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, 2004
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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
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Richards Avenue, Norwalk, CT 06856-5090
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(Address of principal executive offices) (Zip code)
(203) 853-4321
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Date Class Shares Outstanding
- -------- ------------------------------ ------------------
11/11/04 Common Stock - $1.00 Par Value 973,217
11/11/04 Class B Stock - $1.00 Par Value 287,505
(Immediately convertible into a like
number of shares of Common Stock.)
TRANS-LUX CORPORATION AND SUBSIDIARIES
Table of Contents
Page No.
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Part I - Financial Information (unaudited)
Item 1. Consolidated Balance Sheets - September 30, 2004
and December 31, 2003 1
Consolidated Statements of Operations - Three and Nine Months
Ended September 30, 2004 and 2003 2
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2004 and 2003 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibits
Part I - Financial Information
TRANS-LUX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30 December 31
In thousands, except share data 2004 2003
- -----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,082 $ 12,022
Available-for-sale securities 532 393
Receivables, less allowance of $955 - 2004 and $1,092 - 2003 7,418 5,170
Unbilled receivables 1,133 729
Inventories 6,160 5,647
Prepaids and other 596 956
Assets of discontinued operation - 1,930
-------- --------
Total current assets 26,921 26,847
-------- --------
Rental equipment 92,864 89,560
Less accumulated depreciation 54,396 48,654
-------- --------
38,468 40,906
-------- --------
Property, plant and equipment 37,566 41,742
Less accumulated depreciation and amortization 9,288 11,763
-------- --------
28,278 29,979
Goodwill 1,004 1,035
Other assets 6,206 3,255
-------- --------
TOTAL ASSETS $100,877 $102,022
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,339 $ 1,535
Accrued liabilities 5,898 6,578
Current portion of long-term debt 3,170 2,637
Liabilities of discontinued operation - 414
-------- --------
Total current liabilities 11,407 11,164
-------- --------
Long-term debt:
7 1/2% convertible subordinated notes due 2006 12,309 30,177
8 1/4% limited convertible senior subordinated notes due 2012 17,868 -
9 1/2% subordinated debentures due 2012 1,057 1,057
Notes payable 23,584 29,271
-------- --------
54,818 60,505
Deferred credits, deposits and other 4,497 2,052
Deferred income taxes 5,070 4,265
-------- --------
Stockholders' equity:
Capital stock
Common - $1 par value - 5,500,000 shares authorized
2,452,900 shares issued in 2004 and 2003 2,453 2,453
Class B - $1 par value - 1,000,000 shares authorized
287,505 shares issued in 2004 and 2003 287 287
Additional paid-in-capital 13,901 13,901
Retained earnings 21,313 20,490
Accumulated other comprehensive loss (1,031) (1,258)
-------- --------
36,923 35,873
Less treasury stock - at cost - 1,479,714 and 1,479,688 shares
in 2004 and 2003 (excludes additional 287,505 shares held
in 2004 and 2003 for conversion of Class B stock) 11,838 11,837
-------- --------
Total stockholders' equity 25,085 24,036
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $100,877 $102,022
======== ========
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The accompanying notes are an integral part of these consolidated financial statements.
