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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, 2004
    
    Commission File Number
    
    1-8777
 VIRCO MFG. CORPORATION 
  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 
  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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ     No The number of shares outstanding of each of the issuers classes of common stock, as of
December 3, 2004. Common Stock
    
    13,098,364 Shares




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VIRCO MFG. CORPORATION INDEX Part I. Financial InformationItem 1.
    
    Financial Statements (unaudited)Condensed consolidated balance sheets - October 31, 2004, January 31, 2004 and October 31, 2003Condensed consolidated statements of income and operations - Three months ended October 31, 2004 and 2003Condensed consolidated statements of operations - Nine months ended October 31, 2004 and 2003Condensed consolidated statements of cash flows - Nine months ended October 31, 2004 and 2003Notes to condensed consolidated financial statements - October 31, 2004Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures about Market RiskItem 4.
    
    Controls and ProceduresPart II. Other InformationItem 1.
    
    Legal ProceedingsItem 2.
    
    Changes in Securities and Use of ProceedsItem 3.
    
    Defaults Upon Senior SecuritiesItem 4.
    
    Submission of Matters to a Vote of Security HoldersItem 5.
    
    Other InformationItem 6.
    
    Exhibits and Reports on Form 8-K(a)  ExhibitsExhibit 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.
 2




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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.(b)  Reports on Form 8-KOn April 14, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K pursuant to Item 5, our interim report on the Company's financial results for the fourth quarter and fiscal year ended January 31, 2004.On June 7, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K pursuant to Item 5, our interim report on the Company's financial results for the first quarter ended April 30, 2004.On September 7, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K pursuant to Item 5, our interim report on the Company's financial results for the second quarter ended July 31, 2004.On December 10, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K pursuant to Item 5, our interim report on the Company's financial results for the third quarter ended October 31, 2004.SignaturesEX-31.1EX-31.2EX-32.1
  3




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##### Table of Contents



PART 1 
 Item 1. Financial Statements 
 VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands)ASSETS
    
    10/31/2004
    
    1/31/2004
    
    10/31/2003Unaudited (Note 1)
    
    
    
    
    
    Unaudited (Note 1)Current assetsCash
    
    $
    1,633
    
    
    $
    2,059
    
    
    $
    2,284Accounts and notes receivable
    
    
    30,097
    
    
    
    17,696
    
    
    
    25,003Less allowance for doubtful accounts
    
    
    331
    
    
    
    225
    
    
    
    320Net accounts and notes receivable
    
    
    29,766
    
    
    
    17,471
    
    
    
    24,683Income tax receivable
    
    
    1,136
    
    
    
    1,423
    
    
    
    853Inventories (Note 2)Finished goods
    
    
    14,180
    
    
    
    10,470
    
    
    
    10,873Work in process
    
    
    5,403
    
    
    
    11,141
    
    
    
    8,615Raw materials and supplies
    
    
    6,218
    
    
    
    6,860
    
    
    
    6,916Total inventories
    
    
    25,801
    
    
    
    28,471
    
    
    
    26,404Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    2,416Prepaid expenses
    
    
    728
    
    
    
    1,962
    
    
    
    589Total current assets
    
    
    59,064
    
    
    
    51,386
    
    
    
    57,229Property, plant & equipmentCost
    
    
    159,309
    
    
    
    157,271
    
    
    
    156,978Less accumulated depreciation
    
    
    101,060
    
    
    
    93,913
    
    
    
    91,949Net property, plant & equipment
    
    
    58,249
    
    
    
    63,358
    
    
    
    65,029Goodwill and other intangible assets
    
    
    2,343
    
    
    
    2,350
    
    
    
    2,200Other assets
    
    
    9,174
    
    
    
    9,174
    
    
    
    13,492Total assets
    
    $
    128,830
    
    
    $
    126,268
    
    
    $
    137,950
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VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data)LIABILITIES AND STOCKHOLDERS' EQUITY
    
