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 March 31, 2007
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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
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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
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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
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05/17/07 Common Stock - $1.00 Par Value 2,019,355
05/17/07 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.
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Part I - Financial Information (unaudited)
Item 1. Consolidated Balance Sheets - March 31, 2007 and
December 31, 2006 (audited) 1
Consolidated Statements of Operations - Three
Months Ended March 31, 2007 and 2006 2
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2007 and 2006 3
Notes to Consolidated Condensed 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 15
Item 4. Controls and Procedures 15
Part II - Other Information
Item 1A. Risk Factors 16
Item 2. Unregistered Sales of Securities and Use of
Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security
Holders 16
Item 5. Other Information 16
Item 6. Exhibits 17
Signatures 18
Exhibits
Part I - Financial Information
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TRANS-LUX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31 December 31
In thousands, except share data 2007 2006
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(unaudited) (see Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 5,246 $ 5,765
Available-for-sale securities 203 199
Receivables, less allowance of $1,092 - 2007 and $1,034 - 2006 6,273 6,721
Unbilled receivables 71 962
Inventories 6,334 6,467
Prepaids and other 1,054 858
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Total current assets 19,181 20,972
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Rental equipment 90,346 88,903
Less accumulated depreciation 58,686 56,946
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31,660 31,957
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Property, plant and equipment 39,653 39,459
Less accumulated depreciation 11,315 10,948
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28,338 28,511
Goodwill 1,004 1,004
Other assets 5,831 6,028
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TOTAL ASSETS $86,014 $88,472
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,114 $ 2,412
Accrued liabilities 7,240 6,929
Current portion of long-term debt 3,293 3,162
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Total current liabilities 12,647 12,503
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Long-term debt:
8 1/4% Limited convertible senior subordinated notes due 2012 10,129 17,958
9 1/2% Subordinated debentures due 2012 1,057 1,057
Notes payable 31,638 32,522
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42,824 51,537
Deferred credits, deposits and other 3,744 3,782
Deferred income taxes 73 476
Stockholders' equity:
Capital stock
Common - $1 par value - 5,500,000 shares authorized,
2,453,591 shares issued in 2007 and 2006 2,453 2,453
Class B - $1 par value - 1,000,000 shares authorized,
286,814 shares issued in 2007 and 2006 287 287
Additional paid-in-capital 14,742 13,897
Retained earnings 14,541 17,193
Accumulated other comprehensive loss (1,824) (1,853)
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30,199 31,977
Less treasury stock - at cost - 434,331 common shares in 2007 and
1,475,588 common shares in 2006 3,473 11,803
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Total stockholders' equity 26,726 20,174
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $86,014 $88,472
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The accompanying notes are an integral part of these consolidated financial statements.
1
TRANS-LUX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED
MARCH 31
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In thousands, except per share data 2007 2006
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Revenues:
Equipment rentals and maintenance $ 3,120 $ 3,520
Equipment sales 5,475 5,000
Theatre receipts and other 3,535 3,090
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Total revenues 12,130 11,610
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Operating expenses:
Cost of equipment rentals and maintenance 2,752 2,959
Cost of equipment sales 3,930 3,768
Cost of theatre receipts and other 2,492 2,160
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Total operating expenses 9,174 8,887
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Gross profit from operations 2,956 2,723
General and administrative expenses (3,605) (3,378)
Interest income 37 65
Interest expense/debt conversion cost (2,537) (1,128)
Other income (loss) - (1)
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Loss from operations before income taxes and
income from joint venture (3,149) (1,719)
Benefit for income taxes 655 572
Income from joint venture 92 74
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Net Loss $(2,402) $(1,073)
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Loss per share - basic and diluted $ (1.65) $ (0.85)
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Weighted average common shares outstanding - basic and diluted 1,460 1,260
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Cash dividends per share:
Common Stock $ - $ 0.035
Class B Stock $ - $0.0315
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The accompanying notes are an integral part of these consolidated financial
statements.
