UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
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Commission file number 1-2257
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TRANS-LUX CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-1394750
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Richards Avenue, Norwalk, CT 06856-5090
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(Address of principal executive offices) (Zip code)
(203) 853-4321
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(Registrant's telephone number, including area code)
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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (check
one)
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Date Class Shares Outstanding
-------- ------------------------------------ ------------------
11/16/06 Common Stock - $1.00 Par Value 973,598
11/16/06 Class B Stock - $1.00 Par Value 286,814
(Immediately convertible into a like
number of shares of Common Stock.)
TRANS-LUX CORPORATION AND SUBSIDIARIES
Table of Contents
Page No.
Part I - Financial Information (unaudited)
Item 1. Condensed Consolidated Balance Sheets - September 30, 2006
and December 31, 2005 1
Condensed Consolidated Statements of Operations - Three
and Nine Months Ended September 30, 2006 and 2005 2
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2006 and 2005 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
Part II - Other Information
Item 1A. Risk Factors 18
Item 5. Other Information 18
Item 6. Exhibits 18
Signatures 19
Exhibits
Part I - Financial Information
------------------------------
TRANS-LUX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 December 31
In thousands, except share data 2006 2005
----------------------------------------------------------------------------------------------
(unaudited) (see Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 3,713 $ 13,610
Available-for-sale securities 187 431
Receivables, less allowance of $1,094 - 2006 and $935 - 2005 8,801 6,321
Unbilled receivables 1,053 842
Inventories 6,381 5,658
Prepaids and other 1,131 1,149
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Total current assets 21,266 28,011
------- --------
Rental equipment 94,525 91,648
Less accumulated depreciation 62,059 56,280
------- --------
32,466 35,368
------- --------
Property, plant and equipment 39,582 39,188
Less accumulated depreciation 10,972 9,850
------- --------
28,610 29,338
Goodwill 1,004 1,004
Other assets 6,258 6,829
------- --------
TOTAL ASSETS $89,604 $100,550
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,381 $ 2,821
Accrued liabilities 6,512 6,986
Current portion of long-term debt 2,545 14,145
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Total current liabilities 12,438 23,952
------- --------
Long-term debt:
8 1/4% limited convertible senior subordinated notes due 2012 17,976 17,868
9 1/2% subordinated debentures due 2012 1,057 1,057
Notes payable 32,243 29,440
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51,276 48,365
Deferred credits, deposits and other 2,441 2,859
Deferred income taxes 2,374 2,978
Stockholders' equity:
Capital stock
Common - $1 par value - 5,500,000 shares authorized,
2,453,591 shares issued in 2006 and 2005 2,453 2,453
Class B - $1 par value - 1,000,000 shares authorized,
286,814 shares issued in 2006 and 2005 287 287
Additional paid-in-capital 13,905 13,901
Retained earnings 17,435 18,883
Accumulated other comprehensive loss (1,164) (1,287)
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32,916 34,237
Less treasury stock - at cost - 1,480,045 shares in 2006 and 2005
(excludes additional 286,814 shares held in 2006 and 2005
for conversion of Class B stock) 11,841 11,841
------- --------
Total stockholders' equity 21,075 22,396
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $89,604 $100,550
======= ========
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
TRANS-LUX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except per share data 2006 2005 2006 2005
------------------------------------------------------------------------------------------
Revenues:
Equipment rentals and maintenance $ 3,340 $ 3,837 $10,347 $11,442
Equipment sales 8,645 8,283 20,435 19,395
Theatre receipts and other 3,452 3,236 9,974 9,632
------- ------- ------- -------
Total revenues 15,437 15,356 40,756 40,469
------- ------- ------- -------
Operating expenses:
Cost of equipment rentals and maintenance 3,002 3,188 8,910 9,379
Cost of equipment sales 5,864 5,602 14,590 13,090
Cost of theatre receipts and other 2,474 2,425 7,089 7,072
------- ------- ------- -------
Total operating expenses 11,340 11,215 30,589 29,541
------- ------- ------- -------
Gross profit from operations 4,097 4,141 10,167 10,928
General and administrative expenses (3,022) (3,198) (9,502) (9,819)
Interest income 47 63 248 264
Interest expense (1,109) (1,076) (3,397) (3,116)
Gain on sale of assets - - - 108
Other income 9 22 27 74
------- ------- -------- -------
Income (loss) from operations before income
from joint venture and income taxes 22 (48) (2,457) (1,561)
Income from joint venture 123 74 326 253
Income tax (provision) benefit (84) (15) 726 496
------- ------- ------- -------
Net income (loss) $ 61 $ 11 $(1,405) $ (812)
======= ======= ======= =======
Earnings (loss) per share - basic and diluted $ 0.04 $ 0.01 $ (1.12) $ (0.64)
======= ======= ======= =======
Average common shares outstanding - basic
and diluted 1,260 1,260 1,260 1,261
======= ======= ======= =======
Cash dividends per share:
Common stock $ - $ 0.035 $ 0.035 $ 0.105
Class B stock $ - $0.0315 $0.0315 $0.0945
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The accompanying notes are an integral part of these condensed consolidated financial
statements.
