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VIRCO MFG CORPORATION - Quarter Report: 2003 July (Form 10-Q)

Virco Mfg. Corporation Form 10-Q
Table of Contents

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, 2003 Commission File Number 1-8777

VIRCO MFG. CORPORATION


(Exact Name of Registrant as Specified in its Charter)
     
Delaware   95-1613718

 
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
         
2027 Harpers Way, Torrance, CA     90501  

   
 
(Address of principal executive offices)     (Zip Code)  
     
Registrant’s telephone number, including area code:   (310) 533-0474
   

No change


Former name, former address and former fiscal year, if changed since last report.

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes     X     No

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

     The number of shares outstanding of each of the issuer’s classes of common stock, as of August 15, 2003.

     
Common Stock   13,095,804 Shares

 


TABLE OF CONTENTS

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


Table of Contents

VIRCO MFG. CORPORATION

INDEX

     
Part I. Financial Information
 
Item 1.         Financial Statements (unaudited)
   
Condensed consolidated balance sheets — July 31, 2003, and January 31, 2003
   
Condensed consolidated statements of operations — Three months ended July 31, 2003 and 2002
   
Condensed consolidated statements of operations — Six months ended July 31, 2003 and 2002
   
Condensed consolidated statements of cash flows — Six months ended July 31, 2003 and 2002
   
Notes to condensed consolidated financial statements — July 31, 2003
 
Item 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.         Quantitative and Qualitative Disclosures about Market Risk.
 
Item 4.         Controls and Procedures
Part II. Other Information
 
Item 1.         Legal Proceedings
 
Item 2.         Changes in Securities and Use of Proceeds
 
Item 3.         Defaults upon Senior Securities
 
Item 4.         Submission of Matters to a Vote of Security Holders
 
Item 5.         Other Information
 
Item 6.         Exhibits and Reports on Form 8-K
   
Exhibit 31.1
   
Exhibit 31.2
   
Exhibit 32.1
 
Signatures

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PART 1

Item 1. Financial Statements

VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

                     
ASSETS   7/31/2003   1/31/2003

 
 
        Unaudited (Note 1)        
Current assets
               
 
Cash
  $ 2,270     $ 1,639  
 
Accounts and notes receivable
    35,743       17,601  
   
Less allowance for doubtful accounts
    358       200  
 
   
     
 
   
Net accounts and notes receivable
    35,385       17,401  
 
Income tax receivable
    919        
 
Inventories (Note 2)
               
   
Finished goods
    24,236       16,510  
   
Work in process
    17,084       18,233  
   
Raw materials and supplies
    10,079       8,296  
 
   
     
 
   
Total inventories
    51,399       43,039  
 
Deferred income taxes
    2,416       2,494  
 
Prepaid expenses and deferred income tax
    565       1,495  
 
   
     
 
Total current assets
    92,954       66,068  
Property, plant & equipment
               
   
Cost
    156,828       156,863  
   
Less accumulated depreciation
    89,094       83,827  
 
   
     
 
   
Net property, plant & equipment
    67,734       73,036  
Other assets
    15,692       15,692  
 
   
     
 
Total assets
  $ 176,380     $ 154,796  
 
   
     
 

See notes to condensed consolidated financial statements.

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VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

                     
LIABILITIES AND STOCKHOLDERS’ EQUITY   7/31/2003   1/31/2003

 
 
        Unaudited (Note 1)        
Current liabilities
               
 
Checks released but not yet cleared bank
  $ 3,743     $ 2,506  
 
Accounts payable
    9,942       8,395  
 
Income tax payable
          3,538  
 
Accrued compensation and employee benefits
    9,376       7,109  
 
Current maturities on long-term debt
    58,363       1,087  
 
Other current liabilities
    5,478       4,685  
 
   
     
 
Total current liabilities
    86,902       27,320  
Non-current liabilities
               
 
Long term debt (less current portion)
          27,905  
 
Other non-current liabilities
    19,611       16,699  
 
   
     
 
Total non-current liabilities
    19,611       44,604  
Deferred income taxes
    98       98  
Stockholders’ equity
               
 
Preferred stock:
               
    Authorized 3,000,000 shares, $.01 par value; none issued or outstanding            
  Common stock:                
    Authorized 25,000,000 shares, $.01 par value; 14,583,331 and 14,527,074 issued at 7/31/2003 and 1/31/2003     146       145  
 
Additional paid-in capital
    126,728       126,284  
 
Retained deficit
    (31,750 )     (18,927 )
  Less treasury stock at cost (1,484,332 shares at 7/31/2003 and 1,416,472 shares at 1/31/2003)     (19,379 )     (18,634 )
 
Less accumulated comprehensive loss
    (5,976 )     (6,094 )
 
   
     
 
Total stockholders’ equity
    69,769       82,774  
 
   
     
 
Total liabilities and stockholders’ equity
  $ 176,380     $ 154,796  
 
   
     
 

See Notes to Condensed Consolidated Financial Statements.

