Stock 8,879,694 Shares* * Adjusted for Stock Split declared August 19, 1997, date of record September 5, 1997, payable September 30, 1997.
2 VIRCO MFG. CORPORATION AND SUBSIDIARIES INDEX Part I. Financial Information Item 1. Financial Statements (unaudited) Condensed consolidated balance sheets - July 31, 1997 and January 31, 1997. Condensed consolidated statements of income - Three months ended July 31, 1997 and 1996. Consdensed consolidated statements of income - Six months ended July 31, 1997 and 1996. Condensed consolidated statements of cash flows - Three months ended July 31, 1997 and 1996. Condensed consolidated statements of cash flows - Six months ended July 31, 1997 and 1996. Notes to condensed consolidated financial statements - July 31, 1997. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information Item 4. Submission of matters to a vote of Security Holders. Item 6. Exhibits and Reports on Form 8-K Signatures 2
3 PART 1 Item 1. Financial Statements VIRCO MFG. CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (Note 1) <TABLE> <CAPTION> (Dollar amounts in thousands) ASSETS 7/31/97 1/31/97 ------ ------- -------- <S> <C> <C> Current assets Cash $ 1,713 $ 722 Accounts and notes receivable 41,623 25,610 Less allowance for doubtful accounts (422) (100) --------- --------- Net accounts and notes receivable 41,201 25,510 Income taxes receivable -- -- Inventories (note 2) Finished goods 34,131 26,902 Work in process 8,546 6,402 Raw materials and supplies 10,806 10,340 --------- --------- Total inventories 53,483 43,644 Prepaid expenses and deferred income tax 3,366 2,812 --------- --------- Total current assets 99,763 72,688 Restricted short-term investment 436 660 Property, plant & equipment Cost 82,612 79,666 Less accumulated depreciation (45,564) (42,188) --------- --------- Net property, plant & equipment 37,048 37,478 Other assets 7,605 7,194 --------- --------- $ 144,852 $ 118,020 ========= ========= </TABLE> The accompanying notes are an integral part of these condensed financial statements. 3
4 VIRCO MFG. CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (Note 1) <TABLE> <CAPTION> (Dollar amounts in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY 7/31/97 1/31/97 ------------------------------------ ------- ------- <S> <C> <C> Current liabilities Checks released but not yet cleared bank $ 2,711 $ 4,790 Accounts payable 13,895 11,029 Income taxes payable 2,284 317 Current maturities on long-term debt 980 980 Other current liabilities 10,616 10,429 --------- --------- Total current liabilities 30,486 27,545 Non-current liabilities Long term debt (less current portion) 41,114 21,513 Other non-current liabilities 3,883 3,883 --------- --------- Total non-current liabilities 44,997 25,396 Deferred income taxes 1,114 1,114 Shareholders' equity Preferred stock: Authorized 3,000,000 shares, $.01 par value; none issued or outstanding -- -- Common stock: Authorized 10,000,000 shares, $.01 par value; 8,869,944 shares issued at 7/31/97 and 8,859,444 shares issued at 1/31/97 59 59 Additional paid-in capital 50,158 50,104 Retained earnings 18,682 14,251 Less treasury stock at cost (22,389 Shares) (172) (172) Loan to ESOP trust (472) (277) --------- --------- Total shareholders' equity 68,255 63,965 --------- --------- $ 144,852 $ 118,020 ========= ========= </TABLE> The accompanying notes are an integral part of these condensed financial statements. 4
5 VIRCO MFG. CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME Unaudited (Note 1) <TABLE> <CAPTION> (Dollar amounts in thousands, except per share data) 3 Months Ended ------------------------- 7/31/97 7/31/96 ---------- ---------- <S> <C> <C> Net sales $ 83,809 $ 72,538 Cost of goods sold 56,817 51,432 ---------- ---------- Gross profit 26,992 21,106 Shipping, selling, general and administrative expense 16,573 14,512 Provision for doubtful accounts 240 216 Provision for plant shut down 2,600 -- Interest expense 760 889 ---------- ---------- 20,173 15,617 ---------- ---------- Income before income taxes 6,819 5,489 Income taxes 2,591 2,141 ---------- ---------- Net income $ 4,228 $ 3,348 ========== ========== Earnings per share .46 .37 Weighted average shares outstanding (a) 9,127,288 8,979,795 Dividend declared (a) Cash (per share) $ .017 -- Stock -- -- </TABLE> (a) Adjusted for three for two stock split declared August 19, 1997. The accompanying notes are an integral part of these condensed financial statements. 5
6 VIRCO MFG. CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME Unaudited (Note 1) <TABLE> <CAPTION> (Dollar amounts in thousands, except per share data) 6 Months Ended ------------------------- 7/31/97 7/31/96 ---------- ---------- <S> <C> <C> Net sales $ 124,767 $ 109,283 Cost of goods sold 84,574 78,798 ---------- ---------- Gross profit 40,193 30,485 Shipping, selling, general and administrative expense 28,354 25,400 Provision for doubtful accounts 367 326 Provision for plant shut down 2,600 -- Interest expense 1,247 1,629 ---------- ---------- 32,568 27,355 ---------- ---------- Income before income taxes 7,625 3,130 Income taxes 2,898 1,221 ---------- ---------- Net income $ 4,727 $ 1,909 ========== ========== Earnings per share .52 .21 Weighted average shares outstanding (a) 9,091,943 8,972,021 Dividend declared (a) Cash (per share) $ .033 -- Stock -- -- </TABLE> (a) Adjusted for three for two stock split declared August 19, 1997. The accompanying notes are an integral part of these condensed financial statements. 6