1
TRANS-LUX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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In thousands, except per share data 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Revenues:
Equipment rentals and maintenance $ 4,211 $ 4,439 $12,830 $13,872
Equipment sales 6,605 6,462 16,707 19,211
Theatre receipts and other 3,249 3,628 9,969 10,170
------- ------- ------- -------
Total revenues 14,065 14,529 39,506 43,253
------- ------- ------- -------
Operating expenses:
Cost of equipment rentals and maintenance 3,386 3,186 9,930 10,190
Cost of equipment sales 4,363 4,199 11,241 13,831
Cost of theatre receipts and other 2,511 2,661 7,460 7,644
------- ------- ------- -------
Total operating expenses 10,260 10,046 28,631 31,665
------- ------- ------- -------
Gross profit from operations 3,805 4,483 10,875 11,588
General and administrative expenses 2,843 3,538 9,627 12,015
Interest income 80 - 132 33
Interest expense (952) (977) (2,841) (2,976)
Gain on sale of assets - - 2,536 4,207
Other income (expense) 5 20 49 (109)
------- ------- ------- -------
Income (loss) from continuing operations before income taxes,
income from joint venture and discontinued operation 95 (12) 1,124 728
Provision for income taxes 64 89 598 747
Income from joint venture 48 162 303 423
------- ------- ------- -------
Income from continuing operations 79 61 829 404
Income from discontinued operation, net of income taxes - 42 127 534
------- ------- ------- -------
Net income $ 79 $ 103 $ 956 $ 938
======= ======= ======= =======
Earnings per share continuing operations:
Basic $0.06 $0.05 $0.66 $0.32
Diluted $0.06 $0.05 $0.50 $0.32
Earnings per share discontinued operation:
Basic $0.00 $0.03 $0.10 $0.42
Diluted $0.00 $0.01 $0.03 $0.16
Total earnings per share:
Basic $0.06 $0.08 $0.76 $0.74
Diluted $0.06 $0.08 $0.53 $0.54
Average common shares outstanding:
Basic 1,261 1,261 1,261 1,261
Diluted 4,138 3,420 3,863 3,420
Cash dividends per share:
Common stock $0.035 $0.035 $0.105 $0.105
Class B stock $0.0315 $0.0315 $0.0945 $0.0945
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
2
TRANS-LUX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2004 2003
- -------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 956 $ 938
Income from discontinued operation 127 534
-------- --------
Income from continuing operations 829 404
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 7,258 7,390
Income from joint venture (303) (423)
Deferred income taxes 810 663
Gain on sale of assets (2,536) (4,207)
Write down of available-for-sale securities - 129
Gain on sale of securities (11) -
Changes in operating assets and liabilities:
Receivables (2,652) 180
Inventories (513) 970
Prepaids and other assets (145) (659)
Accounts payable and accruals 135 (960)
Deferred revenue, deposits and other 228 (1,105)
-------- --------
Net cash provided by operating activities 3,100 2,382
-------- --------
Cash flows from investing activities:
Equipment for rental (3,304) (2,535)
Purchases of property, plant and equipment (1,958) (226)
Purchases of available-for-sale securities (239) -
Proceeds from sale of securities 100 -
Proceeds from joint venture 150 550
Proceeds from sale of assets 7,028 6,245
-------- --------
Net cash provided by investing activities 1,777 4,034
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt 19,582 17,070
Payments of long-term debt (24,736) (19,920)
Cash dividends (133) (133)
Purchase of treasury stock (1) -
-------- --------
Net cash used in financing activities (5,288) (2,983)
-------- --------
Net cash provided by (used in) discontinued operation (529) 132
-------- --------
Net increase (decrease) in cash and cash equivalents (940) 3,565
Cash and cash equivalents at beginning of year 12,022 8,270
-------- --------
Cash and cash equivalents at end of period $ 11,082 $ 11,835
======== ========
- -------------------------------------------------------------------------------------------------------------
Interest paid $ 2,405 $ 2,181
Interest received 110 129
Income taxes paid (refunded) 29 (189)
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
3
TRANS-LUX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(unaudited)
Note 1 - Basis of Presentation
Financial information included herein is unaudited, however, such information
reflects all adjustments which are, in the opinion of management, necessary for
the fair presentation of the consolidated financial statements for the interim
periods. The results for the interim periods are not necessarily indicative of
the results to be expected for the full year. It is suggested that the
September 30, 2004 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, 2003.
Certain reclassifications of the prior year's amounts have been made to conform
to the current year's presentation.
In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 (revised December 2003)"
("FIN 46R"), which addresses how a business enterprise should evaluate whether
it has a controlling interest in an entity through means other than voting
rights and accordingly should consolidate the entity. Before concluding that it
is appropriate to apply the Accounting Research Bulletin No. 51 voting interest
consolidation model to an entity, an enterprise must first determine that the
entity is not a variable interest entity. The adoption of FIN 46R on March 31,
2004, did not have a material impact on the Company's consolidated financial
statements.