2
TRANS-LUX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
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In thousands 2006 2005
------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (1,405) $ (812)
Adjustment to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 7,145 7,229
Income from joint venture (326) (253)
Deferred income taxes (615) (640)
Gain on sale of assets - (108)
Loss (gain) on sale of available-for-sale securities 15 (1)
Changes in operating assets and liabilities:
Receivables (2,691) (2,717)
Inventories (723) (575)
Prepaids and other assets (207) (272)
Accounts payable and accruals 196 (1,429)
Deferred credits, deposits and other (418) (23)
-------- -------
Net cash provided by operating activities 971 399
-------- -------
Cash flows from investing activities
Equipment manufactured for rental (2,877) (3,176)
Purchases of property, plant and equipment (394) (1,757)
Purchases of available-for-sale securities - (114)
Proceeds from sale of available-for-sale securities 257 32
Proceeds from joint venture, net 878 (125)
Proceeds from sale of assets - 200
-------- --------
Net cash used in investing activities (2,136) (4,940)
-------- --------
Cash flows from financing activities
Proceeds from long-term debt 6,250 1,753
Payments of long-term debt (14,939) (1,456)
Cash dividends (43) (132)
Purchase of treasury stock - (2)
-------- --------
Net cash provided by (used in) financing activities (8,732) 163
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Net decrease in cash and cash equivalents (9,897) (4,378)
Cash and cash equivalents at beginning of year 13,610 12,398
-------- --------
Cash and cash equivalents at end of period $ 3,713 $ 8,020
======== ========
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Interest paid $ 3,650 $ 3,106
Income taxes paid 253 346
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
TRANS-LUX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
Note 1 - Basis of Presentation
Financial information included herein is unaudited, however, such information
reflects all adjustments (of a normal and recurring nature), which are, in the
opinion of management, necessary for the fair presentation of the consolidated
financial statements for the interim periods. The results for the interim
periods are not necessarily indicative of the results to be expected for the
full year. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission and therefore do not
include all information and footnote disclosures required under accounting
principles generally accepted in the United States of America. It is suggested
that the September 30, 2006 condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2005. The condensed consolidated balance sheet at December 31, 2005 is
derived from the December 31, 2005 audited financial statements.
The Company has incurred losses for the nine months ended September 30, 2006 of
$1,405,000 and $1,793,000 for the year ended December 31, 2005, however it has
income of $61,000 for the three months ended September 30, 2006. The Company
has positive working capital of $8.8 million as of September 30, 2006 and a
positive cash flow from operations for the nine months ended September 30, 2006
and 2005 of $971,000 and $399,000, respectively. Management believes that its
current cash resources will be sufficient to fund its operations and its current
obligations through September 30, 2007.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) establishes standards that
require companies to record the cost resulting from all share-based payment
transactions using the fair value method. Transition under SFAS 123(R) requires
using a modified version of prospective application under which compensation
costs are recognized over the remaining service period for all unvested
share-based payments outstanding or a modified retrospective method under which
all prior periods impacted by SFAS 123 are restated. Effective January 1, 2006,
the Company adopted SFAS 123(R) using the modified prospective transition
method, whereby compensation costs are recognized in the consolidated statements
of operations in the period beginning in January 1, 2006. Accordingly,
compensation cost amounts for prior periods are presented in the Company's
footnotes but the consolidated financial statements have not been restated to
reflect, and do not retroactively include, the impact of the adoption of SFAS
123(R). Stock-based compensation expense related to stock options recognized
under SFAS 123(R) for the nine months ended September 30, 2006 was approximately
$3,000, net of tax. See Note 5 - Stock Option Plans, for additional
disclosures.
4
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments" ("SFAS 155"), which amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") and SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 140"). This statement amends SFAS 133 to permit fair
value remeasurement for any hybrid instrument that contains an embedded
derivative that otherwise would require bifurcation. This statement also
eliminates the interim guidance in SFAS No. 133 Implementation Issue D-1, which
provides that beneficial interests in securitized financial assets are not
subject to the provisions of SFAS 133. Finally, this statement amends SFAS 140
to eliminate the restriction on the passive derivative instruments that a
qualifying special-purpose entity may hold. This statement is effective for all
financial instruments acquired or issued in first fiscal years beginning after
September 15, 2006. Management is assessing the potential impact of SFAS 155 on
the Company's financial condition and results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140" ("SFAS 156"), that
provides guidance on accounting for separately recognized servicing assets and
servicing liabilities. In accordance with the provisions of SFAS 156,
separately recognized servicing assets and servicing liabilities must be
initially measured at fair value, if practicable. Subsequent to initial
recognition, the Company may use either the amortization method or the fair
value measurement method to account for servicing assets and servicing
liabilities within the scope of this statement. The Company will adopt SFAS 156
in fiscal year 2007. The adoption of this statement is not expected to have A
material effect on the Company's financial condition and results of operations.
In April 2006, the FASB issued FSP FIN 46R-6, "Determining the Variability to Be
Considered in Applying FASB Interpretation No. 46R" which requires the
variability of an entity to be analyzed based on the design of the entity. The
nature and risks in the entity, as well as the purpose for the entity's creation
are examined to determine the variability in applying FIN 46R, "Consolidation of
Variable Interest Entities" ("FIN 46R"). The variability is used in applying
FIN 46R to determine whether an entity is a variable interest entity, which
interests are variable interests in the entity, and who is the primary
beneficiary of the variable interest entity. This statement is effective for
all reporting periods beginning after June 15, 2006. Management does not expect
this statement to have a significant impact on the Company's financial condition
and results of operations.