2
TRANS-LUX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
MARCH 31
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In thousands 2007 2006
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Cash flows from operating activities
Net loss $(2,402) $(1,073)
Adjustment to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 2,307 2,371
Income from joint venture (92) (74)
Deferred income taxes (655) (572)
Exchange of 8 1/4% Notes for Common Stock 1,345 -
Changes in operating assets and liabilities:
Receivables 1,339 402
Inventories 133 (396)
Prepaids and other assets (182) (108)
Accounts payable and accruals 40 (807)
Deferred credits, deposits and other (37) (68)
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Net cash provided by (used in) operating activities 1,796 (325)
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Cash flows from investing activities
Equipment manufactured for rental (1,443) (1,157)
Purchases of property, plant and equipment (194) (71)
Proceeds from joint venture, net 75 628
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Net cash used in investing activities (1,562) (600)
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Cash flows from financing activities
Proceeds from long-term debt - 150
Payments of long-term debt (753) (4,435)
Cash dividends - (43)
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Net cash used in financing activities (753) (4,328)
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Net decrease in cash and cash equivalents (519) (5,253)
Cash and cash equivalents at beginning of year 5,765 13,610
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Cash and cash equivalents at end of period $ 5,246 $ 8,357
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Interest paid $ 1,421 $ 996
Income taxes paid 5 139
Supplemental disclosures of non-cash financing activities:
Exchange of 7 1/2% Notes - 108
Exchange of 8 1/4% Notes for Common Stock 7,829 -
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The accompanying notes are an integral part of these consolidated financial statements.
3
TRANS-LUX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2007
(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 March 31, 2007 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, 2006. The condensed consolidated balance sheet at December 31, 2006 is
derived from the December 31, 2006 audited financial statements.
The Company has incurred losses for the three months ended March 31, 2007 and
2006 of $2,402,000 and $1,073,000, respectively, although the March 31, 2007 net
loss includes a non-cash, non-tax deductible charge for the exchange of debt for
Common Stock of $1,475,000 relating to the exchange offer (see Note 3). The
Company has positive working capital of $6.5 million as of March 31, 2007 and a
positive cash flow from operations for the three months ended March 31, 2007 of
$1.8 million. As of March 31, 2007, the Company has fully drawn its $5.0
million revolving loan facility, which matures on May 1, 2008. The Company had
obtained waivers from its senior lender to meet its covenant requirements
through May 17, 2007. The Credit Agreement was amended subsequent to the first
quarter of 2007 to extend the maturity date to May 1, 2008. The Company's
objective in regards to the Credit Agreement is to restructure the existing
Credit Agreement or obtain additional funds from external sources through equity
or additional debt financing. The Company is in discussions with its senior
lender to restructure the Credit Agreement to further extend the maturity date.
While management believes it will be successful, there can be no assurance that
management will be successful in achieving any of the above objectives.
Management further believes that its current cash resources will be sufficient
to fund its operations and its current obligations through March 31, 2008.
In July 2006, the Financial Accounting Standards Board ("FASB") issued 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 it 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
4
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."
Effective January 1, 2007, the Company adopted the provisions of FIN 48. See
Note 5 - Income Taxes.
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. SFAS 157 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.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides the
option to report certain financial assets and liabilities at fair value, with
the intent to mitigate volatility in financial reporting that can occur when
related assets and liabilities are recorded on different bases. SFAS 159 is
effective for the Company beginning December 31, 2007. Management is assessing
the potential impact of SFAS 159 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:
March 31 December 31
In thousands 2007 2006
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Raw materials $4,066 $4,508
Work-in-progress 1,512 1,358
Finished goods 756 601
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$6,334 $6,467
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Note 3 - Long-Term Debt
On March 15, 2007, the Company completed an offer to exchange 133 shares of its
Common Stock for each $1,000 principal amount of its 8 1/4% Limited Convertible
Senior Subordinated Notes due 2012 (the "8 1/4% Notes"). The offer was for up
to $9.0 million principal amount, or approximately 50% of the $18.0 million
principal amount outstanding of the 8 1/4% Notes. A total of $7.8 million
principal amount of the 8 1/4% Notes were exchanged, leaving $10.1 million
principal amount of the 8 1/4% Notes outstanding. A total of 1,041,257 shares
of Common Stock were issued in the exchange. In accordance with FASB No. 84
"Induced Conversions of Convertible Debt," the Company recorded a non-cash,
non-tax deductible charge for the exchange of debt for Common Stock and
additional amortization of prepaid financing costs aggregating $1,475,000 in
interest expense/debt conversion cost as a result of the exchange offer.
