UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
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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.)
26 Pearl Street, Norwalk, CT 06850-1647
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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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (S232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the Registrant was required to file and post such files). Yes No
--- ---
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
--- --- ---
Smaller reporting company X
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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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11/12/10 Common Stock - $1.00 Par Value 2,442,923
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 -
September 30, 2010 and December 31, 2009 1
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2010 and 2009 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2010 and 2009 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22
Item 4. Controls and Procedures 23
Part II - Other Information
Item 1. Legal Proceedings 23
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 24
Item 3. Defaults upon Senior Securities 24
Item 4. (Removed and Reserved) 25
Item 5. Other Information 25
Item 6. Exhibits 26
Signatures 26
Exhibits
Part I - Financial Information
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TRANS-LUX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 December 31
In thousands, except share data 2010 2009
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(unaudited) (see Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 463 $ 541
Cash in escrow 337 403
Receivables, less allowance of $1,283 - 2010 and $1,393 - 2009 3,043 1,743
Unbilled receivables - 29
Inventories 5,079 5,149
Prepaids and other 701 619
Current assets associated with discontinued operations 1 55
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Total current assets 9,624 8,539
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Rental equipment 58,853 58,164
Less accumulated depreciation 37,666 34,015
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21,187 24,149
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Property, plant and equipment 6,795 7,206
Less accumulated depreciation 4,555 4,667
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2,240 2,539
Asset held for sale 920 920
Goodwill 810 810
Other assets 648 926
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TOTAL ASSETS $ 35,429 $37,883
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,499 $ 1,410
Accrued liabilities 7,360 5,658
Current portion of long-term debt 16,530 16,990
Liabilities associated with discontinued operations 402 487
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Total current liabilities 26,791 24,545
Long-term debt:
Notes payable 2,364 2,193
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2,364 2,193
Deferred credits, deposits and other 4,146 3,852
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Total liabilities 33,301 30,590
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Stockholders' equity:
Common - $1 par value - 5,500,000 shares authorized,
2,826,424 shares issued and outstanding in 2010 and 2009 2,827 2,827
Additional paid-in-capital 14,273 14,657
Accumulated deficit (10,244) (4,989)
Accumulated other comprehensive loss (1,665) (1,739)
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5,191 10,756
Less treasury stock - at cost - 383,596 common shares in 2010
and 433,596 common shares in 2009 (3,063) (3,463)
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Total stockholders' equity 2,128 7,293
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,429 $37,883
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
TRANS-LUX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
In thousands, except per share data 2010 2009 2010 2009
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Revenues:
Equipment rentals and maintenance $ 2,205 $ 2,641 $ 6,654 $ 7,553
Equipment sales 4,822 5,301 11,902 15,485
Real estate rentals 52 64 182 180
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Total revenues 7,079 8,006 18,738 23,218
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Operating expenses:
Cost of equipment rentals and maintenance 1,958 2,136 5,778 6,312
Cost of equipment sales 3,853 3,996 9,564 11,719
Cost of real estate rentals 16 15 40 45
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Total operating expenses 5,827 6,147 15,382 18,076
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Gross profit from operations 1,252 1,859 3,356 5,142
General and administrative expenses (2,025) (2,174) (6,301) (6,793)
Restructuring costs (63) - (1,105) -
Interest expense, net (380) (417) (1,163) (1,262)
Write-off of note receivable, net - - - (2,686)
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Loss before income taxes (1,216) (732) (5,213) (5,599)
Income tax expense (14) (50) (42) (142)
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Net loss $(1,230) $ (782) $(5,255) $(5,741)
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Loss per share - basic and diluted $ (0.50) $ (0.34) $ (2.16) $ (2.49)
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Weighted average common shares outstanding -
basic and diluted 2,443 2,307 2,434 2,307
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
TRANS-LUX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30
In thousands 2010 2009
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Cash flows from operating activities
Net loss $(5,255) $(5,741)
Adjustment to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 4,009 4,539
Write-off of note receivable, net - 2,686
Non-cash restructuring costs 799 -
Write-off of engineering software, net 456 -
Changes in operating assets and liabilities:
Receivables (1,271) 1,093
Inventories 70 1,117
Prepaids and other assets 70 1,467
Accounts payable and accrued liabilities 2,253 (1,399)
Deferred credits, deposits and other 294 383
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Net cash provided by operating activities 1,425 4,145
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Cash flows from investing activities
Equipment manufactured for rental (1,192) (1,776)
Purchases of property, plant and equipment (57) (161)
Proceeds from sale of available-for-sale securities - 135
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Net cash used in investing activities (1,249) (1,802)
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Cash flows from financing activities
Payments of long-term debt (1,169) (2,407)
Proceeds from long-term debt 880 -
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Net cash used in financing activities (289) (2,407)
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Cash flows from discontinued operations
Cash provided by operating activities of discontinued operations 35 34
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Net cash provided by discontinued operations 35 34
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Net (decrease) increase in cash and cash equivalents (78) (30)
Cash and cash equivalents at beginning of year 541 1,422
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Cash and cash equivalents at end of period $ 463 $ 1,392
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Supplemental disclosure of cash flow information:
Interest paid $ 363 $ 1,327
Income taxes paid - 20
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
TRANS-LUX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(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 September 30, 2010 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, 2009. The Condensed Consolidated Balance Sheet at December 31, 2009 is
derived from the December 31, 2009 audited financial statements.
There have been no material changes in our significant accounting policies
during the nine months ended September 30, 2010 as compared to the significant
accounting policies described in our Annual Report on Form 10-K for the year
ended December 31, 2009. The Company has evaluated subsequent events through
the filing date of this Form 10-Q and has determined that there were no
subsequent events to recognize or disclose in these financial statements.
Recent Accounting Pronouncements: In February 2010, the Financial Accounting
Standards Board issued Accounting Standards Update No. 2010-09, "Subsequent
Events: Amendments to Certain Recognition and Disclosure Requirements," which
provides updated guidance on subsequent events and removes the requirement to
disclose the date though which subsequent events have been evaluated for SEC
filers. This guidance became effective upon issuance and its adoption did not
have an effect on the Company's condensed consolidated financial statements.
