e10vq
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UNITED STATES 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, 2007
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 
(Address of principal executive offices)
 
90501
(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 þ   No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated Filer o       Accelerated Filer þ       Non-Accelerated Filer o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ
     The number of shares outstanding for each of the registrant’s classes of common stock, as of the latest practicable date:
     Common Stock, $.01 par value – 14,428,667 shares as of August 31, 2007.
 
 

 


 

VIRCO MFG. CORPORATION
INDEX
 
 
 
 
 
 
 
 
 
Exhibit 31.1 – Certification of Robert A. Virtue, President, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 – Certification of Robert E. Dose, Vice President, Finance, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 – Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1

 


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PART I
Item 1. Financial Statements
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
                         
    7/31/2007   1/31/2007   7/31/2006
    (In thousands, except share data)
    Unaudited (Note 1)           Unaudited (Note 1)
Assets
                       
 
                       
Current assets:
                       
Cash
  $ 2,048     $ 1,892     $ 3,054  
 
                       
Trade accounts receivable
    51,493       18,796       48,396  
Less allowance for doubtful accounts
    233       200       234  
     
 
                       
Net trade accounts receivable
    51,260       18,596       48,162  
 
                       
Other receivables
    409       228       100  
 
                       
Inventories:
                       
Finished goods, net
    21,028       11,651       18,105  
Work in process, net
    12,250       19,690       9,918  
Raw materials and supplies, net
    7,136       6,496       9,329  
     
 
                       
 
    40,414       37,837       37,352  
 
                       
Prepaid expenses and other current assets
    1,245       1,479       992  
     
 
                       
Total current assets
    95,376       60,032       89,660  
 
                       
Property, plant and equipment:
                       
Land and land improvements
    3,596       3,596       3,596  
Buildings and building improvements
    49,555       49,555       49,514  
Machinery and equipment
    111,596       109,730       108,263  
Leasehold improvements
    1,467       1,323       1,289  
     
 
 
    166,214       164,204       162,662  
Less accumulated depreciation and amortization
    119,397       116,116       112,975  
     
 
                       
Net property, plant and equipment
    46,817       48,088       49,687  
 
                       
Goodwill and other intangible assets, net
    2,304       2,311       2,317  
Other assets
    5,846       5,846       8,728  
     
 
                       
Total assets
  $ 150,343     $ 116,277     $ 150,392  
     
See Notes to Condensed Consolidated Financial Statements.

 


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VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
                         
    7/31/2007   1/31/2007   7/31/2006
    (In thousands, except share and per share data)
    Unaudited (Note 1)           Unaudited (Note 1)
Liabilities
                       
 
                       
Current liabilities
                       
Checks released but not yet cleared bank
  $ 2,893     $ 2,563     $ 3,200  
Accounts payable
    14,850       14,463       16,882  
Accrued compensation and employee benefits
    7,945       8,094       5,194  
Current portion of long-term debt
    10,890       5,074       19,644  
Other accrued liabilities
    9,296       6,844       7,440  
     
 
                       
Total current liabilities
    45,874       37,038       52,360  
 
                       
Non-current liabilities
                       
Accrued self-insurance retention and other
    4,708       3,962       3,387  
Accrued pension expenses
    16,686       15,949       15,433  
Long-term debt, less current portion
    25,153       10,190       30,000  
     
 
                       
Total non-current liabilities
    46,547       30,101       48,820  
 
                       
Deferred income taxes
    260       260          
 
                       
Commitments and contingencies
                       
 
                       
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; issued 14,428,662 shares at 7/31/2007, 14,379,506 shares at 1/31/2007; and 14,322,051 shares at 7/31/2006
    144       143       144  
Additional paid-in capital
    113,890       113,737       113,677  
Retained deficit
    (48,806 )     (57,436 )     (60,416 )
Accumulated comprehensive loss
    (7,566 )     (7,566 )     (4,193 )
     
 
                       
Total stockholders’ equity
    57,662       48,878       49,212  
 
                       
Total liabilities and stockholders’ equity
  $ 150,343     $ 116,277     $ 150,392  
     
See Notes to Condensed Consolidated Financial Statements.

