##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
 FORM 10-Q
 For Quarter Ended
    
    October 31, 2005
    
    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)
    þ o
 þ o
 o þ




---



##### 



Part I. Financial InformationItem 1. Financial Statements (unaudited)Condensed consolidated balance sheets  October 31, 2005, January 31, 2005 and October 31, 2004Condensed consolidated statements of operations  Three months ended October 31, 2005 and 2004Condensed consolidated statements of operations  Nine months ended October 31, 2005 and 2004Condensed consolidated statements of cash flows  Nine months ended October 31, 2005 and 2004Notes to condensed consolidated financial statements  October 31, 2005Item 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 6. 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 2002Exhibit 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 2002Exhibit 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.




---



##### 



PART I
 
 Item 1. Financial Statements
  
  10/31/2005
    
    
    1/31/2005
    
    
    10/31/2004(In thousands, except share data)Unaudited (Note 1)
    
    
    
    
    
    
    Unaudited (Note 1)AssetsCurrent assetsCash
    
    $
    1,441
    
    
    $
    1,192
    
    
    $
    1,633Trade accounts receivable
    
    
    22,569
    
    
    
    16,222
    
    
    
    29,948Less allowance for doubtful accounts
    
    
    289
    
    
    
    225
    
    
    
    331Net trade accounts receivable
    
    
    22,280
    
    
    
    15,997
    
    
    
    29,617Income taxes receivable
    
    
    
    
    
    
    1,279
    
    
    
    1,136Other receivables
    
    
    74
    
    
    
    165
    
    
    
    149InventoriesFinished goods, net
    
    
    8,777
    
    
    
    9,676
    
    
    
    14,180Work in process, net
    
    
    10,335
    
    
    
    10,373
    
    
    
    5,403Raw materials and supplies, net
    
    
    6,471
    
    
    
    5,998
    
    
    
    6,21825,583
    
    
    
    26,047
    
    
    
    25,801Prepaid expenses and other current assets
    
    
    631
    
    
    
    1,340
    
    
    
    728Total current assets
    
    
    50,009
    
    
    
    46,020
    
    
    
    59,064Property, plant and equipment:Land and land improvements
    
    
    3,253
    
    
    
    3,287
    
    
    
    3,287Buildings and building improvements
    
    
    49,581
    
    
    
    49,542
    
    
    
    49,548Machinery and equipment
    
    
    105,114
    
    
    
    104,762
    
    
    
    105,205Leasehold improvements
    
    
    1,289
    
    
    
    1,307
    
    
    
    1,269159,237
    
    
    
    158,898
    
    
    
    159,309Less accumulated depreciation and amortization
    
    
    107,433
    
    
    
    102,009
    
    
    
    101,060Net property, plant and equipment
    
    
    51,804
    
    
    
    56,889
    
    
    
    58,249Goodwill and other intangible assets, net
    
    
    2,327
    
    
    
    2,337
    
    
    
    2,343Other assets
    
    
    8,816
    
    
    
    8,795
    
    
    
    9,174Total assets
    
    $
    112,956
    
    
    $
    114,041
    
    
    $
    128,830




---



##### 



10/31/2005
    
    
    1/31/2005
    
    
    10/31/2004(In thousands, except share data)Unaudited (Note 1)
    
    
    
    
    
    
    Unaudited (Note 1)LiabilitiesCurrent liabilitiesChecks released but not yet cleared bank
    
    $
    2,280
    
    
    $
    1,759
    
    
    $
    4,860Accounts payable
    
    
    10,339
    
    
    
    13,948
    
    
    
    11,272Accrued compensation and employee benefits
    
    
    5,160
    
    
    
    5,722
    
    
    
    5,662Income tax payable
    
    
    858
    
    
    
    
    
    
    
    Current portion of long-term debt
    
    
    5,012
    
    
    
    5,012
    
    
    
    27,018Other accrued liabilities
    
    
    4,696
    
    
    
    4,245
    
    
    
    4,736Total current liabilities
    
    
    28,345
    
    
    
    30,686
    
    
    