Note 2 - Going Concern
The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles in the
United States of America, which contemplates continuation of the Company as a
going concern. The Company has incurred significant recurring losses from
continuing operations and has a significant working capital deficiency. The
Company incurred a net loss of $5.3 million for the nine months ended September
30, 2010 and has a working capital deficiency of $17.2 million as of September
30, 2010. In addition, the Company recorded a loss from continuing operations
of $8.8 million for the year ended December 31, 2009. The results for the nine
months ended September 30, 2010 include a $1.1
4
million restructuring charge related to the relocation of the manufacturing of
the Indoor display equipment from Connecticut to Iowa as further discussed in
Note 3 - Plan of Restructuring, and a $456,000 charge to write-off engineering
software. As further discussed in Note 7 - Long-Term Debt, the Company did not
make the December 1, 2009 required sinking fund payment of $105,700 on its 9
1/2% Subordinated debentures due 2012 (the "Debentures") and the June 1, 2010
interest payment of $50,200. In addition, the Company did not make the March 1,
2010 and September 1, 2010 interest payments totaling $835,600 on its 8 1/4%
Limited convertible senior subordinated notes due 2012 (the "Notes"). Under the
terms of the indenture agreements that govern the Debentures and Notes, the
non-payments constitute events of default; accordingly, the trustees or the
holders of 25% of the outstanding Debentures and Notes have the right to declare
the outstanding principal and interest due and payable immediately. As such,
all outstanding debt under the Debentures and Notes has been classified as
current in the accompanying Condensed Consolidated Balance Sheets. In the event
that the Company receives such notice, the senior lender has the right to demand
payment on outstanding amounts on the Credit Agreement. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
In March 2010, the senior lender agreed to extend the maturity date of the
Credit Agreement to May 1, 2011 and extended payment terms on the term portion
of the debt. The senior lender has retained the right to call the Credit
Agreement in the event that the holders of the Debentures or Notes demand
payment. In August 2010, the senior lender modified the Credit Agreement to
reduce the availability under the revolving loan from $5.0 million to $4.3
million, amended the principal repayment schedule to defer the next three
monthly principal payments of $50,000 each until the maturity date and removed
the senior debt coverage ratio covenant test for the June 30, 2010 and September
30, 2010 periods. The Company also refinanced its mortgage on its Des Moines,
Iowa facility in March 2010, which provided an additional $260,000 for working
capital. The Company continues to be involved in discussions with various
entities to try to obtain additional debt and/or equity financing including
amounts that could be used to settle the Debentures and Notes, however there can
be no assurance that the Company will be successful in obtaining such financing
and if it obtains such financing, how the terms of such financing will effect
the Company.
The Company continues to manage a plan to improve operating results. The plan
includes a joint venture agreement with a People's Republic of China company to
establish a cooperative venture limited liability company in the People's
Republic of China to engage in research, engineering, development,
manufacturing, sale and distribution of LED lamps, LED digital signage and LED
lighting or similar products. The Company is pursuing new business
opportunities in the LED lighting market with energy-saving lighting solutions
and supplementing our established digital display and signage businesses with a
highly flexible, cost-efficient and creative means for facilities to enhance
their environments with LED lighting. The Company intends to feature a
comprehensive offering of the latest LED lighting technologies that provide
facilities and public infrastructure with "green" lighting solutions that emit
less heat, save energy and enable creative designs. The Company continues to
seek ways to reduce costs of components used in its products and other expenses
to improve sales margins, and continues to look at ways to lower overhead costs,
such as compensation and benefits. There can be no assurance that the Company
will achieve higher sales, improved margins or lower costs.
5
Because the Credit Agreement is secured by substantially all of the Company's
eligible accounts receivable, inventory and other assets, management cannot
provide any assurance that the Company would have sufficient cash and liquid
assets to fund normal operations during the period of time when it is required
to repay amounts outstanding under the Credit Agreement. Further, if the
Company is unable to obtain waivers or cure the defaults on the Debentures and
Notes, the Debentures and Notes could be called and be immediately due. Such
notice would trigger a default in the Credit Agreement. If the Credit
Agreement, Debentures and Notes are called, the Company would need to obtain new
financing; there can be no assurance that the Company will be able to do so and
if it obtains such financing, how the terms of such financing will affect the
Company. If the debt is called and new financing cannot be arranged it is
unlikely the Company will be able to continue as a going concern. The
accompanying condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amounts and classification of liabilities that may result from
the outcome of this uncertainty. See Note 7 - Long-Term Debt for further
details.
Note 3 - Plan of Restructuring
In the second quarter of 2010, the Company decided to take certain actions to
reduce operating costs. These actions included the elimination of approximately
50 positions from our operations and the closing of our Stratford, Connecticut
manufacturing facility. For the three and nine months ended September 30, 2010,
we incurred restructuring costs of approximately $0.1 million and $1.1 million,
respectively, consisting of employee severance pay, facility closing costs,
representing primarily lease termination and asset write-off costs, and other
fees directly related to the restructuring plan. The costs associated with the
restructuring are included in a separate line item, Restructuring costs, in the
Condensed Consolidated Statements of Operations. We expect that the majority of
these costs will be paid over the next 12 months.
The following table shows the amounts expensed and paid for restructuring costs
that were incurred during the nine months ended September 30, 2010 and the
remaining accrued balance of restructuring costs as of September 30, 2010, which
is included in Accrued liabilities in the Condensed Consolidated Balance Sheets.
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Payments and Balance
Provision Other Adjustments September 30, 2010
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Severance costs (1) $ 340 $165 $175
Facility closing costs (2) 693 288 405
Other fees 72 9 63
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$1,105 $462 $643
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(1) Represents salaries for employees separated from the Company.
(2) Represents costs associated with the closing of the Stratford, Connecticut
facility (primarily lease termination costs) and leasehold improvement and
equipment write-offs.
6
The following table shows by reportable segment, the restructuring costs
incurred during the nine months ended September 30, 2010 and the remaining
accrued balance of restructuring costs as of September 30, 2010.
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Payments and Balance
Provision Other Adjustments September 30, 2010
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Indoor display $ 998 $370 $628
Outdoor display 107 92 15
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$1,105 $462 $643
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Note 4 - Fair Value
The Company carries its money market funds and cash surrender value of life
insurance related to its deferred compensation arrangements at fair value. The
fair value of these instruments is determined using a three-tier fair value
hierarchy. Based on this hierarchy, the Company determined the fair value of
its money market funds using quoted market prices, a Level 1 or an observable
input, and the cash surrender value of life insurance, a Level 2 based on
observable inputs primarily from the counter party. At September 30, 2010, the
Company's money market funds and the cash surrender value of life insurance had
carrying amounts of $1,000 and $71,000, respectively. The carrying amounts of
cash equivalents, receivables, accounts payable and accrued liabilities
approximate fair value due to the short-term maturities of these items. At
September 30, 2010, the fair value of the Company's Notes and Debentures, using
observable inputs, was $1.0 million and $0.1 million, respectively. At
September 30, 2010, the fair value of the Company's remaining long-term-debt,
including current portion, approximates its carrying value of $7.7 million.
Note 5 - Inventories
Inventories are stated at the lower of cost or market and consist of the
following:
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September 30 December 31
In thousands 2010 2009
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Raw materials $3,755 $3,695
Work-in-progress 900 1,044
Finished goods 424 410
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$5,079 $5,149
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Note 6 - Other Receivable
The Company had a $2.6 million note receivable that was due June 2008, relating
to the sale/leaseback of the Company's Norwalk, Connecticut facility in 2004.
The receivable was secured by a purchase money mortgage subordinated to a $3.5
million first mortgage in favor of the purchaser's bank. The purchaser
defaulted on this payment and the Company pursued legal remedies. After the
negative results of a foreclosure by sale by the first mortgagee, the Company
wrote off this note receivable and related expense for a total of $2.7 million
in the second quarter of 2009.