    10/31/2004
    
    1/31/2004
    
    10/31/2003Unaudited (Note 1)
    
    
    
    
    
    Unaudited (Note 1)Current liabilitiesChecks released but not yet cleared bank
    
    $
    4,860
    
    
    $
    2,702
    
    
    $
    2,229Accounts payable
    
    
    11,272
    
    
    
    9,513
    
    
    
    5,917Accrued compensation and employee benefits
    
    
    5,662
    
    
    
    5,636
    
    
    
    6,617Current maturities on long-term debt
    
    
    27,018
    
    
    
    3,138
    
    
    
    34,012Other current liabilities
    
    
    4,736
    
    
    
    4,993
    
    
    
    4,754Total current liabilities
    
    
    53,548
    
    
    
    25,982
    
    
    
    53,529Non-current liabilitiesAccrued self-insurance retention and other
    
    
    2,023
    
    
    
    4,053
    
    
    
    3,557Accrued pension expenses
    
    
    13,449
    
    
    
    11,686
    
    
    
    18,550Long term debt (less current portion)
    
    
    
    
    
    
    22,195
    
    
    
    247Total non-current liabilities
    
    
    15,472
    
    
    
    37,934
    
    
    
    22,354Stockholders equityPreferred stock:Authorized 3,000,000 shares, $.01 par value;
none issued or outstanding
    
    
    
    
    
    
    
    
    
    
    Common stock:Authorized 25,000,000 shares, $.01 par
value; 14,585,894 shares issued at
10/31/2004; 14,583,331 shares issued at
1/31/2004 and 10/31/2003
    
    
    146
    
    
    
    146
    
    
    
    145Additional paid-in capital
    
    
    127,140
    
    
    
    127,133
    
    
    
    126,728Accumulated deficit
    
    
    (43,961
    )
    
    
    (41,412
    )
    
    
    (39,424
    )Less treasury stock at cost (1,487,530
shares at 10/31/2004 and 1/31/2004;
1,487,530 at 10/31/2003)
    
    
    (19,271
    )
    
    
    (19,271
    )
    
    
    (19,406
    )Less accumulated comprehensive loss
    
    
    (4,244
    )
    
    
    (4,244
    )
    
    
    (5,976
    )Total stockholders equity
    
    
    59,810
    
    
    
    62,352
    
    
    
    62,067Total liabilities and stockholders equity
    
    $
    128,830
    
    
    $
    126,268
    
    
    $
    137,950
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VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OPERATIONS
Unaudited (Note 1) (Amounts in thousands, except per share data)Three Months Ended10/31/2004
    
    10/31/2003Net sales
    
    $
    69,502
    
    
    $
    65,802Cost of goods sold
    
    
    49,111
    
    
    
    46,937Gross profit
    
    
    20,391
    
    
    
    18,865Operating expenseSelling, general and administrative expense
    
    
    19,825
    
    
    
    21,450Separation charges
    
    
    
    
    
    
    4,589Interest expense
    
    
    545
    
    
    
    50120,370
    
    
    
    26,540Income/(loss) before income taxes
    
    
    21
    
    
    
    (7,675
    )Income tax expense/(benefit)
    
    
    
    
    
    
    Net income/(loss)
    
    $
    21
    
    
    $
    (7,675
    )Weighted average shares outstanding(a)Basic
    
    
    13,105
    
    
    
    13,099Diluted
    
    
    13,384
    
    
    
    13,099Net income/(loss) per common share(a)Basic
    
    $
    0.00
    
    
    $
    (0.59
    )Diluted
    
    $
    0.00
    
    
    $
    (0.59
    )
 (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. 6




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VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited (Note 1) (Amounts in thousands, except per share data)Nine Months Ended10/31/2004
    
    10/31/2003Net sales
    
    $
    168,636
    
    
    $
    162,843Cost of goods sold
    
    
    116,131
    
    
    
    112,601Gross profit
    
    
    52,505
    
    
    
    50,242Operating expenseSelling, general and administrative expense
    
    
    53,571
    
    
    
