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, 2008
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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, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (check one)
Large accelerated filer Accelerated filer Non-accelerated filer X Smaller
--- --- ---
reporting company
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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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05/19/08 Common Stock - $1.00 Par Value 2,020,090
05/19/08 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. Condensed Consolidated Balance Sheets - March 31,
2008 and December 31, 2007 (audited) 1
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2008 and 2007 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2008 and 2007 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 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
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31 December 31
In thousands, except share data 2008 2007
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(unaudited) (see Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 4,723 $ 6,591
Available-for-sale securities 167 171
Receivables, less allowance of $872 - 2008 and $892 - 2007 5,480 5,233
Unbilled receivables 104 12
Other receivables 2,580 2,580
Inventories 6,758 6,853
Prepaids and other 1,358 1,375
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Total current assets 21,170 22,815
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Rental equipment 67,559 66,626
Less accumulated depreciation 39,163 37,692
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28,396 28,934
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Property, plant and equipment 40,794 39,858
Less accumulated depreciation 12,111 11,764
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28,683 28,094
Goodwill 1,004 1,004
Other assets 2,909 3,112
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TOTAL ASSETS $82,162 $83,959
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,550 $ 2,439
Accrued liabilities 8,086 7,633
Current portion of long-term debt 6,138 6,276
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Total current liabilities 15,774 16,348
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Long-term debt:
8 1/4% Limited convertible senior subordinated notes due 2012 10,129 10,129
9 1/2% Subordinated debentures due 2012 1,057 1,057
Notes payable 28,566 28,713
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39,752 39,899
Deferred credits, deposits and other 3,180 3,116
Stockholders' equity:
Capital stock
Common - $1 par value - 5,500,000 shares authorized,
2,453,591 shares issued in 2008 and 2007 2,453 2,453
Class B - $1 par value - 1,000,000 shares authorized,
286,814 shares issued in 2008 and 2007 287 287
Additional paid-in-capital 14,734 14,733
Retained earnings 10,821 11,848
Accumulated other comprehensive loss (1,376) (1,262)
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26,919 28,059
Less treasury stock - at cost - 433,596 common shares in
2008 and in 2007 3,463 3,463
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Total stockholders' equity 23,456 24,596
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $82,162 $83,959
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The accompanying notes are an integral part of these condensed consolidated financial
statements.
1
TRANS-LUX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED
MARCH 31
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In thousands, except per share data 2008 2007
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Revenues:
Equipment rentals and maintenance $ 2,739 $ 3,120
Equipment sales 5,174 5,475
Theatre receipts and other 3,188 3,535
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Total revenues 11,101 12,130
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Operating expenses:
Cost of equipment rentals and maintenance 2,363 2,752
Cost of equipment sales 3,609 3,930
Cost of theatre receipts and other 2,394 2,492
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Total operating expenses 8,366 9,174
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Gross profit from operations 2,735 2,956
General and administrative expenses (3,081) (3,605)
Interest income 32 37
Interest expense (785) (1,062)
Debt conversion cost - (1,475)
Other income 4 -
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Loss from operations before income taxes and
income from joint venture (1,095) (3,149)
(Provision) benefit for income taxes (51) 655
Income from joint venture 119 92
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Net Loss $(1,027) $(2,402)
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Loss per share - basic and diluted $ (0.45) $ (1.65)
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Weighted average common shares outstanding - basic and diluted 2,307 1,460
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Cash dividends per share:
Common Stock $ - $ -
Class B Stock $ - $ -
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The accompanying notes are an integral part of these condensed consolidated financial
statements.