In July 2006, the FASB inssued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken in a
tax return. The Company must determine whether is is "more-likely-than-not"
that a tax position will be sustained upon examination, including resolution of
any related appeals or litigation processes, based on the technical merits of
the position. Once it is determined that a position meets the
more-likely-than-not recognition threshold, the position is measured to
determine the amount of benefit to recognize in the financial statements. FIN
48 applies to all tax positions related to income taxes subject to FASB
Statement No. 109, "Accounting for Income Taxes." The interpretation clearly
scopes out income tax positions related to FASB Statement No. 5, "Accounting
for Contingencies." The Company will adopt the provisions of this statement on
July 1, 2007. The cumulative effect of applying the provisions of FIN 48 will
be reported as an adjustment to the opening balance of retained earnings on July
1, 2007. Management does not anticipate that the
5
adoption of this statement will have a material effect on the Company's
financial condition and results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157") that defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands the disclosures
about fair value measurement. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. Management is assessing the potential impact
of SFAS 157 on the Company's financial condition and results of operations.
Note 2 - Inventories
Inventories are stated at the lower of cost or market and consist of the
following:
September 30 December 31
In thousands 2006 2005
------------------------------------------------------
Raw materials $4,119 $3,740
Work-in-progress 1,543 1,411
Finished goods 719 507
------ ------
$6,381 $5,658
====== ======
Note 3 - Long-Term Debt
During the nine months ended September 30, 2006, long-term debt, including
current portion, decreased $8.7 million. On June 15, 2006, the Company redeemed
all of its $12.2 million 7 1/2% Convertible Subordinated Notes due December 1,
2006 (the "7 1/2% Notes"). The 7 1/2% Notes were convertible at the option of
the holder into shares of Common Stock, $1 par value per share, of the Company
at any time prior to the close of business on June 14, 2006 at the rate of
$14.013 per share, which conversion rate was substantially above the current
market price of the Common Stock. The Company utilized $6.1 million of its
non-revolving line of credit to finance one-half of the redemption of the 7 1/2%
Notes and utilized $6.1 million of cash for the remaining one-half. Also during
the nine months ended September 30, 2006, the Company repaid $1.2 million of its
revolving loan facility and made regularly scheduled payments of long-term debt,
offset by $150,000 received from the State of Iowa and City of Des Moines as a
zero percent interest loan for a five-year term.
The Company has a bank Credit Agreement, which was amended subsequent to the end
of the quarter, which provides for a term loan of $10.0 million, a non-revolving
line of credit of up to $6.2 million to finance purchases and/or redemptions of
one-half of the 7 1/2% Notes, and a revolving loan of up to $5.0 million at
variable interest rates ranging from LIBOR plus 2.25% to Prime (ranging from
6.85% to 8.25% at September 30, 2006). The Credit Agreement matures on January
1, 2008. The non-revolving line of credit is convertible into a four-year
amortizing term loan on December 31, 2006 and matures January 1, 2008. At
September 30, 2006, $6.1 million of the non-revolving line of credit was
outstanding and $3.8 million of the revolving loan was outstanding, leaving $1.2
million available under the revolving loan facility. The Credit Agreement
requires an annual facility fee on the unused commitment of 0.25%, and requires
compliance with certain financial covenants,
6
which include a fixed charge coverage ratio of 1.1 to 1.0, a loan-to-value ratio
of not more than 50%, a leverage ratio of 3.0 to 1.0, a cap on capital
expenditures, maintaining a tangible net worth of not less than $18.5 million
and maintaining accounts with an average monthly compensating balance of not
less than $750,000. At September 30, 2006, the Company was in compliance with
all the financial covenants as set forth in the amended Credit Agreement.
On March 13, 2006, the Company completed an offer to exchange $1,000 principal
amount of its 8 1/4% Limited Convertible Senior Subordinated Notes due 2012 (the
"8 1/4% Notes") for each $1,000 principal amount of its 7 1/2% Notes. The
exchange offer commenced February 6, 2006 and expired on March 13, 2006. A
total of $0.1 million principal amount of 7 1/2% Notes were exchanged, leaving
$12.2 million principal amount of 7 1/2% Notes outstanding, which were
subsequently redeemed. The 8 1/4% Notes provide for a higher interest rate,
which is payable semi-annually, have a longer term, are convertible into Common
Stock at a lower conversion price of $9.00 per share until March 1, 2007, may be
redeemed by the Company, in whole or in part, at declining premiums beginning
March 1, 2006, and are senior to the 7 1/2% Notes, which were redeemed on June
15, 2006, and the Company's 9 1/2% Subordinated Debentures (the "Debentures")
due 2012.
Note 4 - Reporting Comprehensive Income/Loss
Total comprehensive income (loss) for the three and nine months ended September
30, 2006 and 2005 is as follows:
Three months ended September 30 Nine months ended September 30
In thousands 2006 2005 2006 2005
----------------------------------------------------------------------------------------------------------------------
Net income (loss) $61 $ 11 $(1,405) $(812)
--- ---- ------- -----
Other comprehensive income (loss):
Unrealized foreign currency translation gain (loss) (4) 126 106 86
Unrealized holding gain (loss) on securities 11 (14) 28 (32)
Income taxes related to other comprehensive
income (loss) items (4) 5 (11) 12
--- ---- ------- -----
Total other comprehensive income (loss), net of tax 3 117 123 66
--- ---- ------- -----
Comprehensive income (loss) $64 $128 $(1,282) $(746)
=== ==== ======= =====
Note 5 - Stock Option Plans
Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R),
which establishes the accounting for stock-based awards exchanged for employee
services. SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be measured at fair value and expensed in
the consolidated statement of operations over the service period (generally the
vesting period). The Company previously accounted for share-based compensation
plans under APB 25 and the related interpretations and provided the required
SFAS 123 pro forma disclosures for employee stock options.