    59,472Separation charges
    
    
    
    
    
    
    12,377Interest expense
    
    
    1,483
    
    
    
    1,31355,054
    
    
    
    73,162Loss before income taxes
    
    
    (2,549
    )
    
    
    (22,920
    )Income tax expense/(benefit)
    
    
    
    
    
    
    (2,946
    )Net loss
    
    $
    (2,549
    )
    
    $
    (19,974
    )Weighted average shares outstanding(a)Basic
    
    
    13,113
    
    
    
    13,107Net loss per common share(a)Basic
    
    $
    (0.19
    )
    
    $
    (1.52
    )
 (a) Net loss per share was calculated based on basic shares outstanding due to the anti-dilutive
effect on the inclusion of common stock equivalent shares. See Notes to Condensed Consolidated Financial Statements. 7




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VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (Note 1) (Dollar amounts in thousands)
    
    Nine Months Ended10/31/2004
    
    10/31/2003Operating activitiesNet loss
    
    $
    (2,549
    )
    
    $
    (19,974
    )Adjustments to reconcile net loss to net cash
used in operating activitiesDepreciation
    
    
    7,376
    
    
    
    8,901Provision for doubtful accounts
    
    
    96
    
    
    
    102Loss on sale of property, plant and equipment
    
    
    9
    
    
    
    49Changes in assets and liabilitiesAccounts and notes receivable
    
    
    (12,391
    )
    
    
    (7,384
    )Inventories
    
    
    2,670
    
    
    
    16,635Prepaid expenses and other current assets
    
    
    1,234
    
    
    
    906Income taxes receivable/payable
    
    
    287
    
    
    
    (4,391
    )Accounts payable and accrued expenses
    
    
    3,426
    
    
    
    2,230Net cash provided by (used in) operating activities
    
    
    158
    
    
    
    (2,926
    )Investing activitiesCapital expenditures
    
    
    (2,276
    )
    
    
    (943
    )Cash used in investing activities
    
    
    (2,276
    )
    
    
    (943
    )Financing activitiesIssuance of long-term debt
    
    
    2,727
    
    
    
    5365Repayment of long-term debt
    
    
    (1,042
    )
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (446
    )Payment of cash dividend
    
    
    
    
    
    
    (525
    )Issuance of common stock
    
    
    7
    
    
    
    120Net cash provided by financing activities
    
    
    1,692
    
    
    
    4,514Net change in cash
    
    
    (426
    )
    
    
    645Cash at beginning of year
    
    
    2,059
    
    
    
    1,639Cash at end of quarter
    
    $
    1,633
    
    
    $
    2,284
 See Notes to Condensed Consolidated Financial Statements. 8




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VIRCO MFG. CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 31, 2004 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 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
and nine month periods ended October 31, 2004, are not necessarily
indicative of the results that may be expected for the year ending
January 31, 2005. The balance sheet at January 31, 2004, 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, 2004.Note 2.
    
    InventoriesYear end financial statements at January 31, 2004 reflect
inventories verified by physical counts with the material content
valued by the LIFO method. At October 31, 2004 and 2003, 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 adjustments
have been made for the periods ended October 31, 2004 and 2003.
LIFO reserves at October 31, 2004 and January 31, 2004 were
$4,042,000. LIFO reserves at October 31, 2003 were $3,527,000.
Management continually monitors production costs, material costs
and inventory levels to determine that interim inventories are
fairly stated.Note 3.
    