2
TRANS-LUX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
MARCH 31
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In thousands 2008 2007
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Cash flows from operating activities
Net loss $(1,027) $(2,402)
Adjustment to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,873 2,307
Income from joint venture (119) (92)
Deferred income taxes - (655)
Exchange of 8 1/4% Notes for Common Stock - 1,345
Changes in operating assets and liabilities:
Receivables (339) 1,339
Inventories 95 133
Prepaids and other assets 34 (182)
Accounts payable and accruals (544) 40
Deferred credits, deposits and other 64 (37)
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Net cash provided by operating activities 37 1,796
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Cash flows from investing activities
Equipment manufactured for rental (933) (1,443)
Purchases of property, plant and equipment (936) (194)
Proceeds from joint venture, net 250 75
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Net cash used in investing activities (1,619) (1,562)
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Cash flows from financing activities
Proceeds from long-term debt 635 -
Payments of long-term debt (921) (753)
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Net cash used in financing activities (286) (753)
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Net decrease in cash and cash equivalents (1,868) (519)
Cash and cash equivalents at beginning of year 6,591 5,765
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Cash and cash equivalents at end of period $ 4,723 $ 5,246
======= =======
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Interest paid $ 1,021 $ 1,421
Income taxes paid 5 5
Supplemental disclosures of non-cash financing activities:
Exchange of 8 1/4% Notes for Common Stock - 7,829
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The accompanying notes are an integral part of these condensed consolidated financial
statements.
3
TRANS-LUX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(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 condensed
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, 2008 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, 2007. The condensed consolidated balance sheet at December 31, 2007 is
derived from the December 31, 2007 audited financial statements.
The Company has incurred losses for the three months ended March 31, 2008 and
2007 of $1,027,000 and $2,402,000, respectively. The March 31, 2007 net loss
included a non-cash, non-tax deductible charge for the exchange of debt for
Common Stock of $1.5 million relating to the exchange offer (see Note 3). The
Company has implemented several initiatives to continue to improve operational
results and cash flows over future periods. The Company's engineering staff
continues to work on areas to improve manufacturing efficiencies; and improving
the outdoor commercial products, particularly digital billboards and fuel price
changers to include larger LED arrays, smaller LED pixel sizes for higher
resolutions and additional features. The Company believes the outdoor
commercial market is a growing industry, and we see increasing usage of digital
signage in the outdoor commercial market. The Company also continues to explore
ways to reduce costs and subsequent to the first quarter has relocated its
Norwalk facility to lower operating costs in the future, although the second
quarter of 2008 will include moving costs. The Company continues to take steps
to reduce the cost to maintain the equipment on rental and maintenance as it
continues to take disconnects. In addition, the Company is recording less
interest expense as a result of the exchange offer in the first quarter of 2007
(see Note 3) and a reduction in interest rates of its variable rate debt. The
Company has positive working capital of $5.4 million as of March 31, 2008. As
of March 31, 2008, the Company has fully drawn its $5.0 million revolving loan
facility, which was amended subsequent to the first quarter to extend the
maturity date to August 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
and cash provided by operations will be sufficient to fund its operations and
its
4
current obligations through March 31, 2009.
In September 2006, the Financial Accounting Standards Board ("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 accordance with accounting principles generally accepted
in the United States and expands the disclosures about fair value measurement.
In February 2008, the FASB amended SFAS 157 and issued FSP No. 157-2 ("FSP
157-2"). FSP 157-2 excludes fair value lease calculations pursuant to SFAS 13,
as amended, from SFAS 157, but does not exclude assets and liabilities acquired
pursuant to SFAS 141(R). FSP 157-2 defers the effective date of SFAS 157 for
non-financial assets and liabilities that are not recognized or disclosed at
fair value on a recurring basis by one year. The adoption of SFAS 157 and the
related FSPs did not have a material impact on the financial condition or
results of operations of the Company.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value.
SFAS 159 also establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that chose different measurement
attributes for similar assets and liabilities. SFAS 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
The adoption of SFAS 159 did not have a material impact on the financial
condition or results of operations of the Company.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
141R"), which replaces FASB Statement No. 141. Under SFAS 141R, an acquiring
entity will be required to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition date fair value with limited
exceptions. SFAS 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. SFAS 141R is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early
adoption is prohibited. We have not yet determined the impact, if any, that the
implementation of SFAS 141R will have on our results of operations or financial
condition.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, SFAS 160 requires the recognition of a noncontrolling
interest (minority interest) as equity in the consolidated financial statements
and separate from the parent's equity. The amount of net income attributable to
the noncontrolling interest will be included in consolidated net income on the
face of the income statement. SFAS 160 clarifies that changes in a parent's
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest.