 


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VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited (Note 1)
                 
    Three months ended
    7/31/2007   7/31/2006
    (In thousands, except per share data)
Net sales
  $ 88,931     $ 78,595  
Costs of goods sold
    55,216       50,212  
     
 
               
Gross profit
    33,715       28,383  
 
               
Selling, general and administrative expenses
    20,825       19,134  
Interest expense
    900       1,297  
     
 
               
Income before income taxes
    11,990       7,952  
Provision for income taxes
    380       120  
     
 
               
Net income
  $ 11,610     $ 7,832  
     
 
               
Net income per common share
               
Basic
  $ 0.81     $ 0.58  
Diluted
  $ 0.80     $ 0.58  
 
               
Weighted average shares outstanding
               
Basic
    14,398       13,494  
Diluted
    14,430       13,529  
See Notes to Condensed Consolidated Financial Statements.

 


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VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited (Note 1)
                 
    Six months ended
    7/31/2007   7/31/2006
    (In thousands, except per share data)
Net sales
  $ 120,053     $ 113,110  
Costs of goods sold
    74,788       73,233  
     
 
               
Gross profit
    45,265       39,877  
 
               
Selling, general and administrative expenses
    34,811       33,009  
Interest expense
    1,444       2,183  
     
 
               
Income before income taxes
    9,010       4,685  
 
               
Provision for income taxes
    380       120  
     
 
               
Net income
  $ 8,630     $ 4,565  
     
 
               
Net income per common share
               
Basic
  $ 0.60     $ 0.34  
Diluted
  $ 0.60     $ 0.34  
 
               
Weighted average shares outstanding
               
Basic
    14,384       13,318  
Diluted
    14,500       13,353  

 


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VIRCO MFG. VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (Note 1)
                 
    Six months ended
    7/31/2007   7/31/2006
    (In thousands)
Operating activities
               
 
               
Net income
  $ 8,630     $ 4,565  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation and amortization
    3,414       3,731  
Provision for doubtful accounts
    8       25  
Loss (gain) on sale of property, plant and equipment
    (17 )     1  
Stock based compensation
    249       600  
 
               
Changes in operating assets and liabilities
               
Trade accounts receivable
    (32,672 )     (30,917 )
Other receivables
    (181 )     277  
Inventories
    (2,577 )     (5,735 )
Income taxes
    366       102  
Prepaid expenses and other current assets
    234       501  
Accounts payable and accrued liabilities
    4,020       2,357  
     
 
               
Net cash used in operating activities
    (18,526 )     (24,493 )
 
               
Investing activities
               
Capital expenditures
    (2,114 )     (1,967 )
Proceeds from sale of property, plant and equipment
    17       0  
     
 
               
Net cash used in investing activities
    (2,097 )     (1,967 )
 
               
Financing activities
               
Proceeds from long-term debt
    20,816       23,184  
Repayment of long-term debt
    (37 )     (6 )
Proceeds from issuance of common stock
    0       4,847  
     
 
               
Net cash provided by financing activities
    20,779       28,025  
 
               
Net increase in cash
    156       1,565  
Cash at beginning of period
    1,892       1,489  
     
 
               
Cash at end of period
  $ 2,048     $ 3,054  
     
See Notes to Condensed Consolidated Financial Statements.

 


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VIRCO MFG. CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
July 31, 2007
Note 1. Basis of Presentation
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 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 months and six months ended July 31, 2007, are not necessarily indicative of the results that may be expected for the year ending January 31, 2008. The balance sheet at January 31, 2007 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, 2007.
Note 2. Seasonality
The market for educational furniture is marked by extreme seasonality, with over 50% of the Company’s total sales typically occurring from June to September each year, which is the Company’s peak season. Hence, the Company typically builds and carries significant amounts of inventory during and in anticipation of this peak summer season to facilitate the rapid delivery requirements of customers in the educational market. This requires a large up-front investment in inventory, labor, storage and related costs as inventory is built in anticipation of peak sales during the summer months. As the capital required for this build-up generally exceeds cash available from operations, the Company has historically relied on third-party bank financing to meet cash flow requirements during the build-up period immediately preceding the peak season.
In addition, the Company typically is faced with a large balance of accounts receivable during the peak season. This occurs for two primary reasons. First, accounts receivable balances typically increase during the peak season as shipments of products increase. Second, many customers during this period are government institutions, which tend to pay accounts receivable more slowly than commercial customers.
The Company’s working capital requirements during and in anticipation of the peak summer season require management to make estimates and judgments that affect assets, liabilities, revenues and expenses, and related contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to market demand, labor costs, and stocking inventory.
Note 3. New Accounting Standards
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS 157”) which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS 157 also expands the amount of disclosure regarding the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not anticipate any material impact to its financial statements from the adoption of this standard.
In October 2006, the FASB ratified EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. This statement is effective for years beginning after December 15, 2007. This statement clarifies that FASB 106, “Employers Accounting for Post-Retirement Benefits other than Pensions”, applies to endorsement split-dollar life insurance arrangements. The Company estimates that adoption of this statement will increase the Company’s recorded liabilities by approximately $2,000,000 with no impact to the statement of operations or cash flows of the Company. The Company has purchased life insurance policies that are designed to pay a death benefit that is greater than the promised retirement benefit.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective as of the beginning of any fiscal year beginning after November 15, 2007. The Company does not anticipate any material impact to its financial statements from the adoption of this standard.
Note 4. Inventories
Fiscal year end financial statements at January 31, 2007 reflect inventories verified by physical counts with the material content valued by the LIFO method. At July 31, 2007 and 2006, there were no physical verifications 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

