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SECURITIES AND EXCHANGE COMMISSION  Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934 FORM 10-Q For Quarter Ended July 31, 2004 Commission File Number 1-8777 VIRCO MFG. CORPORATION 
  Delaware
    
    95-1613718(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 2027 Harpers Way, Torrance, CA
    
    90501(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (310) 533-0474 No change 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
x No o The number of shares outstanding of each of the issuers classes of common
stock, as of August 4, 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 - July 31, 2004, January 31,
2004 and July 31, 2003Condensed consolidated statements of income and operations - Three
months ended July 31, 2004 and 2003Condensed consolidated statements of operations - Six months ended
July 31, 2004 and 2003Condensed consolidated statements of cash flows - Six months ended
July 31, 2004 and 2003Notes to condensed consolidated financial statements - July 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-KExhibit 31.1Exhibit 31.2Exhibit 32.1
  (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. 2




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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. 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. Signatures 3




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PART 1 
 Item 1. Financial Statements VIRCO MFG. CORPORATION 
 CONDENSED CONSOLIDATED BALANCE SHEETS 7/31/2004
    
    1/31/2004
    
    7/31/2003Unaudited (Note 1)
    
    
    
    
    
    Unaudited (Note 1)ASSETSCurrent assetsCash
    
    $
    1,012
    
    
    $
    2,059
    
    
    $
    2,270Accounts and notes receivable
    
    
    39,137
    
    
    
    17,696
    
    
    
    35,743Less allowance for doubtful accounts
    
    
    312
    
    
    
    225
    
    
    
    358Net accounts and notes receivable
    
    
    38,825
    
    
    
    17,471
    
    
    
    35,385Income tax receivable
    
    
    1,130
    
    
    
    1,423
    
    
    
    919Inventories (Note 2)Finished goods
    
    
    21,091
    
    
    
    10,470
    
    
    
    24,236Work in process
    
    
    13,761
    
    
    
    11,141
    
    
    
    17,084Raw materials and supplies
    
    
    8,030
    
    
    
    6,860
    
    
    
    10,079Total inventories
    
    
    42,882
    
    
    
    28,471
    
    
    
    51,399Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    2,416Prepaid expenses
    
    
    775
    
    
    
    1,962
    
    
    
    565Total current assets
    
    
    84,624
    
    
    
    51,386
    
    
    
    92,954Property, plant & equipmentCost
    
    
    158,768
    
    
    
    157,271
    
    
    
    156,828Less accumulated depreciation
    
    
    98,630
    
    
    
    93,913
    
    
    
    89,094Net property, plant & equipment
    
    
    60,138
    
    
    
    63,358
    
    
    
    67,734Goodwill and other intangible assets
    
    
    2,346
    
    
    
    2,350
    
    
    
    2,200Other assets
    
    
    9,174
    
    
    
    9,174
    
    
    
    13,492Total assets
    
    $
    156,282
    
    
    $
    126,268
    
    
    $
    176,380
 4




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VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS 7/31/2004
    
    1/31/2004
    
    7/31/2003Unaudited (Note 1)
    
    
    
    
    
    Unaudited (Note 1)LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesChecks released but not yet cleared bank
    
    $
    3,596
    
    
    $
    2,702
    
    
    $
    3,743Accounts payable
    
    
    18,401
    
    
    
    9,513
    
    
    
    9,942Accrued compensation and employee benefits
    
    
    5,841
    
    
    
    5,636
    
    
    
    9,376Current maturities on long-term debt
    
    
    21,261
    
    
    
    3,138
    
    
    
    58,363Other current liabilities
    
    
    5,016
    
    
    
    4,993
    
    
    
    5,478Total current liabilities
    
    
    54,115
    
    
    
    25,982
    
    
    
    86,902Non-current liabilitiesAccrued self-insurance retention and other
    
    
    3,958
    
    
    
    4,053
    
    
    
    4,527Accrued pension expenses
    
    
    12,860
    
    
    
    11,686
    
    
    
    15,084Long term debt (less current portion)
    