5
In addition to the $7.8 million decrease in long-term debt as a result of the
exchange offer, during the three months ended March 31, 2007, long-term debt,
including current portion, decreased $0.8 million, due to regularly scheduled
payments of long-term debt.
The Company has a bank Credit Agreement, which was amended in 2007, which
provides for a term loan of $10.0 million, a term loan of $6.1 million to
finance one-half of the redemption of the 7 1/2% Convertible Subordinated Notes
due December 1, 2006 (the "7 1/2% Notes") in June 2006 and a revolving loan of
up to $5.0 million at variable interest rates ranging from LIBOR plus 2.25% to
Prime (ranging from 7.56% to 8.25% at March 31, 2007). The Credit Agreement
matures on May 1, 2008. At March 31, 2007, the entire revolving loan facility
had been drawn. 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 loan-to-value ratio of not more than 50%, a leverage
ratio of 3.0 to 1.0, 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. As of March 31, 2007, the Company was in compliance
with the forgoing financial covenants, but the Company was not in compliance
with the fixed charge coverage ratio of 1.1 to 1.0 due to the non-cash, non-tax
deductible charge for the exchange of debt for Common Stock and the cap on
capital expenditures, which its senior lender waived subsequent to the end of
the quarter.
On March 13, 2006 and April 14, 2004, the Company completed two separate offers
to exchange $1,000 principal amount of its 8 1/4% Notes for each $1,000
principal amount of its 7 1/2% Notes. A total of $18.0 million principal amount
of 7 1/2% Notes were exchanged ($0.1 million in 2006 and $17.9 million in 2004),
leaving $12.2 million principal amount of 7 1/2% Notes outstanding. On June 15,
2006, the remaining $12.2 million principal amount of outstanding 7 1/2% Notes
were redeemed at par. The 8 1/4% Notes provide for a higher interest rate,
which is payable semi-annually, have a longer term, were convertible into Common
Stock at a lower conversion price of $9.00 per share until March 1, 2007, and
therefore currently no longer a convertible issue. The 8 1/4% Notes may be
redeemed by the Company, in whole or in part, at declining premiums and were
senior to the 7 1/2% Notes and are senior to the Company's 9 1/2% Subordinated
Debentures due 2012.
Note 4 - Reporting Comprehensive Loss
Total comprehensive loss for the three months ended March 31, 2007 and 2006 is as follows:
Three months ended March 31
In thousands 2007 2006
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Net loss, as reported $(2,402) $(1,073)
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Other comprehensive income (loss):
Unrealized foreign currency translation 27 (14)
Unrealized holding gain on available-for-sale securities 4 7
Income tax expense related to items of other
comprehensive income (loss) (2) (3)
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Total other comprehensive income (loss), net of tax 29 (10)
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Comprehensive loss $(2,373) $(1,083)
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6
Note 5 - Income Taxes
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of
the implementation of FIN 48, the Company recognized a $250,000 adjustment for
interest and penalties in connection with uncertain tax positions. This
increase was accounted for as an adjustment to the beginning balance of retained
earnings. At the adoption date, the Company had approximately $508,000 of
unrecognized tax benefits, the recognition of which would increase the effective
tax rate. There were no significant changes to this amount during the first
quarter of 2007, nor do we expect that the total amount of unrecognized tax
liabilities will significantly increase or decrease within the next twelve
months. The Company's policy is to classify interest and penalties related to
uncertain tax positions in income tax expense. The amounts recorded through
March 31, 2007 and the amounts anticipated to be recorded during the remainder
of 2007 are insignificant.
The Company is subject to U.S. federal income tax as well as income tax in
multiple state and local jurisdictions and Canadian federal and provincial
income tax. Currently, no federal or state or provincial income tax returns are
under examination. The tax years 2003 through 2006 remain open to examination
by the major taxing jurisdictions and the 2002 tax year remains open to
examination by some state and local taxing jurisdictions to which the Company is
subject.