7
The following summarizes the activity of the Company's stock options for the
nine months ended September 30, 2006:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price ($) Term (Yrs) Value ($)
-------------------------------------------------------------------------------------------------
Outstanding at beginning of year 71,300 6.10
Granted 500 5.95
Exercised -
Terminated (500) 5.38
------
Outstanding at end of period 71,300 6.11 4.3
====== ===
Vested and expected to vest at end of period 71,300 6.11 4.3 206,000
====== ===
Exercisable at end of period 70,800 6.11 4.3 205,000
====== ===
As of September 30, 2006, there was $1,000 of total unrecognized compensation
cost related to non-vested options granted under the Plans. That cost will be
recognized in the next four fiscal quarters.
Expected volatility is based on historical volatility of the Company's stock and
the expected life of options is based on historical data with respect to
exercise periods.
Prior to the adoption of SFAS 123(R), the Company provided the disclosures
required under SFAS 123. The Company did not recognize stock option-based
compensation cost in our consolidated statements of operations for the periods
prior to the adoption of SFAS 123(R), as all options granted had an exercise
price equal to the market price of our common stock on the date of grant.
The following table illustrates the effect on net income (loss) and earnings
(loss) per share for the three and nine months ended September 30, 2005 as if
the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation:
Three months ended Nine months ended
In thousands, except per share data September 30, 2005 September 30, 2005
--------------------------------------------------------------------------------------------
Net income (loss), as reported $ 11 $ (812)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax 1 8
----- ------
Pro forma net income (loss) $ 10 $ (820)
Basic earnings (loss) per share:
As reported $0.01 $(0.64)
Pro forma $0.01 $(0.66)
----- ------
In accordance with SFAS 123(R), the fair value of each option grant has been
estimated as of the date of grant using the binomial options-pricing model with
the following weighted average assumptions used:
Three and nine months ended September 30
2006 2005
-----------------------------------------------------------------
Expected dividend yield - 2.06%
Expected volatility 42.00% 43.00%
Risk free interest rate 4.76% 4.59%
Expected life (in years) 4.0 4.0
-----------------------------------------------------------------
8
Note 6 - Business Segment Data
The Company evaluates segment performance and allocates resources based upon
operating income. The Company's operations are managed in three reportable
business segments. The Display Division comprises two operating segments,
Indoor display and Outdoor display. Both design, produce, lease, sell and
service large-scale, multi-color, real-time electronic information displays.
Both operating segments are conducted on a global basis, primarily through
operations in the U.S. The Company also has operations in Canada. The Indoor
display and Outdoor display segments are differentiated primarily by the
customers they serve. The Entertainment/real estate segment owns a chain of
motion picture theatres in the western Mountain States and income-producing real
estate properties. Segment operating income is shown after general and
administrative expenses directly associated with the segment and includes the
operating results of the theatre joint venture, MetroLux Theatres. Corporate
general and administrative items relate to costs that are not directly
identifiable with a segment. There are no intersegment sales. Of the total
goodwill of $1.0 million, $0.9 million relates to the Outdoor display segment
and $0.1 million relates to the Indoor display segment.
Foreign revenues represent less than 10% of the Company's revenues and therefore
are not separately disclosed. The foreign operation does not manufacture their
own equipment; the domestic operation provides the equipment that the foreign
operation leases or sells. The foreign operation operates similarly to the
domestic operation and has similar profit margins.
Information about the Company's operations in its three business segments for
the three and nine months ended September 30, 2006 and 2005 is as follows:
Three months ended September 30 Nine months ended September 30
In thousands 2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------------------
Revenues:
Indoor display $ 3,975 $ 4,080 $10,300 $11,322
Outdoor display 8,010 8,040 20,482 19,515
Entertainment/real estate 3,452 3,236 9,974 9,632
------- ------- ------- -------
Total revenues 15,437 15,356 40,756 40,469
======= ======= ======= =======
Operating income (loss):
Indoor display 444 353 (91) 1,052
Outdoor display 999 911 1,526 1,451
Entertainment/real estate 906 712 2,640 2,330
------- ------- ------- -------
Total operating income 2,349 1,976 4,075 4,833
Other income 9 22 27 182
Corporate general and administrative expenses (1,151) (959) (3,084) (3,471)
Interest expense - net (1,062) (1,013) (3,149) (2,852)
Income tax benefit (expense) (84) (15) 726 496
------- ------- ------- -------
Net income (loss) $ 61 $ 11 $(1,405) $ (812)
======= ======= ======= =======
Note 7 - Components of Net Periodic Pension Cost
As of December 31, 2003, the benefit service under the pension plan had been
frozen and, accordingly, there is no service cost for the periods ended
September 30, 2006 and 2005.
9
The following table presents the components of net periodic pension cost:
Three months ended September 30 Nine months ended September 30
In thousands 2006 2005 2006 2005
--------------------------------------------------------------------------------------------------
Interest cost $ 153 $ 156 $ 459 $ 468
Expected return on plan assets (163) (156) (489) (468)
Amortization of prior service cost 4 4 12 12
Amortization of net actuarial loss 77 67 231 201
----- ----- ----- -----
Net periodic pension cost $ 71 $ 71 $ 213 $ 213
===== ===== ===== =====
There is no minimum required contribution for 2006.
