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, 2000 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 1, 2000. Common Stock 11,338,578 Shares* * Adjusted for 10% stock dividend declared August 15, 2000, date of record September 7, 2000, payable September 29, 2000. 2 VIRCO MFG. CORPORATION INDEX Part I. Financial Information Item 1. Financial Statements (unaudited) Condensed consolidated balance sheets - July 31, 2000 and January 31, 2000 Condensed consolidated statements of income - Three months ended July 31, 2000 and 1999. Condensed consolidated statements of income - Six months ended July 31, 2000 and 1999. Condensed consolidated statements of cash flows - Six months ended July 31, 2000 and 1999. Notes to condensed consolidated financial statements - July 31, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 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 I Item 1. Financial Statements VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (Note 1) (Dollar amounts in thousands, except per share data) ASSETS 7/31/2000 1/31/2000 ------ --------- --------- Current assets Cash $ 751 $ 1,072 Accounts and notes receivable 58,412 27,584 Less allowance for doubtful accounts (472) (200) --------- --------- Net accounts and notes receivable 57,940 27,384 Inventories (Note 2) Finished goods 44,445 35,795 Work in process 11,354 9,260 Raw materials and supplies 13,805 12,003 --------- --------- Total inventories 69,604 57,058 Income taxes receivable -- 1,753 Prepaid expenses and deferred income tax 2,251 2,659 --------- --------- Total current assets 130,546 89,926 Property, plant & equipment Cost 145,327 136,315 Less accumulated depreciation (52,685) (48,378) --------- --------- Net property, plant & equipment 92,642 87,937 Other assets 13,021 13,000 --------- --------- Total assets $ 236,209 $ 190,863 ========= ========= See notes to condensed consolidated financial statements. 3 4 VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (Note 1) (Dollar amounts in thousands, except per share data) LIABILITIES AND STOCKHOLDERS' EQUITY 7/31/2000 1/31/2000 ------------------------------------ --------- --------- Current liabilities Checks released but not yet cleared bank $ 6,231 $ 4,786 Accounts payable 21,446 19,749 Accrued compensation and employee benefits 9,073 10,333 Current maturities on long-term debt 2,049 1,998 Other current liabilities 5,250 1,637 --------- --------- Total current liabilities 44,049 38,503 Non-current liabilities Long term debt (less current portion) 77,845 46,027 Other non-current liabilities 9,354 7,968 --------- --------- Total non-current liabilities 87,199 53,995 Deferred income taxes 4,531 4,531 Stockholders' equity Preferred stock: Authorized 3,000,000 shares, $.01 par value; none issued or outstanding - - Common stock: Authorized 25,000,000 shares, $.01 par value; 10,957,770 issued at 7/31/2000 and 10,952,350 shares issued at 1/31/2000 110 110 Additional paid-in capital 84,637 84,635 Retained earnings 27,193 20,242 Less treasury stock at cost (649,972 shares at 7/31/2000 and 621,874 shares at 1/31/2000) (10,975) (10,692) Less unearned ESOP shares (115) (41) Less accumulated comprehensive loss (420) (420) --------- --------- Total stockholders' equity 100,430 93,834 --------- --------- Total liabilities and stockholders' equity $ 236,209 $ 190,863 ========= ========= See notes to condensed consolidated financial statements. 4 5 VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME Unaudited (Note 1) (Dollar amounts in thousands, except per share data) Three Months Ended ---------------------- 7/31/2000 7/30/1999 --------- --------- Net sales $98,917 $88,224 Cost of goods sold 66,773 57,756 ------- ------- Gross profit 32,144 30,468 Selling, general and administrative and other 22,588 18,605 Provision for doubtful accounts 144 266 Interest expense 1,614 898 ------- ------- 24,346 19,769 Income before income taxes 7,798 10,699 Income taxes 3,041 4,172 ------- ------- Net income $ 4,757 $ 6,527 ======= ======= Earnings per share $ .42 $ .57 Earnings per share - assuming dilution $ .41 $ .56 Weighted average share outstanding (a) 11,358 11,485 Weighted average share outstanding - assuming dilution (a) 11,501 11,700 Dividend per share Cash (a) $ .02 $ .02 (a) Adjusted for 10% stock dividend declared August 15, 2000. See notes to condensed consolidated financial statements. 5 6 VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME Unaudited (Note 1) (Dollar amounts in thousands, except per share data) Six Months Ended ------------------------- 7/31/2000 7/30/1999 --------- --------- Net sales $ 145,175 $ 125,703 Cost of goods sold 98,925 83,874 --------- --------- Gross profit 46,250 41,829 Selling, general and administrative and other 39,088 32,658 Provision for doubtful accounts 269 384 Interest expense 2,766 1,309 Gain on sale of real estate (7,945) -- --------- --------- 34,178 34,351 Income before income taxes 12,072 7,478 Income taxes 4,708 2,916 --------- --------- Net income $ 7,364 $ 4,562 ========= ========= Earnings per share $ .65 $ .39 Earnings per share - assuming dilution $ .64 $ .39 Weighted average share outstanding (a) 11,361 11,595 Weighted average share outstanding - assuming dilution (a) 11,500 11,810 Dividend per share Cash (a) $ .04 $ .03 (a) Adjusted for 10% stock dividend declared August 15, 2000. See notes to condensed consolidated financial statements. 