The Company expects its 2007 effective income tax rate benefit to be
approximately 22%. Estimates of the annual effective tax rate benefit at the
end of interim periods are, of necessity, based on evaluations of possible
future events and transactions and may be subject to subsequent revision.
Note 6 - Pension Plan
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 March
31, 2007 and 2006.
The following table presents the components of net periodic pension cost:
Three months ended March 31
In thousands 2007 2006
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Interest cost $ 160 $ 153
Expected return on plan assets (168) (163)
Amortization of prior service cost 4 4
Amortization of net actuarial loss 71 77
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Net periodic pension cost $ 67 $ 71
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As of March 31, 2007, the Company has recorded a current and long-term pension
liability of $95,000 and $3.0 million, respectively. The minimum required
contribution for 2007 is expected to be $95,000.
7
Note 7 - Stock Option Plans
Effective January 1, 2006, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 123 (revised 2004) "Share Based Payment"
("SFAS 123R"), which establishes the accounting for stock-based awards exchanged
for employee and director services. SFAS 123R requires all share-based payments
to employees and directors, including grants of employee and director stock
options, to be measured at fair value and expensed in the Consolidated
Statements of Operations over the service period (generally the vesting period).
The Company elected the "modified prospective method" of transition as permitted
by SFAS 123R. Under this transition method, the Company is required to record
compensation expense for all awards granted after the date of adoption and for
the unvested portion of previously granted awards that were outstanding at the
date of adoption, and accordingly, periods prior to adoption were not restated.
SFAS 123R required the Company to apply an estimated forfeiture rate in
calculating the period expense, as opposed to recognizing forfeitures as an
expense reduction as they occur. The Company has not experienced any
forfeitures that would need to be taken into consideration in SFAS 123R
calculations. 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 and director stock options.
The Company did not issue any stock options during the three months ended March
31, 2007 and 2006. The unrecognized compensation costs related to unvested
stock options granted under the Company's stock option plans was nominal.
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.
The following summarizes the activity of the Company's stock options for the three months
ended March 31, 2007:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price ($) Term (Yrs) Value ($)
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Outstanding at beginning of year 67,300 6.15
Granted - -
Exercised - -
Terminated (1,000) 11.44
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Outstanding at end of period 66,300 6.07 3.9
====== ===
Vested and expected to vest at end of period 66,300 6.07 3.9 202,000
====== === =======
Exercisable at end of period 65,800 6.07 3.9 201,000
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Note 8 - 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 month periods ended March 31,
8
2007 and 2006, the assumed exercise or conversion of any of these securities
would be anti-dilutive; and, accordingly, diluted earnings (loss) per share
equals basic earnings (loss) per share for each period. The number of such
shares for the three months ended March 31, 2007 and 2006 subject to convertible
debt was 1,995,000 and 2,865,000, respectively. The number of such shares as of
March 31, 2007 and 2006 subject to stock options was 66,300 and 69,300,
respectively.
Note 9 - 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 results of operations of the
Company.
Note 10 - 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.
9
Information about the Company's operations in its three business segments for
the three months ended March 31, 2007 and 2006 is as follows:
Three months ended March 31
In thousands 2007 2006
-----------------------------------------------------------------------------
Revenues:
Indoor display $ 2,518 $ 2,990
Outdoor display 6,077 5,530
Entertainment/real estate 3,535 3,090
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Total revenues 12,130 11,610
======= =======
Operating income (loss)
Indoor display (486) (333)
Outdoor display 291 23
Entertainment/real estate 918 821
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Total operating income 723 511
Other income (loss) - (1)
Corporate general and administrative expenses (1,280) (1,092)
Interest expense/debt conversion cost - net (2,500) (1,063)
Income tax benefit 655 572
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Net loss $(2,402) $(1,073)
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Note 11 - 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 months ended March 31, 2007 and 2006, and summary balance sheet
information relates to MetroLux as of March 31, 2007 and December 31, 2006:
Three months ended March 31
In thousands 2007 2006
-----------------------------------------------------------------------------
Revenues $1,293 $1,141
Gross profit 752 670
Net income 184 149
Company's share of partnership net income 92 74
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March 31 December 31
In thousands 2007 2006
-----------------------------------------------------------------------------
Current assets $ 549 $ 634
Noncurrent assets 1,780 1,851
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Total assets 2,329 2,485
====== ======
Current liabilities 845 859
Noncurrent liabilities 658 832
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Total liabilities 1,503 1,691
====== ======
Company's equity in partnership net assets $ 414 $ 412
-----------------------------------------------------------------------------
The Company's equity in partnership net assets is reflected in other assets in
the Consolidated Balance Sheets. The Company has guaranteed $0.6 million (75%)
of a $0.8 million business loan to finance theatre equipment at its
fourteen-plex theatre held by MetroLux, until May 2011, and,
10
accordingly has recognized a liability for $33,000 at March 31, 2007. The
unrelated 50% partner of MetroLux also guaranteed $0.6 million (75%) of the $0.8
million business loan. The assets of MetroLux collateralize this business loan.