    53,548Non-current liabilitiesAccrued self-insurance retention and other
    
    
    2,591
    
    
    
    3,221
    
    
    
    2,023Accrued pension expenses
    
    
    13,749
    
    
    
    12,751
    
    
    
    13,449Long-term debt, less current portion
    
    
    20,537
    
    
    
    18,118
    
    
    
    Total non-current liabilities
    
    
    36,877
    
    
    
    34,090
    
    
    
    15,472Commitments and contingenciesStockholders equityPreferred stockAuthorized 3,000,000 shares, $.01 par
value; none issued or outstandingCommon stockAuthorized 25,000,000 shares, $.01 par
value; issued 13,137,288 shares at
10/31/2005 and 13,098,364 at 1/31/2005;
and 14,583,331 shares at 10/31/2004
    
    
    131
    
    
    
    131
    
    
    
    146Additional paid-in capital
    
    
    108,143
    
    
    
    107,883
    
    
    
    127,140Accumulated deficit
    
    
    (57,198
    )
    
    
    (55,407
    )
    
    
    (43,961
    )Less treasury stock at cost (0 shares at
10/31/2005 and 1/31/2005; 1,487,530 shares
at 10/31/2004)
    
    
    
    
    
    
    
    
    
    
    (19,271
    )Accumulated comprehensive loss and other
    
    
    (3,342
    )
    
    
    (3,342
    )
    
    
    (4,244
    )Total stockholders equity
    
    
    47,734
    
    
    
    49,265
    
    
    
    59,810Total liabilities and stockholders equity
    
    $
    112,956
    
    
    $
    114,041
    
    
    $
    128,830




---



##### 



Three months ended10/31/2005
    
    
    10/31/2004(In thousands, except per share data)Net sales
    
    $
    70,484
    
    
    $
    69,502Costs of goods sold
    
    
    50,400
    
    
    
    49,111Gross profit
    
    
    20,084
    
    
    
    20,391Selling, general and administrative expenses
    
    
    20,781
    
    
    
    19,825Separation charges
    
    
    742
    
    
    
    Interest expense
    
    
    895
    
    
    
    545(Loss) income before income taxes
    
    
    (2,334
    )
    
    
    21Provision for income taxes
    
    
    140
    
    
    
    Net (loss) income
    
    $
    (2,194
    )
    
    $
    21Net (loss) income per common shareBasic
    
    $
    (0.17
    )
    
    $
    0.00Diluted
    
    
    (0.17
    )
    
    
    0.00Weighted average shares outstandingBasic
    
    
    13,146
    
    
    
    13,105Diluted
    
    
    13,357
    
    
    
    13,384




---



##### 



Nine months ended10/31/2005
    
    
    10/31/2004(In thousands, except per share data)Net sales
    
    $
    179,644
    
    
    $
    168,636Costs of goods sold
    
    
    123,649
    
    
    
    116,131Gross profit
    
    
    55,995
    
    
    
    52,505Selling, general and administrative expenses
    
    
    54,830
    
    
    
    53,571Separation charges
    
    
    742
    
    
    
    Interest expense
    
    
    2,324
    
    
    
    1,483Loss before income taxes
    
    
    (1,901
    )
    
    
    (2,549
    )Provision for income taxes
    
    
    109
    
    
    
    Net loss
    
    $
    (1,792
    )
    
    $
    (2,549
    )Net loss per common shareBasic
    
    $
    (0.14
    )
    
    $
    (0.19
    )Diluted
    
    
    (0.14
    )
    
    
    (0.19
    )Weighted average shares outstandingBasic
    
    
    13,111
    
    
    
    13,113Diluted
    
    
    13,350
    
    
    
    13,319




---



##### 



Nine months ended10/31/2005
    
    
    10/31/2004(In thousands)Operating activitiesNet loss
    
    $
    (1,792
    )
    
    $
    (2,549
    )Adjustments to reconcile net loss to net cash
(used in) provided by operating activitiesDepreciation and amortization
    
    
    6,767
    
    
    
    7,376Provision for doubtful accounts
    
    
    60
    
    
    