 


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permanent. No such adjustments have been made for the periods ended July 31, 2007 and 2006. LIFO reserves at July 31, 2007, January 31, 2007 and July 31, 2006 were $7,357,000, $7,357,000 and $6,423,000, respectively. Management continually monitors production costs, material costs and inventory levels to determine that interim inventories are fairly stated.
Note 5. Debt
The Company has entered into a revolving credit facility with Wells Fargo Bank, which was amended in March and April 2007, and which provides a term loan of $20,000,000 and a secured revolving line of credit that varies as a percentage of inventory and receivables, up to a maximum of $40,000,000, with the maximum increasing to $50,000,000 during certain months of the year. The amended agreement, which became effective March 2007, extended the maturity date from February 15, 2008 to February 15, 2009. The term note is a two-year loan, amortizing at $10,000,000 per year with interest payable monthly at a fluctuating rate equal to the Wells Fargo Bank’s prime rate (8.25% at July 31, 2007) plus a 0.5% margin.
Interest under the credit facility is payable monthly at a fluctuating rate equal to the Wells Fargo Bank’s prime rate plus a fluctuating margin similar to the term note. The revolving line typically provides for advances of 80% on eligible accounts receivable and 20% – 60% on eligible inventory. The advance rates fluctuate depending on the time of the year and the types of assets. The agreement has an unused commitment fee of 0.375%. Approximately $32,488,000 was available for borrowing as of July 31, 2007.
The credit facility with Wells Fargo Bank is subject to various financial covenants including minimum revenues and required levels of EBITDA. The agreement also places certain restrictions on capital expenditures, new operating leases, dividends and the repurchase of the Company’s common stock. The revolving credit facility is secured by the Company’s accounts receivable, inventories, equipment and property. The Company is in compliance with its covenants at July 31, 2007.
Note 6. Income Taxes
On February 1, 2007, the Company adopted the provisions of FIN No. 48. As a result of the implementation of FIN No. 48, the Company recognized no material adjustment to the liability for unrecognized income tax benefits. At the adoption date of February 1, 2007, the Company had approximately $760,000 of unrecognized tax benefits. At July 31, 2007, the Company had approximately $760,000 of unrecognized tax benefits all of which would impact the effective tax rate if recognized. The Company estimates that no unrecognized tax benefits will decrease in the next twelve months due to the expiration of statute of limitations or completion of audits in progress. The Company records interest and penalties on uncertain tax positions to income tax expense. As of February 1, 2007 and July 31, 2007, the Company has accrued $164,000 of interest and $134,000 of penalties related to uncertain tax positions. The tax years 2004 to 2006 remain open to examination by the IRS for federal income taxes. The tax years 2003 to 2006 remain open for major state taxing jurisdictions. The Company is not being audited by a major taxing jurisdiction at July 31, 2007.
At January 31, 2007, the Company had net operating losses that can potentially be carried forward for federal and state income tax purposes, expiring at various dates through 2027 if not utilized. Federal net operating losses that can potentially be carried forward total approximately $15,409,000 at January 31, 2007. State net operating losses that can potentially be carried forward total approximately $32,791,000 at January 31, 2007. Net operating losses carried forward will be utilized to offset taxable income realized for the six months ended July 31, 2007.
As disclosed in Footnote 6 in the Form 10K for the period ended January 31, 2007, the Company has recorded a valuation allowance against the Company’s net deferred tax asset. The Company reviews the required valuation allowance on a quarterly basis. If the recent positive trend in operating results continue into the second half of 2007, the Company anticipates that there may be a favorable adjustment in the valuation allowance that may be recorded prior to January 31, 2008. The adjustment would have no impact on cash, but would increase the recorded net deferred tax asset with a corresponding income tax benefit. The estimated amount of valuation allowance subject to this adjustment is approximately $8 million, net of operating losses utilized during 2007.
Note 7. Net Income per Share
                                 