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, advertising,
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, gaming, government and corporate 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, retail, advertising 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.
Results of Operations
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
Total revenues for the three months ended March 31, 2007 increased $520,000 or
4.5% to $12.1 million from $11.6 million for the three months ended March 31,
2006, primarily due to increases in Outdoor display sales revenues and
Entertainment/real estate revenues, offset by decreases in Indoor display
revenues and Outdoor display rentals and maintenance revenues.
Indoor display revenues decreased $472,000 or 15.8%. Of this decrease, Indoor
display equipment sales decreased $244,000 or 29.3%, primarily due to a
reduction in sales from the financial services and transportation markets.
Indoor display equipment rentals and maintenance revenues decreased $228,000 or
10.6%, primarily due to disconnects and non-renewals of equipment on rental and
maintenance on existing contracts in the financial services market. The
financial services market continues to be negatively impacted by the current
consolidation within that industry.
Outdoor display revenues increased $547,000 or 9.9%. Of this increase, Outdoor
display equipment sales increased $719,000 or 17.3%, primarily in the outdoor
catalog sports, outdoor digital billboard and commercial markets. Outdoor
display equipment rentals and maintenance revenues decreased
11
$172,000 or 12.6%, primarily due to the continued expected revenue decline in
the older Outdoor display equipment rental and maintenance bases acquired in the
early 1990s.
Entertainment/real estate revenues increased $445,000 or 14.4%, primarily due to
an increase in box office revenues and concession sales.
Total operating income for the three months ended March 31, 2007 increased
$212,000 or 41.5% to $723,000 from $511,000 for the three months ended March 31,
2006, principally due to the increases in revenues in the Outdoor display and
Entertainment/real estate segments, offset by the decline in the Indoor display
segment.
Indoor display operating income decreased $153,000 or 45.9% to a loss of
$486,000 in 2007 compared to a loss of $333,000 in 2006, primarily as a result
of the decrease in revenues in the financial services and transportation
markets. The cost of Indoor displays represented 77.3% of related revenues in
2007 compared to 76.6% in 2006. The cost of Indoor displays as a percentage of
related revenues increased primarily due to the decrease in revenues from Indoor
display equipment rentals and maintenance and a $56,000 increase in field
service costs to maintain the equipment, offset by a $110,000 decrease in
depreciation expense. The Company continues to address the cost of field
service to bring it in line with revenues from equipment rentals and
maintenance. Cost of Indoor display equipment rentals and maintenance includes
field service expenses, plant repair costs, maintenance and depreciation.
Indoor display cost of equipment sales decreased $287,000 or 59.1%, primarily
due to the decrease in revenues. There was an increase in the gross margin of
Indoor display equipment sales due to the product mix of sales. Indoor display
general and administrative expenses increased $26,000 or 2.5%, primarily due to
an increase in medical costs and travel.