7
Note 7 - Long-Term Debt
The Company has $10.1 million of 8 1/4% Limited convertible senior subordinated
notes due 2012 (the "Notes") which are no longer convertible into common shares;
interest is payable semi-annually and the Notes may be redeemed, in whole or in
part, at par. The Company did not remit the March 1, 2010 and September 1, 2010
semi-annual interest payments totaling $835,600 to the trustee. The
non-payments constitute an event of default under the indenture governing the
Notes and the trustee, by notice to the Company, or the holders of 25% of the
principal outstanding, by notice to the Company and the trustee, may declare the
outstanding principal plus interest due and payable immediately. When such
notice is received by the Company, no payment shall be made by the Company to
the holders or trustee until the earlier of such non-payment event of default is
cured or waived or 179 days since receipt by the trustee of notice of such
event, unless the holder of Senior Indebtedness has accelerated the due date
thereof. If the holder of Senior Indebtedness accelerates the due date at any
time, then no payment may be made on the Notes until the default is cured or
waived. At September 30, 2010 and December 31, 2009, the total amount
outstanding is classified as Current portion of long-term debt.
The Company has $1.1 million of 9 1/2% Subordinated debentures due 2012 (the
"Debentures") which are due in annual sinking fund payments of $105,700
beginning in 2009, which payment has not been remitted by the Company, with the
remainder due in 2012; interest is payable semi-annually and the Debentures may
be redeemed, in whole or in part, at par. The Company did not remit the June 1,
2010 semi-annual interest payment of $50,200 to the trustee. The non-payments
constitute an event of default under the indenture governing the Debentures and
the trustee, by notice to the Company, or the holders of 25% of the principal
outstanding, by notice to the Company and the trustee, may declare the
outstanding principal plus interest due and payable immediately. During the
continuation of any event which, with notice or lapse of time or both, would
constitute a default under any agreement under which Senior Indebtedness is
issued, if the effect of such default is to cause or permit the holder of Senior
Indebtedness to become due prior to its stated maturity, no payment (including
any required sinking fund payment) of principal, premium or interest shall be
made on the Debentures unless and until such default shall have been remedied,
if written notice of such default has been given to the trustee by the Company
or the holder of Senior Indebtedness. The failure to make the sinking fund
payment is an event of default under the Credit Agreement and no payment can be
made to the trustee or the holders at this time as such event has not been
waived. Likewise, the failure to pay the interest on the Notes is an event
preventing payments on the Debentures, as the Notes are Senior Indebtedness with
respect to the Debentures. At September 30, 2010 and December 31, 2009, the
total amount outstanding is classified as Current portion of long-term debt.
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 (which is no
longer available) to finance the redemption of one-half of the 7 1/2%
Subordinated notes due 2006 (which were redeemed in June 2006 and no longer
outstanding), and a revolving loan of up to $4.3 million, based on eligible
accounts receivable and inventory, at a variable rate of interest of Prime plus
2.00%, with a floor of 6.00% (6.00% at
8
September 30, 2010), which is due to mature May 1, 2011. In August 2010, the
senior lender modified the Credit Agreement to reduce the availability under the
revolving loan from $5.0 million to $4.3 million, amended the principal
repayment schedule to defer the next three monthly principal payments of $50,000
each until the maturity date and removed the senior debt coverage ratio covenant
test for the June 30, 2010 and September 30, 2010 periods. As of September 30,
2010, the Company has drawn $4.2 million against the revolving loan facility and
$0.1 million was available for additional borrowing. The Credit Agreement, as
amended, requires an annual facility fee on the unused commitment of 0.25% and
requires compliance with certain financial covenants, as defined in the Credit
Agreement, which include a senior debt coverage ratio of not less than 1.25 to
1.0, a loan-to-value ratio of not more than 50% and a $1.0 million cap on
capital expenditures per quarter beginning with the quarter ended December 31,
2010. In addition, the April 13, 2010 amendment waived the default on the Notes
and Debentures, but in the event that the holders of the Notes or Debentures or
trustees declare a default and begin to exercise any of their rights and
remedies in connection with the non-payment defaults, this shall constitute a
separate and distinct event of default and the senior lender may exercise any
and all rights and remedies it may have. In addition, the April 13, 2010
amendment waived the default of non-payment of certain pension plan
contributions, but in the event that any government agency takes any enforcement
action or otherwise exercises any rights and remedies it may have, this shall
constitute a separate and distinct event of default and the senior lender may
exercise any and all rights and remedies it may have. The amounts outstanding
under the Credit Agreement are collateralized by all of the Display division
assets. At September 30, 2010 and December 31, 2009, the total amount
outstanding under the Credit Agreement is classified as Current portion of
long-term debt.
On March 1, 2010, the Company refinanced its existing mortgage on its facility
located in Des Moines, Iowa, which was scheduled to mature in 2009. The
refinancing was for $650,000 at a fixed rate of interest of 6.50% payable in
monthly installments, which matures on March 1, 2015 and requires a compensating
balance of $200,000. The Company used proceeds of $390,000 to settle the prior
debt and the $260,000 balance for working capital needs.
The Company has a $1.8 million mortgage on its real estate rental property
located in Santa Fe, New Mexico at a variable rate of interest of Prime, with a
floor of 6.75%, which was the interest rate in effect at September 30, 2010,
payable in monthly installments through December 12, 2012.
On February 25, 2010, the Company took out a mortgage on land located in Silver
City, New Mexico and repaid it on August 27, 2010. The financing was for
$100,000 at a fixed rate of interest of 7.80% payable in monthly interest only
payments, which was due to mature on February 25, 2012.
9
Note 8 - Comprehensive Loss
Total comprehensive loss is as follows:
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Three Months Ended Nine Months Ended
September 30 September 30
In thousands 2010 2009 2010 2009
----------------------------------------------------------------------------------------
Net loss, as reported $(1,230) $(782) $(5,255) $(5,741)
---------------------------------------
Other comprehensive income:
Unrealized foreign currency translation gain 117 292 73 436
---------------------------------------
Total other comprehensive income, net of tax 117 292 73 436
---------------------------------------
Comprehensive loss $(1,113) $(490) $(5,182) $(5,305)
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Note 9 - Pension Plan
As of December 31, 2003, the benefit service under the pension plan had been
frozen and, accordingly, there is no service cost. As of April 30, 2009, the
compensation increments have been frozen and, accordingly, no additional
benefits are being accrued under the plan.
The following table presents the components of net periodic pension cost:
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
In thousands 2010 2009 2010 2009
-------------------------------------------------------------------------
Interest cost $ 135 $ 151 $ 405 $ 451
Expected return on plan assets (104) (121) (312) (359)
Amortization of prior service cost - 5 - 13
Amortization of net actuarial loss 76 105 228 315
-----------------------------------
Net periodic pension cost $ 107 $ 140 $ 321 $ 420
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As of September 30, 2010, the Company has recorded a current pension liability
of $0.1 million, which is included in Accrued liabilities on the Condensed
Consolidated Balance Sheets, and a long-term pension liability $4.0 million,
which is included in Deferred credits, deposits and other on the Condensed
Consolidated Balance Sheets. The minimum required contribution for 2010 is
expected to be $0.1 million. The Company will seek a waiver for the minimum
required contribution for 2010, which it has not contributed to date.
The pension plan asset information included below is presented at fair value.
ASC 820 establishes a framework for measuring fair value and required
disclosures about assets and liabilities measured at fair value. The fair value
of these assets is determined using a three-tier fair value hierarchy. Based on
this hierarchy, the Company determined the fair value of its money market funds,
equity and index funds and guaranteed investment contracts using quoted market
prices, a Level 1 or an observable input, and bonds, a Level 2 based on
observable inputs and quoted prices in markets that are not active. The Company
does not have any Level 3 pension assets, which such valuation would be based on
unobservable measurements and management's estimates.
