UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
--- ---
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
-------- ------------------------------------ ------------------
11/13/07 Common Stock - $1.00 Par Value 2,020,090
11/13/07 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 - September 30, 2007 and
December 31, 2006 (audited) 1
Consolidated Statements of Operations - Three and
Nine Months Ended September 30, 2007 and 2006 2
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2007 and 2006 3
Notes to 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 16
Item 4. Controls and Procedures 17
Part II - Other Information
Item 1A. Risk Factors 17
Item 2. Unregistered Sales of Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
Signatures 19
Exhibits
Part I - Financial Information
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TRANS-LUX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30 December 31
In thousands, except share data 2007 2006
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(unaudited) (see Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 3,470 $ 5,765
Available-for-sale securities 186 199
Receivables, less allowance of $1,194 - 2007 and $1,034 - 2006 6,996 6,721
Unbilled receivables 612 962
Other receivables 2,580 -
Inventories 7,378 6,467
Prepaids and other 835 858
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Total current assets 22,057 20,972
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Rental equipment 92,234 88,903
Less accumulated depreciation 62,167 56,946
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30,067 31,957
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Property, plant and equipment 39,958 39,459
Less accumulated depreciation 12,028 10,948
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27,930 28,511
Goodwill 1,004 1,004
Other assets 3,306 6,028
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TOTAL ASSETS $84,364 $88,472
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,845 $ 2,412
Accrued liabilities 6,980 6,929
Current portion of long-term debt 6,140 3,162
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Total current liabilities 15,965 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 27,453 32,522
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38,639 51,537
Deferred credits, deposits and other 3,131 3,782
Deferred income taxes - 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 14,733 13,897
Retained earnings 13,977 17,193
Accumulated other comprehensive loss (1,358) (1,853)
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30,092 31,977
Less treasury stock - at cost - 433,596 common shares in 2007 and
1,475,588 common shares in 2006 3,463 11,803
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Total stockholders' equity 26,629 20,174
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $84,364 $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 Nine Months Ended
September 30 September 30
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In thousands, except per share data 2007 2006 2007 2006
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Revenues:
Equipment rentals and maintenance $ 3,036 $ 3,340 $ 9,268 $10,347
Equipment sales 7,506 8,645 19,276 20,435
Theatre receipts and other 3,727 3,452 11,013 9,974
------- ------- -------- -------
Total revenues 14,269 15,437 39,557 40,756
------- ------- -------- -------
Operating expenses:
Cost of equipment rentals and maintenance 2,794 3,002 8,280 8,910
Cost of equipment sales 5,253 5,864 13,716 14,590
Cost of theatre receipts and other 2,796 2,474 8,061 7,089
------- ------- -------- -------
Total operating expenses 10,843 11,340 30,057 30,589
------- ------- -------- -------
Gross profit from operations 3,426 4,097 9,500 10,167
General and administrative expenses (3,093) (3,022) (10,132) (9,502)
Interest income 30 47 200 248
Interest expense/debt conversion cost (965) (1,109) (4,440) (3,397)
Other income 15 9 608 27
------- ------- -------- -------
(Loss) income from operations before income taxes and
income from joint venture (587) 22 (4,264) (2,457)
Benefit (provision) for income taxes 166 (84) 953 726
Income from joint venture 121 123 345 326
------- ------- -------- -------
Net (loss) income $ (300) $ 61 $ (2,966) $(1,405)
======= ======= ======== =======
(Loss) income per share - basic and diluted $ (0.13) $ 0.04 $ (1.46) $ (1.12)
======= ======= ======== =======
Weighted average common shares outstanding - basic and diluted 2,305 1,260 2,026 1,260
======= ======= ======== =======
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)
Nine Months Ended
September 30
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In thousands 2007 2006
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Cash flows from operating activities
Net loss $(2,966) $ (1,405)
Adjustment to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization 6,682 7,145
Income from joint venture (345) (326)
Deferred income taxes (1,074) (615)
Exchange of 8 1/4% Notes for Common Stock 1,345 15
Changes in operating assets and liabilities:
Receivables 75 (2,691)
Inventories (911) (723)
Prepaids and other assets 82 (207)
Accounts payable and accruals 989 196
Deferred credits, deposits and other (651) (418)
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Net cash provided by operating activities 3,226 971
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Cash flows from investing activities
Equipment manufactured for rental (3,331) (2,877)
Purchases of property, plant and equipment (499) (394)
Proceeds from sale of available-for-sale securities - 257
Proceeds from joint venture, net 400 878
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Net cash used in investing activities (3,430) (2,136)
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Cash flows from financing activities
Proceeds from long-term debt 1,769 6,250
Payments of long-term debt (3,860) (14,939)
Cash dividends - (43)
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Net cash used in financing activities (2,091) (8,732)
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Net decrease in cash and cash equivalents (2,295) (9,897)
Cash and cash equivalents at beginning of year 5,765 13,610
------- --------
Cash and cash equivalents at end of period $ 3,470 $ 3,713
======= ========
------------------------------------------------------------------------------------------------
Interest paid $ 3,248 $ 3,650
Income taxes paid 45 253
Supplemental disclosures of non-cash financing activities:
Exercise of stock options 10 -
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 FINANCIAL STATEMENTS
September 30, 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 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, 2007
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 consolidated
balance sheet at December 31, 2006 is derived from the December 31, 2006 audited
financial statements.