    DebtThe Company has entered into a revolving credit facility with Wells Fargo Bank, amended
and restated January 27, 2004, which provides a term loan of $12,500,000 and a secured
revolving line of credit that varies with levels of inventory and receivables, up to a
maximum of $45,000,000. The term loan is a three-year amortizing line with interest
payable monthly at a fluctuating rate equal to the Banks prime rate plus a fluctuating
margin of 0.75%, or at LIBOR plus 3.25%. Under the term loan, the Bank is entitled to
require the Company to fix the interest rate on up to $6 million of debt. Effective
February 1, 2004, Virco purchased an interest rate swap from Wells Fargo Bank, that
effectively fixed the rate of interest on $6 million for a period of three years at a
rate of 6.32%. The revolving line has an 18-month maturity to expire on August 1, 2005
with interest payable monthly at a fluctuating rate equal to the Banks prime rate (4.75%
at October 31, 2004) plus a margin of 0.50%, or at LIBOR plus 2.75%. Subsequent to
October 31, 2004, the revolving line was further extended by an additional three months
expiring November 1, 2005. The revolving line also allows the Company the option to
borrow under 30- 60- and 90-day fixed term rates at LIBOR plus 2.75%.
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At October 31, 2004, the Company was in violation of certain of its loan covenants. In
December 2004, Wells Fargo provided the Company with a waiver of these covenants as of
October 31, 2004. 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, 2005. Accordingly,
the debt has been classified as a current liability on the October 31, 2004 balance
sheet. The Company is currently negotiating with Wells Fargo to restructure the credit
facility so that the Company will comply with the future 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.For the quarter ended October 31, 2003, the Company violated one of the covenants under
the line of credit with Wells Fargo Bank. Accordingly, the debt has been classified as a
current liability on the October 31, 2003 balance sheet. Wells Fargo provided a waiver
of the covenant.Note 4.
    
    Income TaxesWe recognize deferred income taxes under the asset and liability method of accounting for
income taxes in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income
Taxes. Deferred income taxes are
recognized for differences between the financial statement and tax basis of assets and
liabilities at enacted statutory tax rates in effect for the years in which the
differences are expected to reverse. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date. In
assessing the realizability of deferred tax assets, we consider whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income or reversal of deferred tax liabilities during the periods in which those
temporary differences become deductible. We consider the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies in making
this assessment. Based on this consideration, we believe it is more likely than not that
the net deferred tax assets will not be realized, and a valuation allowance has been
recorded against the net deferred tax assets at October 31, 2004 and January 31, 2004; a
partial valuation allowance has been recorded at October 31, 2003. At October 31, 2004,
the Company had net operating loss carry forwards for federal and state income tax
purposes, expiring at various dates through 2024, if not utilized. Federal net operating
losses that potentially can be carried forward total approximately $13.8 million at
October 31, 2004.Note 5.
    
    Net Income/(Loss) Per ShareFor the three month period ended October 31, 2004, net income/(loss) per share was
calculated based on diluted shares outstanding at October 31, 2004. For the nine month
period ended October 31, 2004 and three and nine month periods ended October 31, 2003,
net loss per share was calculated based on basic shares outstanding due to the
anti-dilutive effect of the inclusion of common stock equivalent shares. The following
table sets forth the computation of income/(loss) per share (in thousands, except
per share data) :
 10




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Three Months Ended
    
    Nine Months EndedOctober 31
    
    October 312004
    
    2003
    
    2004
    
    2003Net income/(loss)
    
    $
    21
    
    
    $
    (7,675
    )
    
    $
    (2,549
    )
    
    $
    (19,974
    )Average shares
outstanding
    
    
    13,105
    
    
    
    13,099
    
    
    
    13,113
    
    
    
    13,107Net effect of
dilutive stock
options  based on
the treasury stock
method using
average market
price
    
    
    279
    
    
    
    35
    
    
    
    206
    
    
    
    23Totals
    
    
    13,384
    
    
    
    13,134
    
    
    
    13,319
    
    
    
    13,130Net income/(loss)
per share  basic
    
    $
    0.00
    
    
    $
    (0.59
    )
    
    $
    (0.19
    )
    
    $
    (1.52
    )Net income/(loss)
per share  diluted
    
    $
    0.00
    
    
    $
    (0.59
    )
    
    $
    (0.19
    )
    
    $
    (1.52
    )
 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 information for
the three and nine months ended October 31, 2004 and October 31, 2003 are as follows (in
thousands, except per share data): Three Months Ended
    