6 7 VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (Note 1) (Dollar amounts in thousands) Six Months Ended ------------------------ 7/31/2000 7/31/1999 --------- --------- Cash flows from operating activities Net income $ 7,364 $ 4,562 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 6,320 4,705 Provision for doubtful accounts 269 384 (Gain)Loss on sales of fixed asset (7,948) 18 Change in assets and liabilities: Accounts and notes receivable (30,825) (27,492) Inventories (12,546) (8,318) Prepaid expenses and deposits 408 202 Income taxes receivable/payable 1,743 1,798 Accounts payable and accrued expenses 6,891 3,574 -------- -------- Net cash used in operating activities (28,324) (20,567) Cash flows from investing activities Capital expenditures (12,466) (15,462) Proceeds from sale of assets 9,389 41 Net investment in life insurance (21) (1,004) -------- -------- Net cash used in investing activities (3,098) (16,425) Cash flows from financing activities Issuance of long-term debt 32,810 41,132 Repayment of long-term debt (941) (1,282) Payment of cash dividend (413) (386) Purchase of treasury stock (283) (3,051) Issuance of common stock 2 31 Loans to ESOP (74) 149 -------- -------- Net cash provided by financing activities 31,101 36,593 Net change in cash (321) (399) Cash at beginning of period 1,072 1,086 -------- -------- Cash at end of period $ 751 $ 687 ======== ======== See notes to condensed consolidated financial statements 7 8 VIRCO MFG. CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 31, 2000 and July 31, 1999 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, 2000 are not necessarily indicative of the results that may be expected for the year ended January 31, 2001. The balance sheet at January 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended January 31, 2000. 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, 2000. Management continually monitors production costs, material costs and inventory levels to determine that interim inventories are fairly stated. Note 3. Income Taxes - ------ Income taxes for the six months ended July 31, 2000 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 - ------ The weighted average number of shares used in the computation of diluted net income per share were 11,501,000 and 11,700,000 for the quarter ended July 31, 2000 and July 31, 1999, respectively. The weighted average number of shares used in the computation of diluted net income per share were 11,500,000 and 11,810,000 for the six months ended July 31, 2000 and July 31, 1999, respectively. Per share and weighted-average share amounts for the second quarter and six months ended July 31, 1999 have been restated to reflect a 10% stock dividend payable on September 29, 2000 to stockholders of record as of September 7, 2000. 8 9 Comprehensive income includes net income and minimum pension liability adjustments. Comprehensive income was $4,757,000 and $6,527,000 for the quarter ended July 31, 2000 and July 31, 1999, respectively. Comprehensive income was $7,364,000 and $4,562,000 for the six months ended July 31, 2000 and July 31, 1999, respectively. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and for Hedging Activities." SFAS 133 requires derivatives to be recorded on the balance sheet at fair value and establishes special accounting for the following three types of hedges: hedges of changes in the fair value of assets, liabilities or firm commitments (referred to as fair value hedges); hedges of the variable cash flows of forecasted transactions (cash flow hedges); and hedges of foreign currency exposures of net investments in foreign operations. The accounting treatment and criteria for each of the three types of hedges is unique. Changes in fair value of derivatives that do not meet the criteria of one of these three categories of hedges would be included in income. SFAS 133 was amended by SFAS 137, which delayed its effective date. The Company does not believe that adopting this standard will have a material effect on its financial position, results of operations and cash flows. Currently, the Company does not anticipate adopting this standard before February 1, 2001. Note 5. Gain on Sale of Real Estate - ------- On April 25, 2000, the Company finalized the sale of its Torrance, California, warehouse. The Company received $9,385,000 in cash and recorded $7,945,000 pre-tax gain on disposition during the quarter ended April 30, 2000. Note 6. Amendment to Credit Facility - ------- Beginning July 1, 2000, the credit facility with Wells Fargo Bank is expanded to $90,000,000 from $80,000,000. The maximum principal amount available under this note shall be reduced automatically on September 30, 2000, and on each January 1, commencing January 1, 2001, by the amount of $10,000,000. 9 10 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 2000, the Company had a net income of $4,757,000 on sales of $98,917,000 compared to a net income of $6,527,000 on sales of $88,224,000 in the same period last year. Earnings were $.41 per share compared to $.56 per share in the same period last year, after giving effect to the 10% stock dividend declared August 15, 2000. For the six months ended July 31, 2000, the Company earned net income of $7,364,000 on sales of $145,175,000 compared to net income of $4,562,000 on sales of $125,703,000 in the same period last year. Earnings were $.64 per share compared to $.39 per share in the same period last year, after giving effect to the 10% stock dividend declared August 15, 2000. 