The Company has incurred net losses for the three and nine months ended
September 30, 2007 of $300,000 and $2,966,000, respectively, although the nine
months ended September 30, 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 $6.1
million as of September 30, 2007 and a positive cash flow from operations for
the nine months ended September 30, 2007 of $3.2 million. As of September 30,
2007, the Company has fully drawn its $5.0 million revolving loan facility,
which was amended in the third quarter of 2007 to extend the maturity date to
May 1, 2009. 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. 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 September 30, 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 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
4
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 Statement of Financial Accounting Standards
("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 after November 15, 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:
September 30 December 31
In thousands 2007 2006
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Raw materials $5,295 $4,508
Work-in-progress 1,321 1,358
Finished goods 762 601
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$7,378 $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.
In addition to the $7.8 million decrease in long-term debt as a result of the
exchange offer, during the nine months ended September 30, 2007, long-term debt,
including current portion, decreased
5
$2.2 million due to regularly scheduled payments of long-term debt, offset by
borrowing of $0.1 million. Also during the third quarter, the Company secured
the refinancing of $1.6 million and an additional $2.1 million mortgage to
finance the expansion of a theatre location. The refinanced mortgage now has a
maturity date of March 2018 and an interest rate of 7.69%, with interest only
payments for the first year.
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 7.59% to 7.75% at September 30, 2007). The Credit Agreement
matures on May 1, 2009. At September 30, 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 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
$24,750,000 and maintaining accounts with an average monthly compensating
balance of not less than $750,000. As of September 30, 2007, the Company was in
compliance with all the financial covenants.
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 and were convertible into
Common Stock at a lower conversion price of $9.00 per share until March 1, 2007,
and therefore are 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 are
senior to the Company's 9 1/2% Subordinated Debentures due 2012.
Note 4 - Reporting Comprehensive (Loss) Income
Total comprehensive (loss) income for the three and nine months ended September
30, 2007 and 2006 is as follows:
Three months ended September 30 Nine months ended September 30
In thousands 2007 2006 2007 2006
-------------------------------------------------------------------------------------------------------
Net (loss) income, as reported $(300) $61 $(2,966) $(1,405)
----- --- ------- -------
Other comprehensive income:
Unrealized foreign currency translation 234 (4) 504 106
Unrealized holding gain (loss) on
available-for-sale securities (7) 11 (14) 28
Income taxes related to items of other
comprehensive income 3 (4) 6 (11)
----- --- ------- -------
Total other comprehensive income, net of tax 230 3 496 123
----- --- ------- -------
Comprehensive (loss) income $ (70) $64 $(2,470) $(1,282)
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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 three and
nine months ended September 30, 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 September 30, 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 23%. 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 three and nine months
ended September 30, 2007 and 2006.
The following table presents the components of net periodic pension cost:
Three months ended September 30 Nine months ended September 30
In thousands 2007 2006 2007 2006
-----------------------------------------------------------------------------------------------
Interest cost $160 $ 153 $ 480 $ 459
Expected return on plan assets (169) (163) (505) (489)
Amortization of prior service cost 4 4 12 12
Amortization of net actuarial loss 70 77 212 231
---- ----- ----- -----
Net periodic pension cost $ 65 $ 71 $ 199 $ 213
-----------------------------------------------------------------------------------------------
As of September 30, 2007, the Company has recorded a current and long-term
pension liability of zero and $2.9 million, respectively. The Company made a
contribution of $288,000 in September 2007.