    Nine Months EndedOctober 31
    
    October 312004
    
    2003
    
    2004
    
    2003Net income/(loss)
    
    $
    21
    
    
    $
    (7,675
    )
    
    $
    (2,549
    )
    
    $
    (19,974
    )Total
stock-based employee
compensation expense
determined under the
fair value based
method for all
awards, net of
related tax effects
    
    
    13
    
    
    
    6
    
    
    
    40
    
    
    
    43Net income/(loss)
    
    $
    8
    
    
    $
    (7,691
    )
    
    $
    (2,589
    )
    
    $
    (20,017
    )Net
income/(loss) per
share  basic
    
    $
    0.00
    
    
    $
    (0.59
    )
    
    $
    (0.20
    )
    
    $
    (1.52
    )Net
income/(loss) per
share  diluted
    
    $
    0.00
    
    
    $
    (0.59
    )
    
    $
    (0.19
    )
    
    $
    (1.52
    )
 11




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Note 6.
    
    Comprehensive Income/(Loss)Comprehensive income/(loss) for the three and nine months ended October 31,
2004 and October 31, 2003 was the same as net income/(loss) reported on the
statement of income and operations.Accumulated comprehensive loss at October 31, 2004, January 31, 2004 and October 31, 2003
is composed of minimum pension liability adjustments.Note 7.
    
    Retirement PlansThe Company and its subsidiaries cover all employees under a noncontributory defined
benefit retirement plan, 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 10K dated January 31, 2004, 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 (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 10K dated January
31, 2004, 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 10K dated January 31, 2004, 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 and nine
months ended October 31, 2004 and 2003 were as follows (in thousands):
 Non-EmployeeDirectors RetirementPension Plan
    
    VIP Retirement Plan
    
    PlanThree months ended October 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    57
    
    
    $
    346
    
    
    $
    65
    
    
    $
    200
    
    
    $
    5
    
    
    $
    5Interest cost
    
    
    321
    
    
    
    466
    
    
    
    83
    
    
    
    122
    
    
    
    6
    
    
    
    6Expected return on plan assets
    
    
    (250
    )
    
    
    (294
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of transition amount
    
    
    (9
    )
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    95
    
    
    
    140
    
    
    
    (115
    )
    
    
    (124
    )
    
    
    22
    
    
    
    22Recognized net actuarial loss
    
    
    52
    
    
    
    270
    
    
    
    22
    
    
    
    102
    
    
    
    (6
    )
    
    
    (6
    )Settlement and curtailment
    
    
    
    
    
    
    1,539
    
    
    
    
    
    
    
    (132
    )
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    266
    
    
    $
    2,457
    
    
    $
    55
    
    
    $
    168
    
    
    $
    27
    
    
    $
    27
 12




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##### Table of Contents



Non-EmployeeDirectors RetirementPension Plan
    
    VIP Retirement Plan
    
    PlanNine months ended October 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    172
    
    
    $
    1,038
    
    
    $
    195
    
    
    $
    600
    
    
    $
    16
    
    
    $
    14Interest cost
    
    
    963
    
    
    
    1,398
    
    
    
    249
    
    
    
    367
    
    
    
    18
    
    
    
    17Expected return on plan assets
    
    
    (750
    )
    
    
    (881
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of transition amount
    
    
    (27
    )
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    284
    
    
    
    421
    
    
    
    (344
    )
    
    
    (374
    )
    
    
    65
    
    
    
    66Recognized net actuarial loss
    
    
    158
    
    
    
    808
    
    
    
    65
    
    
    
    307
    
    
    
    (19
    )
    
    
    (17
    )Settlement and curtailment
    
    
    
    
    
    
    3,077
    
    
    
    
    
    
    
    (264
    )
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    800
    
    
    $
    5,830
    
    
    $
    165
    
    
    $
    636
    
    
    $
    80
    
    
    $
    80
 Note 8.
    