    Three Months Ended   Six Months Ended
    7/31/2007   7/31/2006   7/31/2007   7/31/2006
    (In thousands, except per share data)   (In thousands, except per share data)
Net income
  $ 11,610     $ 7,832     $ 8,630     $ 4,565  
 
                               
Average shares outstanding
    14,398       13,494       14,384       13,318  
Net effect of dilutive stock options based on the treasury stock method using average market price
    32       35       116       35  
     
 
                               
Totals
    14,430       13,529       14,500       13,353  
 
Net income per share — basic
  $ 0.81     $ 0.58     $ 0.60     $ 0.34  
Net income per share — diluted
  $ 0.80     $ 0.58     $ 0.60     $ 0.34  

 


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Note 8. Stock Based Compensation
The Company’s two stock plans are the 2007 Employee Incentive Plan (the 2007 Plan) and the 1997 Employee Incentive Stock Plan (the 1997 Plan). Under the 2007 Plan, the Company is permitted to grant an aggregate of 1,000,000 shares to its employees and directors in the form of stock options or awards. As of July 31, 2007, 12,887 stock awards, 262,500 stock units have been issued under the 2007 Plan and 724,613 shares remain available for future grant. The Company’s 1997 Plan expired in 2007 and had 234,594 unexercised options. Stock options granted under the plans have an exercise price equal to the market price at the date of grant and have a maximum term of 10 years.
The shares of common stock issued upon exercise of a previously granted stock option are considered new issuances from shares reserved for issuance upon adoption of the various plans. While the Company does not have a formal written policy detailing such issuance, it requires that the option holders provide a written notice of exercise to the stock plan administrator and payment for the shares prior to issuance of the shares.
Accounting for the Plans
Effective February 1, 2006 the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share-Based Payment”, using the modified prospective-transition method. The modified prospective-transition method was applied to those unvested options issued prior to the Company’s adoption that have historically been accounted for under the Intrinsic Value Method. All outstanding options were 100% vested prior to the adoption and no options were granted since the adoption of FASB Statement No. 123(R). Accordingly, no compensation expense was recorded on the Company’s options during the three or six months ended July 31, 2007 or July 31, 2006.
The Company has granted restricted stock and restricted stock units to members of management and non-management directors. Compensation expense is recognized based on the estimated fair value of restricted stock units at the date of grant and amortized over the vesting period.
As the compensation cost for restricted stock units was measured using the estimated fair value on the date of grant and recognized over the vesting period, there was no effect on the statements of operations, due to the adoption of FASB Statement No. 123(R). At February 1, 2006, the Company recorded a transitional reclassification of $247,000 from current liabilities to additional paid-in capital.
Restricted Stock Unit Awards
On June 19, 2007, the Company granted a total of 262,500 restricted stock units, with an estimated fair value of $6.79 per unit and exercise price of $0.01 per unit, to eligible employees under the 2007 Plan. Interests in such restricted stock units vest ratably over five years, with such units vesting 20% at each anniversary date.
On June 19, 2007, the Company granted 12,887 shares of restricted stock, with an estimated fair value of $6.79 per share and exercise price of $0.01 per share, to non-employee directors under the 2007 Plan. Interests in such restricted stocks vest 100% at June 18, 2008.
On June 30, 2004, the Company granted a total of 270,000 restricted stock units, with an estimated fair value of $6.92 per unit and exercise price of $0.01 per unit, to eligible employees under the 1997 Plan. Interest in such restricted stock units vest ratably over five years, with such units vesting 20% at each anniversary date.
On June 20, 2006, the Company granted 17,640 shares of restricted stock, with an estimated fair value of $4.96 per share and exercise price of $0.01 per share, to non-employee directors under the 1997 Plan. Interests in such restricted stocks vested 100% on June 19, 2007.
On January 13, 2006, the Company granted a total of 73,881 restricted stock units, with an estimated fair value of $5.21 per unit and exercise price of $0.01 per unit, to non-employee directors under the 1997 Plan. Participants vest their interest in notional stock units ratably over the vesting period, with such units being 100% vested at July 5, 2006.
                                         
                                    Unrecognized
                                    Compensation
    Expense for 3 months ended   Expense for 6 months ended   Cost at
    7/31/2007   7/31/2006   7/31/2007   7/31/2006   7/31/2007
     
2007 Incentive Stock Plan
                                       
 
                                       
262,500 Restricted Stock Units issued 6/19/2007, vesting over 5 years
  $ 58,000           $ 58,000           $ 1,722,000  
 