10
The following table presents the pension plan assets by level within the fair
value hierarchy as of September 30, 2010:
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In thousands Level 1 Level 2 Level 3 Total
---------------------------------------------------------------------
Equity and index funds $2,774 $ - $ - $2,774
Guaranteed investment contracts 2,264 - - 2,264
Bonds - 21 - 21
Money market funds 17 - - 17
-----------------------------------
Total pension plan assets $5,055 $21 $ - $5,076
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In March 2010, the Company submitted to the Internal Revenue Service a request
for waiver of the minimum funding standard for its defined benefit plan. The
waiver request was submitted as a result of the current economic climate and the
current business hardship that the Company is experiencing. The waiver, if
granted, will defer payment of $285,000 of the minimum funding standard for the
2009 plan year. If the waiver is not granted, the Pension Benefit Guaranty
Corporation and the Internal Revenue Service have various enforcement remedies
they can implement to protect the participant's benefits, such as termination of
the plan and require the Company to make the unpaid contributions. The senior
lender has waived the default of non-payment of certain pension plan
contributions. In the event that any government agency takes any enforcement
action or otherwise exercises any rights and remedies it may have, this shall
constitute a separate and distinct event of default and the senior lender may
exercise any and all rights and remedies it may have. At this time, the Company
is not anticipating making its required contributions for the 2010 plan year.
Note 10 - Stock Option Plans
The Company did not issue any stock options during the three and nine months
ended September 30, 2010. The Company issued options to purchase 2,000 shares
with an exercise price of $1.05 per share under the Non-Employee Director Stock
Option Plan in June 2009. The unrecognized compensation costs related to
unvested stock options granted under the Company's stock option plans was
nominal.
The following table summarizes the activity of the Company's stock options for
the nine months ended September 30, 2010:
-------------------------------------------------------------------------------------------
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price ($) Term (Yrs) Value ($)
-------------------------------------------------------------------------------------------
Outstanding at beginning of year 26,000 4.57
Granted - -
Exercised - -
Terminated (3,000) -
------
Outstanding at end of period 23,000 4.51 2.3
================================
Vested and expected to vest at end of period 23,000 4.51 2.3 -
================================
Exercisable at end of period 21,500 4.78 2.1 -
-------------------------------------------------------------------------------------------
11
In February 2010, the Board granted Mr. Jean-Marc Allain, the Company's new
President and Chief Executive Officer, 50,000 shares of restricted stock from
treasury shares which vest 50% after one year and the remaining 50% after two
years.
Note 11 - Loss Per Common Share
Basic and diluted loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding for the period. In periods
when the Company reports net income, diluted per common share amounts are
calculated by adjusting net income 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 September 30, 2010 and 2009, there were outstanding stock options to
purchase 23,000 and 33,500 shares of Common Stock, respectively, which were
excluded from the calculation of diluted loss per share because their impact
would have been anti-dilutive.
Note 12 - Legal Proceedings and Claims
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business and/or which are covered by insurance that it
believes individually and in the aggregate will not have a material adverse
effect on the consolidated financial position or operations of the Company.
Note 13 - Business Segment Data
The Company evaluates segment performance and allocates resources based upon
operating income. The Company's operations are managed in four 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 new LED lighting segment intends to sell
energy-saving lighting solutions that provide facilities and public
infrastructure with "green" lighting solutions that emit less heat, save energy
and enable creative designs. The Real estate rental segment owns an
income-producing property. Segment operating income (loss) is shown after
operating expenses and sales, general and administrative expenses directly
associated with the segment. Corporate general and administrative expenses
relate to costs that are not directly identifiable with a segment. There are no
intersegment sales. Of the total goodwill of $0.8 million, $0.7 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
12
operates similarly to the domestic operation and has similar profit margins.
Information about the Company's operations in its four business segments for the
three and nine months ended September 30, 2010 and 2009 is as follows:
----------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
In thousands 2010 2009 2010 2009
----------------------------------------------------------------------------------------
Revenues:
Indoor display $ 1,601 $ 2,049 $ 5,426 $ 6,640
Outdoor display 5,426 5,893 13,130 16,398
LED lighting - - - -
Real estate rental 52 64 182 180
----------------------------------------
Total revenues $ 7,079 $ 8,006 $18,738 $23,218
----------------------------------------
Operating income (loss):
Indoor display $ (587) $ (358) $(2,042) $ (927)
Outdoor display 645 1,014 403 2,054
LED lighting (68) - (146) -
Real estate rental 33 47 134 125
----------------------------------------
Total operating income (loss) 23 703 (1,651) 1,252
Write-off of note receivable, net - - - (2,686)
Corporate general and administrative expenses (859) (1,018) (2,399) (2,903)
Interest expense, net (380) (417) (1,163) (1,262)
----------------------------------------
Loss before income taxes (1,216) (732) (5,213) (5,599)
Income tax expense (14) (50) (42) (142)
----------------------------------------
Net loss $(1,230) $ (782) $(5,255) $(5,741)
----------------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Trans-Lux is a full service provider of integrated multimedia systems for
today's communications environments. The essential elements of these systems
are the real-time, programmable electronic information displays we manufacture,
distribute and service. Designed to meet the evolving communications needs of
both the indoor and outdoor markets, these displays are used primarily in
applications for the financial, banking, gaming, corporate, advertising,
transportation, entertainment and sports industries. In 2010 the Company
started a new business opportunity in the LED lighting market with energy-saving
lighting solutions that will feature a comprehensive offering of the latest LED
lighting technologies that provide facilities and public infrastructure with
"green" lighting solutions that emit less heat, save energy and enable creative
designs. The Company also owns and operates an income producing rental
property. The Company operates in four reportable segments: Indoor display,
Outdoor display, LED lighting and Real estate rental.
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 and commercial markets. The LED lighting segment will include worldwide
13
revenues and related expenses from the sale of LED lighting products. The Real
estate rental segment includes the operations of an income-producing real estate
property.
Going Concern
In light of the unprecedented instability in the financial markets and the
severe slowdown in the overall economy, we do not have adequate liquidity,
including access to the debt and equity capital markets, to operate our business
in the manner in which we have historically operated. As a result, our
short-term business focus has been to preserve our liquidity position. In April
2010, we were successful in negotiating the renewal of the bank Credit
Agreement, which was scheduled to mature on April 1, 2010. The senior lender
reduced the monthly principal payments and modified the maturity of the Credit
Agreement to May 1, 2011. In August 2010, the senior lender modified the Credit
Agreement to reduce the availability under the revolving loan from $5.0 million
to $4.3 million, amended the principal repayment schedule to defer the next
three monthly principal payments of $50,000 each until the maturity date and
removed the senior debt coverage ratio covenant test for the June 30, 2010 and
September 30, 2010 periods. The Credit Agreement is secured by substantially
all of our eligible accounts receivable, inventory and other assets. We cannot
provide any assurance that we would have sufficient cash and liquid assets to
fund normal operations during the period of time when we are required to repay
amounts outstanding under the Credit Agreement. Unless we are successful in
obtaining additional liquidity, we believe that we will not have sufficient cash
and liquid assets to fund normal operations for the next 12 months. In
addition, the Company has not made the December 1, 2009 required sinking fund
payment of $105,700 on its 9 1/2% Subordinated debentures due 2012 (the
"Debentures") and the June 1, 2010 interest payment of $50,200. In addition,
the Company did not make the March 1, 2010 and September 1, 2010 interest
payments totaling $835,600 on its 8 1/4% Limited convertible senior subordinated
notes due 2012 (the "Notes"). As a result, if the Company is unable to (i)
obtain additional liquidity for working capital, (ii) make the required sinking
fund payment or interest payments on its Debentures, (iii) make the required
interest payment on its Notes and (iv) make the required payments under the
Credit Agreement when due, there would be a significant adverse impact on the
financial position and operating results of the Company.