    WarrantyThe Company provides a product warranty on most products. It generally warrants that
customers can return a defective product during the specified warranty period following
purchase in exchange for a replacement product or that the Company can repair the product
at no charge to the customer. The Company determines whether replacement or repair is
appropriate in each circumstance. The Company uses historic data to estimate appropriate
levels of warranty reserves. Because product mix, production methods, and raw material
sources change over time, historic data may not always provide precise estimates for
future warranty expense. The following is a summary of the Companys warranty-claim
activity for the nine months ended October 31, 2004 and 2003.
 Nine months ended October 31,2004
    
    2003Beginning Accrued Warranty Balance
    
    $
    1,351,000
    
    
    $
    901,000Provision
    
    
    1,225,000
    
    
    
    898,000Costs Incurred
    
    
    (1,225,000
    )
    
    
    (898,000
    )Ending Accrued Warranty Balance
    
    $
    1,351,000
    
    
    $
    901,000
 Note 9.
    
    Separation ChargesDuring the second and third quarters of fiscal year 2003, the Company determined that the
reduced level of orders received in the first quarter would likely continue for the rest
of the year and possibly through 2004 as well. In the second quarter the Company
announced a Voluntary Severance Program in addition to other measures
that included
voluntary part-time work and voluntary sabbaticals. Under the program, employees who
voluntarily terminated their employment with the Company were paid six months of
severance pay. During the second quarter, nearly 500 employees accepted this offer.
Approximately 25% of the workforce severed their employment in June and July. Including
employer taxes, the Company incurred approximately $7.8 million in severance costs during
the second quarter. During the third quarter, the Company elected to further reduce expenses and head count
through a non-voluntary reduction in force. In September, the Company laid off an
additional 160 employees. These employees were given six months of severance pay in addition to a variety of
outplacement service benefits to help them locate new employment. The Company incurred
approximately $2.6 million of severance costs and approximately
$2 million in pension settlement costs in the third quarter related to this
reduction in force.
 13




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##### Table of Contents



VIRCO MFG. CORPORATION 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Results of Operations: For the third quarter of 2004, the Company earned net income of $21,000 on sales of $69,502,000
compared to a net loss of $7,675,000 on sales of $65,802,000 in the same period last year. Sales
for the third quarter ended October 31, 2004 increased by $3,700,000, a 6% increase, compared to
the same period last year. Incoming orders for the same period increased by approximately 3%.
For the nine month period ending October 31, 2004, the Company incurred a net loss of $2,549,000 on
sales of $168,636,000, compared to a net loss of $19,974,000 on sales of $162,843,000 in the same
period last year. Incoming orders for same period increased by approximately 3%. Backlog at
October 31, 2004 was slightly lower compared to the prior year. As more fully disclosed in the Companys Annual Report for the fiscal year ended January 31, 2004,
in the prior year the Company incurred a severe decline in sales volume, primarily due to decreased
funding levels at state and local governments. In the prior year, Virco offered employees a
voluntary severance package, resulting in a $7.8 million separation charge in the second quarter
last year. This voluntary program was followed by a mandatory reduction in force in the third
quarter, resulting in a $4.6 million charge. These programs were intended to reduce the cost
structure of the Company so that Virco could operate profitably at an annual sales volume of
approximately $200 million. For the first nine months of the current year, the rate of orders from
publicly funded entities has stabilized. The efforts to reduce the cost structure of the Company
have been effective, with the Company shipping increased sales during the first nine months while
reducing selling, general and administrative spending by nearly $6 million. The Company has
made similar reductions in manufacturing overhead spending, but these savings have been offset by
increased material costs. Gross profit for the third quarter and first nine months, as a percentage of sales, remained
slightly higher than the same periods last year. For the quarter ended October 31, 2004 as well as
the first nine months, the Company has incurred significantly higher steel prices. In addition to
higher prices, the Company has not always been able to purchase the precise steel desired,
resulting in yield variances. Since the Company sells to schools under annual contracts, the
Company has been unable to pass the impact of these increased material costs to its customers. As
steel prices and availability over the next three months is still quite uncertain, it is not
possible to accurately quantify the impact on the Company for the year, but the cost could be in
the range of seven to ten million dollars. For the first nine months decreased overhead spending
substantially offset the increased material cost, resulting in slightly improved gross margin
percentages. In response to the increased costs of raw material and freight, the Company intends to raise prices
for the fiscal year ending January 31, 2006. In addition to price increases, the Company intends
to promote pricing structures that encourage larger average order sizes, facilitating freight and
warehousing efficiencies. Due to the nature of the Companys annual contracts, the planned price
increase will not begin to take effect until the first quarter of
2005, and will not be fully effective
until the summer of 2005. Selling, general and administrative (SG&A) expense for the quarter ended October 31, 2004 declined
by approximately $1.6 million compared to the same period last year. SG&A expense decreased as a
percentage of sales by more than 4%. SG&A expense for the nine months ended October 31, 2004
declined by nearly $6 million compared to the same period last year, and decreased as a percentage
of sales by approximately 4%. 14