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VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited (Note 1)

(Dollar amounts in thousands, except per share data)

                 
    Three Months Ended
   
    7/31/2003   7/31/2002
   
 
Net sales
  $ 65,861     $ 83,164  
Cost of goods sold
    44,895       52,175  
 
   
     
 
Gross profit
    20,966       30,989  
Operating expense
               
Selling, general and administrative expense
    21,426       23,136  
Separation charges
    7,788        
Interest expense
    418       869  
 
   
     
 
 
    29,632       24,005  
(Loss)/income before income taxes
    (8,666 )     6,984  
Income tax (benefit )/expense
    (380 )     2,724  
 
   
     
 
Net (loss)/income
  $ (8,286 )   $ 4,260  
 
   
     
 
Amounts per common share (a)
               
Net (loss)/income
  $ (0.63 )   $ 0.32  
 
   
     
 
Weighted average shares outstanding (a)
    13,095,000       13,487,000  
Dividend per common share (a)
               
Cash
  $ 0.02     $ 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.

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VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited (Note 1)

(Dollar amounts in thousands, except per share data)

                 
    Six Months Ended
   
    7/31/2003   7/31/2002
   
 
Net sales
  $ 97,041     $ 124,332  
Cost of goods sold
    65,664       79,044  
 
   
     
 
Gross profit
    31,377       45,288  
Operating expense
               
Selling, general and administrative expense
    38,022       40,214  
Separation charges
    7,788        
Interest expense
    812       1,594  
 
   
     
 
 
    46,622       41,808  
(Loss)/income before income taxes
    (15,245 )     3,480  
Income tax (benefit)/expense
    (2,946 )     1,357  
 
   
     
 
Net (loss)/income
  $ (12,299 )   $ 2,123  
 
   
     
 
Amounts per common share (a)
               
Net (loss)/income
  $ (0.93 )   $ 0.16  
 
   
     
 
Weighted average shares outstanding (a)
    13,247,000       13,507,000  
Dividend per common share (a)
               
Cash
  $ 0.04     $ 0.04  

(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.

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VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited (Note 1)

(Dollar amounts in thousands)

                     
        Six Months Ended
       
    7/31/2003   7/31/2002
   
 
Operating activities
               
 
Net (loss)/income
  $ (12,299 )   $ 2,123  
 
Adjustments to reconcile net (loss)/income to net cash used in operating activities:
               
 
Depreciation
    6,030       6,847  
 
Provision for doubtful accounts
    102       307  
 
Loss on sale of fixed assets
    49        
 
Changes in assets and liabilities:
               
   
Accounts and notes receivable
    (18,086 )     (26,437 )
   
Inventories
    (8,360 )     (11,343 )
   
Prepaid expenses and other current assets
    930       542  
   
Income taxes receivable/payable
    (4,457 )     1,438  
   
Accounts payable and accrued expenses
    8,332       10,673  
 
   
     
 
Net cash used in operating activities
    (27,759 )     (15,850 )
Investing activities
               
 
Capital expenditures
    (777 )     (1,517 )
 
Acquisition
          (4,550 )
 
Proceeds from sale of assets
          2  
 
   
     
 
Net cash used in investing activities
    (777 )     (6,065 )
Financing activities
               
 
Issuance of debt
    30,622       25,844  
 
Repayment of long-term debt
    (631 )     (1,094 )
 
Purchase of treasury stock
    (419 )     (487 )
 
Payment of cash dividend
    (525 )     (1,247 )
 
Issuance of common stock
    120       137  
 
   
     
 
Net cash provided by financing activities
    29,167       23,153  
Net change in cash
    631       1,238  
Cash at beginning of period
    1,639       1,704  
 
   
     
 
Cash at end of period
  $ 2,270     $ 2,942  
 
   
     
 

See Notes to Condensed Consolidated Financial Statements.