In addition, SFAS 160 requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated.
5
Such gain or loss will be measured using the fair value of the noncontrolling
equity investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008. Early adoption is prohibited. We have not yet
determined the impact, if any, that the implementation of SFAS 160 will have on
our results of operations or financial condition.
Note 2 - Inventories
Inventories are stated at the lower of cost or market and consist of the
following:
March 31 December 31
In thousands 2008 2007
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Raw materials $4,546 $4,743
Work-in-progress 1,309 1,351
Finished goods 903 759
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$6,758 $6,853
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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, $1 par value per share, 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 $1.5 million in debt conversion cost as a result of
the exchange offer.
The Company has a bank Credit Agreement, which provides for a term loan of $10.0
million, a non-revolving line of credit of up to $6.2 million to finance
purchases and/or redemptions of one-half of the 7 1/2% Notes, and a revolving
loan of up to $5.0 million at variable interest rates ranging from LIBOR plus
2.25% to Prime (ranging from 5.25% to 5.39% at March 31, 2008). The Credit
Agreement was amended subsequent to the first quarter to extend the maturity to
August 1, 2009. Effective December 31, 2006, $6.1 million of the non-revolving
line of credit was converted into a four-year. At March 31, 2008, 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 cap on capital
expenditures, a leverage ratio and maintaining accounts with an average monthly
compensating balance of not less than $750,000. As of March 31, 2008, the
Company was in compliance with the forgoing financial covenants, but the Company
was not in compliance with maintaining a tangible net worth of not less than
$23.5 million, which its senior lender waived subsequent to the end of the
quarter. In addition, the tangible
6
net worth covenant was modified to $21.0 million as of June 30, 2008. The
amounts outstanding under the Credit Agreement are collateralized by all of the
Display division assets.
Note 4 - Reporting Comprehensive Loss
Total comprehensive loss for the three months ended March 31, 2008 and 2007 is
as follows:
Three months ended March 31
In thousands 2008 2007
-------------------------------------------------------------------------------
Net loss, as reported $(1,027) $(2,402)
Other comprehensive income (loss):
Unrealized foreign currency translation (loss) gain (111) 27
Unrealized holding (loss) gain on
available-for-sale securities (4) 4
Income tax benefit (expense) related to items of
other comprehensive income (loss) 1 (2)
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Total other comprehensive income (loss), net of tax (114) 29
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Comprehensive loss $(1,141) $(2,373)
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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. The Company's policy is to classify interest and penalties related to
uncertain tax positions in income tax expense.
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 2004 through 2007 remain open to examination
by the major taxing jurisdictions and the 2003 tax year remains open to
examination by some state and local taxing jurisdictions to which the Company is
subject.
A valuation allowance has been established for the amount of deferred tax assets
related to Federal and state net operating loss carryforwards, which management
estimates will more likely than not expire unused.
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.
7
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, 2008 and 2007.
The following table presents the components of net periodic pension cost:
Three months ended March 31
In thousands 2008 2007
---------------------------------------------------------
Interest cost $ 160 $ 160
Expected return on plan assets (158) (168)
Amortization of prior service cost 4 4
Amortization of net actuarial loss 66 71
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Net periodic pension cost $ 72 $ 67
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As of March 31, 2008, the Company has recorded a current and long-term pension
liability of $0.2 million and $3.1 million, respectively. The minimum required
contribution for 2008 is expected to be $0.2 million.
Note 7 - Stock Option Plans
The Company did not issue any stock options during the three months ended March
31, 2008 and 2007. The unrecognized compensation costs related to unvested
stock options granted under the Company's stock option plans was nominal.
Expected volatility is based on historical volatility of the Company's stock and
the expected life of options is based on historical data with respect to
exercise periods.