    96Loss on sale of property, plant and equipment
    
    
    77
    
    
    
    9Changes in assets and liabilitiesTrade accounts receivable
    
    
    (6,343
    )
    
    
    (12,380
    )Other receivables
    
    
    91
    
    
    
    (11
    )Inventories
    
    
    464
    
    
    
    2,670Income taxes
    
    
    2,137
    
    
    
    287Prepaid expenses and other current assets
    
    
    731
    
    
    
    1,234Accounts payable and accrued liabilities
    
    
    (2,611
    )
    
    
    3,426Net cash (used in) provided by operating activities
    
    
    (419
    )
    
    
    158Investing activitiesCapital expenditures
    
    
    (1,774
    )
    
    
    (2,276
    )Proceeds from sale of property, plant and equipment
    
    
    15
    
    
    
    Net cash used in investing activities
    
    
    (1,759
    )
    
    
    (2,276
    )Financing activitiesIssuance of long-term debt
    
    
    2,419
    
    
    
    2,727Repayment of long-term debt
    
    
    
    
    
    
    (1,042
    )Proceeds from issuance of common stock
    
    
    8
    
    
    
    7Net cash provided by financing activities
    
    
    2,427
    
    
    
    1,692Net increase (decrease) in cash
    
    
    249
    
    
    
    (426
    )Cash at beginning of year
    
    
    1,192
    
    
    
    2,059Cash at end of year
    
    $
    1,441
    
    
    $
    1,633Supplemental disclosures of cash flow informationCash paid (received) during the year for:Interest, net of amounts capitalized
    
    $
    2,324
    
    
    $
    1,483Income tax, net
    
    
    (2,249
    )
    
    
    (281
    )Non cash activitiesAccrued asset retirement obligations
    
    $
    31
    
    
    $
    




---



##### 



Note 1.
    
    Basis of PresentationThe 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
months ended October 31, 2005, are not necessarily indicative of
the results that may be expected for the year ending January 31,
2006. The balance sheet at January 31, 2005, 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, 2005.Note 2.
    
    InventoriesYear end financial statements at January 31, 2005 reflect
inventories verified by physical counts with the material content
valued by the LIFO method. At October 31, 2005 and 2004, there was
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, 2005 and 2004. LIFO reserves at
October 31, 2005 and January 31, 2005 were $6,201,000. LIFO
reserves at October 31, 2004 were $4,042,000. Management
continually monitors production costs, material costs and
inventory levels to determine that interim inventories are fairly
stated.Note 3.
    
    DebtAt October 31, 2005, the Company was in violation of certain of
its loan covenants. In December 2005, the Company restructured
its debt with Wells Fargo Bank, which waived the October 31, 2005
covenant violation, and the Company and Wells Fargo amended the
terms of the loan and several of the financial covenants. The
Companys revolving credit facility with Wells Fargo Bank, amended
and restated as of December 6, 2005 provides a Term Loan of
$20,000,000 and a secured revolving line of credit that varies as
a percentage of inventory and receivables, up to a maximum of
$50,000,000 during the four months from June 2006 through
September 2006 and a maximum of $40,000,000 for the balance of the
agreement. The term note is a two-year loan amortizing at
$5,000,000 per year with interest payable monthly at a fluctuating
rate equal to the Wells Fargos prime rate (6.75% at October 31,
2005) plus a fluctuating margin of 2.00%. The fluctuating margin
decreases by 1/4% for each quarter that the Company meets or exceeds
certain earnings before income taxes, depreciation and
amortization (EBITDA) targets. Accordingly, a 100 basis point
upward fluctuation in the lenders base rate would cause the
Company to incur additional interest charges of approximately
$95,000 and $272,000 for the three month and nine month periods
ended October 31, 2005, respectively. The Company would benefit
from a similar interest savings if the base rate were to fluctuate
downward by a like amount. This restructured line of credit is
designed to provide adequate liquidity for Vircos 2006 operating
plan.The revolving line has a 26-month maturity with interest payable
monthly at a fluctuating rate equal to Wells Fargos prime rate
plus a fluctuating margin similar to the term note. The revolving
line typically provides for advances of 80% on eligible accounts
receivable and 20% to 60% on eligible inventory. The advance rates
fluctuate depending on the time of the year and the types of
assets. The agreement has an unused commitment fee of 0.375%.
Approximately $12,642,000 was available for borrowing as of
October 31, 2005.The revolving credit facility with Wells Fargo Bank is subject to
minimum (EBITDA) requirements. The