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VIRCO MFG. CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2003

Note 1:   The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-months ended July 31, 2003, are not necessarily indicative of the results that may be expected for the year ending January 31, 2004. The balance sheet at January 31, 2003, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended January 31, 2003.
 
Note 2.   Inventories
 
    Year end financial statements reflect inventories verified by physical counts with the material content valued by the LIFO method. At this interim date, there has been no physical verification of inventory quantities. Cost of sales is recorded at current cost. The effect of penetrating LIFO layers is not recorded at interim dates unless the reduction in inventory is expected to be permanent. No such adjustment has been made for the period ended July 31, 2003. Management monitors production costs, material costs and inventory levels to determine that interim inventories are fairly stated.
 
Note 3.   Debt
 
    Effective January 31, 2003, the Company entered into a credit facility with Wells Fargo Bank that provides a secured revolving line of credit that ranges from $40,000,000 to $70,000,000. At July 31, 2003, the Company was in violation of certain of its loan covenants. In September 2003 Wells Fargo provided the Company with a waiver of these covenants as of July 31, 2003. However, based on management’s forecasts of 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 third quarter ending October 31, 2003. Accordingly, the debt has been classified as a current liability on the July 31, 2003 balance sheet. The Company is currently negotiating with Wells Fargo to restructure the credit facility so that the Company will comply with the quarterly debt covenants. No assurance can be given that such negotiations will be successful. If they are not, the Company would be in default with the bank, which could significantly affect its liquidity. If additional sources of financing are not available, the Company plans to continue to implement measures to conserve cash or reduce costs.
 
Note 4.   Income Taxes

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    Income taxes for the six-month period ended July 31, 2003, were computed using the effective tax rate estimated to be applicable for the full fiscal year and the determination of a valuation allowance for deferred income tax assets. For the three months ended July 31, 2003, the Company established a $3 million deferred tax valuation allowance. The allowance was recognized based on the weight of available evidence that it is more likely than not that this portion of the Company’s deferred tax asset will not be realized within the next three years, notwithstanding that some of those assets may have longer lives under applicable tax laws. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. The Company believes, based on its history of prior operating earnings, its actions to reduce costs (see Note 8), and its expectations of future earnings, that operating income of the Company will more likely than not be sufficient to realize the future benefits of the amount classified as a net deferred tax asset. Future adverse changes in market conditions, poor operating results or a decline in our projections about future profitability may affect the Company assessment of the adequacy of the reserve and, consequently, the net carrying value of net deferred tax assets. In the event that the Company determines that it is more likely than not that it would be unable to realize an additional portion of the net deferred tax asset, an additional adjustment to the deferred tax asset valuation allowance would be charged to income in the period such determination was made.
 
Note 5.   Reclassifications
 
    Certain prior year amounts have been reclassified to conform to the current year presentation.
 
Note 6.   Net (Loss)/Income Per Share

For the quarter ended July 31, 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. The following table sets forth the computation of basic loss per share:

                                 
    Three Months Ended   Six Months Ended
   
 
    July 31   July 31
   
 
    2003   2002   2003   2002
   
 
 
 
Net (loss)/income
  $ (8,286,000 )   $ 4,260,000     $ (12,299,000 )   $ 2,123,000  
 
   
     
     
     
 
Average shares outstanding
    13,095,000       13,335,000       13,247,000       13,377,000  
Net effect of dilutive stock options – based on the treasury stock method using average market price.     15,000       152,000       73,000       130,000  
 
   
     
     
     
 
Totals
    13,110,000       13,487,000       13,320,000       13,507,000  
 
   
     
     
     
 
Net loss per share – basic
  $ (0.63 )   $ 0.32     $ (0.93 )   $ 0.16  
 
   
     
     
     
 
Net loss per share – diluted
  $ (0.63 )   $ 0.32     $ (0.93 )   $ 0.16  
 
   
     
     
     
 

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

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    Three Months Ended   Six Months Ended
   
 
    July 31   July 31
   
 
    2003   2002   2003   2002
   
 
 
 
Net (loss)/income, as reported
  $ (8,286,000 )   $ 4,260,000     $ (12,299,000 )   $ 2,123,000  
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects     10,000       9,000       20,000       18,000  
 
   
     
     
     
 
Pro forma net (loss)/income
  $ (8,296,000 )   $ 4,251,000     $ (12,319,000 )   $ 2,105,000  
 
   
     
     
     