                                       
12,887 Grants of Restricted Stock issued 6/19/2007, vesting over 1 year
    15,000             15,000             73,000  

 


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                                    Unrecognized
                                    Compensation
    Expense for 3 months ended   Expense for 6 months ended   Cost at
    7/31/2007   7/31/2006   7/31/2007   7/31/2006   7/31/2007
     
1997 Incentive Stock Plan
                                       
 
                                       
270,000 Restricted Stock Units issued 6/30/2004, vesting over 5 years
    59,000       88,000       147,000       176,000       706,000  
 
                                       
17,640 Grants of Restricted Stock issued 6/19/2007, vesting over 1 year
    8,000       15,000       29,000       15,000        
 
                                       
73,881 Restricted Stock Units issued 1/13/2006, vesting over 5 months
          137,000             342,000        
     
Totals for the period
  $ 140,000     $ 240,000     $ 249,000     $ 533,000     $ 2,501,000  
     
 Stockholders’ Rights
On October 15, 1996, the Board of Directors declared a dividend of one preferred stock purchase right (“the Rights”) for each outstanding share of the Company’s common stock. Each of the Rights entitles a stockholder to purchase for an exercise price of $50.00 ($20.70, as adjusted for stock splits and stock dividends), subject to adjustment, one one-hundredth of a share of Series A Junior Participating Cumulative Preferred Stock of the Company, or under certain circumstances, shares of common stock of the Company or a successor company with a market value equal to two times the exercise price. The Rights are not exercisable, and would only become exercisable for all other persons when any person has acquired or commences to acquire a beneficial interest of at least 20% of the Company’s outstanding common stock. The Rights have no voting privileges, and may be redeemed by the Board of Directors at a price of $.001 per Right at any time prior to the acquisition of a beneficial ownership of 20% of the outstanding common shares. There are 200,000 shares (483,153 shares as adjusted by stock splits and stock dividends) of Series A Junior Participating Cumulative Preferred Stock reserved for issuance upon exercise of the Rights. On July 31, 2007, the Company and Mellon Investor Services LLC entered into an amendment to the Rights Agreement governing the Rights. The amendment, among other things, extended the term of the Rights issued under the Rights Agreement to October 25, 2016, removed the dead-hand provisions from the Rights Agreement, and formally replaced the former Rights Agent, The Chase Manhattan Bank, with its successor-in-interest, Mellon Investor Services LLC.
Note 9. Comprehensive Income
Comprehensive income for the three months ended July 31, 2007 and 2006 was the same as net income reported on the statements of operations. Accumulated comprehensive income (loss) at July 31, 2007 and 2006 and January 31, 2007 is composed of minimum pension liability adjustments.
Note 10. Retirement Plans
The Company and its subsidiaries cover all employees under a noncontributory defined benefit retirement plan, entitled the Virco Employees’ Retirement Plan (the “Plan”). Benefits under the Plan are based on years of service and career average earnings. As more fully described in the Form 10-K for the period ended January 31, 2007, benefit accruals under this plan were frozen effective December 31, 2003.
The Company also provides a supplementary retirement plan for certain key employees, the VIP Retirement Plan (the “VIP Plan”). The VIP Plan provides a benefit of up to 50% of average compensation for the last five years in the VIP Plan, offset by benefits earned under the Plan. As more fully described in the Form 10-K for the period ended January 31, 2007, benefit accruals under this plan were frozen effective December 31, 2003.
The Company also provides a non-qualified plan for non-employee directors of the Company (the “Non-Employee Directors Retirement Plan”). The Non-Employee Directors Retirement Plan provides a lifetime annual retirement benefit equal to the director’s annual retainer fee for the fiscal year in which the director terminates his or her position with the Board, subject to the director providing 10 years of service to the Company. As more fully described in the Form 10-K for the period ended January 31, 2007, benefit accruals under this plan were frozen effective December 31, 2003.
The net periodic pension costs for the Plan, the VIP Plan, and the Non-Employee Directors Retirement Plan for the three months and six months each ended July 31, 2007 and 2006 were as follows (in thousands):

 


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    Three Months Ended
    Pension Plan   VIP Retirement Plan   Non-Employee Directors Retirement
                                    Plan
    2007   2006   2007   2006   2007   2006
     
Service cost
  $ 41     $ 43     $ 50     $ 53     $ 6     $ 6  
Interest cost
    345       352       90       85       7       6  
Expected return on plan assets
    (224 )     (246 )                        
Amortization of transition amount
    (9 )     (9 )                        
Amortization of prior service cost
    117       117       (134 )     (134 )     6       22  
Recognized net actuarial (Gain) or loss
    49       41       30       34       (7 )     (7 )
Settlement and curtailment
                                   