The following summarizes the activity of the Company's stock options for the
three months ended March 31, 2008:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price ($) Term (Yrs) Value ($)
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Outstanding at beginning of year 65,000 6.08
Granted - -
Exercised - -
Terminated (1,500) 5.40
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Outstanding at end of period 63,500 6.09 3.3
====== ===
Vested and expected to vest at end of period 61,000 6.12 3.2 52,900
====== === ======
Exercisable at end of period 61,000 6.12 3.2 52,900
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8
Note 8 - Loss Per Common Share
Basic loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding for the period. The Company's
diluted loss per common share is calculated by adjusting net loss for the
after-tax interest expense on convertible debt and dividing that amount by the
weighted average number of common shares outstanding, adjusted for shares that
would be assumed outstanding after convertible debt conversion and stock options
vested under the treasury stock method. At March 31, 2008, there were no
outstanding convertible debt. At March 31, 2008 and 2007, outstanding stock
options to purchase 63,500 and 66,300 shares, respectively, of Common Stock were
excluded from the calculation of diluted loss per share because their impact
would have been anti-dilutive.
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 operating expenses
and sales, general and administrative expenses directly associated with the
segment. The Entertainment/real estate segment 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, 2008 and 2007 is as follows:
Three months ended March 31
In thousands 2008 2007
---------------------------------------------------------------------
Revenues:
Indoor display $ 2,708 $ 2,518
Outdoor display 5,205 6,077
Entertainment/real estate 3,188 3,535
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Total revenues 11,101 12,130
======= =======
Operating income (loss)
Indoor display (139) (486)
Outdoor display 313 291
Entertainment/real estate 701 918
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Total operating income 875 723
Other income 4 -
Corporate general and administrative expenses (1,102) (1,280)
Interest expense - net (753) (1,025)
Debt conversion cost - (1,475)
Income tax (provision) benefit (51) 655
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Net loss $(1,027) $(2,402)
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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, 2008 and 2007, and balance sheet summary
information as of March 31, 2008 and December 31, 2007:
Three months ended March 31
In thousands 2008 2007
-----------------------------------------------------------------
Revenues $1,337 $1,293
Gross profit 251 205
Net income 238 184
Company's share of partnership net income 119 92
-----------------------------------------------------------------
March 31 December 31
In thousands 2008 2007
-----------------------------------------------------------------
Current assets $ 567 $ 956
Noncurrent assets 1,504 1,573
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Total assets 2,071 2,529
====== ======
Current liabilities 1,010 1,086
Noncurrent liabilities 522 641
------ ------
Total liabilities 1,532 1,727
====== ======
Company's equity in partnership net assets $ 284 $ 417
-----------------------------------------------------------------
The Company's equity in partnership net assets is reflected in other assets in
the Condensed Consolidated Balance Sheets. The Company has guaranteed
$0.5 million (75%) of a $0.7 million business loan to finance theatre equipment
held by its joint venture, MetroLux, until May 2011, and,
10
accordingly has recognized a liability for $30,000 at March 31, 2008. The
unrelated 50% partner of MetroLux also guaranteed $0.5 million (75%) of the $0.7
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, 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, government/private and gaming 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, digital billboards 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, 2008 Compared to Three Months Ended March 31, 2007
Total revenues for the three months ended March 31, 2008 decreased $1.0 million
or 8.5% to $11.1 million from $12.1 million for the three months ended March 31,
2007, primarily due to decreases in Outdoor display revenues and
Entertainment/real estate revenues, offset by increases in Indoor display
revenues.
Indoor display revenues increased $190,000 or 7.5%. Of this increase, Indoor
display equipment sales increased $394,000 or 67.0%, primarily due to an
increase in sales from the financial services and gaming markets. Indoor
display equipment rentals and maintenance revenues decreased $204,000 or 10.6%,
primarily due to disconnects and non-renewals of equipment on rental on existing
contracts in the financial services market. The financial services market
continues to be negatively impacted by the current investment climate, resulting
in consolidation within that industry, and the wider use of flat-panel screens.