Outdoor display operating income increased $268,000 to $291,000 in 2007 compared
to $23,000 in 2006, primarily as a result of the increase in Outdoor display
sales. The cost of Outdoor displays represented 77.9% of related revenues in
2007 compared to 80.2% in 2006. Outdoor display cost of equipment sales
increased $449,000 or 13.7%, principally due to the increase in volume. Outdoor
display cost of equipment rentals and maintenance decreased $149,000 or 12.9%,
primarily due to a $64,000 decrease in field service costs to maintain the
equipment, and an $85,000 decrease in depreciation expense. Outdoor display
general and administrative expenses decreased $22,000, or 2.1%. Cost of Outdoor
display equipment rentals and maintenance includes field service expenses, plant
repair costs, maintenance and depreciation.
Entertainment/real estate operating income increased $97,000 or 11.8%, primarily
due to the increases in box office revenues and concession sales. Cost of
Entertainment/real estate, which includes film rental costs and depreciation
expense, increased $332,000 or 15.4%, primarily due to the increases in
revenues. The cost of Entertainment/real estate represented 70.5% of related
revenues in 2007 compared to 69.9% in 2006. Entertainment/real estate general
and administrative expenses increased $35,000 or 19.2% primarily due to
increased salaries and travel costs.
Corporate general and administrative expenses increased $188,000 or 17.2%,
primarily due to an increase in benefits, such as medical costs. The Company
continues to monitor and reduce certain overhead costs.
12
Net interest expense/debt conversion cost increased $1,437,000, of which
1,475,000 relates to the one-time, non-cash, non-tax deductible charge for the
exchange of debt for Common Stock relating to the exchange offer, that was
completed March 14, 2007, see Note 3, offset by reduced interest expense based
on reduced total debt. 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 rate for the three months ended March 31, 2007 and 2006 was
21.4% and 34.8%, respectively. The 2007 rate includes the one-time, non-cash,
non-tax deductible charge relating to exchange of debt for Common Stock, see
Note 3. The Company adopted the provisions of FIN 48 on January 1, 2007, see
Note 5.
Liquidity and Capital Resources
On March 15, 2007, the Company completed an offer to exchange 133 shares of its
Common Stock for each $1,000 principal amount of its 8 1/4% Limited Convertible
Senior Subordinated Notes due 2012 (the "8 1/4% Notes"). The offer was for up
to $9.0 million principal amount, or approximately 50% of the $18.0 million
principal amount outstanding of the 8 1/4% Notes. A total of $7.8 million
principal amount of the 8 1/4% Notes were exchanged, leaving $10.1 million
principal amount of the 8 1/4% Notes outstanding. A total of 1,041,257 shares
of Common Stock were issued in the exchange, which improved stockholders' equity
by a net $7.7 million. As a result of the exchange offer, the Company recorded
a one-time, non-cash, non-tax deductible charge or the exchange debt for Common
Stock and additional amortization of prepaid financing costs aggregating
$1,475,000 in interest expense/debt conversion cost.
In addition to the $7.8 million decrease in long-term debt as a result of the
exchange offer, during the three months ended March 31, 2007, long-term debt,
including current portion, decreased $0.8 million, due to regularly scheduled
payments of long-term debt.
The Company has a bank Credit Agreement, which was amended in 2007, which
provides for a term loan of $10.0 million, a term loan of $6.1 million to
finance one-half of the redemption of the 7 1/2% Convertible Subordinated Notes
due December 1, 2006 (the "7 1/2% Notes") in June 2006 and a revolving loan of
up to $5.0 million at variable interest rates ranging from LIBOR plus 2.25% to
Prime (ranging from 7.56% to 8.25% at March 31, 2007). The Credit Agreement
matures on May 1, 2008. At March 31, 2007, the entire revolving loan facility
had been drawn. 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 loan-to-value ratio of not more than 50%, a leverage
ratio of 3.0 to 1.0, 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. As of March 31, 2007, the Company was in compliance
with the forgoing financial covenants, but the Company was not in compliance
with the fixed charge coverage ratio of 1.1 to 1.0 due to the one-time,
non-cash, non-tax deductible charge for the exchange of debt for Common Stock
and the cap on capital expenditures, which its senior lender waived subsequent
to the end of the quarter. The Company continues to be in discussion with its
senior lender to restructure the Credit Agreement to further
13
extend the maturity date.