Note 8 - Legal Proceedings and Claims
The Company is subject to legal proceedings and claims, which arise in the
ordinary course of its business. The Company is not a party to any pending
legal proceedings and claims that it believes will have a material adverse
effect on the consolidated financial position or operations of the Company.
Note 9 - Joint Venture
The Company has a 50% ownership in a joint venture partnership, MetroLux
Theatres ("MetroLux"), accounted for by the equity method.
The following results of operations summary information relates to MetroLux for
the three and nine months ended September 30, 2006 and 2005, and summary balance
sheet information relates to MetroLux as of September 30, 2006 and December 31,
2005:
Summary results of operations
Three months ended September 30 Nine months ended September 30
In thousands 2006 2005 2006 2005
-------------------------------------------------------------------------------------------------------------
Revenues $1,434 $765 $3,882 $2,360
Gross profit 845 443 2,272 1,366
Net income 247 149 653 507
Company's share of partnership net income 123 74 326 253
-------------------------------------------------------------------------------------------------------------
Summary balance sheets
September 30 December 31
In thousands 2006 2005
--------------------------------------------------------------------------
Current assets $ 326 $3,623
Noncurrent assets 1,842 2,021
------ ------
Total assets 2,168 5,644
====== ======
Current liabilities 399 2,751
Noncurrent liabilities 860 883
------ ------
Total liabilities 1,259 3,634
====== ======
Company's equity in partnership net assets $ 532 $1,047
--------------------------------------------------------------------------
10
The Company's equity in partnership net assets is reflected in other assets in
the consolidated balance sheets. The Company has guaranteed $0.7 million (75%)
of a $0.9 million business loan to finance theatre equipment at its new
fourteen-plex theatre held by MetroLux, until May 2011, and, accordingly has
recognized a liability for $37,000 at September 30, 2006. The unrelated 50%
partner of MetroLux also guaranteed $0.7 million (75%) of the $0.9 million
business loan. The assets of MetroLux collateralize this business loan.
Note 10 - Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is based upon weighted average common
shares outstanding. Diluted earnings (loss) per common share is based upon
the weighted average number of common shares outstanding, including the dilutive
effect of stock options and convertible debt using the treasury stock and if
converted methods. However, for the three and nine month periods ended
September 30, 2006 and 2005, the assumed exercise or conversion of any of these
securities would be anti-dilutive; and, accordingly, diluted earnings (loss) per
share basic equals earnings (loss) per share for each period.
The number of such shares as of September 30, 2006 and September 30, 2005
subject to convertible debt was 1,994,000 and 1,985,000, respectively. The
number of such shares as of September 30, 2006 and September 30, 2005 subject to
stock options was 70,800 and 69,300, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Trans-Lux is a full service provider of integrated multimedia systems for
today's communications environments. The essential elements of these systems
are the real-time, programmable electronic information displays we manufacture,
distribute and service. Designed to meet the evolving communications needs of
both the indoor and outdoor markets, these displays are used primarily in
applications for the financial, banking, gaming, corporate, retail,
transportation, entertainment and sports industries. In addition to its display
business, the Company owns and operates a chain of motion picture theatres in
the western Mountain States. The Company operates in three reportable segments:
Indoor Display, Outdoor Display and Entertainment/Real Estate.
The Indoor Display segment includes worldwide revenues and related expenses from
the rental, maintenance and sale of indoor displays. This segment includes the
financial, banking, gaming, corporate, retail and transportation markets. The
Outdoor Display segment includes worldwide revenues and related expenses from
the rental, maintenance and sale of outdoor displays. Included in this segment
are catalog sports and commercial markets. The Entertainment/Real Estate
segment includes the operations of the motion picture theatres in the western
Mountain States and income-producing real estate properties.
11
Results of Operations
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
2005
Total revenues for the nine months ended September 30, 2006 increased $287,000
or 0.7% to $40.8 million from $40.5 million for the nine months ended September
30, 2005, principally due to increases in Outdoor display sales revenues and
Entertainment/real estate revenues, offset by decreases in Indoor display
rentals and maintenance revenues and sales revenues.
Indoor display revenues decreased $1.0 million or 9.0%. Of this decrease,
Indoor display equipment rentals and maintenance revenues decreased $909,000 or
12.5%, primarily due to disconnects and non-renewals of equipment on rental and
maintenance on existing contracts in the financial services market. Indoor
display equipment sales decreased $113,000 or 2.8%, primarily due to a reduction
in sales to the financial services market. The financial services market
continues to be negatively impacted by the current consolidations within that
industry. Although the market conditions appear to be slowly improving,
installations of new equipment tend to lag any economic turnaround.
Outdoor display revenues increased $967,000 or 5.0%. Of this increase, Outdoor
display equipment sales increased $1.2 million or 7.5%, primarily in the outdoor
catalog sports market. Outdoor display equipment rentals and maintenance
revenues decreased $186,000 or 4.4%, primarily due to the continued expected
gradual revenue decline in the older Outdoor display equipment rental and
maintenance bases acquired in the early 1990s.
Entertainment/Real Estate revenues increased $342,000 or 3.6%, primarily due to
an increase in both box office revenues and concession sales.
Total operating income for the nine months ended September 30, 2006 decreased
15.7% to $4.1 million from $4.8 million for the nine months ended September 30,
2005, principally due to the reduction in revenues in the Indoor display segment
and a decrease in the gross margin of the Indoor display segment due to the
product mix.