The decrease in indoor display equipment rentals and maintenance revenues has
lessened over last year, which indicates that the market conditions appear to be
slowly improving, although the Company does continue to take disconnects and
non-
11
renewal of existing equipment on rental and maintenance; however the Company
also enters into new lease contracts.
Outdoor display revenues decreased $872,000 or 14.3%. Of this decrease, Outdoor
display equipment sales decreased $695,000 or 14.2%, primarily in the outdoor
commercial markets and catalog sports. Outdoor display equipment rentals and
maintenance revenues decreased $177,000 or 14.9%, 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 decreased $347,000 or 9.8%, primarily due to
a decrease in box office revenues due to a lack of blockbuster films.
Total operating income for the three months ended March 31, 2008 increased
$152,000 or 21.0% to $875,000 from $723,000 for the three months ended March 31,
2007, principally due to decreases in the allowance for uncollectable
accounts and general and administrative expenses, such as payroll and benefits,
offset by the decline in revenues.
Indoor display operating income increased $347,000 to a loss of $139,000 in 2008
compared to a loss of $486,000 in 2007, primarily as a result of a decrease in
general and administrative expenses. The cost of Indoor displays represented
78.3% of related revenues in 2008 compared to 77.3% in 2007. 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
$27,000 increase in field service costs to maintain the equipment, offset by a
$122,000 decrease in depreciation expense. The Company continually addresses
the cost of field service to keep 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 increased $268,000,
primarily due to the increase in revenues. Indoor display general and
administrative expenses decreased $331,000 or 31.3%, primarily due to a
reduction in selling payroll and benefits and related expenses and a $157,000
decrease in the allowance for uncollectable accounts.
Outdoor display operating income increased $22,000 or 7.6%, primarily as a
result of a decrease in the Outdoor display cost of equipment rentals and
maintenance. The cost of Outdoor displays represented 74.0% of related revenues
in 2008 compared to 77.9% in 2007. Outdoor display cost of equipment sales
decreased $589,000 or 15.8%, principally due to the decrease in volume. Outdoor
display cost of equipment rentals and maintenance decreased $295,000 or 29.4%,
primarily due to a $148,000 decrease in field service costs to maintain the
equipment and a $146,000 decrease in depreciation expense. Outdoor display
general and administrative expenses remained level. Cost of Outdoor display
equipment rentals and maintenance includes field service expenses, plant repair
costs, maintenance and depreciation.
Entertainment/real estate operating income decreased $217,000 or 23.6%,
primarily due to the decreases in box office revenues due to a lack of
blockbuster films. Cost of Entertainment/real estate, which includes film
rental costs, concession costs, operating expenses and depreciation expense,
decreased $98,000 or 3.9%, primarily due to the decreases in revenues. The cost
of
12
Entertainment/real estate represented 75.1% of related revenues in 2008 compared
to 70.5% in 2007. This increases is due to an increase in certain operating
expenses, such as credit card fees and payroll costs. Entertainment/real estate
general and administrative expenses remained level.
Corporate general and administrative expenses decreased $178,000 or 13.9%,
primarily due to a decrease in benefits, such as medical costs. The Company
continues to monitor and reduce certain overhead costs.
Net interest expense decreased $272,000 due lower interest rates of the variable
rate debt and a reduction in total debt. The debt conversion cost of
$1.5 million relates to the one-time, non-cash, non-tax deductible charge for
the exchange of debt for Common Stock as a result of the exchange offer that was
completed March 14, 2007, see Note 3. 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, 2008 and 2007 was
5.2% and 21.4%, respectively. The 2008 rate was affected by the $0.4 million
valuation allowance on its deferred tax assets as a result of reporting a
pre-tax loss in recent years. The 2007 rate was affected by the $1.5 million
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, $1 par value per share, 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 $1.5 million in debt conversion cost as a result of
the exchange offer.
During the three months ended March 31, 2008, long-term debt, including current
portion, decreased $0.3 million, due to $0.9 million of regularly scheduled
payments of long-term debt offset $0.6 million of borrowing on the DreamCatcher
Cinema construction loan.