    
    25,560
    
    
    
    22,195
    
    
    
    Total non-current liabilities
    
    
    42,378
    
    
    
    37,934
    
    
    
    19,611Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    98Stockholders 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 at 7/31/2004;
14,583,331 shares issued at
1/31/2004 and 7/31/2003
    
    
    146
    
    
    
    146
    
    
    
    146Additional paid-in capital
    
    
    127,140
    
    
    
    127,133
    
    
    
    126,728Accumulated deficit
    
    
    (43,982
    )
    
    
    (41,412
    )
    
    
    (31,750
    )Less treasury stock at cost (1,487,530
shares at 7/31/2004 and 1/31/2004;
1,484,332 at 7/31/2003)
    
    
    (19,271
    )
    
    
    (19,271
    )
    
    
    (19,379
    )Less accumulated comprehensive loss
    
    
    (4,244
    )
    
    
    (4,244
    )
    
    
    (5,976
    )Total stockholders equity
    
    
    59,789
    
    
    
    62,352
    
    
    
    69,769Total liabilities and stockholders equity
    
    $
    156,282
    
    
    $
    126,268
    
    
    $
    176,380
 5




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VIRCO MFG. CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OPERATIONS  (Amounts in thousands, except per share data) Three Months Ended7/31/2004
    
    7/31/2003Net sales
    
    $
    68,813
    
    
    $
    65,861Cost of goods sold
    
    
    47,016
    
    
    
    44,895Gross profit
    
    
    21,797
    
    
    
    20,966Operating expenseSelling, general and administrative expense
    
    
    19,204
    
    
    
    21,426Separation charges
    
    
    
    
    
    
    7,788Interest expense
    
    
    562
    
    
    
    41819,766
    
    
    
    29,632Income/(loss) before income taxes
    
    
    2,031
    
    
    
    (8,666
    )Income tax expense/(benefit)
    
    
    
    
    
    
    (380
    )Net income/(loss)
    
    $
    2,031
    
    
    $
    (8,286
    )Weighted average shares outstanding(a)Basic
    
    
    13,098
    
    
    
    13,095Diluted
    
    
    13,406
    
    
    
    13,095Net income/(loss) per common share(a)Basic
    
    $
    0.16
    
    
    $
    (0.63
    )Diluted
    
    $
    0.15
    
    
    $
    (0.63
    )Dividend per common shareCash
    
    $
    
    
    
    $
    0.02
 (a) For fiscal year 2003, net loss per share was calculated based on basic shares
outstanding at July 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  (Amounts in thousands, except per share data) Six Months Ended7/31/2004
    
    7/31/2003Net sales
    
    $
    99,134
    
    
    $
    97,041Cost of goods sold
    
    
    67,020
    
    
    
    65,664Gross profit
    
    
    32,114
    
    
    
    31,377Operating expenseSelling, general and administrative expense
    
    
    33,745
    
    
    
    38,022Separation charges
    
    
    
    
    
    
    7,788Interest expense
    
    
    939
    
    
    
    81234,684
    
    
    
    46,622Loss before income taxes
    
    
    (2,570
    )
    
    
    (15,245
    )Income tax expense/(benefit)
    
    
    
    
    
    
    (2,946
    )Net loss
    
    $
    (2,570
    )
    
    $
    (12,299
    )Weighted average shares outstanding(a)Basic
    
    
    13,111
    
    
    
    13,247Net loss per common share(a)Basic
    
    $
    (0.20
    )
    
    $
    (0.93
    )Dividend per common shareCash
    
    $
    
    
    
    $
    0.04
 (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) Six Months Ended7/31/2004
    
    7/31/2003Operating activitiesNet loss
    
    $
    (2,570
    )
    
    $
    (12,299
    )Adjustments to reconcile net loss to net cash used
in operating activitiesDepreciation
    
    
    4,934
    
    
    
    6,030Provision for doubtful accounts
    
    
    87
    
    
    
    102Loss on sale of property, plant and equipment
    
    
    2
    
    
    