 
Basic and diluted earnings per share, as reported:   $ (0.63 )   $ 0.32     $ (0.93 )   $ 0.16  
 
   
     
     
     
 
Basic and diluted earnings per share, pro forma:   $ (0.63 )   $ 0.32     $ (0.93 )   $ 0.16  
 
   
     
     
     
 

Note 7.   Comprehensive (Loss)/Income
 
    Comprehensive loss for the quarter ended July 31, 2003 was $8,286,000 compared to comprehensive income of $4,367,000 for the quarter ended July 31, 2002. Comprehensive loss for the six months ended July 31, 2003 was $12,181,000 compared to comprehensive income of $2,344,000 for the six months ended July 31, 2002. The difference between results reported on the statement of operations and comprehensive (loss)/income is primarily attributable to adjustments in the prior year to account for a derivative financial investment that expired in March 2003.
 
    Accumulated comprehensive loss at the quarter ended July 31, 2003 is primarily composed of minimum pension liability adjustments.
 
Note 8.   Separation Charges
 
    During June 2003, the Company implemented a voluntary separation program for those who accepted a six-month pay package. Costs associated with this voluntary separation program are reported as separation charges in the accompanying statements of operations for the three and six-month periods ended July 31, 2003. Additional pension related charges, estimated to be approximately $3,000,000, are expected to be recorded in the second half of fiscal 2003.
 
    Subsequent to July 31, 2003, the Company involuntarily separated an additional 160 employees. Costs for this separation are expected to total approximately $2,500,000. Additional pension related charges, estimated to be approximately $1,000,000, are expected to be recorded in the second half of fiscal 2003.
 
Note 9.   New Accounting Standards
 
    In January 2003, the Financial Accounting Standards Board, (“FASB”) issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51 and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. This interpretation requires variable interest entities to be consolidated if the equity investment at risk is not sufficient to permit an entity to finance its activities without support from other parties or the equity investors lack specific characteristics. The adoption of this Interpretation is not expected to have a material impact on the Company’s financial statements.
 
    In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified and for hedging

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    relationships designated after June 30, 2003. The Company does not expect the adoption of this statement to have a material impact on its financial statements.
 
    In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The impact upon adoption of SFAS No. 150 is not expected to have a material impact on the results of operations or the financial position of the Company.

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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 2003, the Company incurred a net loss of $8,286,000 on sales of $65,861,000 compared to a net income of $4,260,000 on sales of $83,164,000 in the same period last year. Net loss per share was $0.63 compared to net income per share of $0.32 in the same period last year. For the six months ended July 31, 2003, the Company incurred a net loss of $12,299,000 on sales of $97,041,000 compared to net income of $2,123,000 on sales of $124,332,000 in the same period last year. Net loss per share was $0.93 compared to net income per share of $0.16 in the same period last year.

Sales for the second quarter decreased by $17,303,000, a 21% decrease compared to the same period last year. For the first six months of 2003 sales decreased by $27,291,000, a 22% decrease compared to the prior year. Backlog at quarter end decreased by 14% compared to the prior year.

The decrease in sales is primarily attributable to budgetary pressures on state and local governments. As more fully discussed in the President’s Letter included with our 2002 annual report (page 21), schools obtain funding for educational furniture from two primary sources. The first source is from bonds that fund development of new schools and significant refurbishment of older schools. The availability of funds from bonds is relatively stable compared to the prior year. The second source of funds is typically provided from a state’s general funds. Many of the state governments are facing severe funding shortages and school officials will curtail expenditures on maintenance, furniture, and supplies in order to avoid laying off teachers and administrators. With approximately 80-85% of school budgets spent on teachers and administrators, the impact on funds available for furniture can be dramatic when school funding is reduced. In addition to the weakness in the education market, the market for commercial furniture, which suffered a severe decline in 2001 and 2002, continues to be very weak.

Gross profit for the second quarter, as a percentage of sales, decreased approximately 5.43% compared to the same period last year. For the first six months, gross profit as a percentage of sales decreased by approximately 4.09% compared to the prior year. The reduction in gross margin is attributable to increased material costs and reduced production hours. In the prior year, the Company benefited from favorable raw material costs, especially steel. During the second half of 2002, the Company incurred higher steel costs, and has had difficulty passing these costs on to our customers. Material costs, as a percentage of sales were 2.1% higher in the first quarter, 1.5% higher in the second quarter, and 1.7% higher for the first six months. In addition to increased material costs, the Company substantially reduced factory production in order to control inventory levels. In the second quarter, production hours decreased by 43% compared to the prior year. This was accomplished using three tactics. First, the Company implemented a hiring freeze. Second, the Company has traditionally hired temporary labor in its factories during the summer months, and did not hire these temporary workers in the current year. Finally, the Company has traditionally hired temporary workers to perform installations at customer locations. In the current year, the Company created installation teams from its factory and warehouse locations. These installation teams performed a significant number of the installations, allowing the Company to reduce production hours, reduce money spent on temporary labor services, and improve customer service at installed jobs.