---



##### 



agreement also places certain
restrictions on capital expenditures, new operating leases,
dividends and the repurchase of the Companys common stock. The
revolving credit facility is secured by the Companys accounts
receivable, inventories, equipment and Property.

At October 31, 2004, the Company was in violation of one of its
covenants under the line of credit with Wells Fargo Bank, and the
Bank provided a waiver of that covenant. However, based upon
managements forecast at that time of operating results for the
remainder of the year, it was considered to be more likely than
not that the Company would also violate the loan covenants at the
fourth quarter ending January 31, 2005. Accordingly, the debt was
classified as a current liability on the October 31, 2004 balance
sheet.Note 4.
    
    Income TaxesThe Company recognizes 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, 2005, January 31, 2005 and October 31, 2004.Note 5.
    
    Net (Loss) Income per ShareFor the three and nine months ended October 31, 2005, 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 (loss)
income per share:
 Three Months Ended
    
    
    Nine Months ended10/31/2005
    
    
    10/31/2004
    
    
    10/31/2005
    
    
    10/31/2004(In thousands, except per share data)Net (loss) income
    
    $
    (2,194
    )
    
    $
    21
    
    
    $
    (1,792
    )
    
    $
    (2,549
    )Average shares outstanding
    
    
    13,146
    
    
    
    13,105
    
    
    
    13,111
    
    
    
    13,113Net effect of dilutive stock options
based on the treasury stock method
using average market price
    
    
    211
    
    
    
    279
    
    
    
    239
    
    
    
    206Totals
    
    
    13,357
    
    
    
    13,384
    
    
    
    13,350
    
    
    
    13,319Net (loss) income per shareBasic
    
    $
    (0.17
    )
    
    $
    0.00
    
    
    $
    (0.14
    )
    
    $
    (0.19
    )Diluted
    
    
    (0.17
    )
    
    
    0.00
    
    
    
    (0.14
    )
    
    
    (0.19
    )




---



##### 



Three Months Ended
    
    
    Nine Months ended10/31/2005
    
    
    10/31/2004
    
    
    10/31/2005
    
    
    10/31/2004(In thousands, except per share data)Net (loss) income, as reported
    
    $
    (2,194
    )
    
    $
    21
    
    
    $
    (1,792
    )
    
    $
    (2,549
    )Total stock-based employee compensation expense
determined under the fair value based method for
all awards, net of related tax effects
    
    
    11
    
    
    
    13
    
    
    
    38
    
    
    
    40Pro forma net (loss) income
    
    $
    (2,205
    )
    
    $
    8
    
    
    $
    (1,830
    )
    
    $
    (2,589
    )Net (loss) income per share, as reportedBasic
    
    $
    (0.17
    )
    
    $
    0.00
    
    
    $
    (0.14
    )
    
    $
    (0.20
    )Diluted
    
    
    (0.17
    )
    
    
    0.00
    
    
    
    (0.14
    )
    
    
    (0.20
    )Weighted average shares outstandingBasic
    
    
    13,146
    
    
    
    13,105
    
    
    
    13,111
    
    
    
    13,113Diluted
    
    
    13,357
    
    
    
    13,384
    
    
    
    13,350
    
    
    
    13,319
 Note 6.
    