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 seasonal nature of Virco's sales has intensified due to strategic marketing decisions and changes in the buying pattern of educational customers. Sales for the second quarter increased $10,693,000 compared to the same period last year. Backlog at July 31, 2000 was slightly lower compared to the same time last year. Approximately 75% of the increase in sales for the first six months were from educational sales and the balance from commercial sales. The increase in Education sales was attributable to the Company pursuing an aggressive pricing policy, combined with a strong market for education products. The increase in Commercial sales was consistent with prior year's growth in our private school, hospitality, convention center and church markets. In the prior year, the growth in these markets was offset by declines in sales to mass merchants. In the current quarter, there was no such reduction in mass merchant sales. Gross profit for the second quarter, as a percentage of sales, decreased by 2% compared to the same period last year. During the six months ended July 31, 2000, the Company incurred pressure on margins relating to aggressive pricing to stimulate sales, cost increases for raw materials and higher labor rates. These pressures were slightly offset by improved efficiency in the manufacturing facilities. Although factory spending increased compared to the prior year, production increased by a greater percentage than did factory spending. Selling, general and administrative expense and other for the quarter ended July 31, 2000 is approximately $3,983,000 more than the same period last year. Freight and selling expenses increased as a result of the increased sales volume and increased shipping and warehousing costs. In addition to reduced margins as discussed above, the Company invested in additional inventory, customer service representatives, and installation staff to provide enhanced levels of customer service and on-time delivery. Administrative expenses increased in large part due to information technology expenses relating to the SAP Enterprise Resource Planning System. This system, which went live in March of 1999, has been enhanced throughout the last year. Some of the enhancements, including sales force automation and a business to business Website, were not activated until February 2000. Interest expense increased by $716,000 due to a higher average borrowing balance and higher interest rates for the quarter ended July 31, 2000 compared to the same period last year. The increase in borrowings was attributable to capital spending on the Conway, Arkansas facility expansion and an increase in cash used in building inventory in anticipation of strong summer delivery activities. 10 11 FINANCIAL CONDITION: As a result of seasonally high shipments in the second quarter, accounts receivable increased by approximately $30,825,000 compared to year-end. In anticipation of strong third quarter deliveries, inventory increased by $12,546,000 compared to year-end. This increase in accounts receivable and inventory was financed through the credit facility with Wells Fargo Bank. Capital spending for the quarter ended July 31, 2000 was $12,466,000 compared to $15,462,000 for the same period last year. For the quarter ended July 31, 2000, capital investments included machinery and equipment and construction of the second 400,000 sq. ft. segment of the 800,000 sq. ft. warehouse and distribution facility in Conway, Arkansas. As discussed in the Company's 1999 annual report, construction on the first 400,000 sq. ft. segment began in March 1999 and was completed and fully operational in December 1999. The second 400,000 sq. ft. segment is in operation as of July 31, 2000. Higher capital spending for the same period in last year was primarily related to the Conway, Arkansas facility expansion and SAP project. The Company believes that its investments in infrastructure and information systems will ultimately deliver improved operating efficiency. For further discussions on these two projects, please refer to the Company's 1999 annual report. These capital investments and the ongoing capital expenditures are being financed through credit facilities established with Wells Fargo Bank, the sale of real estate, and operating cash flow. Beginning July 1, 2000, the credit facility with Wells Fargo Bank is expanded to $90,000,000 from $80,000,000. The maximum principal amount available under this note shall be reduced automatically on September 30, 2000, and on each January 1, commencing January 1, 2001, by the amount of $10,000,000. At July 31, 2000, the Company has approximately $13,733,000 available under its credit facility with Wells Fargo Bank. Net cash used in operating activities for the six months ended July 31, 2000 was $28,324,000 compared to $20,567,000 for the same period last year. The increase in cash used in operating activities was primarily due to the increase in inventory and trade receivables partly offset by cash received from the sale of the Torrance warehouse during the first quarter ended April 30, 2000. Long term debt was $77,845,000 as of July 31, 2000 compared to $46,027,000 as of January 31, 2000. In April 1998, the Board of Directors approved a stock buyback program giving authorization to buy back up to $5,000,000 of common stock. The