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##### Table of Contents



The decreased expense is due to improved warehousing and freight efficiencies, reductions in
staffing, and freezing of the defined benefit plans. Interest expense for the first nine months increased by approximately $170,000 compared to the same
period last year. The increase is attributable to increased rates offset by reduced borrowings. At October 31, 2004, the Company had net operating loss carry forwards for federal and state income
tax purposes, expiring at various dates through 2024, if not utilized. Federal net operating
losses that potentially can be carried forward total approximately $13.8 million at October 31,
2004. In the prior year, the Company recorded an income tax benefit of $2.9 million, primarily
attributable to net operating loss carry backs available. For the current year, the Company did
not accrue an income tax benefit. Financial Condition: As a result of seasonally higher shipments during the summer, accounts receivable were $12.3
million greater than January 31, 2004. Accounts receivable were approximately $5 million higher
than October 31, 2003 due to increased October shipping activity
this year in addition to a larger number of
projects, which take longer to collect. The Company traditionally builds large quantities of
inventory during the first and second quarters in anticipation of seasonally high summer shipments.
In the prior year, the Company severely curtailed production and
inventory to reflect reduced sales
volumes. For the current year, sales volume has stabilized and the related volume of inventory
has stabilized. The Company decreased inventory by nearly $2.7 million compared to January 31,
2004. Inventories were approximately $0.6 million less than the
level at October 31, 2003 despite the increased
cost of raw materials due to improved inventory management. The increase in receivables and
inventory were financed through the credit facility with Wells Fargo Bank. The Company has established a goal of limiting capital spending to approximately $5,000,000 for
2004, which is approximately one-half of anticipated depreciation expense. Capital spending for
the nine months ended October 31, 2004 was $2,276,000 compared to $943,000 for the same
period last year. Capital expenditures are being financed through the Companys credit facility
established with Wells Fargo Bank. Net cash provided in operating activities for the first nine months ended October 31, 2004 was
$158,000 compared to net cash used of $2,900,000 for the same period last year. The improvement
in cash provided by operating activities was due to an improvement in operating loss for the first
nine months primarily attributable to the reduced cost structure, offset by a smaller reduction in inventories along with a larger increase in
receivables. In April 1998, the Board of Directors approved a stock buyback program. As of October 31, 2004,
the Company has repurchased approximately 1,454,000 shares at a cost of approximately $18,788,000
since the inception of this program. Under the current Wells Fargo Bank credit facility, the
Company is restricted from buying back additional shares or paying cash dividends. At October 31, 2004, the Company was in violation of certain of the debt covenants related to the
credit agreement with Wells Fargo. Effective December 2, 2004, Wells Fargo provided the Company
with a waiver of these covenenants as of October 31, 2004. Based upon managements forecasts for
operating results for the remainder of the year, it is more likely than not that the Company will
violate the loan covenants at the fourth quarter ending January 31, 2005. Accordingly, the debt
has been classified as a current liability on the October 31, 2004 balance sheet. The Company is
currently negotiating with Wells Fargo to restructure the credit facility 15