Moreover, because of the uncertainty surrounding our inability to obtain
additional liquidity and the potential of the noteholders and/or trustee to give
notice to the Company of a default on either the Debentures or the Notes, our
independent registered public accounting firm for the year ended December 31,
2009 issued an opinion on our consolidated financial statements that states that
the consolidated financial statements were prepared assuming we will continue as
a going concern, however the opinion further states that the uncertainty
regarding the inability to make the required sinking fund payment on the
Debentures and the interest payment on the Notes and the potential of the senior
lender accelerating the payments on the Credit Agreement due to an event of
default on the Debentures and Notes raises substantial doubt about our ability
to continue as a going concern.
14
Results of Operations
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30,
2009
Total revenues for the nine months ended September 30, 2010 decreased $4.5
million or 19.3% to $18.7 million from $23.2 million for the nine months ended
September 30, 2009, primarily due to a decrease in both the Indoor and Outdoor
display revenues.
Indoor display revenues decreased $1.2 million or 18.3%. Of this decrease,
Indoor display equipment sales decreased $522,000 or 26.7%, primarily due to a
decrease in sales from the financial services and gaming markets. Indoor
display equipment rentals and maintenance revenues decreased $693,000 or 14.8%,
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
for smaller applications. The global recession has negatively impacted Indoor
sales and rentals and maintenance revenues.
Outdoor display revenues decreased $3.3 million or 19.9%. Of this decrease,
Outdoor display equipment sales decreased $3.1 million or 22.6%, primarily in
the catalog sports and commercial markets. Outdoor display equipment rentals
and maintenance revenues decreased $206,000 or 7.2%. The global recession has
negatively impacted the Outdoor sales revenues.
LED lighting is a start-up business and did not generate any revenues for the
nine months ended September 30, 2010.
Real estate rental revenues remained level.
Total operating income (loss) for the nine months ended September 30, 2010
decreased $2.9 million to an operating loss of $1.7 million from an operating
income of $1.3 million for the nine months ended September 30, 2009, principally
due to the decline in revenues, the restructuring costs and the charge to
write-off engineering software.
Indoor display operating loss increased $1.1 million to $2.0 million in 2010
compared to $927,000 in 2009, primarily as a result of the decrease in revenues
and the $998,000 restructuring costs, offset by a $447,000 decrease in bad debt
expense and a $420,000 decrease in depreciation expense. The cost of Indoor
displays represented 92.5% of related revenues in 2010 compared to 87.3% in
2009. The Company periodically 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 decreased $283,000 or 22.7%, primarily due to the decrease in revenues.
Indoor display general and administrative expenses decreased $321,000 or 18.1%,
primarily due the decrease in the bad debt expense. The restructuring will
result in annual payroll savings of approximately $1.2 million.
Outdoor display operating income decreased $1.7 million, primarily as a result
of a decrease in
15
revenues, the $456,000 charge to write-off engineering software and the $107,000
restructuring costs, offset by a decrease in selling payroll and benefits and
related expenses. The cost of Outdoor displays represented 78.6% of related
revenues in 2010 compared to 74.6% in 2009. Outdoor display cost of equipment
sales decreased $1.9 million or 17.9%, principally due to the decrease in
volume. Outdoor display cost of equipment rentals and maintenance decreased
$40,000 or 2.3%. Outdoor display general and administrative expenses increased
$190,000 or 9.0%, primarily due to the charge to write-off engineering software,
offset by a reduction in selling payroll and benefits and related expenses.
Cost of Outdoor display equipment rentals and maintenance includes field service
expenses, plant repair costs, maintenance and depreciation. The restructuring
will result in annual payroll savings of approximately $0.7 million.
LED lighting operating loss of $146,000 is primarily due to the start-up
expenses of this new segment.
Real estate rental operating income increased $10,000 or 8.1%, primarily due to
the decrease in the cost of the rental revenues. The cost of Real estate rental
represented 22.0% of related revenues in 2010 compared to 25.0% in 2009. Real
estate rental general and administrative expenses decreased slightly.
Corporate general and administrative expenses decreased $504,000 or 17.4%. The
2010 corporate general and administrative expenses includes a reduction of
$396,000 in the Canadian currency exchange. Reductions in audit, insurance and
medical expenses and payroll contributed to the decrease this year, offset by an
increase in accrued consulting fees. The Company continues to monitor and
reduce certain overhead costs such as benefit and medical costs.
Net interest expense decreased $99,000 or 7.8%, primarily due to scheduled
payments of long-term debt as well as a reduction in the outstanding balance of
the revolving credit facility as compared to 2009.
The effective tax rate for the nine months ended September 30, 2010 and 2009 was
0.8% and 2.5%, respectively. Both the 2010 and 2009 tax rate are being affected
by the valuation allowance on the Company's deferred tax assets as a result of
reporting pre-tax losses. The income tax expense relates to the Company's
Canadian subsidiary.
Three Months Ended September 30, 2010 Compared to Three Months Ended September
30, 2009
Total revenues for the three months ended September 30, 2010 decreased $927,000
or 11.6% to $7.1 million from $8.0 million for the three months ended September
30, 2009, primarily due to a decrease in the Outdoor display sales revenues and
Indoor display equipment rentals and maintenance revenues.
Indoor display revenues decreased $449,000 or 21.9%. Of this decrease, Indoor
display equipment rentals and maintenance revenues decreased $275,000 or 17.7%,
primarily due to disconnects and
16
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 for smaller applications.
Indoor display equipment sales decreased $174,000 or 34.8%, primarily due to a
decrease in sales from the gaming market. The global recession has negatively
impacted Indoor sales and rentals and maintenance revenues.
Outdoor display revenues decreased $466,000 or 7.9%. Of this decrease, Outdoor
display equipment sales decreased $305,000 or 6.4%, primarily in the catalog
sports and commercial markets. Outdoor display equipment rentals and
maintenance revenues decreased $161,000 or 14.8%, primarily due to the continued
expected revenue decline in the older Outdoor display equipment rental and
maintenance bases acquired in the early 1990s. The global recession has
negatively impacted the Outdoor sales and rentals and maintenance revenues.
LED lighting is a start-up business and did not generate any revenues for the
three months ended September 30, 2010.
Real estate rental revenues decreased $12,000 or 18.8%, due to a reduction in
rental income from one of our tenants in our Santa Fe, New Mexico rental
property.