The Company records compensation expense for its stock-based employee
compensation plans in accordance with the intrinsic-value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Intrinsic value is the amount by which the market price of the
underlying stock exceeds the exercise price of the stock option or award on the
measurement date, generally the date of grant. The Company's options are issued
with a strike price equal to the market price of the underlying stock at date of
grant and, accordingly, no compensation cost has been recognized for its stock
option plans. In December 2002, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure," that amends SFAS No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation." The following table illustrates the
effect on net income and earnings per share for the three and nine months ended
September 30, 2004 and 2003 if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation:
Three months ended September 30 Nine months ended September 30
In thousands, except per share data 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------
Net income, as reported $ 79 $ 103 $ 956 $ 938
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of tax 3 1 9 13
----- ----- ----- -----
Pro forma net income $ 76 $ 102 $ 947 $ 925
Earnings per share: ----- ----- ----- -----
As reported
Basic $0.06 $0.08 $0.76 $0.74
----- ----- ----- -----
Diluted $0.06 $0.08 $0.53 $0.54
----- ----- ----- -----
Pro forma
Basic $0.06 $0.08 $0.75 $0.73
----- ----- ----- -----
Diluted $0.06 $0.08 $0.53 $0.53
----- ----- ----- -----
4
Note 2 - Inventories
Inventories consist of the following:
September 30 December 31
In thousands 2004 2003
- --------------------------------------------------------------------
Raw materials and spare parts $4,114 $3,767
Work-in-progress 1,391 1,234
Finished goods 655 646
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$6,160 $5,647
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Note 3 - Long-Term Debt
During the nine months ended September 30, 2004, long-term debt, including
current portion, decreased $5.2 million, primarily due to the use of the
proceeds received from the sale of the Company's Australian subsidiary and from
the sale of the Company's Norwalk, Connecticut headquarters to pay down debt and
regular scheduled payments of long-term debt, offset by $1.7 million of advances
on a construction loan to expand the Company's movie theatre in Durango,
Colorado.
During the first quarter of 2003, the Company completed a refinancing of its
senior debt with two term loans totaling $17.0 million and a revolving credit
facility of up to $5.0 million at variable interest rates ranging from LIBOR
plus 1.75% to Prime plus 0.25% (3.41% at September 30, 2004) and maturing
October 1, 2005. The Company is in discussions with lenders to seek longer term
financing of its senior debt. At September 30, 2004, the entire revolving
credit facility was available as none had been drawn. The bank 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 1.0 to 1.0, a total funded debt ratio of 5.0 to 1.0, a
leverage ratio of 3.0 to 1.0 and maintaining a tangible net worth of not less
than $20.0 million, plus 50% of annual net income. At September 30, 2004, the
Company was in compliance with such financial covenants.
On April 14, 2004, the Company successfully completed its offer to exchange
$1,000 principal amount of its new 8 1/4% Limited Convertible Senior
Subordinated Notes due 2012 ("New Notes") for each $1,000 principal amount of
its 7 1/2% Convertible Subordinated Notes due 2006 ("Old Notes"). The exchange
offer commenced March 2, 2004 and expired on April 14, 2004. A total of $17.9
million principal amount of Old Notes were exchanged, leaving $12.3 million
principal amount of Old Notes outstanding. The New Notes provide for a higher
interest rate, have a longer term, will be convertible into Common Stock at a
lower conversion price of $9.00 per share until March 1, 2007 and are senior to
the Old Notes and the Company's 9 1/2% Subordinated Debentures due 2012.
Note 4 - Sale of Assets and Discontinued Operation
Sale of Assets
On March 28, 2003, the Company sold its custom sports business located in Logan,
Utah for $7.9 million, of which $3.7 million was paid in cash and $4.2 million
was in assumption of two Industrial Revenue Bonds. The Company recorded a gain
of approximately $876,000, net of tax, on the sale. As part of the sale, the
Company recorded bonuses to certain continuing employees of $75,000, which was
included in the recorded gain. As a result of the sale, the Company is
reporting lower revenues. The operations and cash flows of the custom sports
business were not clearly distinguishable from other components of the outdoor
display segment and therefore have not been reported as a discontinued
operation.