On March 13, 2006 and April 14, 2004, the Company completed two separate offers
to exchange $1,000 principal amount of its 8 1/4% Notes for each $1,000
principal amount of its 7 1/2% Notes. A total of $18.0 million principal amount
of 7 1/2% Notes were exchanged ($0.1 million in 2006 and $17.9 million in 2004),
leaving $12.2 million principal amount of 7 1/2% Notes outstanding. On June 15,
2006, the remaining $12.2 million principal amount of outstanding 7 1/2% Notes
were redeemed at par. The 8 1/4% Notes provide for a higher interest rate,
which is payable semi-annually, have a longer term, were convertible into Common
Stock at a lower conversion price of $9.00 per share until March 1, 2007, and
therefore currently no longer a convertible issue. The 8 1/4% Notes may be
redeemed by the Company, in whole or in part, at declining premiums and were
senior to the 7 1/2% Notes and are senior to the Company's 9 1/2% Subordinated
Debentures due 2012.
Under various agreements, the Company is obligated to make future cash payments
in fixed amounts. These include payments under the Company's long-term debt
agreements, employment and consulting agreement payments and rent payments
required under operating lease agreements. The Company's long-term debt
requires interest payments. The Company has both variable and fixed interest
rate debt. Interest payments are projected based on current interest rates
until the underlying debts mature.
The following table summarizes the Company's fixed cash obligations as of March
31, 2007 for the remainder of 2007 and the next four years:
Remainder of
In thousands 2007 2008 2009 2010 2011
------------------------------------------------------------------------------------
Long-term debt, including interest $4,932 $21,123 $3,219 $3,179 $3,101
Employment and consulting
agreement obligations 1,248 1,373 780 383 303
Operating lease payments 564 514 315 293 136
------ ------- ------ ------ ------
Total $6,744 $23,010 $4,314 $3,855 $3,540
------------------------------------------------------------------------------------
Cash and cash equivalents decreased $0.5 million for the three months ended
March 31, 2007 compared to a decrease of $5.3 million for the three months ended
March 31, 2006. The decrease in 2007 is primarily attributable to the
investment in equipment for rental of $1.4 million and $0.8 million of scheduled
payments of long-term debt, offset by $1.8 million of cash provided by operating
activities. The decrease in 2006 is primarily attributable to a $4.1 million
repayment on the revolving line of credit, $0.3 million of scheduled payments of
long-term debt, investment in equipment for rental of $1.2 million and cash used
in operating activities of $0.3 million, offset by proceeds from the Company's
joint venture of $0.6 million.
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
14
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 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 March 31, 2007, 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 $326,000. A 10% change in the
Canadian dollar relative to the U.S. dollar would result in a currency exchange
expense fluctuation of approximately $14,000, 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.
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
first fiscal quarter, that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
15
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 31,2006.
The Company has incurred losses for the three months ended March 31, 2007 and
2006 of $2,402,000 and $1,073,000, respectively, although the March 31, 2007 net
loss includes a non-cash, non-tax deductible charge for the exchange of debt for
Common Stock of $1,475,000 relating to the exchange offer (see Note 3). The
Company has positive working capital of $6.5 million as of March 31, 2007 and a
positive cash flow from operations for the three months ended March 31, 2007 of
$1.8 million. As of March 31, 2007, the Company has fully drawn its $5.0
million revolving loan facility, which matures on May 1, 2008. The Credit
Agreement was amended subsequent to the first quarter of 2007 to extend the
maturity date to May 1, 2008. The Company's objective in regards to the Credit
Agreement is to restructure the existing Credit Agreement or obtain additional
funds from external sources through equity or additional debt financing. The
Company is in discussions with its senior lender to restructure the Credit
Agreement to further extend the maturity date. While management believes it
will be successful, there can be no assurance that management will be successful
in achieving any of the above objectives. Management further believes that its
current cash resources will be sufficient to fund its operations and its current
obligations through March 31, 2008.
Item 2. Unregistered Sales of Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
16
Item 6. Exhibits
10.1 Amendment to the Consulting Agreement with Moving Images, LLC
dated as of March 28, 2007, filed herewith.
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.
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.
17
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: May 18, 2007
by /s/ Angela D. Toppi
--------------------------------
Angela D. Toppi
Executive Vice President and
Chief Financial Officer
18