Total operating income for the three months ended September 30, 2010 decreased
$680,000 to $23,000 from $703,000 for the three months ended September 30, 2009,
principally due to the decline in revenues and a decrease in the gross profit
margin.
Indoor display operating loss increased $229,000 to $587,000 in 2010 compared to
$358,000 in 2009, primarily as a result of the reduction in revenues, a $63,000
restructuring charge and an increase in marketing expenses, offset by a decrease
in bad debt expense and a $145,000 decrease in depreciation expense. The cost
of Indoor displays represented 100.9% of related revenues in 2010 compared to
92.1% in 2009. The Company periodically 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 decreased $109,000 or 33.4%, primarily due to the decrease in
revenues. Indoor display general and administrative expenses decreased $10,000
or 1.9%, primarily due to an $86,000 reduction in bad debt expense, offset by a
$63,000 restructuring charge and an increase in marketing expenses.
Outdoor display operating income decreased $369,000 to $645,000 in 2010 compared
to $1.0 million in 2009, primarily as a result of the decrease in revenues. The
cost of Outdoor displays represented 77.3% of related revenues in 2010 compared
to 72.0% in 2009. Outdoor display cost of equipment sales decreased $33,000 or
0.9%, principally due to the decrease in volume, offset by an increase in
material costs. Outdoor display cost of equipment rentals and maintenance
decreased $16,000 or 2.8%. Outdoor display general and administrative expenses
decreased $47,000 or 7.4%, primarily due to reductions in selling expenses,
offset by a decrease in bad debt expense. Cost of Outdoor display equipment
rentals and maintenance includes field service expenses, plant repair costs,
maintenance and depreciation.
17
LED lighting operating loss of $68,000 is primarily due to the start-up expenses
of this new segment.
Real estate rental operating income decreased $13,000 or 28.3%, primarily due to
the decrease in rental revenues. The cost of Real estate rental represented
30.8% of related revenues in 2010 compared to 21.9% in 2009. Real estate rental
general and administrative expenses remained level.
Corporate general and administrative expenses decreased $159,000 or 15.6%. The
2010 corporate general and administrative expenses includes a reduction of
$178,000 in the Canadian currency exchange. Reductions in audit, insurance and
medical expenses and payroll contributed to the decrease, offset by an increase
in accrued consulting fees.
Net interest expense decreased $37,000 or 8.9%, primarily due to scheduled
payments of long-term debt as well as a reduction in the outstanding balance of
the revolving credit facility as compared to 2009.
The effective tax rate for the three months ended September 30, 2010 and 2009
was 1.2% and 6.8%, respectively. Both the 2010 and 2009 tax rate are being
affected by the valuation allowance on the Company's deferred tax assets as a
result of reporting pre-tax losses. The income tax expense relates to the
Company's Canadian subsidiary.
Liquidity and Capital Resources
The accompanying unaudited condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. The
Company has incurred significant recurring losses from continuing operations and
has a significant working capital deficiency. The Company incurred a net loss
of $5.3 million for the nine months ended September 30, 2010 and has a working
capital deficiency of $17.2 million as of September 30, 2010. In addition, the
Company reported a loss from continuing operations of $8.8 million for the year
ended December 31, 2009. The results for the nine months ended September 30,
2010 include a $1.1 million restructuring charge related to the relocation of
the manufacturing of the Indoor display equipment from Connecticut to Iowa, as
further discussed in Note 3 - Plan of Restructuring, and a $456,000 charge to
write-off engineering software. As further discussed in Note 7 - Long-Term
Debt, the Company did not make the December 1, 2009 required sinking fund
payment of $105,700 on its 9 1/2% Subordinated debentures due 2012 (the
"Debentures") and the June 1, 2010 interest payment of $50,200. In addition,
the Company did not make the March 1, 2010 and September 1, 2010 interest
payments totaling $835,600 on its 8 1/4% Limited convertible senior subordinated
notes due 2012 (the "Notes"). Under the terms of the indenture agreements that
govern the Debentures and Notes, the non-payments constitute events of default;
accordingly, the trustees or the holders of 25% of the outstanding Debentures
and Notes have the right to declare the outstanding principal and interest due
and payable immediately. In the event that the Company receives such notice,
the senior lender has the right to demand payment on outstanding amounts on the
Credit Agreement. As such, the outstanding Debentures, Notes and Credit
Agreement debt have been classified as Current portion of long-term debt on the
accompanying Condensed Consolidated Balance Sheets. These matters raise
18
substantial doubt about the Company's ability to continue as a going concern.
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 (which is no
longer available) to finance the redemptions of one-half of the 7 1/2%
Subordinated notes due 2006 (which were redeemed in June 2006 and no longer
outstanding), and a revolving loan of up to $4.3 million, based on eligible
accounts receivable and inventory, at a variable rate of interest of Prime plus
2.00%, with a floor of 6.00% (6.00% at September 30, 2010), which is due to
mature on May 1, 2011. In August 2010, the senior lender modified the Credit
Agreement to reduce the availability under the revolving loan from $5.0 million
to $4.3 million, amended the principal repayment schedule to defer the next
three monthly principal payments of $50,000 each until the maturity date and
removed the senior debt coverage ratio covenant test for the June 30, 2010 and
September 30, 2010 periods. As of September 30, 2010, the Company has drawn
$4.2 million against the revolving loan facility and $0.1 million was available
for additional borrowing. The Credit Agreement, as amended, requires an annual
facility fee on the unused commitment of 0.25% and requires compliance with
certain financial covenants as defined in the Credit Agreement, which include a
senior debt coverage ratio of not less than 1.25 to 1.0, a loan-to-value ratio
of not more than 50% and a $1.0 million cap on capital expenditures per quarter
beginning with the quarter ended December 31, 2010. The April 13, 2010
amendment also waived the default on the Notes and Debentures, but in the event
that the holders of the Notes or Debentures or trustees declare a default and
begins to exercise any of their rights and remedies in connection with the
non-payment defaults, this shall constitute a separate and distinct event of
default and the senior lender may exercise any and all rights and remedies it
may have. In addition, the April 13, 2010 amendment waived the default of
non-payment of certain pension plan contributions, but in the event that any
government agency takes any enforcement action or otherwise exercises any rights
and remedies it may have, this shall constitute a separate and distinct event of
default and the senior lender may exercise any and all rights and remedies it
may have. The Company's objective in regards to the Credit Agreement is to
obtain additional funds from external sources through equity or additional debt
financing and the Company is in discussions with senior lenders and others to
obtain additional borrowing capacity, which management believes will be
difficult to accomplish within the next 12 months given the current global
credit markets, economic conditions and operating results of the Company. While
management hopes it can be successful in the long run, there can be no assurance
that management will be successful in achieving these objectives. The Company
continually evaluates the need and availability of long-term capital in order to
meet its cash requirements and fund potential new opportunities. The amounts
outstanding under the Credit Agreement are collateralized by all of the Display
division assets. At September 30, 2010 and December 31, 2009, the total amount
outstanding under the Credit Agreement is classified as Current portion of
long-term debt.
On March 1, 2010, the Company refinanced its existing mortgage on its facility
located in Des Moines, Iowa, which was scheduled to mature in 2009. The
refinancing was for $650,000 at a fixed rate of interest of 6.50% payable in
monthly installments, which matures on March 1, 2015. The Company used proceeds
of $390,000 to settle the prior debt and the $260,000 balance for working
capital needs.