Indoor display operating income decreased $1.2 million, from an operating income
of $1.1 million to an operating loss of $91,000, primarily as a result of the
decrease in revenues in the financial services market and a decrease in the
gross margin on sold equipment due to the product mix. The cost of Indoor
displays represented 73.1% of related revenues in 2006 compared to 64.9% in
2005. The cost of Indoor displays as a percentage of related revenues increased
primarily due to the relationship between field service costs of equipment
rentals and maintenance decreasing, and the revenues from Indoor display
equipment rentals and maintenance also decreasing but not at the same rate. The
Company continues to monitor and address the cost of field service to bring it
in line with revenues from equipment rentals and maintenance. Indoor display
cost of equipment sales increased $378,000 or 21.6%, primarily due to the
decrease in the gross margin of Indoor display equipment sales due to the
product mix of sales to the transportation market. Indoor display general and
administrative expenses decreased $61,000 or 2.1%, primarily due to an $86,000
decrease in the allowance for doubtful accounts receivable, offset by an
increase in travel costs and commissions. Cost of Indoor display equipment
rentals and maintenance includes field service expenses, plant repair costs,
12
maintenance and depreciation.
Outdoor display operating income increased $75,000 or 5.2%, primarily as a
result of a decrease of $291,000 in field service costs, offset by the product
mix and a $50,000 non-recurring material cost. The Company continues to address
the cost of field service to bring it in line with revenues from equipment
rentals and maintenance. The cost of Outdoor displays represented 78.0% of
related revenues in 2006 compared to 77.5% in 2005. Outdoor display cost of
equipment sales increased $1.1 million or 9.9%, principally due to the increase
in volume from the outdoor catalog sports market. Outdoor display cost of
equipment rentals and maintenance decreased $273,000 or 7.2%, primarily due to a
decrease in field service costs. Outdoor display general and administrative
expenses increased $43,000 or 1.5%, primarily due to an increase in salaries and
benefits. Cost of Outdoor display equipment rentals and maintenance includes
field service expenses, plant repair costs, maintenance and depreciation.
Entertainment/Real Estate operating income increased $310,000 or 13.3%,
primarily due to an increase in box office revenues and concession sales. The
cost of Entertainment/real estate represented 71.1% of related revenues in 2006
compared to 73.4% in 2005. Cost of Entertainment/real estate, which includes
film rental costs and depreciation expense, remained level, primarily due to the
reduction in certain operating expenses. Entertainment/Real Estate general and
administrative expenses increased $88,000 or 18.2%, primarily due to increased
salaries and benefits.
Corporate general and administrative expenses decreased $387,000 or 11.1%,
primarily due to reductions in insurance expense, payroll and benefits, and a
$10,000 increase in the currency exchange gain in 2006.
Net interest expense increased $297,000 or 10.4%, which is primarily
attributable to an increase in variable interest rates. The income from joint
venture relates to the operations of the theatre joint venture, MetroLux
Theatres, in Loveland, Colorado, which is included in the Entertainment/real
estate segment.
The effective tax rates for the nine months ended September 30, 2006 and 2005
were 34.1% and 37.9%, respectively.
Three Months Ended September 30, 2006 Compared to Three Months Ended September
30, 2005
Total revenues for the three months ended September 30, 2006 remained level at
$15.4 million compared to the three months ended September 30, 2005, principally
due to increases in both Indoor and Outdoor display sales revenues and
Entertainment/real estate revenues, offset by decreases in both the Indoor and
Outdoor display rentals and maintenance revenues.
Indoor display revenues decreased $105,000 or 2.6%. Of this decrease, Indoor
display equipment rentals and maintenance revenues decreased $353,000 or 14.9%,
primarily due to disconnects and non-renewals of equipment on rental and
maintenance on existing contracts in the financial services market. Indoor
display equipment sales increased $248,000 or 14.5%, primarily due to an
increase in
13
sales to the international financial services market. The financial services
market continues to be negatively impacted by the current consolidations within
that industry. Although the market conditions appear to be slowly improving,
installations of new equipment tend to lag any economic turnaround.
Outdoor display revenues decreased $30,000 or 0.4%. Of this decrease, Outdoor
display equipment rentals and maintenance revenues decreased $144,000 or 9.8%,
primarily due to the continued expected gradual revenue decline in the older
Outdoor display equipment rental and maintenance bases acquired in the early
1990s. Outdoor display equipment sales increased $114,000 or 1.7%, primarily in
the outdoor catalog sports market.
Entertainment/Real Estate revenues increased $216,000 or 6.7%, primarily due to
an increase in both box office revenues and concession sales.
Total operating income for the three months ended September 30, 2006 increased
$373,000 to $2.3 million from $2.0 million for the three months ended September
30, 2005, principally due to the decrease in general and administrative costs
and the increases in box office and concession revenues of the
Entertainment/real estate segment and an increase in volume from the outdoor
catalog sports market of the Outdoor display segment.
Indoor display operating income increased $91,000 or 25.8%, primarily as a
result of a decrease in general and administrative costs, offset by the decrease
in revenues in the financial services market and a decrease in the gross margin
on sold equipment due to the product mix. The cost of Indoor displays
represented 70.2% of related revenues in 2006 compared to 66.8% in 2005. The
cost of Indoor displays as a percentage of related revenues increased primarily
due to the relationship between field service costs of equipment rentals and
maintenance decreasing, and the revenues from Indoor display equipment rentals
and maintenance also decreasing but not at the same rate. The Company reduced
the cost of field service by $42,000 during the three months ended September 30,
2006 and continues to monitor and address these costs to bring them in line with
revenues from equipment rentals and maintenance. Indoor display cost of
equipment sales increased $149,000 or 18.3%, primarily due to the increase in
revenues. Indoor display general and administrative expenses decreased $258,000
or 25.8%, primarily due to a decrease in the allowance for doubtful accounts
receivable. Cost of Indoor display equipment rentals and maintenance includes
field service expenses, plant repair costs, maintenance and depreciation.