5
On June 3, 2004, the Company entered into a sale/leaseback of its Norwalk,
Connecticut headquarters for a sales price of $8.1 million, of which $5.5
million was paid in cash and the balance of $2.6 million is payable, with
interest, four years from closing. The Company leased back the property for
four years, after which a three-year lease for part of the building will take
effect. In accordance with SFAS No. 28 "Accounting for Sales with Leasebacks,"
the Company recorded a gain of approximately $2.5 million ($1.5 million, net of
tax), on the sale and deferred $2.2 million of the gain for a total gain of $4.7
million. The deferred gain represents the present value of the lease payments
over the term of the leaseback and will be recognized proportionately to the
rental charge over the next seven years. The $2.6 million balance of the
purchase price, included in other assets in the consolidated balance sheets, is
secured by a purchase money mortgage subordinate to a $3.5 million first
mortgage in favor of the purchaser's lender. In conjunction with the sale, the
Company prepaid $4.9 million of its long-term debt with its senior lenders.
Discontinued Operation
On April 28, 2004, the Company completed an agreement to sell the capital stock
of its Australian subsidiary, Trans-Lux Pty Limited ("PTY"), for $1.7 million in
cash, and the operating results were assumed by the buyer effective as of
February 29, 2004. In accordance with the provisions of SFAS No. 144,
"Accounting For the Impairment or Disposal of Long-lived Assets," the Company
has accounted for PTY as a discontinued operation. The consolidated financial
statements reflect the assets and liabilities of the discontinued operation and
the operations for the prior periods are reported as a discontinued operation.
The following table presents the financial results of the discontinued
operation:
Three months ended
September 30 Nine months ended September 30
In thousands 2003 2004 2003
- ---------------------------------------------------------------------------------------------------
Revenues $ 319 $ 135 $ 958
Operating expenses 181 126 575
----- ----- -----
Gross profit 138 9 383
General and administrative expenses (134) (126) (353)
Foreign currency gain 39 141 681
Interest income 17 3 52
Gain on sale of assets - 112 -
Income tax provision (18) (12) (229)
----- ----- -----
Income from discontinued operation $ 42 $ 127 $ 534
----- ----- -----
Earnings per share:
Basic $0.03 $0.10 $0.42
----- ----- -----
Diluted $0.01 $0.03 $0.16
----- ----- -----
The following table presents the principal assets and liabilities of the
discontinued operation:
December 31
In thousands 2003
- -----------------------------------------------------------------------
Accounts receivable $ 870
Inventories 114
Property and equipment, net 690
Other assets 256
------
Total assets of discontinued operation 1,930
Accrued expenses, accounts and income taxes payable 414
Intercompany payable (eliminated in consolidation) $1,924
6
Note 5 - Reporting Comprehensive Income
Total comprehensive income for the three and nine months ended September 30,
2004 and 2003 is as follows:
Three months ended September 30 Nine months ended September 30
In thousands 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 79 $103 $ 956 $ 938
---- ---- ------ ------
Other comprehensive income:
Unrealized foreign currency translation gain (loss) 127 (3) 233 131
Unrealized holding gain (loss) on securities 26 (26) (11) 27
Reclassification adjustment on securities - - - 129
Income tax benefit (expense) related to other
comprehensive income items (11) 16 5 (56)
---- ---- ------ ------
Total other comprehensive income (loss), net of taxes 142 (13) 227 231
---- ---- ------ ------
Comprehensive income $221 $ 90 $1,183 $1,169
---- ---- ------ ------
Note 6 - Business Segment Data
The Company evaluates segment performance and allocates resources based upon
operating income. The Company's operations are managed in three reportable
business segments. The Display Division comprises two operating segments,
Indoor display and Outdoor display. Both design, produce, lease, sell and
service large-scale, multi-color, real-time electronic information displays.
Both operating segments are conducted on a global basis, primarily through
operations in the U.S. The Company also has operations in Canada. The Indoor
display and Outdoor display segments are differentiated primarily by the
customers they serve. The Entertainment/real estate segment owns a chain of
motion picture theatres in the western Mountain States and income-producing real
estate properties. Segment operating income is shown after general and
administrative expenses directly associated with the segment and includes the
operating results of the joint venture activities. Corporate general and
administrative items relate to costs that are not directly identifiable with a
segment. There are no intersegment sales.