7 VIRCO MFG. CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Unaudited (note 1) (Dollar amounts in thousands, except per share data) 3 Months Ended ---------------------- 7/31/97 7/31/96 -------- -------- <S> <C> <C> Cash flows from operating activities Net income $ 4,228 $ 3,348 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,699 1,462 Provision for doubtful accounts 214 152 Loss on sales of fixed assets 43 -- Change in assets and liabilities: Accounts and notes receivable (19,934) (15,555) Inventories 6,716 4,311 Prepaid expenses and deposits (188) 2,031 Income taxes (receivable)/payable 1,866 (184) Other assets -- 34 Accounts payable and accrued expenses 2,942 3,218 -------- -------- Net cash used in operating activities (2,414) (1,183) Cash flows from investing activities Capital expenditures (1,304) (1,728) Proceeds from sale of assets -- -- Net investment in life insurance (11) (20) Restricted short term investments 229 153 -------- -------- Net cash used in investing activities (1,086) (1,595) Cash flows from financing activities Issuance of long-term debt 4,514 3,946 Repayment of long-term debt (187) (225) Issuance of common stock 54 Payment of cash dividend (148) -- Loans to ESOP (334) (1) -------- -------- Net cash provided by financing activities 3,899 3,720 Net change in cash 399 942 Cash at beginning of quarter 1,314 310 -------- -------- Cash at end of quarter $ 1,713 $ 1,252 ======== ======== </TABLE> The accompanying notes are an integral part of these condensed financial statements. 7
8 VIRCO MFG. CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Unaudited (note 1) (Dollar amounts in thousands, except per share data) 6 Months Ended ----------------------- 7/31/97 7/31/96 -------- --------- <S> <C> <C> Cash flows from operating activities Net income $ 4,727 $ 1,909 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,389 2,930 Provision for doubtful accounts 334 262 Loss on sales of fixed assets 43 -- Change in assets and liabilities: Accounts and notes receivable (16,025) (10,650) Inventories (9,839) (1,237) Prepaid expenses and deposits (554) 1,103 Income taxes (receivable)/payable 1,967 (397) Other assets 299 51 Accounts payable and accrued expenses 974 (321) -------- -------- Net cash used in operating activities (14,685) (6,350) Cash flows from investing activities Capital expenditures (3,002) (3,723) Proceeds from sale of assets -- -- Net investment in life insurance (710) (600) Restricted short term investments 224 628 -------- -------- Net cash used in investing activities (3,488) (3,695) Cash flows from financing activities Issuance of long-term debt 19,911 11,094 Repayment of long-term debt (310) (450) Issuance of common stock 54 -- Payment of cash dividend (296) -- Loans to ESOP (195) (8) -------- -------- Net cash provided by financing activities 19,164 10,636 Net change in cash 991 591 Cash at beginning of quarter 722 661 -------- -------- Cash at end of quarter $ 1,713 $ 1,252 ======== ======== </TABLE> The accompanying notes are an integral part of these condensed financial statements. 8
9 VIRCO MFG. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1997 and July 31, 1996 Note 1: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended July 31, 1997 are not necessarily indicative of the results that may be expected for the year ended January 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant Company and Subsidiaries' annual report on Form 10-K for the year ended January 31, 1997. Note 2. Inventory Year end financial statements reflect inventories verified by physical counts with the material content valued by the LIFO method. At this interim date, there has been no physical verification of inventory quantities. Cost of sales is recorded at current cost. The effect of penetrating LIFO layers is not recorded at interim dates unless the reduction in inventory is expected to be permanent. No such adjustment has been made for the period ended July 31, 1997. Management continually monitors production costs, material costs and inventory levels to determine that interim inventories are fairly stated. Note 3. Income Taxes The Company adopted Statement of Financial Accounting Standards (SFAS) No 109. Income taxes for the six month period ended July 31, 1997 were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. Note 4. Significant Accounting Policies Net Income/Loss Per Common Share. The per share data for the three and six month periods ended July 31, 1997 are based on the weighted average number of common and common share equivalents outstanding during the period. Stock options are considered common share equivalents if dilutive. In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, Earnings Per Share, which is effective for annual and interim financial statements issued for periods ending after December 15, 1997 and early adoption is not permitted. When adopted, the statement will require restatement of prior years; earnings per share ("EPS"), SFAS 128 was issued to simplify the standards for calculating EPS previously found in APB No. 15, Earnings Per Share, SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS. The new rules also require dual presentation of basic and diluted EPS on the face of the statement of operations for companies with a complex capital structure. For the Company, basic EPS will exclude the dilutive effects of 9
10 stock options and warrants. Diluted EPS for the Company will reflect all potential dilutive securities. Under the provisions of SFAS 128, basic and dilutive EPS would have been substantially the same as the reported amounts. On August 19, 1997, the Company's Board of Directors authorized a three for two stock split effected in the form of a 50% stock dividend payable on September 30, 1997 to stockholders of record September 5, 1997. This resulted in the issuance of 2,959,898 additional shares of common stock as of September 3, 1997. All per share and weighted average share amounts have been restated to reflect this stock split. Note 5. On May 28, 1997, the Company announced that the Virsan Mexico manufacturing facility would be shut down, and the related property, plant, equipment, and inventory would either be sold or transferred to other Virco manufacturing facilities. As more fully discussed in the Management's Discussion and Analysis, the Company recorded a $2,600,000 pre-tax charge in the second quarter related to this plant closure. 10
