VIRCO MFG CORPORATION - 10-Q Quarterly Report

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 October 31, 2003 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 incorporation or organization)		(I.R.S. Employer 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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

The number of shares outstanding of each of the issuer’s classes of common stock, as of November 18, 2003.

Common Stock 13,095,801 Shares

TABLE OF CONTENTS


PART I
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 3. Quantitative and Qualitative Disclosures about Market Risk.
	Item 4. Controls and Procedures
PART II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

VIRCO MFG. CORPORATION

INDEX

Part I. Financial Information


Item 1.		Financial Statements (unaudited)

		Condensed consolidated balance sheets — October 31, 2003, and January 31, 2003

		Condensed consolidated statements of operations — Three months ended October 31, 2003 and 2002

		Condensed consolidated statements of operations — Nine months ended October 31, 2003 and 2002

		Condensed consolidated statements of cash flows — Nine months ended October 31, 2003 and 2002

		Notes to condensed consolidated financial statements — October 31, 2003

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.		Quantitative and Qualitative Disclosures about Market Risk.

Item 4.		Controls and Procedures

Part II. Other Information

Item 1.		Legal Proceedings

Item 2.		Changes in Securities and Use of Proceeds

Item 3.		Defaults upon Senior Securities

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

Item 5.		Other Information

Item 6.		Exhibits and Reports on Form 8-K

		Exhibit 31.1

		Exhibit 31.2

		Exhibit 32.1

Signatures

PART I

Item 1. Financial Statements

VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)


			10/31/2003		1/31/2003

			Unaudited (Note 1)
ASSETS
Current assets
	Cash		$	2,284	$	1,639
	Accounts and notes receivable			25,003		17,601
		Less allowance for doubtful accounts		320		200

		Net accounts and notes receivable		24,683		17,401
	Income tax receivable			853		—
	Inventories (Note 2)
		Finished goods		10,873		16,510
		Work in process		8,615		18,233
		Raw materials and supplies		6,916		8,296

		Total inventories		26,404		43,039
	Deferred income taxes			2,416		2,494
	Prepaid expenses and other current assets			589		1,495

Total current assets				57,229		66,068
Property, plant & equipment
		Cost		156,978		156,863
		Less accumulated depreciation		91,949		83,827

		Net property, plant & equipment		65,029		73,036
Other assets				15,692		15,692

Total assets			$	137,950	$	154,796

See Notes to Condensed Consolidated Financial Statements.

VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)


			10/31/2003			1/31/2003

			Unaudited (Note 1)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
	Checks released but not yet cleared bank		$	2,229		$	2,506
	Accounts payable			5,917			8,395
	Income tax payable			—			3,538
	Accrued compensation and employee benefits			6,617			7,109
	Current maturities on long-term debt			34,012			1,087
	Other current liabilities			4,754			4,685

Total current liabilities				53,529			27,320
Non-current liabilities
	Long term debt (less current portion)			—			27,905
	Other non-current liabilities			22,354			16,797

Total non-current liabilities				22,354			44,702
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; 14,583,331 and 14,527,074 issued at 10/31/2003 and 1/31/2003		145			145
	Additional paid-in capital			126,728			126,284
	Retained deficit			(39,424	)		(18,927	)
	Less treasury stock at cost (1,487,530 shares at 10/31/2003 and 1,416,472 shares at 1/31/2003)			(19,406	)		(18,634	)
	Less accumulated comprehensive loss			(5,976	)		(6,094	)

Total stockholders’ equity				62,067			82,774

Total liabilities and stockholders’ equity			$	137,950		$	154,796

See Notes to Condensed Consolidated Financial Statements.

VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited (Note 1)

(Dollar amounts in thousands, except per share data)


	Three Months Ended

	10/31/2003			10/31/2002

Net sales	$	65,802		$	85,022
Cost of goods sold		46,937			53,805

Gross profit		18,865			31,217
Operating expense
Selling, general and administrative expense		21,450			25,191
Separation charges		4,589			—
Interest expense		501			708

		26,540			25,899
(Loss)/income before income taxes		(7,675	)		5,318
Income tax expense		—			2,074

Net (loss)/income	$	(7,675	)	$	3,244

Amounts per common share ^(a)
Net (loss)/income	$	(0.59	)	$	0.24

Weighted average shares outstanding ^(a)		13,099,000			13,457,000
Dividend per common share ^(a)
Cash	$	—		$	0.02

(a) For fiscal year 2003, net loss per share was calculated based on basic shares outstanding at October 31, 2003, due to the anti-dilutive effect on the inclusion of common stock equivalent shares.

See Notes to Condensed Consolidated Financial Statements.

VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited (Note 1)

(Dollar amounts in thousands, except per share data)


	Nine Months Ended

	10/31/2003			10/31/2002

Net sales	$	162,843		$	209,354
Cost of goods sold		112,601			132,849

Gross profit		50,242			76,505
Operating expense
Selling, general and administrative expense		59,472			65,405
Separation charges		12,377			—
Interest expense		1,313			2,302

		73,162			67,707
(Loss)/income before income taxes		(22,920	)		8,798
Income tax (benefit)/expense		(2,946	)		3,431

Net (loss)/income	$	(19,974	)	$	5,367

Amounts per common share ^(a)
Net (loss)/income	$	(1.52	)	$	0.40

Weighted average shares outstanding ^(a)		13,107,000			13,493,000
Dividend per common share ^(a)
Cash	$	—		$	0.02

(a) For fiscal year 2003, net loss per share was calculated based on basic shares outstanding at October 31, 2003, due to the anti-dilutive effect on the inclusion of common stock equivalent shares.

See Notes to Condensed Consolidated Financial Statements.

VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (Note 1)


			Nine Months Ended

(Dollar amounts in thousands)			10/31/2003			10/31/2002

Operating activities
	Net (loss)/income		$	(19,974	)	$	5,367
	Adjustments to reconcile net (loss)/income to net cash (used in) provided by operating activities:
	Depreciation			8,901			10,223
	Provision for doubtful accounts			102			319
	Loss on sale of fixed assets			49			—
	Changes in assets and liabilities:
		Accounts and notes receivable		(7,384	)		(8,072	)
		Inventories		16,635			1,878
		Prepaid expenses and other current assets		906			361
		Income taxes receivable/payable		(4,391	)		3,530
		Accounts payable and accrued expenses		2,230			(274	)

Net cash (used in) provided by operating activities				(2,926	)		13,332
Investing activities
	Capital expenditures			(943	)		(2,700	)
	Acquisition			—			(4,550	)
	Proceeds from sale of assets			—			2

Net cash used in investing activities				(943	)		(7,248	)
Financing activities
	Issuance of debt			5,365			5,586
	Repayment of long-term debt			—			(2,705	)
	Purchase of treasury stock			(446	)		(754	)
	Payment of cash dividend			(525	)		(2,250	)
	Issuance of common stock			120			178

Net cash provided by financing activities				4,514			55
Net change in cash				645			6,139
Cash at beginning of period				1,639			1,704

Cash at end of period			$	2,284		$	7,843

See Notes to Condensed Consolidated Financial Statements.

VIRCO MFG. CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2003


Note 1:		The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 nine-months ended October 31, 2003, are not necessarily indicative of the results that may be expected for the year ending January 31, 2004. The balance sheet at January 31, 2003, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States 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, 2003.

Note 2.		Inventories

		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. An estimated provision has been made for the period ended October 31, 2003. Management continually monitors production costs, material costs and inventory levels to determine that interim inventories are fairly stated.

