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 April 30, 1998 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 June 1, 1998. Common Stock 8,945,767 Shares 2 VIRCO MFG. CORPORATION AND SUBSIDIARIES INDEX Part I. Financial Information Item 1. Financial Statements (unaudited) Condensed consolidated balance sheets - April 30, 1998 and January 31, 1998. Condensed consolidated statements of income - Three months ended April 30, 1998 and 1997. Condensed consolidated statements of cash flows - Three months ended April 30, 1998 and 1997. Notes to condensed consolidated financial statements - April 30, 1998. 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 & 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) (Dollar amounts in thousands) ASSETS 4/30/98 1/31/98 ------ --------- --------- Current assets Cash $ 966 $ 1,221 Accounts and notes receivable 24,354 26,942 Less allowance for doubtful accounts (237) (100) --------- --------- Net accounts and notes receivable 24,117 26,842 Inventories (note 2) Finished goods 36,615 25,467 Work in process 9,942 8,739 Raw materials and supplies 10,071 9,656 --------- --------- Total inventories 56,628 43,862 Prepaid expenses and deferred income tax 2,483 2,294 --------- --------- Total current assets 84,194 74,219 Property, plant & equipment Cost 78,728 75,754 Less accumulated depreciation (38,082) (36,385) --------- --------- Net property, plant & equipment 40,646 39,369 Other assets 9,242 8,427 --------- --------- $ 134,082 $ 122,015 ========= ========= 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) (Dollar amounts in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY 4/30/98 1/31/98 --------- --------- Current liabilities Checks released but not yet cleared bank $ 4,293 $ 3,200 Accounts payable 12,633 13,324 Income taxes payable 382 -- Current maturities on long-term debt 3,421 3,442 Other current liabilities 9,431 10,221 --------- --------- Total current liabilities 30,160 30,187 Non-current liabilities Long term debt (less current portion) 20,892 9,459 Other non-current liabilities 4,053 4,053 --------- --------- Total non-current liabilities 24,945 13,512 Deferred income taxes 991 991 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; 8,973,368 shares issued at 4/30/98 and 8,909,183 shares issued at 1/31/98 90 89 Additional paid-in capital 50,593 50,301 Retained earnings 28,034 27,423 Less treasury stock at cost (31,213 Shares) (432) (172) Loan to ESOP trust (299) (316) --------- --------- Total shareholders' equity 77,986 77,325 --------- --------- $ 134,082 $ 122,015 ========= ========= 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) (Dollar amounts in thousands, except per share data) 3 Months Ended ------------------------------ 4/30/98 4/30/97 ---------- ---------- Net sales $ 44,938 $ 40,958 Cost of goods sold 30,263 27,757 ---------- ---------- Gross profit 14,675 13,201 Shipping, selling, general and administrative expense 13,012 11,781 Provision for doubtful accounts 139 127 Interest expense 250 487 ---------- ---------- 13,401 12,395 ---------- ---------- Income before income taxes 1,274 806 Income taxes 484 307 ---------- ---------- Net income 790 $ 499 ========== ========== Earnings per share .09 .06 Earnings per share - assuming dilution .09 .06 Weighted average shares outstanding 8,928,932 8,859,444 Weighted average shares outstanding- assuming dilution 9,194,358 9,046,326 Dividend declared Cash (per share) $ .02 $ .02 The accompanying notes are an integral part of these condensed financial statements. 5 6 VIRCO MFG. CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (note 1) (Dollar amounts in thousands, except per share data) 3 Months Ended --------------------------- 4/30/98 4/30/97 -------- -------- Cash flows from operating activities Net income $ 790 $ 499 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,697 1,690 Provision for doubtful accounts 139 120 (Gain)/loss on sales of fixed assets -- -- Change in assets and liabilities: Accounts and notes receivable 2,586 3,909 Inventories (12,766) (16,555) Prepaid expenses and deposits (189) (366) Income taxes receivable/payable 382 101 Other assets (55) 300 Accounts payable and accrued expenses (388) (1,969) -------- -------- Net cash used In operating activities (7,804) (12,271) Cash flows from investing activities Capital expenditures (2,974) (1,698) Proceeds from sale of assets -- -- Net investment in life insurance (760) (699) Restricted short term investments -- (5) -------- -------- Net cash used in investing activities (3,734) (2,402) Cash flows from financing activities Issuance of long-term debt 11,597 15,398 Repayment of long-term debt (185) (123) Payment of cash dividend (179) (148) Issuance of common stocks 33 -- Loans to ESOP 17 138 -------- -------- Net cash provided by financing activities 11,283 15,265 Net change in cash (255) 592 Cash at beginning of quarter 1,221 722 -------- -------- Cash at end of quarter $ 966 $ 1,314 ======== ======== The accompanying notes are an integral part of these condensed financial statements. 6 7 VIRCO MFG. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1998 and April 30, 1997 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 April 30, 1998 are not necessarily indicative of the results that may be expected for the year ended January 31, 1999. 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, 1998. 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 April 30, 1998. 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 three month period ended April 30, 1998 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 In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." SFAS No. 128, which replaced the calculation of primary and fully diluted net income per share with basic and diluted net income per share. Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share is calculated by dividing net income by the weighted average number of common shares outstanding plus the dilutive effect of convertible securities. All prior year net income per share data has been restated in accordance with the new standard. 