    49Changes in assets and liabilitiesAccounts and notes receivable
    
    
    (21,441
    )
    
    
    (18,086
    )Inventories
    
    
    (14,411
    )
    
    
    (8,360
    )Prepaid expenses and other current assets
    
    
    1,187
    
    
    
    930Income taxes receivable/payable
    
    
    293
    
    
    
    (4,457
    )Accounts payable and accrued expenses
    
    
    11,089
    
    
    
    8,332Net cash used in operating activities
    
    
    (20,830
    )
    
    
    (27,759
    )Investing activitiesCapital expenditures
    
    
    (1,718
    )
    
    
    (777
    )Proceeds from sale of property, plant and equipment
    
    
    6
    
    
    
    Net cash used in investing activities
    
    
    (1,712
    )
    
    
    (777
    )Financing activitiesIssuance of long-term debt
    
    
    22,530
    
    
    
    30,622Repayment of long-term debt
    
    
    (1,042
    )
    
    
    (631
    )Purchase of treasury stock
    
    
    
    
    
    
    (419
    )Payment of cash dividend
    
    
    
    
    
    
    (525
    )Issuance of common stock
    
    
    7
    
    
    
    120Net cash provided by financing activities
    
    
    21,495
    
    
    
    29,167Net change in cash
    
    
    (1,047
    )
    
    
    631Cash at beginning of year
    
    
    2,059
    
    
    
    1,639Cash at end of quarter
    
    $
    1,012
    
    
    $
    2,270
 See Notes to Condensed Consolidated Financial Statements. 8




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VIRCO MFG. CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 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 six month periods ended July 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 July 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 July 31, 2004 and 2003. LIFO
reserves at July 31, 2004 and January 31, 2004 were $4,042,000.
LIFO reserves at July 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 with interest payable monthly at a fluctuating rate equal to
the Banks prime rate (4.25% at July 31, 2004) 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%. As of July 31, 2003, the Company violated one of the
covenants under the line of credit with Wells Fargo Bank. Wells Fargo
provided a waiver of the covenant, but 9




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required the Company to limit stock buyback activity to $250,000 for
the period between June 4, 2003 and December 1, 2003.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 July 31, 2004 and January 31,
2004; a partial valuation allowance has been recorded at July 31, 2003.
At July 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 can
potentially be carried forward total approximately $13.8 million at
July 31, 2004.Note 5.
    
    Net Income/(Loss) Per ShareFor the three and six month periods ended July 31, 2004, net
income/(loss) per share was calculated based on diluted shares
outstanding at July 31, 2004. For the three and six month periods
ended July 31, 2003, net loss per share was calculated based on basic shares outstanding at July 31, 2003 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): Three Months Ended
    
    Six Months EndedJuly 31
    
    July 312004
    
    2003
    
    2004
    
    2003Net income/(loss)
    
    $
    2,031
    
    
    $
    (8,286
    )
    
    $
    (2,570
    )
    
    $
    (12,299
    )Average shares
outstanding
    
    
    13,098
    
    
    
    13,095
    
    
    
    13,111
    
    
    
    13,247Net effect of
dilutive stock
options  based on
the treasury stock
method using
average market
price
    
    
    308
    
    
    
    15
    
    
    
    169
    
    
    
    73Totals
    
    
    13,406
    
    
    
    13,110
    
    
    
    13,280
    
    
    
    13,320
 10




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Three Months Ended
    
    Six Months EndedJuly 31
    
    July 312004
    
    2003
    
    2004
    
    2003Net income/(loss)
per share - basic
    
    $
    0.16
    
    
    $
    (0.63
    )
    
    $
    (0.20
    )
    
    $
    (0.93
    )Net income/(loss)
per share - diluted
    
    $
    0.15
    
    
    $
    (0.63
    )
    
    $
    (0.20
    )
    
    $
    (0.93
    )
 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 six months ended July 31, 2004 and July
31, 2003 are as follows (in thousands, except per share data): Three Months Ended
    