7
Note 7 - Stock Option Plans
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123
(revised 2004) "Share-Based Payments" ("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 was 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 requires
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 and nine months
ended September 30, 2007. 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
nine months ended September 30, 2007:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price ($) Term (Yrs) Value ($)
------------------------------------------------------------------------------------------------
Outstanding at beginning of year 67,300 6.15
Granted - -
Exercised (2,500) 4.03 4,200
Terminated (2,300) 9.63
------
Outstanding at end of period 62,500 6.10 3.6
====== ===
Vested and expected to vest at end of period 62,500 6.10 3.6 12,900
====== === ======
Exercisable at end of period 62,500 6.10 3.6 12,900
------------------------------------------------------------------------------------------------
8
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 and nine month periods ended
September 30, 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 and nine months ended September 30, 2007 subject to
convertible debt was zero and 439,000, respectively, and 1,985,000, and
1,994,000 for the three and nine months ended September 30, 2006, respectively.
The number of such shares as of September 30, 2007 and 2006 subject to stock
options was 62,500 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 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 its
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 and nine months ended September 30, 2007 and 2006 is as follows:
Three months ended September 30 Nine months ended September 30
In thousands 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------
Revenues:
Indoor display $ 2,776 $ 3,975 $ 8,008 $10,300
Outdoor display 7,766 8,010 20,536 20,482
Entertainment/real estate 3,727 3,452 11,013 9,974
------- ------- ------- -------
Total revenues 14,269 15,437 39,557 40,756
======= ======= ======= =======
Operating income (loss):
Indoor display (374) 444 (1,296) (91)
Outdoor display 985 999 1,818 1,526
Entertainment/real estate 832 906 2,641 2,640
------- ------- ------- -------
Total operating income 1,443 2,349 3,163 4,075
Other income 15 9 608 27
Corporate general and administrative expenses (989) (1,151) (3,450) (3,084)
Interest expense/debt conversion cost - net (935) (1,062) (4,240) (3,149)
Income tax benefit (expense) 166 (84) 953 726
------- ------- ------- -------
Net (loss) income $ (300) $ 61 $(2,966) $(1,405)
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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 and nine months ended September 30, 2007 and 2006, and summary balance
sheet information relates to MetroLux as of September 30, 2007 and December 31,
2006:
Three months ended September 30 Nine months ended September 30
In thousands 2007 2006 2007 2006
----------------------------------------------------------------------------------------------------
Revenues $1,599 $1,434 $4,299 $3,882
Gross profit 258 266 744 757
Net income 242 247 690 653
Company's share of partnership net income 121 123 345 326
----------------------------------------------------------------------------------------------------
September 30 December 31
In thousands 2007 2006
------------------------------------------------------------------
Current assets $ 350 $ 634
Noncurrent assets 1,642 1,851
------ ------
Total assets 1,992 2,485
====== ======
Current liabilities 775 859
Noncurrent liabilities 585 832
------ ------
Total liabilities 1,360 1,691
====== ======
Company's equity in partnership net assets $ 316 $ 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, accordingly has
recognized a liability for $33,000 at September 30, 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.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006
Total revenues for the nine months ended September 30, 2007 decreased 2.9% to
$39.6 million from $40.8 million for the nine months ended September 30, 2006.
Entertainment/real estate revenues and Outdoor display sales revenues increased
but were offset by decreases in Indoor display revenues and Outdoor display
rentals and maintenance revenues.
Indoor display revenues decreased $2.3 million or 22.3%. Of this decrease,
Indoor display equipment sales decreased $1.5 million or 38.0%, primarily due to
a reduction in sales from the financial services and transportation markets.
Indoor display equipment rentals and maintenance revenues decreased $790,000 or
12.4%, 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 ongoing
consolidation within that industry.
Outdoor display revenues increased $54,000 or 0.3%. Of this increase, Outdoor
display equipment sales increased $343,000 or 2.1%, primarily in the outdoor
digital billboard and commercial markets. Outdoor display equipment rentals and
maintenance revenues decreased $289,000 or 7.2%, primarily due to the continued
expected revenue decline in the older Outdoor display equipment rental and
maintenance bases acquired in the early 1990s.
11
Entertainment/real estate revenues increased $1.0 million or 10.4%, primarily
due to an increase in box office revenues and concession sales.
Total operating income for the nine months ended September 30, 2007 decreased
22.4% to $3.2 million from $4.1 million for the nine months ended September 30,
2006, principally due to the decrease in revenues in the Indoor display segment.
Indoor display operating loss increased $1.2 million to a loss of $1.3 million
in 2007 compared to a loss of $91,000 in 2006, primarily as a result of the
decrease in revenues in the financial services and transportation markets. The
cost of Indoor displays represented 80.0% of related revenues in 2007 compared
to 73.1% 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 $189,000 increase in field service costs
to maintain the equipment, offset by a $320,000 decrease in depreciation
expense. The Company continues to address the cost of field service. 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 $1.0 million or 46.9%, 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 $40,000 or 1.4%, primarily due to bad debt
expense, offset by a reduction in salaries, related benefits and travel costs.