     
 
                                               
Net periodic pension cost
  $ 319     $ 298     $ 36     $ 38     $ 12     $ 27  
     
                                                 
    Six Months Ended
    Pension Plan   VIP Retirement Plan   Non-Employee Directors Retirement
                                    Plan
    2007   2006   2007   2006   2007   2006
     
Service cost
  $ 82     $ 86     $ 100     $ 106     $ 12     $ 12  
Interest cost
    690       704       180       170       14       12  
Expected return on plan assets
    (448 )     (492 )                        
Amortization of transition amount
    (18 )     (18 )                        
Amortization of prior service cost
    234       234       (268 )     (268 )     12       44  
Recognized net actuarial (Gain) or loss
    98       82       60       68       (14 )     (14 )
Settlement and curtailment
                                   
     
 
                                               
Net periodic pension cost
  $ 638     $ 596     $ 72     $ 76     $ 24     $ 54  
     
Note 11. Warranty
The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales data and warranty costs incurred. The majority of the Company’s products sold through January 31, 2005, carry a five-year warranty. Effective February 1, 2005, the Company extended its standard warranty period to 10 years. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The warranty liability is included in accrued liabilities in the accompanying consolidated balance sheet.
The following is a summary of the Company’s warranty claim activity for the three month and six month periods each ended July 31, 2007 and 2006 (in thousands):
                                 
    Three Months Ended   Six Months Ended
    7/31/2007   7/31/2006   7/31/2007   7/31/2006
            (In thousands)        
Beginning Accrued Warranty Balance
  $ 1,850     $ 1,500     $ 1,750     $ 1,500  
Provision
    191       196       536       402  
Costs Incurred
    (241 )     (196 )     (486 )     (402 )
     
 
                               
Ending Accrued Warranty Balance
  $ 1,800     $ 1,500     $ 1,800     $ 1,500  
     

 


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Note 12. Other Financing Activities
     On June 6, 2006, WEDBUSH, Inc. and Wedbush Morgan Securities, Inc. (together with WEDBUSH, Inc., the “Purchasers”), entered into a stock purchase agreement (the “Agreement”) with the Company. Pursuant to the Agreement, (a) the Purchasers purchased from the Company shares (the “Shares”) of the Company’s common stock yielding gross proceeds to the Company of $5,000,000 at a purchase price per share of $4.66 (the “Per Share Purchase Price”) and (b) the Company issued warrants to the Purchasers exercisable for 268,010 shares of common stock pursuant to which the Purchasers will have the right to acquire the 268,010 shares at an exercise price of 120% of the Per Share Purchase Price during the first three years following the closing of the transaction and at 130% of the Per Share Purchase Price during the fourth and fifth years following the closing of the transaction. The Company filed a Registration Statement on Form S-3 registering the resale of the Shares on July 6, 2006 and amended that registration statement on August 17, 2006. The Registration Statement became effective on September 18, 2006. Wedbush Morgan holds the securities purchased pursuant to the Agreement as nominee on behalf of those of its clients which purchased the securities.
     On June 26, 2006, certain members of management and certain Directors (the “Follow-on Purchasers”) entered into a stock purchase agreement with the Company to purchase shares of common stock and warrants. On August 29, 2006 this agreement was rescinded and replaced with a similar agreement for the purchase of 57,455 shares at a purchase price per share of $5.02 (the “Follow-on Per Share Purchase Price”) yielding gross proceeds to the Company of approximately $288,000. Additionally the Company issued warrants to the Follow-on Purchasers exercisable for 14,364 shares of common stock pursuant to which the Follow-on Purchasers will have the right to acquire the 14,364 shares at an exercise price of 120% of the Follow-on Per Share Purchase Price during the first three years following the closing of the transaction and at 130% of the Follow-on Per Share Purchase Price during the fourth and fifth years following the closing of the transaction. The transaction closed during the third quarter ended October 31, 2006.
     The securities sold to the Purchasers and Follow-on Purchasers were issued pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), afforded by Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder, as a transaction to accredited and sophisticated investors not involving a public offering. The proceeds from the sale of the Shares were used for general corporate purposes, and the proceeds, if any, received from the exercise of the warrant agreements will be used to reduce outstanding indebtedness and for general corporate purposes. At January 31, 2007, the Company incurred $537,000 in closing costs, which were netted against the proceeds received.