Outdoor display operating income increased $88,000 or 9.7%, primarily as a
result of a decrease of $103,000 in field service costs. The Company continues
to monitor and address the cost of field service to bring it in line with
revenues from equipment rentals and maintenance. The cost of Outdoor displays
represented 75.9% of related revenues in 2006 compared to 75.4% in 2005.
Outdoor display cost of equipment sales increased $113,000 or 2.4%, principally
due to the increase in volume from the outdoor catalog sports market. Outdoor
display cost of equipment rentals and maintenance decreased $99,000 or 7.8%,
primarily due to a decrease in field service costs. Outdoor display general and
administrative expenses decreased $132,000 or 12.4%, primarily due to a
reduction in certain selling expenses. Cost of Outdoor display equipment
rentals and maintenance includes field service expenses, plant repair costs,
maintenance and depreciation.
14
Entertainment/Real Estate operating income increased $194,000 or 27.2%,
primarily due to an increase in both box office revenues and concession sales.
The cost of Entertainment/real estate represented 71.7% of related revenues in
2006 compared to 74.9% in 2005. Cost of Entertainment/real estate, which
includes film rental costs and depreciation expense, increased $49,000 or 2.0%,
primarily due to an increase in box office revenues. Entertainment/Real Estate
general and administrative expenses increased $22,000 or 12.7%, primarily due to
increased salaries and benefits.
Corporate general and administrative expenses increased $192,000 or 20.0%,
primarily due to a $136,000 reduction in the currency exchange gain in 2006 and
an increase in certain overhead expenses.
Net interest expense increased $49,000 or 4.8%, which is primarily attributable
to an increase in variable interest rates. The income from joint venture
relates to the operations of the theatre joint venture, MetroLux Theatres, in
Loveland, Colorado, which is included in the Entertainment/real estate segment.
The effective tax rates for the three months ended September 30, 2006 and 2005
were 57.9% and 57.7%, respectively.
Liquidity and Capital Resources
On September 25, 2006, the Board of Directors of the Corporation did not declare
a regular quarterly cash dividend for the third quarter of 2006 in order to
conserve cash and prepay the 7 1/2% Notes at the end of the second quarter.
On June 15, 2006, the Company redeemed all of its $12.2 million 7 1/2% Notes.
The 7 1/2% Notes were convertible at the option of the holder into shares of
Common Stock, $1 par value per share, of the Company at any time prior to the
close of business on June 14, 2006 at the rate of $14.013 per share, which
conversion rate was substantially above the current market price of the Common
Stock. The Company utilized $6.1 million of its non-revolving line of credit to
finance one-half of the redemption of the 7 1/2% Notes and utilized $6.1 million
of cash for the remaining one-half.
The Company has a bank Credit Agreement, which was amended subsequent to the end
of the quarter, which provides for a term loan of $10.0 million, a non-revolving
line of credit of up to $6.2 million to finance purchases and/or redemptions of
one-half of the 7 1/2% Notes, and a revolving loan of up to $5.0 million at
variable interest rates ranging from LIBOR plus 2.25% to Prime (ranging from
6.85% to 8.25% at September 30, 2006). The Credit Agreement matures on January
1, 2008. The non-revolving line of credit is convertible into a four-year
amortizing term loan on December 31, 2006 and matures January 1, 2008. At
September 30, 2006, $6.1 million of the non-revolving line of credit was
outstanding and $3.8 million of the revolving loan was outstanding, leaving $1.2
million available under the revolving loan facility. The Credit Agreement
requires an annual facility fee on the unused commitment of 0.25%, and requires
compliance with certain financial covenants, which include a fixed charge
coverage ratio of 1.1 to 1.0, a loan-to-value ratio of not more than 50%, a
leverage ratio of 3.0 to 1.0, a cap on capital expenditures, maintaining a
tangible net worth of not
15
less than $18.5 million and maintaining accounts with an average monthly
compensating balance of not less than $750,000. At September 30, 2006, the
Company was in compliance with all the financial covenants as set forth in the
amended Credit Agreement.
On March 13, 2006, the Company completed an offer to exchange $1,000 principal
amount of its 8 1/4% Notes for each $1,000 principal amount of its 7 1/2% Notes.
The exchange offer commenced February 6, 2006 and expired on March 13, 2006. A
total of $0.1 million principal amount of 7 1/2% Notes were exchanged, leaving
$12.2 million principal amount of 7 1/2% Notes outstanding, and $18.0 million
principal amount of the 8 1/4% Notes outstanding. The 7 1/2% Notes were
subsequently redeemed. The 8 1/4% Notes provide for a higher interest rate,
which is payable semi-annually, have a longer term, are convertible into Common
Stock at a lower conversion price of $9.00 per share until March 1, 2007, may be
redeemed by the Company, in whole or in part, at declining premiums beginning
March 1, 2006, and are senior to the 7 1/2% Notes, which were redeemed on June
15, 2006, and the Company's Debentures.