Outdoor display operating income increased $292,000 or 19.1% to $1.8 million in
2007 compared to $1.5 million in 2006, primarily as a result of the increase in
Outdoor display sales. The cost of Outdoor displays represented 75.9% of
related revenues in 2007 compared to 78.0% in 2006. Outdoor display cost of
equipment sales increased $125,000 or 1.0%, principally due to the increase in
volume. Outdoor display cost of equipment rentals and maintenance decreased
$502,000 or 14.3%, primarily due to a $247,000 decrease in field service costs
to maintain the equipment and a $255,000 decrease in depreciation expense.
Outdoor display general and administrative expenses increased $140,000 or 4.7%,
primarily due to bad debt expense. Cost of Outdoor display equipment rentals
and maintenance includes field service expenses, plant repair costs, maintenance
and depreciation.
Entertainment/real estate operating income remained level at $2.6 million. Cost
of Entertainment/real estate, which includes film rental costs and depreciation
expense, increased $972,000 or 13.7%, primarily due to the increase in revenues
and an increase in film rental and labor costs. The cost of Entertainment/real
estate represented 73.2% of related revenues in 2007 compared to 71.1% in 2006.
The cost of Entertainment/real estate as a percentage of related revenues
increased primarily in film rental costs due to blockbuster films, an increase
in concession costs and an increase in the minimum wage. Entertainment/real
estate general and administrative expenses increased $84,000 or 14.7%, primarily
due to increased salaries, related benefits and travel costs.
Corporate general and administrative expenses increased $366,000 or 11.9%,
primarily due to a foreign currency loss of $172,000 compared to a foreign
currency gain of $91,000 in the prior year (an increase of $263,000) and an
increase in medical costs, general insurance and professional fees. The Company
has begun its efforts to beome compliant with Sarbanes-Oxley 404 on internal
12
controls. The Company continues to monitor and reduce certain overhead costs.
Net interest expense/debt conversion cost increased $1.1 million, of which $1.5
million relates to the one-time, non-cash, non-tax deductible charge for the
exchange of debt for Common Stock relating to the successful 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. Other income of $608,000 relates to a
$593,000 gain resulting from the termination of an office lease.
The effective tax rate for the nine months ended September 30, 2007 and 2006 was
24.3% and 34.1%, 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.
Three Months Ended September 30, 2007 Compared to Three Months Ended September
30, 2006
Total revenues for the three months ended September 30, 2007 decreased 7.6% to
$14.3 million from $15.4 million for the three months ended September 30, 2006,
primarily due to decreases in both Indoor and Outdoor display revenues, offset
by an increase in Entertainment/real estate revenues.
Indoor display revenues decreased $1.2 million or 30.2%. Of this decrease,
Indoor display equipment sales decreased $949,000 or 48.5%, primarily due to a
reduction in sales from the financial services and transportation markets.
Indoor display equipment rentals and maintenance revenues decreased $250,000 or
12.4%, 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 ongoing
consolidation within that industry.
Outdoor display revenues decreased $244,000 or 3.0%. Of this decrease, Outdoor
display equipment sales decreased $190,000 or 2.8%, primarily in the outdoor
commercial market, offset by an increase in the outdoor catalog sports market.
Outdoor display equipment rentals and maintenance revenues decreased $54,000 or
4.1%, 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 $275,000 or 8.0%, primarily due to
an increase in box office revenues and concession sales.
Total operating income for the three months ended September 30, 2007 decreased
$906,000 or 38.6% to $1.4 million from $2.3 million for the three months ended
September 30, 2006, principally due to the decreases in revenues in the Indoor
display segment.
Indoor display operating income/loss decreased $818,000 to a loss of $374,000 in
2007 compared to
13
income of $444,000 in 2006, primarily as a result of the decrease in revenues in
the financial services and transportation markets. The cost of Indoor displays
represented 83.0% of related revenues in 2007 compared to 70.2% 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 $85,000 increase in field service costs to maintain the
equipment, offset by a $103,000 decrease in depreciation expense. The Company
continues to address the cost of field service. 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 $475,000 or 49.4%, primarily due to the decrease in revenues. Indoor
display general and administrative expenses increased $104,000 or 14.0%,
primarily due to bad debt expense.
Outdoor display operating income decreased $14,000 or 1.4% to $985,000 in 2007
compared to $999,000 in 2006, primarily as a result of an increase in Outdoor
display general and administrative expenses. The cost of Outdoor displays
represented 74.0% of related revenues in 2007 compared to 75.9% in 2006.