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##### Table of Contents



to provide adequate liquidity for its fiscal year ending January 31, 2006 business plan and to
establish covenants consistent with the plan. 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. Approximately $11,000,000 was available for
borrowing as of October 31, 2004. Critical Accounting Policies and Estimates: The Companys critical accounting policies are outlined in its Form 10-K for fiscal year ended
January 31, 2004. Forward-Looking Statements: From time to time, 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, 2004. 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 For fiscal 2004, the Company has entered into a revolving credit facility with Wells Fargo Bank, as
amended and restated January 27, 2004, which provides a term loan of $12,500,000 and a secured
revolving line of credit that varies with levels of inventory and receivables, up to a maximum of
$45,000,000. The term loan is a three-year amortizing line with interest payable monthly at a
fluctuating rate equal to the Banks prime rate (4.75% at October 31, 2004) plus a fluctuating
margin of 0.75%, or at LIBOR plus 3.25%. Under the term loan, the Bank is entitled to require the
Company to fix the interest rate on up to $6 million of debt. Effective February 1, 2004, the
Company purchased an interest rate swap from Wells Fargo Bank that effectively fixed the rate of
interest on $6 million for a period of three years at a rate of 6.32%. The revolving line has an
18-month maturity with interest payable monthly at a fluctuating rate equal to the Banks prime
rate plus a margin of 0.50%, or at LIBOR plus 2.75%. The revolving line also allows the Company the
option to borrow under 30- 60- and 90-day fixed term rates at LIBOR plus 2.75%. Accordingly, a 100
basis point upward fluctuation in the lenders base rate would cause the Company to incur
additional interest charges of approximately $108,000 for the fiscal quarter ended October 31,
2004. The Company would benefit from a similar interest savings if the base rate 16




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##### Table of Contents



were to fluctuate downward by a like amount. As of October 31, 2004, the Company has borrowed
$26,682,000 under its Wells Fargo term loan and asset-based credit facility. 
 Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed with the Securities and Exchange
Commission (the SEC) pursuant to the Securities Exchange Act of 1934 (the Exchange Act) is
recorded, processed, summarized and reported within the time periods specified in the SEC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. We carried out an evaluation, under the supervision and with the participation of our companys
management, including the Companys President and Chief Executive Officer along with the Companys
Chief Financial Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures as of the end of the period covered by this Quarterly 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 Chief Financial Officer and other members of
management, concluded that the Companys disclosure controls and procedures are effective in
alerting them in a timely fashion to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Companys periodic filings with the
Securities Exchange Commission. (b) Changes In Internal Control Over Financial Reporting No changes in the Companys internal control over financial reporting have come to managements
attention during the last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, its internal control over financial reporting. 17




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##### Table of Contents



PART II VIRCO MFG. CORPORATION OTHER INFORMATION 
 Item 1. Legal Proceedings None 
 Item 2. Changes in Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 Item 6. Exhibits and Reports on Form 8-K (a) 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. (b) Reports on Form 8-K On April 14, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K pursuant
to Item 5, our interim report on the Companys financial results for the fourth
quarter and fiscal year ended January 31, 2004. 18




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##### Table of Contents



On June 7, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K pursuant to
Item 5, our interim report on the Companys first quarter results. On September 7, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K
pursuant to Item 5, our interim report on the Companys financial results for the
second quarter ended July 31, 2004. On December 10, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K
pursuant to Item 5, our interim report on the Companys financial results for the
third quarter ended October 31, 2004. Signatures 19




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##### Table of Contents



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:
    
    December 10, 2004
    
    By:
    
    /s/ Robert E. DoseRobert E. DoseVice President  FinanceDate:
    
    December 10, 2004
    
    By:
    
    /s/ Bassey YauBassey YauCorporate Controller
 20