 


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VIRCO MFG. CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The results for the first six months reflect the success of the Company’s Equipment for Educators integrated market development program, an increase in the seasonal nature of education furniture and equipment sales, and an improvement in the Company’s ability to service the seasonal peak. The Company’s ability to service the seasonal peak sales has benefited from increased financial strength, which allows the Company to build inventory earlier in the year utilizing longer efficient production runs and new products that have been designed to take advantage of the assemble-to-ship (ATS) production and distribution model
For the second quarter of 2007, the Company earned a pre-tax profit of $11,990,000 on sales of $88,931,000 compared to a pre-tax profit of $7,952,000 on sales of $78,595,000 in the same period last year.
Sales for the second quarter ended July 31, 2007 increased by $10,336,000, a 13.2% increase, compared to the same period last year. Incoming orders for the same period increased by approximately 10.3% compared to the prior year. Backlog at July 31, 2007 increased by approximately 10% compared to the prior year. Gross margin as a percentage of sales increased to 37.9% in 2007 compared to 36.1% in the prior year. The improvement in margin was attributable to increased prices, efficient levels of production, increased sales including service related charges such as installation, and relatively stable material costs.
Selling, general and administrative expense for the quarter ended July 31, 2007 increased by approximately $1,691,000 compared to the same period last year, but decreased as a percentage of sales by nearly 1%. The increase in spending was attributable to increased service related costs and increased variable compensation costs. The decrease as a percentage of sales was attributable to the second quarter sales increasing at a greater rate than spending.
Interest expense decreased by approximately $397,000 compared to the same period last year. The decrease is due to reduced interest rates in addition to lower loan balances.
For the six months ended July 31, 2007 the Company earned a pre-tax profit of $9,010,000 on sales of $120,053,000 compared to a pre-tax profit of $4,685,000 on sales of $113,110,000 in the same period last year.
Sales for the first six months increased by $6,943,000, or 6.1%, compared to the same period last year. The increase was attributable to increased prices of approximately 5% and increased volume of slightly more than 1%. Incoming orders for the same period increased by approximately 7.2%. Gross margin as a percentage of sales increased to 37.7% compared to 35.3% in the same period last year. The improvement in margin was attributable to increased prices, efficient levels of production, increased sales including service related charges such as installation, and relatively stable material costs.
Selling, general and administrative expense for the six months ended July 31, 2007 increased by approximately $1,802,000 compared to the same period last year, but were comparable as a percentage of sales. The increase in spending was attributable to increased service related costs and increased variable compensation costs.
Interest expense decreased by approximately $739,000 compared to the same period last year. The decrease is due to reduced interest rates in addition to lower loan balances.
As disclosed in Footnote 6 in the Form 10K for the period ended January 31, 2007, the Company has recorded a valuation allowance against the Company’s net deferred tax asset. The Company reviews the required valuation allowance on a quarterly basis. If the positive trend in operating results for the second quarter ended July 31, 2007 continues through the third quarter ending October 31, 2007 and fourth quarter ending January 31, 2008, the Company anticipates that there may be a favorable adjustment in the required valuation allowance that would be recorded in the quarter ending October 31, 2007 or quarter ending January 31, 2008. The adjustment would be non-cash, and result in recording an increase in net deferred tax asset with a corresponding offset to income tax benefit. The amount of valuation allowance subject to the quarterly review process, adjusting for net operating losses utilized, is approximately $8 million.
Financial Condition
As a result of seasonally high shipments in the second quarter, accounts and notes receivable increased by approximately $33 million at July 31, 2007 compared to January 31, 2007. Receivables increased at July 31, 2007 compared to July 31, 2006 due to the increase in second quarter sales compared to the prior year. The Company traditionally builds large quantities of component inventory during the first quarter in anticipation of seasonally high summer shipments. During the second and third quarters, the Company reduces levels of component production and assembles components to a finished goods state as customer orders are received. At July 31, 2007, inventories are slightly higher than the prior year. This increase is proportional to the increased order backlog at July 31, 2007 compared to the prior year. The increase in receivables and inventory during the first six months was financed through the credit facility with Wells Fargo Bank.
At July 31, 2007 compared to July 31, 2006, borrowings under the line of credit decreased by more than $13,600,000. The impact of net income of more than $11,600,000 during the rolling 12 months ending July 31, 2007, and depreciation in excess of capital expenditures have improved the financial strength of the Company.
The Company has established a goal of limiting capital spending to less than $5,000,000 for 2007, which is approximately two-thirds of anticipated depreciation expense. Capital spending for the six months ended July 31, 2007, was $2,114,000 compared to $1,967,000 for the