The Company has a $1.8 million mortgage on its real estate rental property
located in Santa Fe, New
19
Mexico at a variable rate of interest of Prime, with a floor of 6.75%, which was
the interest rate in effect at September 30, 2010, payable in monthly
installments through December 12, 2012.
On February 25, 2010, the Company took out a mortgage on land located in Silver
City, New Mexico and repaid it on August 27, 2010. The financing was for
$100,000 at a fixed rate of interest of 7.80% payable in monthly interest only
payments, which was due to mature on February 25, 2012.
The Company has generated cash provided by operating activities from operations
of $1.4 million and $4.1 million for the nine months ended September 30, 2010
and 2009, respectively. The Company has implemented several initiatives to
improve operational results and cash flows over future periods, including the
closing of the Stratford, Connecticut manufacturing facility. The Company
continues to explore ways to reduce operational and overhead costs. The Company
periodically takes steps to reduce the cost to maintain the equipment on rental
and maintenance.
The Company is dependent on future operating performance in order to generate
sufficient cash flows in order to continue to run its businesses. Future
operating performance is dependent on general economic conditions, as well as
financial, competitive and other factors beyond our control. As a result, we
have experienced a decline in our sales and lease and maintenance bases. The
cash flows of the Company are constrained, and in order to more effectively
manage its cash resources in these challenging economic times, the Company has,
from time to time, increased the timetable of its payment of some of its
payables. There can be no assurance that we will meet our anticipated current
and near term cash requirements. The Company's objective in regards to the
Credit Agreement is to obtain additional funds from external sources through
equity or additional debt financing prior to the maturity of the Credit
Agreement on May 1, 2011, and is in discussions with senior lenders and others,
but has no agreements, commitments or understanding from such senior lenders or
others with respect to obtaining any additional funds, and the current global
credit environment has been and continues to be a challenge in accomplishing
these objectives. If the Company is unable to obtain replacement financing
before the maturity of the Credit Agreement on May 1, 2011, the senior lender
has the right to call the loan. If the loan were called, the Company would have
difficulties meeting its obligations in the normal course of business. The
Company continually evaluates the need and availability of long-term capital in
order to meet its cash requirements.
The Company has $10.1 million of Notes outstanding. Interest is payable
semi-annually and the Notes may be redeemed, in whole or in part, at par. The
Company has not remitted the March 1, 2010 and September 1, 2010 semi-annual
interest payments totaling $835,600 to the trustee. The non-payments constitute
an event of default under the indenture governing the Notes and the trustee, by
notice to the Company, or the holders of 25% of the principal outstanding, by
notice to the Company and the trustee, may declare the outstanding principal
plus interest due and payable immediately. When such notice is received by the
Company, no payment shall be made by the Company to the holders or trustee until
the earlier of such non-payment event of default is cured or waived or 179 days
since receipt by the trustee of notice of such event, unless the holder of
Senior Indebtedness has accelerated the due date thereof. If the holder of
Senior Indebtedness accelerates the due date at any time, then no payment may be
made until the default is cured or waived.
20
In addition, the Company has $1.1 million of Debentures outstanding. The
Company has not remitted the December 1, 2009 annual sinking fund payment of
$105,700. Interest is payable semi-annually and the Debentures may be
redeemed, in whole or in part, at par. The Company has not remitted the $50,200
June 1, 2010 semi-annual interest payment to the trustee. The non-payments
constitute an event of default under the indenture governing the Debentures and
the trustee, by notice to the Company, or the holders of 25% of the principal
outstanding, by notice to the Company and the trustee, may declare the
outstanding principal plus interest due and payable immediately. During the
continuation of any event which, with notice or lapse of time or both, would
constitute a default under any agreement under which Senior Indebtedness is
issued, if the effect of such default is to cause or permit the holder of Senior
Indebtedness to become due prior to its stated maturity, no payment (including
any required sinking fund payment) of principal, premium or interest shall be
made on the Debentures unless and until such default shall have been remedied,
if written notice of such default has been given to the trustee by the Company
or the holder of Senior Indebtedness. The failure to make the sinking fund
payment is an event of default under the Credit Agreement and no payment can be
made to such trustee or the holders at this time as such event has not been
waived.
In March 2010, the Company submitted to the Internal Revenue Service a request
for waiver of the minimum funding standard for its defined benefit plan. The
waiver request was submitted as a result of the current economic climate and the
current business hardship that the Company is experiencing. The waiver, if
granted, will defer payment of $285,000 of the minimum funding standard for the
2009 plan year. If the waiver is not granted, the Pension Benefit Guaranty
Corporation and the Internal Revenue Service have various enforcement remedies
they can implement to protect the participant's benefits, such as termination of
the plan and require the Company to make the unpaid contributions. The senior
lender has waived the default of non-payment of certain pension plan
contributions. In the event that any government agency takes any enforcement
action or otherwise exercises any rights and remedies it may have, this shall
constitute a separate and distinct event of default and the senior lender may
exercise any and all rights and remedies it may have. At this time, the Company
is not anticipating to make its required contributions for the 2010 plan year.
Management believes that with its current cash resources and cash provided by
operations, it will have difficulty funding operations and its current
obligations over the next 12 months.
Cash and cash equivalents decreased $78,000 for the nine months ended September
30, 2010 compared to a decrease of $30,000 for the nine months ended September
30, 2009. The decrease in 2010 is primarily attributable to the investment in
equipment for rental of $1.2 million, the investment in property, plant and
equipment of $57,000 and scheduled payments of long-term debt of $680,000,
offset by cash provided by operating activities of $1.4 million and $130,000 of
borrowings on its revolving credit facility. In addition, the Company
refinanced its Des Moines mortgage, netting an additional $260,000 for working
capital needs. The decrease in 2009 is primarily attributable to the investment
in equipment for rental of $1.8 million, the investment in property, plant and
equipment of $161,000 and scheduled payments of long-term debt of $2.0 million
and $0.4 million pay down on the revolving loan facility, offset by cash
provided by operating activities of $4.1 million and the proceeds from sale of
available-for-sale securities of $135,000.
A fundamental principle of the preparation of financial statements in accordance
with accounting
21
principles generally accepted in the United States of America is the assumption
that an entity will continue in existence as a going concern, which contemplates
continuity of operations and the realization of assets and settlement of
liabilities occurring in the ordinary course of business. This principle is
applicable to all entities except for entities in liquidation or entities for
which liquidation appears imminent. In accordance with this requirement, the
Company has prepared its condensed consolidated financial statements on a going
concern basis. While we have prepared our consolidated financial statements on
a going concern basis, the continuing losses and uncertainty regarding the
inability to make the required sinking fund payment on the Debentures and the
interest payments on the Notes and the Debentures and the potential of the
senior lender accelerating the payments on the Credit Agreement due to an event
of default on the Debentures and Notes raises substantial doubt about our
ability to continue as a going concern. Therefore, we may not be able to
realize our assets and settle our liabilities in the ordinary course of
business. Our condensed consolidated financial statements included in this
quarterly report on Form 10-Q do not reflect any adjustments that might
specifically result from the outcome of this uncertainty.