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Selling, general and administrative expense for the quarter ended July 31, 2003 decreased by $1,710,000 compared to the same period last year, but increased as a percentage of sales. Selling, general and administrative expense for the six months ended July 31, 2003 decreased by $2,192,000 compared to the same period last year.

Interest expense for the quarter ended July 31, 2003 decreased by approximately $451,000 compared to the same period last year. Interest expense for the six months ended July 31, 2003 decreased by approximately $782,000 compared to the same period last year. The reduction is primarily due to lower interest rates.

Income taxes for the six-month period ended July 31, 2003, were computed using the effective tax rate estimated to be applicable for the full fiscal year and the determination of a valuation allowance for deferred income tax assets. For the three months ended July 31, 2003, the Company established a $3 million deferred tax valuation allowance. The allowance was recognized based on the weight of available evidence that it is more likely than not that this portion of the Company’s deferred tax asset will not be realized within the next three years, notwithstanding that some of those assets may have longer lives under applicable tax laws. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. The Company believes, based on its history of prior operating earnings, its actions to reduce costs (see Note 8), and its expectations of future earnings, that operating income of the Company will more likely than not be sufficient to realize the future benefits of the amount classified as a net deferred tax asset. Future adverse changes in market conditions, poor operating results or a decline in our projections about future profitability may affect the Company assessment of the adequacy of the reserve and, consequently, the net carrying value of net deferred tax assets. In the event that the Company determines that it is more likely than not that it would be unable to realize an additional portion of the net deferred tax asset, an additional adjustment to the deferred tax asset valuation allowance would be charged to income in the period such determination was made.

During the second quarter, 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 include 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 paid approximately $7.8 million under this plan in the second quarter. In addition to the severance payments, the Company expects to incur approximately $3 million in pension settlement costs, which is anaticipated to be recorded in the third and fourth quarters.

Subsequent to the quarter end, 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 will incur approximately $2.5 million of severance costs in the third quarter related to this reduction in force. In addition to severance costs, the Company will incur additional pension settlement costs of approximately $1 million which is anticipated to be recorded in the third and fourth quarters.

As a result of the voluntary and involuntary severance programs, the Company anticipates salaries and wages in 2004 to decrease by approximately $22 million compared to 2002, with 2003 being a transition year. In addition to the reduction in salaries, the Company anticipates it will save the related costs for retirement, health, and welfare benefits.

Financial Condition:

Net cash used in operating activities for the six months ended July 31, 2003, was $27,759,000 compared to $15,850,000 for the same period last year. The increase in cash used in operating activities was primarily due to a large operating loss combined with an increase in income tax receivable.

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As a result of seasonally high sales in the second quarter, accounts receivable increased by $18,142,000 compared to the year-ended January 31, 2003. In the prior year, accounts receivable increased by $26,437,000 in the same period. In anticipation of seasonally higher third quarter deliveries, inventory increased by $8,360,000 compared to the year-ended January 31, 2003. In the prior year, inventory increased by $11,343,000 in the same period. This increase in accounts receivable and inventory was financed through the credit facility with Wells Fargo Bank.

The Company has established a goal of limiting capital spending to approximately $5,000,000 to $7,000,000 for 2003, which is approximately one-half of anticipated depreciation expense. Capital spending for the six-month period ended July 31, 2003, was $777,000 compared to $1,517,000 for the same period last year. Capital expenditures are being financed through the credit facility established with Wells Fargo Bank and operating cash flow.

To facilitate the Company’s seasonal working capital requirements, beginning June 1, 2003, the credit facility with Wells Fargo Bank increased from $60,000,000 to $70,000,000. This line of credit decreases to $60,000,000 on September 1, 2003 and to $40,000,000 effective November 1, 2003.