 


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same period last year. Capital expenditures are being financed through the Company’s credit facility established with Wells Fargo Bank and operating cash flow. Approximately $32,488,000 was available for borrowing as of July 31, 2007.
Net cash used in operating activities for the six months ended July 31, 2007 was $18,526,000 compared to $24,493,000 for the same period last year. The improvement in cash used in operations for the first six months was attributable to increased profitability, reduced increase in inventory, offset slightly by an increase in receivables compared to the prior year. 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 for the next twelve months.
Off Balance Sheet Arrangements
During the first six months, there were no material changes in the Company’s off balance sheet arrangements or contractual obligations and commercial commitments from those disclosed in the Form 10-K for the fiscal year ended January 31, 2007.
Critical Accounting Policies and Estimates
The Company’s critical accounting policies are outlined in its Form 10-K for fiscal year ended January 31, 2007.
Forward-Looking Statements
From time to time, including in this quarterly report, the Company or its representatives have made and 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,” “believes,” “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 availability and cost of materials, especially steel, availability and cost of labor, demand for the Company’s products, 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 fiscal year ended January 31, 2007.
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
The Company has entered into a revolving credit facility with Wells Fargo Bank, which was amended and restated in March 2007, and which provides a term loan of $20,000,000 and a secured revolving line of credit that varies as a percentage of inventory and receivables, up to a maximum of $40,000,000, with the maximum increasing to $50,000,000 during certain months of the year. The amended agreement, which became effective March 2007, extended the maturity date from February 15, 2008 to February 15, 2009. The term note is a two-year loan, amortizing at $10,000,000 per year with interest payable monthly at a fluctuating rate equal to the Wells Fargo Bank’s prime rate (8.25% at July 31, 2007) plus a 0.5% margin.
Interest under the credit facility is payable monthly at a fluctuating rate equal to the Wells Fargo Bank’s prime rate plus a fluctuating margin similar to the term note. The revolving line typically provides for advances of 80% on eligible accounts receivable and 20% – 60% on eligible inventory. The advance rates fluctuate depending on the time of the year and the types of assets. The agreement has an unused commitment fee of 0.375%. Approximately $32,488,000 was available for borrowing as of July 31, 2007.
The revolving credit facility with Wells Fargo Bank is subject to various financial covenants including a liquidity requirement, a leverage requirement, a cash flow coverage requirement and profitability requirements. The agreement also places certain restrictions on capital expenditures, new operating leases, dividends and the repurchase of the Company’s common stock. The revolving credit facility is secured by the Company’s accounts receivable, inventories, equipment and property. The Company was in compliance with its covenants at July 31, 2007.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed with the Securities and Exchange Commission (the “Commission”) pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Assessing the costs and benefits of such controls and procedures necessarily involves the exercise of judgment by management, and such controls and procedures, by their nature, can provide only reasonable assurance that management’s objectives in establishing them will be achieved.
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its President and Chief Executive Officer along with its Principal Financial Officer, of the effectiveness of the design and operation of disclosure controls and procedures as of the end of the period covered by this Annual Report pursuant to Exchange Act Rule 13a-15. Based upon the foregoing, the Company’s President and Chief Executive Officer along with the Company’s Principal Financial Officer concluded that, subject

 


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to the limitations noted in this Part I, Item 4, Virco’s disclosure controls and procedures are effective in ensuring that (i) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting during the fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 


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PART II
VIRCO MFG. CORPORATION
OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes in risk factors as disclosed in the Form 10-K for the period ended January 31, 2007.
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 19, 2007.
Election of three directors whose terms expire in 2010.
                 
    Votes For   Authority Withheld
     
Douglas A. Virtue
    12,347,103       159,040  
Thomas J. Schulte
    12,375,047       103,127  
Albert J. Moyer
    11,700,800       1,451,646  
Ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for fiscal year 2007 was approved; 12,458,858 shares were voted for the proposal, 9,795 shares were voted against it and 9,522 shares abstained.
The 2007 Virco Mfg. Corporation Incentive Stock Plan was approved; 8,167,540 shares were voted for the proposal, 2,309,069 shares were voted against it and 185,903 shares abstained.
Item 6. Exhibits
Exhibit 31.1 – Certification of Robert A. Virtue, President, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 – Certification of Robert E. Dose, Vice President, Finance, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 – Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 


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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 7, 2007  By:   /s/ Robert E. Dose    
    Robert E. Dose   
    Vice President – Finance