7 8 3 MONTHS ENDED 4/30/98 4/30/97 ------------------------------ Numerator: Net Income $ 790,000 $ 499,000 Denominator: Denominator for basic earnings per share - weighted - average 8,928,932 8,859,444 shares Dilutive potential common shares 265,426 186,882 ------------------------------ Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 9,194,358 9,046,326 ------------------------------ Basic earnings per share $ 0.09 $ 0.06 ============================== Diluted earnings per share $ 0.09 $ 0.06 ============================== In 1998, the Company adopted SFAS No, 130, "Reporting Comprehensive Income." The Statement established standards for the reporting and display of comprehensive income, which comprises certain specific items previously reported directly in stockholders' equity. Other comprehensive income comprises items such as unrealized gains and losses on debt and equity securities classified as available-for-sale securities, minimum pension liability adjustments, and foreign currency translation adjustments. The Company does not believe adoption of this SOP will have a material impact on the Company's financial statements. In June 1997, the Financial Accounting Standards Board Issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information: SFAS 131 provides accounting guidance for reporting and requires such enterprises to report selected information about operating segments in interim financial reports. The statement uses a "management approach" to identify operating segments and provides specific criteria for operating segments. SFAS 131 is effective for the year ended January 31, 1999 and will be required for interim periods in 1999. The adoption of this SFAS has no impact on the way the Company reports or has reported its financial statements. In March 1998, the AICPA issued SOP 98-1, Accounting For the Costs of Computer Software Developed For or Obtained for Internal-Use. The SOP is effective for the Company beginning on February 1, 1999. The SOP will require the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal-use. The Company currently capitalizes costs associated with software developed for its own use. The Company does not believe adoption of this SOP will have a material impact on the Company's future earnings or financial position. 8 9 PART II VIRCO MFG. CORPORATION SUBSIDIARIES Other Information Item 4. Submission of matters to a vote of Security Holders None Item 6. Exhibits and Reports on Form 8-K None 9 10 VIRCO MFG. CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations: For the first quarter of 1998, the Company earned a net profit from continuing operations of $790,000 on sales of $44,938,000 compared to a net profit from continuing operations of $499,000 on sales of $40,958,000 in the same period last year. Net income per share, assuming dilution, was $.09 for the first quarter of 1998 and $.06 for the first quarter of 1997, a 50 percent increase over the same period last year. The volume of first quarter sales 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 increased volume, improved product mix and continued acceptance of our newer lines of furniture. Marketing, general and administrative expense for the first quarter, as a percent of sales, remains at 29% compared to the same period last year. Interest expense decreased to $250,000 for the quarter compared to $487,000 in the same period last year, primarily due to lower average debt. In May 1998, the Company reached an agreement to sell the manufacturing facility located in Southern Pines, NC. The sales price of the transaction is $1,000,000 with payment to be made at closing. In the first quarter, the Company made a $120,000 accrual for the anticipated loss on disposition of this property. The sale is closed in May 1998. In addition to the above sale of Southern Pines, NC. manufacturing facility, the Company had resolved a long-standing dispute over pricing on deliveries made to the GSA at a cost of $200,000. The Company had previously established a reserve of $500,000 on this matter in recognition of the original GSA demand, which exceeded $1,000,000. This resolution will enable the Company to again participate in GSA contract business, as the Company had chosen not to participate in GSA contract business while the dispute was pending. The combined effect of the disposition of Southern Pines, NC. manufacturing facility, GSA settlement and higher than normal training costs related to the implementation of the new business information system netted so that there is no first quarter earnings impact from these one time events. Financial Condition: As a result of seasonally low deliveries in the first quarter, accounts and notes receivable decreased by approximately $2,586,000 compared to January 31, 1998. Inventory was increased by nearly $12,766,000 compared to January 31, 1998 in anticipation of strong summer deliveries. This increase in inventory was financed through the credit facility with Wells Fargo Bank. Capital spending for the first quarter 1998 was $2,974,000 compared to $1,698,000 a year ago. As discussed in the Company's 1997 Annual Report, the Company initiated two large capital projects, which will have significant cash flow effects on the 1998 fiscal year. Budgeted capital expenditures for 1998 fiscal year include $25,000,000 for the Conway, AR expansion, $2,000,000 for the SAP Enterprise Resource Planning System and 10 11 $2,000,000 ongoing capital expenditures at the Torrance, CA facility. These capital investments are being financed through credit facilities established with Wells Fargo Bank and General Electric Capital Corporation. Net cash flows used by operating activities totaled $7,804,000 compared to $12,271,000 a year ago. The net improvement in cash flows used by operating activities is primarily due to reduction in the amount of inventory accumulated during the first quarter. Long term debt was $20,892,000 as of April 30, 1998 compared to $36,787,000 the same period last year. The $15,895,000 reduction in long term debt is primarily due to the Company's improved profitability. 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, demand for the Company's products, and competitive conditions affecting selling prices and margins. 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, 1998. 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. 11 12 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 12