Outdoor display cost of equipment sales decreased $136,000 or 2.8%, principally
due to the decrease in volume. Outdoor display cost of equipment rentals and
maintenance decreased $197,000 or 16.8%, primarily due to a $114,000 decrease in
field service costs to maintain the equipment and an $85,000 decrease in
depreciation expense. Outdoor display general and administrative expenses
increased $105,000 or 11.2%, due to bad debt expense. Cost of Outdoor display
equipment rentals and maintenance includes field service expenses, plant repair
costs, maintenance and depreciation.
Entertainment/real estate operating income decreased $74,000 or 8.2%, primarily
due to an increase in cost of Entertainment/real estate. Cost of
Entertainment/real estate, which includes film rental costs and depreciation
expense, increased $322,000 or 13.0%, primarily due to the increase in revenues
and an increase in film rental and labor costs. The cost of Entertainment/real
estate represented 75.0% of related revenues in 2007 compared to 71.7% in 2006.
The cost of Entertainment/real estate as a percentage of related revenues
increased primarily in film rental costs due to blockbuster films released in
the third quarter, an increase in concession costs and the increase in the
minimum wage. Entertainment/real estate general and administrative expenses
increased $24,000 or 12.3%, primarily due to increased salaries and travel
costs.
Corporate general and administrative expenses decreased $162,000 or 14.0%,
primarily due to a decrease in certain benefit costs and professional fees,
offset by a foreign currency loss of $99,000 compared to a foreign currency gain
of $2,000 in the prior year (an increase of $101,000). The Company continues to
monitor and reduce certain overhead costs.
Net interest expense/debt conversion cost decreased $127,000, due to 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 September 30, 2007 and 2006
was 35.6% and 57.9%, respectively.
14
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 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.
In addition to the $7.8 million decrease in long-term debt as a result of the
exchange offer, during the nine months ended September 30, 2007, long-term debt,
including current portion, decreased $2.2 million due to regularly scheduled
payments of long-term debt, offset by borrowing of $0.1 million. Also during
the third quarter, the Company secured the refinancing of $1.6 million and an
additional $2.1 million mortgage to finance the expansion of a theatre location.
The refinanced mortgage now has a maturity date of March 2018 and an interest
rate at 7.69%, with interest only payments for the first year.
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 7.59% to 7.75% at September 30, 2007). The Credit Agreement
matures on May 1, 2009. At September 30, 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 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
$24,750,000, and maintaining accounts with an average monthly compensating
balance of not less than $750,000. As of September 30, 2007, the Company was in
compliance with all the financial covenants. The Company continues to be in
discussion with its senior lender to restructure the Credit Agreement.
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 and were convertible into
Common Stock at a lower conversion price of $9.00 per share until March 1, 2007,
and therefore are 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 are
senior to the Company's 9 1/2%
15
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
September 30, 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 $1,997 $ 9,478 $15,905 $3,230 $3,151
Employment and consulting
agreement obligations 416 1,373 780 383 303
Operating lease payments 188 697 529 508 454
------ ------- ------- ------ ------
Total $2,601 $11,548 $17,214 $4,121 $3,908
----------------------------------------------------------------------------
Cash and cash equivalents decreased $2.3 million for the nine months ended
September 30, 2007 compared to a decrease of $9.9 million for the nine months
ended September 30, 2006. The decrease in 2007 is primarily attributable to the
investment in equipment for rental of $3.3 million and $2.2 million of scheduled
payments of long-term debt, offset by $3.2 million of cash provided by operating
activities and proceeds from long-term debt of $0.1 million. The decrease in
2006 is primarily attributable to the redemption of the outstanding $12.2
million 7 1/2% Notes on June 15, 2006. In 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 in 2006 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.
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
16
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 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, 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 $299,000. A 10% change in the
Canadian dollar relative to the U.S. dollar would result in a currency exchange
expense fluctuation of approximately $161,000, 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
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, 2006.
17
The Company has incurred net losses for the three and nine months ended
September 30, 2007 of $300,000 and $2,966,000, respectively, although the nine
months ended September 30, 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 $6.1
million as of September 30, 2007 and a positive cash flow from operations for
the nine months ended September 30, 2007 of $3.2 million. As of September 30,
2007, the Company has fully drawn its $5.0 million revolving loan facility,
which was amended during the third quarter of 2007 to extend the maturity date
to May 1, 2009. 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. 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 September 30, 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.
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 14, 2007
by /s/ Angela D. Toppi
----------------------------
Angela D. Toppi
Executive Vice President and
Chief Financial Officer
19