    Comprehensive Income (Loss)Comprehensive income (loss) for the three and nine months
ended October 31, 2005 and 2004 was the same as net income
(loss) reported on the statements of income and operations.
Accumulated comprehensive loss at October 31, 2005 and 2004
and January 31, 2005 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 10-K for the
period ending January 31, 2005, benefit accruals under this
plan were frozen effective December 31, 2003.The Company also provides a supplementary retirement plan for
certain key employees, the VIP Retirement Plan (the VIP
Plan). The VIP Plan provides a benefit of up to 50% of
average compensation for the last five years in the VIP Plan,
offset by benefits earned under the Plan. As more fully
described in the Form 10-K for the period ending January 31,
2005, benefit accruals under this plan were frozen effective
December 31, 2003.The Company also provides a non-qualified plan for
non-employee directors of the Company (the Non-Employee
Directors Retirement Plan). The Non-Employee Directors
Retirement Plan provides a lifetime annual retirement benefit
equal to the directors annual retainer fee for the fiscal
year in which the director terminates his or her position
with the Board, subject to the director providing 10 years of
service to the Company. As more fully described in the Form
10-K for the period ending January 31, 2005, 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, 2005 and 2004 were as
follows (in thousands):




---



##### 



Non-EmployeeVIP Retirement Plan
    
    
    Directors RetirementPension Plan
    
    
    Three Months Ended
    
    
    Plan2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    55
    
    
    $
    57
    
    
    $
    58
    
    
    $
    65
    
    
    $
    6
    
    
    $
    5Interest cost
    
    
    337
    
    
    
    321
    
    
    
    89
    
    
    
    83
    
    
    
    6
    
    
    
    6Expected return on plan assets
    
    
    (248
    )
    
    
    (250
    )
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    0Amortization of transition amount
    
    
    (9
    )
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    0Amortization of prior service cost
    
    
    107
    
    
    
    95
    
    
    
    (125
    )
    
    
    (115
    )
    
    
    22
    
    
    
    22Recognized net actuarial loss or
(gain)
    
    
    33
    
    
    
    52
    
    
    
    27
    
    
    
    22
    
    
    
    (7
    )
    
    
    (6
    )Settlement and curtailment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    275
    
    
    $
    266
    
    
    $
    49
    
    
    $
    55
    
    
    $
    27
    
    
    $
    27
 Non-EmployeeVIP Retirement Plan
    
    
    Directors RetirementPension Plan
    
    
    Three Months Ended
    
    
    Plan2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    165
    
    
    $
    172
    
    
    $
    174
    
    
    $
    195
    
    
    $
    18
    
    
    $
    16Interest cost
    
    
    1,011
    
    
    
    963
    
    
    
    267
    
    
    
    249
    
    
    
    18
    
    
    
    18Expected return on plan assets
    
    
    (744
    )
    
    
    (750
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Amortization of transition amount
    
    
    (27
    )
    
    
    (27
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Amortization of prior service cost
    
    
    321
    
    
    
    284
    
    
    
    (375
    )
    
    
    (344
    )
    
    
    66
    
    
    
    65Recognized net actuarial loss or
(gain)
    
    
    99
    
    
    
    156
    
    
    
    81
    
    
    
    65
    
    
    
    (21
    )
    
    
    (19
    )Settlement and curtailment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    825
    
    
    $
    800
    
    
    $
    147
    
    
    $
    165
    
    
    $
    81
    
    
    $
    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 three and nine months ended October 31, 2005
and 2004:
 Three Months Ended
    
    
    Nine Months Ended10/31/2005
    
    
    10/31/2004
    
    
    10/31/2005
    
    
    10/31/2004(In thousands)
    
    
    (In thousands)Beginning accrued warranty balance
    
    $
    1,500
    
    
    $
    1,351
    
    
    $
    1,500
    
    
    $
    1,751Provision
    
    
    261
    
    
    
    390
    
    
    
    693
    
    
    
    825Costs incurred
    
    
    (261
    )
    
    
    (390
    )
    
    
    (693
    )
    
    
    (1,225
    )Ending accrued warranty balance
    
    $
    1,500
    
    
    $
    1,351
    
    
    $
    1,500
    
    
    $
    1,351




---



##### 








---



##### 








---



##### 



1 4
       
  1 4




---



##### 








---



##### 



PART II




---



##### 



VIRCO MFG. CORPORATIONDate: December 8, 2005
    
    By:
    
    /s/ Robert E. DoseRobert E. DoseVice President  Finance