The Company has a bank Credit Agreement, which provides for a term loan of $10.0
million, a non-revolving line of credit of up to $6.2 million to finance
purchases and/or redemptions of one-half of the 7 1/2% Notes, and a revolving
loan of up to $5.0 million at variable interest rates ranging from LIBOR plus
2.25% to Prime (ranging from 5.25% to 5.39% at March 31, 2008). The Credit
Agreement was amended subsequent to the first quarter to extend the maturity to
August 1, 2009. Effective December 31, 2006, $6.1 million of the non-revolving
line of credit was converted into a four-year. At March 31, 2008, the entire
revolving loan facility had been drawn. The Credit
13
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 cap on capital expenditures, a leverage ratio and maintaining accounts with an
average monthly compensating balance of not less than $750,000. As of March 31,
2008, the Company was in compliance with the forgoing financial covenants, but
the Company was not in compliance with maintaining a tangible net worth of not
less than $23.5 million, which its senior lender waived subsequent to the end of
the quarter. In addition, the tangible net worth covenant was modified to $21.0
million as of June 30, 2008. The amounts outstanding under the Credit Agreement
are collateralized by all of the Display division assets.
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, 2008 for the remainder of 2008 and the next four years:
Remainder of
In thousands 2008 2009 2010 2011 2012
--------------------------------------------------------------------------------
Long-term debt, including interest $7,400 $15,765 $3,147 $3,098 $15,482
Employment and consulting
agreement obligations 1,175 989 427 303 198
Operating lease payments 567 529 509 455 304
------ ------- ------ ------ -------
Total $9,142 $17,283 $4,083 $3,856 $15,984
--------------------------------------------------------------------------------
Cash and cash equivalents decreased $1.9 million for the three months ended
March 31, 2008 compared to a decrease of $0.5 million for the three months ended
March 31, 2007. The decrease in 2008 is primarily attributable to the
investment in equipment for rental of $0.9 million, the investment in property,
plant and equipment of $0.9 million, which includes the expansion of the
DreamCatcher Cinema, and $0.9 million of scheduled payments of long-term debt,
offset by $0.6 million of proceeds from long-term debt and proceeds from the
Company's joint venture of $0.3 million, with cash provided by and used in
operations offsetting each other. 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.
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.
14
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, 2008, 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 $284,000. A 10% change in the
Canadian dollar relative to the U.S. dollar would result in a currency exchange
expense fluctuation of approximately $84,000, based on dealer quotes,
considering current exchange rates.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15
under the Securities Exchange Act of 1934, as of the end of the period covered
by this report, we have carried out an evaluation, under the supervision and
with the participation of our management, including our Co-Chief Executive
Officers and Chief Financial Officer (our principal executive officers and
principal financial officer), of the effectiveness of the design and operation
of our disclosure controls and procedures. Our Co-Chief Executive Officers and
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission and that such
information is accumulated and communicated to our management (including our
Co-Chief Executive Officers and Chief Financial Officer) to allow timely
decisions regarding required disclosures. Based on such evaluation, our
Co-Chief Executive Officers and Chief Financial Officer have concluded these
disclosure controls are effective as of March 31, 2008.
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, 2007.
The Company has incurred losses for the three months ended March 31, 2008 and
2007 of $1,027,000 and $2,402,000, respectively. The March 31, 2007 net loss
included a non-cash, non-tax deductible charge for the exchange of debt for
Common Stock of $1.5 million relating to the exchange offer (see Note 3). The
Company has positive working capital of $5.4 million as of March 31, 2008. As
of March 31, 2008, the Company has fully drawn its $5.0 million revolving loan
facility, which was amended subsequent to the first quarter to extend the
maturity date to August 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
and cash provided by operations will be sufficient to fund its operations and
its current obligations through March 31, 2009.
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 Employment Agreement with Karl Hirschauer dated as of April 1,
2008, 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 20, 2008
by /s/ Angela D. Toppi
----------------------------
Angela D. Toppi
Executive Vice President and
Chief Financial Officer
18