    Six Months EndedJuly 31
    
    July 312004
    
    2003
    
    2004
    
    2003Net income/(loss)
    
    $
    2,031
    
    
    $
    (8,286
    )
    
    $
    (2,570
    )
    
    $
    (12,299
    )Total stock-based
employee
compensation
expense determined
under the fair
value based method
for all awards, net
of related tax
effects
    
    
    13
    
    
    
    10
    
    
    
    26
    
    
    
    20Net income/(loss)
    
    $
    2,018
    
    
    $
    (8,296
    )
    
    $
    (2,596
    )
    
    $
    (12,319
    )Net income/(loss)
per share - basic
    
    $
    0.15
    
    
    $
    (0.63
    )
    
    $
    (0.20
    )
    
    $
    (0.93
    )Net income/(loss)
per share - diluted
    
    $
    0.15
    
    
    $
    (0.63
    )
    
    $
    (0.20
    )
    
    $
    (0.93
    )
  Note 6.
    
    Comprehensive Income/(Loss)Comprehensive income/(loss) for the three and six months ended July 31,
2004 and July 31, 2003 was the same as net income/(loss) reported on
the statement of income and operations.Accumulated comprehensive loss at July 31, 2004, January 31, 2004 and
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. 11




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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 Virco
Employees Retirement 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 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 Virco Employees Retirement Plan,
the VIP Retirement Plan, and the Non-Employee Directors Retirement Plan
for the three and six months ended July 31, 2004 and 2003 were as
follows (in thousands): Non-EmployeeDirectors RetirementPension Plan
    
    VIP Retirement Plan
    
    PlanThree months ended July 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
    
    
    
    
    
    
    1,538
    
    
    
    
    
    
    
    (132
    )
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    266
    
    
    $
    2,456
    
    
    $
    55
    
    
    $
    168
    
    
    $
    27
    
    
    $
    27
 Non-EmployeeDirectors RetirementPension Plan
    
    VIP Retirement Plan
    
    PlanSix months ended July 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    115
    
    
    $
    692
    
    
    $
    130
    
    
    $
    400
    
    
    $
    10
    
    
    $
    10Interest cost
    
    
    642
    
    
    
    932
    
    
    
    166
    
    
    
    244
    
    
    
    12
    
    
    
    12Expected return on plan assets
    
    
    (500
    )
    
    
    (587
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of transition amount
    
    
    (18
    )
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    190
    
    
    
    281
    
    
    
    (230
    )
    
    
    (248
    )
    
    
    44
    
    
    
    44Recognized net actuarial loss
    
    
    104
    
    
    
    539
    
    
    
    44
    
    
    
    204
    
    
    
    (12
    )
    
    
    (12
    )Settlement and curtailment
    
    
    
    
    
    
    1,538
    
    
    
    
    
    
    
    (132
    )
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    533
    
    
    $
    3,374
    
    
    $
    110
    
    
    $
    468
    
    
    $
    54
    
    
    $
    54
 The Company previously disclosed in its financial statements for the
year ended January 31, 2004 that it expects to contribute approximately
$1 million to its deferred benefit plans during the year ending January
31, 2005. 12




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##### Table of Contents



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 six months ended July 31, 2004 and
2003. Six months ended July 31,2004
    
    2003Beginning Accrued Warranty Balance
    
    $
    1,751,000
    
    
    $
    901,000Provision
    
    
    435,000
    
    
    
    596,000Costs Incurred
    
    
    (835,000
    )
    