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 has both variable and
fixed interest rate debt. Interest payments are projected based on actual
interest payments incurred until the underlying debts mature.
The following table summarizes the Company's fixed cash obligations as of
September 30, 2010 for the remainder of 2010 and the next four years:
---------------------------------------------------------------------------------------------
Remainder of
In thousands 2010 2011 2012 2013 2014
---------------------------------------------------------------------------------------------
Long-term debt, including interest $17,394 $ 281 $1,978 $ 89 $ 89
Employment and consulting agreement obligations 138 550 226 195 195
Operating lease payments 82 293 185 77 -
---------------------------------------
Total $17,614 $1,124 $2,389 $361 $284
---------------------------------------------------------------------------------------------
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
The Company may, from time to time, provide estimates as to future performance.
These forward-looking statements will be estimates and may or may not be
realized by the Company. The Company undertakes no duty to update such
forward-looking statements. Many factors could cause actual results to differ
from these forward-looking statements, including loss of market share through
competition, introduction of competing products by others, pressure on prices
from competition or purchasers of the Company's products, interest rate and
foreign exchange fluctuations, terrorist acts and war.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to interest rate risk on its long-term debt. The Company
manages its exposure to changes in interest rates by the use of variable and
fixed interest rate debt. In addition
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the Company is exposed to foreign currency exchange rate risk mainly as a result
of its investment in its Canadian subsidiary. The Company may, from time to
time, enter into derivative contracts to manage its interest risk. The Company
does not enter into derivatives for trading or speculative purposes. At
September 30, 2010, 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 $70,000. A 10% change in the
Canadian dollar relative to the U.S. dollar would result in a currency exchange
expense fluctuation of approximately $342,000, 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 Chief Executive Officer
and Chief Financial Officer (our principal executive officer and principal
financial officer), of the effectiveness of the design and operation of our
disclosure controls and procedures. Our Chief Executive Officer 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 Chief Executive
Officer and Chief Financial Officer) to allow timely decisions regarding
required disclosures. Based on such evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded these disclosure controls are effective
as of September 30, 2010.
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
quarter ended September 30, 2010, that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business and/or which are covered by insurance that it
believes individually and in the aggregate will not have a material adverse
effect on the consolidated financial position or operations of the Company.
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Item 1A. Risk Factors
Limited Trading Volume and Volatility of Stock Price; NYSE Amex Delisting
Our Common Stock is not widely held and the volume of trading has been
relatively low and sporadic. Accordingly, the Common Stock is subject to
increased price volatility and reduced liquidity. There can be no assurance a
more active trading market for the Common Stock will develop or be sustained if
it does develop. The limited public float of our Common Stock could cause the
market price for the Common Stock to fluctuate substantially. In addition,
stock markets have experienced wide price and volume fluctuations in recent
periods and these fluctuations often have been unrelated to the operating
performance of the specific companies affected. In addition, the volatility and
liquidity of our stock could be impacted by the delisting of our Common Stock
from the NYSE Amex. Any of these factors could adversely affect the market
price of the Common Stock.
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. The risk factors identified in our Annual Report on Form 10-K for
the year ended December 31, 2009 should be carefully considered.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
As disclosed in Note 7 - Long-Term Debt to the condensed consolidated financial
statements, the Company has $10.1 million of 8 1/4% Limited convertible senior
subordinated notes due 2012 (the "Notes") which are no longer convertible into
common shares; interest is payable semi-annually and the Notes may be redeemed,
in whole or in part, at par. The Company did not remit the March 1, 2010 and
September 1, 2010 semi-annual interest payments totaling $835,600 to the
trustee. The non-payments constitute an event of default under the indenture
governing the Notes and the trustee, by notice to the Company, or the holders of
25% of the principal outstanding, by notice to the Company and the trustee, may
declare the outstanding principal plus interest due and payable immediately.
When such notice is received by the Company, no payment shall be made by the
Company to the holders or trustee until the earlier of such non-payment event of
default is cured or waived or 179 days since receipt by the trustee of notice of
such event, unless the holder of Senior Indebtedness has accelerated the due
date thereof. If the holder of Senior Indebtedness accelerates the due date at
any time, then no payment may be made until the default is cured or waived. At
September 30, 2010, the total amount outstanding is classified as Current
portion of long-term debt.
Also disclosed in Note 7 - Long-Term Debt, the Company has $1.1 million of 9
1/2% Subordinated debentures due 2012 (the "Debentures") which are due in annual
sinking fund payments of $105,700
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beginning in 2009, which payment has not been remitted by the Company, with the
remainder due in 2012; interest is payable semi-annually and the Debentures may
be redeemed, in whole or in part, at par. The Company did not remit the June 1,
2010 semi-annual interest payment of $50,200 to the trustee. The non-payments
constitute an event of default under the Indenture governing the Debentures and
the trustee, by notice to the Company, or the holders of 25% of the principal
outstanding, by notice to the Company and the trustee, may declare the
outstanding principal plus interest due and payable immediately. During the
continuation of any event which, with notice or lapse of time or both, would
constitute a default under any agreement under which Senior Indebtedness is
issued, if the effect of such default is to cause or permit the holder of Senior
Indebtedness to become due prior to its stated maturity, no payment (including
any required sinking fund payment) of principal, premium or interest shall be
made on the Debentures unless and until such default shall have been remedied,
if written notice of such default has been given to the trustee by the Company
or the holder of Senior Indebtedness. The failure to make the sinking fund
payment is an event of default under the Credit Agreement and no payment can be
made to the trustee or the holders at this time as such event has not been
waived. At September 30, 2010, the total amount outstanding is classified as
Current portion of long-term debt.
Item 4. (Removed and Reserved)
Item 5. Other Information
The Company received a letter dated November 10, 2010 from NYSE Amex LLC (the
"Exchange") informing the Company that the Listings Qualifications Panel of the
Exchange's Committee on Securities (the "Panel") has affirmed the determination
to delist the Common Stock of the Company as of November 17, 2010. The Panel
stated that it agreed with the determination of the staff of the compliance
department of the Exchange that the Company does not meet the Exchange's
requirement of at least $6.0 million of stockholders' equity and the Company is
currently financially impaired given its default under numerous obligations and
working capital deficit.
The Company may request a review by the full Committee on Securities within 15
calendar days from November 10, 2010, however, such a request will not operate
as a stay of the Panel's decision. The Exchange has infromed the Company,
therefore, that it will suspend trading in the Company's Common Ctock as soon as
practicable in accordance with the Exchange's Company Guide (the "Company
Guide") and will file an application with the Securities and Exchange Commission
to strike the Company's Common Stock from listing and registration on the
Exchange when and if authorized in accordance with the Company Guide.
The Company is currently considering all of its options in light of the Panel's
decision, including but not limited to, requesting that the full Committee on
Securities review the decision of the Panel.
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Item 6. Exhibits
31.1 Certification of Jean-Marc Allain, President and 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 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 Jean-Marc Allain, President and 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 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)
by /s/ Angela D. Toppi
-----------------------------
Angela D. Toppi
Executive Vice President and
Chief Financial Officer
by /s/ Todd Dupee
-----------------------------
Todd Dupee
Vice President and Controller
Date: November 15, 2010
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