Note 3.		Debt

		Effective January 31, 2003, the Company entered into a credit facility with Wells Fargo Bank that provides a secured revolving line of credit that ranges from $40,000,000 to $70,000,000. At October 31, 2003, the Company was in violation of certain of its loan covenants. In December 2003 Wells Fargo provided the Company with a waiver of these covenants as of October 31, 2003. However, based on management’s forecasts for operating results for the remainder of the year, it is considered to be more likely than not that the Company will violate the loan covenants at the fourth quarter ending January 31, 2004. Accordingly, the debt has been classified as a current liability on the October 31, 2003 balance sheet. The Company is currently negotiating with Wells Fargo to restructure the credit facility so that the Company will comply with the quarterly debt covenants. No assurance can be given that such negotiations will be successful. If they are not, the Company would be in default with the bank, which could significantly affect its liquidity. If additional sources of financing are not available, the Company plans to continue to implement measures to conserve cash or reduce costs.


Note 4.		Income Taxes

		Income taxes for the nine-month period ended October 31, 2003, were computed using the effective tax rate estimated to be applicable for the full fiscal year and the determination of a valuation allowance for deferred income tax assets. For the nine months ended October 31, 2003, the Company established a $6 million deferred tax valuation allowance. The allowance was recognized based on the weight of available evidence that it is more likely than not that this portion of the Company’s deferred tax asset will not be realized within the next three years, notwithstanding that some of those assets may have longer lives under applicable tax laws. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. The Company believes, based on its history of prior operating earnings, its actions to reduce costs (see Note 8), and its expectations of future earnings, that operating income of the Company will more likely than not be sufficient to realize the future benefits of the amount classified as a net deferred tax asset. Future adverse changes in market conditions, poor operating results or a decline in our projections about future profitability may affect the Company’s assessment of the adequacy of the reserve and, consequently, the net carrying value of net deferred tax assets. In the event that the Company determines that it is more likely than not that it would be unable to realize an additional portion of the net deferred tax asset, an additional adjustment to the deferred tax asset valuation allowance would be charged to income in the period such determination was made.

Note 5.		Reclassifications

		Certain prior year amounts have been reclassified to conform to the current year presentation.

Note 6.		Net (Loss)/Income Per Share

For the quarter ended October 31, 2003, net loss per share was calculated based on basic shares outstanding at October 31, 2003 due to the anti-dilutive effect on the inclusion of common stock equivalent shares. The following table sets forth the computation of basic loss per share:


	Three Months Ended					Nine Months Ended
	October 31					October 31

	2003			2002		2003			2002

Net (loss)/income	$	(7,675,000	)	$	3,244,000	$	(19,974,000	)	$	5,367,000

Average shares outstanding		13,099,000			13,311,000		13,107,000			13,349,000
Net effect of dilutive stock options — based on the treasury stock method using average market price		35,000			146,000		23,000			144,000

Totals		13,134,000			13,457,000		13,130,000			13,493,000

Net loss per share — basic	$	(0.59	)	$	0.24	$	(1.52	)	$	0.40

Net loss per share — diluted	$	(0.59	)	$	0.24	$	(1.52	)	$	0.40

SFAS No. 123, as amended by SFAS No. 148, requires pro forma information regarding net income and net income per share to be disclosed for new options granted after fiscal year 1996. The fair value of these options was determined at the date of grant using the Black-Scholes option-pricing model. The estimated fair value of the options is amortized to expense over the options’ vesting period for pro forma disclosures. The per share “pro forma” for the effects of SFAS No. 123, as amended by SFAS 148, is not indicative of the effects on reported net income/loss for future years. The Company’s “reported” and “pro forma” information for the three and nine-month periods ended October 31, 2003 and October 31, 2002 are as follows:


	Three Months Ended					Nine Months Ended
	October 31					October 31

	2003			2002		2003			2002

Net (loss)/income, as reported	$	(7,675,000	)	$	3,244,000	$	(19,974,000	)	$	5,367,000
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		16,000			9,000		43,000			28,000

Pro forma net (loss)/income	$	(7,691,000	)	$	3,235,000	$	(20,017,000	)	$	5,339,000

Basic and diluted earnings per share, as reported:	$	(0.59	)	$	0.24	$	(1.52	)	$	0.40

Basic and diluted earnings per share, pro forma:	$	(0.59	)	$	0.24	$	(1.52	)	$	0.40


Note 7.		Comprehensive (Loss)/Income

		Comprehensive loss for the quarter ended Octo

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