11 VIRCO MFG. CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations: For the second quarter of 1997, the Company earned a net profit of $4,228,000 on sales of $83,809,000 compared to a net income of $3,348,000 on sales of $72,538,000 in the same period last year. Earnings were $.46 per share compared to $.37 per share in the same period last year after giving effect to the stock split. For the six month period ended July 31, 1997, the Company earned a net profit of $4,727,000 on sales of $124,767,000 compared to a net profit of $1,909,000 on sales of $109,283,000 in the same period prior year. Earnings were $.52 per share compared to $.21 per share in the same period last year after giving effect to the stock split. The second quarter and year to date results are consistent with Virco's seasonal business cycle which produces diminished first quarter sales followed by strong second and third quarter deliveries of educational furniture. The increase in sales compared to the prior year is attributable to increases in volume combined with selected price increases. The significant improvement in profitability is attributable to an improvement in gross margin from 29.1% in the second quarter of 1996 to 32.2% in the second quarter of 1997. The increase in gross margin is attributable to increases in selling prices, stable material costs and improvements in production efficiency. Sales backlog at July 31, 1997 is approximately $1,700,000 greater than the prior year. In May 1997, the Company decided to discontinue operations at the Mexico manufacturing facility. Subsequently, the Company has reached an agreement for the bulk sale of the assets of the Mexican facility on October 1 of this year, subject to certain conditions. The facility will cease operations prior to October 1, 1997. The production requirements from this facility will be transferred to the Torrance, CA and Conway, AR manufacturing plants. It is anticipated that all of the employees at this site (approximately 550) will be terminated. As of July 31, 1997, 370 employees were terminated. Included in the second quarter results, the Company recorded a plant closing reserve of $2,600,000 and $1,224,000 were charged against this reserve during the quarter. The primary component of this reserve is related to severance benefits which will be paid to the employees in accordance with Mexican law. Other components include voluntary severance payments to U.S. employees which work at this facility, carrying costs incurred while liquidating the real estate and production equipment and other miscellaneous costs associated with the shutdown. The majority of such spending will occur prior to October 1, 1997. At the August 19, 1997 Board meeting, the Board of Directors authorized an expansion and re-configuration of the Conway, Arkansas facility. It is anticipated that this expansion will support growth in sales volume for the next several years. The re-configuration will incorporate cell-based manufacturing concepts which have been extremely successful at the Torrance, CA manufacturing plant. It is expected that the expansion and re-configuration will cost approximately $15 million, and occur over a 20 month period starting October 1, 1997. At the same meeting, the Board of Directors authorized the Company to install a new business information system to replace existing mainframe applications. The business information system is expected to cost approximately $5,000,000. Phase one of this implementation is scheduled to occur between October 1, 1997 and May 1, 1998. Financial Condition: As a result of seasonally high sales activity, accounts receivable increased by $16,025,000 compared to January 31, 1997. In anticipation of strong third quarter educational deliveries, inventory at July 31, 1997 increased by $9,839,000 compared to January 31, 1997. 11
12 Increases in receivable and inventory were financed through increased borrowings under our revolving line of credit with Wells Fargo Bank. The expansion of the Conway, AR manufacturing facility and the installation of the new business information system will be financed through our revolving line of credit with Wells Fargo, lease financing available through GE Capital, and internally generated funds. At July 31, 1997, the Company had approximately $17,000,000 available under its credit facility with Wells Fargo. 12
13 PART II VIRCO MFG. CORPORATION SUBSIDIARIES Other Information Item 4. Submission of matters to a vote of Security Holders The following is a description of matters submitted to a vote of registrant's stockholders at the Annual Meeting of Stockholders held June 17, 1997: Election of three directors whose term expire in 2000. <TABLE> <CAPTION> Votes For --------- <S> <C> Donald A. Patrick 4,906,248 Raymond W. Virtue 4,906,744 Robert A. Virtue 4,907,966 Adoption of the Virco Mfg. corporation 1997 Stock Incentive Plan. 4,081,332 </TABLE> Item 6. Exhibits and Reports on Form 8-K None 13
14 VIRCO MFG. CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VIRCO MFG. CORPORATION Date: By: ---------------------------- ------------------------------- James R. Braam Vice President - Finance Date: By: ---------------------------- ------------------------------- Robert E. Dose Corporate Controller 14