    
    (596,000
    )Ending Accrued Warranty Balance
    
    $
    1,351,000
    
    
    $
    901,000
 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 second quarter of 2004, the Company earned net income of $2,031,000 on
sales of $68,813,000 compared to a net loss of $8,286,000 on sales of
$65,861,000 in the same period last year. Sales for the second quarter ended
July 31, 2004 increased by $2,952,000, a 4% increase, compared to the same
period last year. Incoming orders for the same period increased by
approximately 3%. For the six month period ending July 31, 2004, the Company
incurred a net loss of $2,570,000 on sales of $99,134,000, compared to a net
loss of $12,299,000 on sales of $97,041,000 in the same period last year.
Incoming orders for same period increased by approximately 3%. Backlog at July
31, 2004 was slightly higher 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. 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 six 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 six months while
reducing selling and general and administrative spending by more than $4
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 second quarter and first six months, as a percentage of
sales, remained consistent compared to the same periods last year. For the
quarter ended July 31, 2004 as well as the first six 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, and because of the current economic climate, 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 six 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 six months, a combination of selective price increases
and decreased overhead spending substantially offset the increased material
cost, resulting in flat gross margin percentages. Selling, general and administrative expense for the quarter ended July 31, 2004
declined by approximately $2 million compared to the same period last year, and
included a $450,000 recovery of a legal claim. SG&A decreased as a percentage
of sales nearly 5%. Selling, general and administrative expense for the six
months ended July 31, 2004 declined by more than $4 million compared to the
same period last year, and decreased as a percentage of sales approximately 5%.
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 six months increased by approximately $127,000
compared to the same period last year. The increase is attributable to
increased rates offset by reduced borrowings. 14




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##### Table of Contents



At July 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 can potentially be carried forward
total approximately $13.8 million at July 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 $21.4 million greater than January 31, 2004. Accounts
receivable were approximately $3.4 million higher than July 31, 2003 due to
increased July shipping activity. The Company traditionally builds large
quantities of inventory during the first and second quarters in anticipation of
seasonally high summer shipments. For the current year, the Company increased
inventory by nearly $14.4 million compared to January 31, 2004. Inventories
were approximately $8.5 million less than July 31, 2003 due to improved
inventory management. The increase in receivables and inventory were financed
through the credit facility with Wells Fargo Bank. The Company significantly reduced inventories at the end of fiscal year ended
January 31, 2004 in response to reduced sales volume. The Company maintained
the year over year reduction in inventory through the first quarter.
Inventories and production levels were increased during the second quarter as
the Company received orders for summer deliveries. 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 six months ended
July 31, 2004, was $1,718,000 compared to $777,000 for the same period last
year. Capital expenditures are being financed through the Companys credit
facility established with Wells Fargo Bank. Net cash used in operating activities for the first six months ended July 31,
2004 was $20.8 million compared to $27.8 million for the same period last year.
The decrease in cash used in operating activities was due to reduction in
operating loss for the first six months, offset by increased working capital
needs. In April 1998, the Board of Directors approved a stock buyback program. As of
July 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. 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 $10,000,000 was available for borrowing as of
July 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. 15




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##### Table of Contents



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, and competitive conditions affecting selling prices and
margins, capital costs and general economic conditions. Such risks and
uncertainties are discussed in more detail in the Companys Annual Report on
Form 10-K for the 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 (4.25% at July 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 $104,000 for the fiscal
quarter ended July 31, 2004. The Company would benefit from a similar interest
savings if the base rate were to fluctuate downward by a like amount. As of
July 31, 2004, the Company has borrowed $46,821,000 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 16




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##### Table of Contents



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 The following is a description of matters submitted to a vote of
registrants stockholders at the Annual Meeting of Stockholders held
June 8, 2004. Election of three directors whose terms expire in 2007. Votes For
    
    Authority WithheldDouglas A. Virtue
    
    
    11,158,495
    
    
    
    902,017Evan M. Gruber
    
    
    11,306,493
    
    
    
    606,015Albert J. Moyer
    
    
    11,522,774
    
    
    
    173,453
 Ratification of the appointment of Ernst & Young LLP as the Companys
independent auditors for fiscal year 2004 was approved: 11,577,992
shares were voted for the proposal, 44,404 shares were voted against
it and 11,457 shares abstained. 
 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. 18




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##### Table of Contents



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. 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. Signatures 19




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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 8, 2004
    By:
    /s/ Robert E. DoseRobert E. DoseVice President - Finance Date: September 8, 2004
    By:
    /s/ Bassey YauBassey YauCorporate Controller 20