The Company has a traditionally declared a quarterly $0.02 per share cash dividend and an annual 10% stock dividend. At the regularly scheduled August 2003 Board of Directors meeting, the Board suspended the cash and stock dividends until operations return to profitability and cash flows support payment of dividends.

As of July 31, 2003, the Company violated certain debt covenants relating to its revolving line of credit with Wells Fargo Bank. In September 2003 Wells Fargo provided the Company with a waiver of these covenants. However, based on management’s forecast 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 third quarter ending October 31, 2003. Accordingly, the debt has been classified as a current liability on the July 31, 2003 balance sheet. The Company is currently negotiating with Wells Fargo to restructure the credit facility so that the Company will comply with the quarterly debt covenants. No assurance can be given that such negotiations will be successful. If they are not, the Company would be in default with the bank, which could significantly affect its liquidity. If additional sources of financing are not available, the Company plans to continue to implement measures to conserve cash or reduce costs.

In April 1998, the Board of Directors approved a stock buyback program. As of July 31, 2003, the Company has repurchased approximately 1,451,000 shares at a cost of approximately $18,767,000 since the inception of this program. The Company intends to continue buying back shares of common stock as long as the Company believes the shares are undervalued and operating cashflows and borrowing capacity under the Wells Fargo line allow. Under the current Wells Fargo line, the Company must limit stock buyback activity to $250,000 for the period between June 4, 2003 and December 1, 2003.

In May 2002, the Company purchased certain assets of Furniture FocusTM, Inc., an Ohio reseller that offers complete package solutions for the furniture, fixtures and equipment segments of bond-funded public school construction projects, primarily in the upper Midwest. The Company paid $2,400,000 in cash for certain assets of the corporation and recorded goodwill of $2,200,000. The goodwill is not expected to be deductible for income tax. In addition, the Company purchased approximately $2,150,000 of accounts receivable. The additional revenue and operating results from the inception as a result of this acquisition, did not have a significant effect on the Company’s financial position, operations or cash flows.

The Company believes that upon the successful completion of the refinancing or restructuring of the Wells Fargo line of credit, funds available under the restructured or refinanced line, together with cashflows from operations, will be sufficient to fund the Company’s debt service requirements, capital expenditures and working capital needs.

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Critical Accounting Policies and Estimates:

The Company’s critical accounting policies are outlined in its Form 10-K for fiscal year ended January 31, 2003.

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, risks and uncertainties relating to the Company’s ability to refinance or restructure its credit line with Wells Fargo Bank; material availability and cost of materials, especially steel; the 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, 2003.

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.

On February 22, 2000, the Company entered into an interest rate swap agreement with Wells Fargo Bank. The initial notional swap amount was $30,000,000 for the period February 22, 2000 through February 28, 2001. The notional swap amount then decreased to $20,000,000 until the end of the swap agreement, March 3, 2003. The swap agreement was in consideration for a fixed rate at 7.23% plus a fluctuating margin of 1.50% to 2.50%. The swap agreement was not renewed at expiration.

As of July 31, 2003, the Company had borrowed $57,276,000 under its Wells Fargo credit facility. The revolving credit facility with Wells Fargo Bank is a two-year non-amortizing line with interest payable monthly at a fluctuating rate equal to the Bank’s prime rate, plus a fluctuating margin of 0.25% - 0.50%. The line also allows the Company the option to borrow under 30- 60- and 90-day fixed term rates at LIBOR plus a fluctuating margin of 1.50% to 2.50%. Accordingly, a 100 basis point upward fluctuation in the lender’s base rate would cause the Company to incur additional interest charges of approximately $126,000 and $362,000 for the fiscal quarter and six months ended July 31, 2003, respectively. The Company would benefit from a similar interest savings if the base rate were to fluctuate downward by a like amount.

Item 4. Controls and Procedures

  (a)   Evaluation of Disclosure Controls and Procedures

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Our 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 our 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 our 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 our 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, our internal control over financial reporting.

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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 10, 2003.
 
    Election of three directors whose terms expire in 2006.
                 
    Votes For   Authority Withheld
   
 
Robert A. Virtue
    11,199,118       64,569  
Robert K. Montgomery
    10,864,742       733,321  
Donald A. Patrick
    11,198,181       66,443  

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

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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 July 21, 2003, we filed a Current Report on Form 8-K in which we furnished, pursuant to Item 5, our interim report on business conditions and cost reduction initiatives.

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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 15, 2003   By:   /s/ Robert E. Dose
           
        Robert E. Dose
        Vice President – Finance

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