Under various agreements, the Company is obligated to make future cash payments
in fixed amounts. These consist of payments under the Company's long-term debt
agreements, employment and consulting agreement payments and rent payments
required under operating lease agreements.
The following table summarizes the Company's fixed contractual obligations as of
September 30, 2006 for the remainder of 2006 and the next four years:
Remainder of
In thousands 2006 2007 2008 2009 2010
-------------------------------------------------------------------------------------
Long-term debt, including interest $1,711 $7,365 $20,199 $3,879 $3,826
Employment and consulting
agreement obligations 411 1,648 1,416 841 464
Operating lease payments 188 548 450 316 293
------ ------ ------- ------ ------
Total $2,310 $9,561 $22,065 $5,036 $4,583
-------------------------------------------------------------------------------------
Cash and cash equivalents decreased $8.7 million for the nine months ended
September 30, 2006 compared to a decrease of $4.4 million in 2005. The decrease
in 2006 is primarily attributable to the redemption of the outstanding $12.2
million 7 1/2% Notes on June 15, 2006. The Company utilized $6.1 million of its
non-revolving line of credit to finance one-half of the redemption of the 7 1/2%
Notes and utilized $6.1 million of cash for the remaining one-half. The Company
also made a net $1.2 million repayment on the revolving line of credit and $1.6
million of scheduled payments of long-term debt, and made investments in
equipment for rental, offset by the proceeds from the joint venture and cash
provided by operating activities of $971,000. The decrease in 2005 is primarily
attributable to the investment in equipment for rental, expansion of the
Company's movie theatre in Dillon, Colorado and scheduled payments of long-term
debt, offset by cash provided by operating activities of $399,000.
16
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
The Company may, from time to time, provide estimates as to future performance.
These forward-looking statements will be estimates, and may or may not be
realized by the Company. The Company undertakes no duty to update such
forward-looking statements. Many factors could cause actual results to differ
from these forward-looking statements, including loss of market share through
competition, introduction of competing products by others, pressure on prices
from competition or purchasers of the Company's products, interest rate and
foreign exchange fluctuations, terrorist acts and war.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to interest rate risk on its long-term debt. The Company
manages its exposure to changes in interest rates by the use of variable and
fixed interest rate debt. In addition the Company is exposed to foreign
currency exchange rate risk mainly as a result of its investment in its Canadian
subsidiary. The Company may, from time to time, enter into derivative contracts
to manage its interest risk. The Company does not enter into derivatives for
trading or speculative purposes. At September 30, 2006, the Company did not
hold any derivative financial instruments.
A one percentage point change in interest rates would result in an annual
interest expense fluctuation of approximately $327,000. A 10% change in the
Canadian dollar relative to the U.S. dollar would result in a currency exchange
expense fluctuation of approximately $137,000, based on dealer quotes,
considering current exchange rates.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. The Company's President and
Co-Chief Executive Officer, Michael R. Mulcahy, the Company's Executive Vice
President and Co-Chief Executive Officer, Thomas Brandt, and the Company's
Executive Vice President and Chief Financial Officer, Angela D. Toppi, have
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this quarterly
report. The Company's disclosure controls and procedures are designed to ensure
that material information required to be disclosed by the Company in the reports
that are filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. Our disclosure
controls and procedures include components of our internal controls over
financial reporting. Management's assessment of the effectiveness of our
internal controls over financial reporting is expressed at the level of
reasonable assurance because a control system, no matter how well designed and
operated, can provide only reasonable, but not absolute assurance that the
control system's objectives will be met. Based on this evaluation, the
Company's Co-Chief Executive Officers and Chief Financial Officer have concluded
that these controls and procedures are effective.
17
Changes in Internal Control over Financial Reporting. There has been no change
in the Company's internal control over financial reporting, that occurred in the
third fiscal quarter, that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
Part II - Other Information
Item 1A. Risk Factors
The Company is subject to a number of risks including general business and
financial risk factors. Any or all of such factors could have a material
adverse effect on the business, financial condition or results of operations of
the Company. You should carefully consider the following risk factors, in
addition to those identified in our Annual Report on Form 10-K for the year
ended December 31, 2005.
The Company has incurred losses for the nine months ended September 30, 2006 of
$1,405,000 and $1,793,000 for the year ended December 31, 2005, however it has
income of $61,000 for the three months ended September 30, 2006. The Company
has positive working capital of $8.8 million as of September 30, 2006 and a
positive cash flow from operations for the nine months ended September 30, 2006
and 2005 of $971,000 and $399,000, respectively. Management believes that its
current cash resources will be sufficient to fund its operations and its current
obligations through September 30, 2007.
Item 5. Other Information
During the quarter for which this report on Form 10-Q is filed, the registrant
filed a Form 8-K dated September 25, 2006, stating that the Board of Directors
accepted the resignations of Messrs. Baruch and Greenes from the Board of
Directors.
Item 6. Exhibits
31.1 Certification of Michael R. Mulcahy, President and Co-Chief Executive
Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Thomas Brandt, Executive Vice President and Co-Chief
Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3 Certification of Angela D. Toppi, Executive Vice President and Chief
Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
18
32.1 Certification of Michael R. Mulcahy, President and Co-Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Thomas Brandt, Executive Vice President and Co-Chief
Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification of Angela D. Toppi, Executive Vice President 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.
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.
TRANS-LUX CORPORATION
---------------------
(Registrant)
Date: November 17, 2006
by /s/ Angela D. Toppi
-----------------------
Angela D. Toppi
Executive Vice President and
Chief Financial Officer
19