amount authorized was subsequently increased to $14,000,000. As of July 31, 2000, the Company has repurchased approximately 617,000 shares at a cost of approximately $10,509,000 since the inception of this program in April 1998. The Company intends to continue buying back shares of common stock as long as the Company believes the shares are undervalued and operating cash flows and borrowing capacity under the Wells Fargo line allow. On August 15, 2000, the Company's Board of Directors authorized a 10% stock dividend payable on September 29, 2000 to stockholders on record as of September 7, 2000. In the same meeting, the Board also authorized a $0.02 per share cash dividend payable on October 31, 2000 to stockholders on record as of October 13, 2000. For the six months ended July 31, 2000, the Company paid $413,000 in cash dividends. The Company believes that cash flows from operations, together with the Company's unused borrowing capacity with Wells Fargo Bank will be sufficient to fund the Company's debt service requirements, capital expenditures and working capital needs. YEAR 2000 COMPLIANCE As of the date of this report, the Company has experienced no significant problems related to the Year 2000 issue. After extensive system verification and testing, all computerized information and process control systems 11 12 are operating normally. The performance of critical customers and suppliers continues without notable change. Production and business activities are normal at all locations. The Company continues to monitor the status of its operations, suppliers and distribution channels to ensure no significant interruptions. FORWARD-LOOKING STATEMENTS From time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing, including those contained herein. Such forward-looking statements may be included in, without limitation, reports to stockholders, press releases; oral statements made with the approval of an authorized executive officer of the Company and filings with the Securities and Exchange Commission. The words or phrases "anticipates," "expects," "will continue," "estimates," "projects," or similar expressions are intended to identify "forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The results contemplated by the Company's forward-looking statements are subject to certain risks and uncertainties that could cause actual results to vary materially from anticipated results, including without limitation, material costs, availability and cost of labor, demand for the Company's products, and competitive conditions affecting selling prices and margins, capital costs and general economic conditions. Such risks and uncertainties are discussed in more detail in the Company's Annual Report on Form 10-K for the year ended January 31, 2000. The Company's forward-looking statements represent its judgment only on the dates such statements were made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changed or unanticipated events or circumstances. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. On February 22, 2000, the Company entered into an interest rate swap agreement with Wells Fargo Bank. The initial notional swap amount is $30,000,000 for the period February 22, 2000 through February 29, 2001. The notional swap amount then decreases 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 July 31, 2000, the Company has borrowed $71,548,000 under its Wells Fargo credit facility, of which $30,000,000 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 lender's base rate would cause the Company to incur additional interest charges of approximately $148,000 per fiscal quarter and $270,000 for the six months ended July 31, 2000. The Company would benefit from a similar interest savings if the base rate were to fluctuate downward by a like amount. 12 13 PART II VIRCO MFG. CORPORATION 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 20, 2000. Election of three directors whose term expire in 2003. Votes For --------- Robert A. Virtue 8,768,150 Donald A. Patrick 8,880,854 Robert K. Montgomery 8,868,823 Item 6. Exhibits and Reports on Form 8-K Exhibit (11) - Statement re: Computation of Earnings Per Share 13 14 VIRCO MFG. CORPORATION Exhibit (11) - Statement re: Computation of Earnings Per Share Three Months Ended Six Months Ended July 31 July 31 --------------------- ---------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Diluted earnings per share Average shares outstanding 11,358,000 11,485,000 11,361,000 11,595,000 Net effect of dilutive stock options - based on the treasury stock method using average market price 143,000 215,000 139,000 215,000 ----------- ------------ ------------ ----------- Totals 11,501,000 11,700,000 11,500,000 11,810,000 =========== ============ ============ =========== Net income $ 4,757,000 $ 6,527,000 $ 7,364,000 $ 4,562,000 =========== ============ ============ =========== Per share amount $ .41 $ .56 $ .64 $ .39 ===== ====== ====== ===== Weighted average shares outstanding for the three months and six months ended July 31, 1999 were adjusted for 10% stock dividend declared August 15, 2000. 14 15 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: September 12, 2000 By: /s/ Robert E. Dose ----------------------- ------------------------------ Robert E. Dose Vice President - Finance Date: September 12, 2000 By: /s/ Bassey Yau ----------------------- ------------------------------ Bassey Yau Corporate Controller 15