Information about the Company's operations in its three business segments for
the three and nine months ended September 30, 2004 and 2003 is as follows:
Three months ended September 30 Nine months ended September 30
In thousands 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Revenues:
Indoor display $ 4,666 $ 4,198 $13,591 $13,767
Outdoor display 6,150 6,703 15,946 (1) 19,316
Entertainment/real estate 3,249 3,628 9,969 10,170
------- ------- ------- -------
Total revenues 14,065 14,529 39,506 43,253
------- ------- ------- -------
Operating income:
Indoor display 749 511 2,285 1,931
Outdoor display 462 1,065 619 293
Entertainment/real estate 658 946 2,404 2,369
------- ------- ------- -------
Total operating income from continuing operations 1,869 2,522 5,308 4,593
Other income 5 20 2,585 4,098
Corporate general and administrative expenses (859) (1,415) (3,757) (4,597)
Interest expense-net (872) (977) (2,709) (2,943)
Income tax provision (64) (89) (598) (747)
------- ------- ------- -------
Income from continuing operations 79 61 829 404
Income from discontinued operation, net
of income taxes - 42 127 534
------- ------- ------- -------
Net income $ 79 $ 103 $ 956 $ 938
------- ------- ------- -------
(1) Decrease primarily related to the sale of the custom sports business in
March 2003.
7
Note 7 - Components of Net Periodic Pension Cost
In December 2003, the FASB issued SFAS No. 132R, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132R"). SFAS 132R revises
the financial statement disclosures required for pension and postretirement
obligations, including new interim disclosures. As of December 31, 2003, the
benefit service under the pension plan has been frozen and, accordingly, there
is no service cost for the period ended September 30, 2004.
The following table presents the components of net periodic pension cost:
Three months ended September 30 Nine months ended September 30
In thousands 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Service cost $ - $ 127 $ - $ 381
Interest cost 152 148 456 444
Expected return on plan assets (148) (134) (444) (402)
Amortization of prior service cost 5 5 15 15
Amortization of net actuarial loss 61 55 183 165
Curtailment - 16 - 48
----- ----- ----- -----
Net periodic pension cost $ 70 $ 217 $ 210 $ 651
----- ----- ----- -----
The Company previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute $166,000 to its pension plan
in 2004. The Company had elected to contribute an increased amount of $524,000,
which was contributed in July 2004.
Note 8 - Legal Proceedings and Claims
The Company is subject to legal proceedings and claims, which arise in the
ordinary course of its business. The Company is not a party to any pending
legal proceedings and claims that it believes will have a material adverse
effect on the consolidated financial position or operations of the Company.
Note 9 - Joint Venture
The Company has a 50% ownership in a joint venture partnership, MetroLux
Theatres ("MetroLux"), accounted for by the equity method. The following
results of operations summary information relates to MetroLux for the three and
nine months ended September 30, 2004 and 2003, and summary balance sheet
information relates to MetroLux as of September 30, 2004 and December 31, 2003.
Three months ended September 30 Nine months ended September 30
In thousands 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Revenues $ 778 $1,085 $2,666 $2,933
Gross profit 412 624 1,485 1,688
Net income 96 324 606 847
Company's share of partnership net income 48 162 303 423
September 30 December 31
In thousands 2004 2003
- ---------------------------------------------------------------------------
Current assets $ 377 $ 341
Noncurrent assets 3,830 3,937
------ ------
Total assets 4,207 4,278
------ ------
Current liabilities 403 653
Noncurrent liabilities 1,731 1,859
------ ------
Total liabilities 2,134 2,512
------ ------
Company's equity in partnership net assets $1,036 $ 888
------ ------
The Company's equity in partnership net assets is reflected in other assets in
the consolidated balance sheets.
8
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, gaming, government and corporate markets. The Outdoor display
segment includes worldwide revenues and related expenses from the rental,
maintenance and sale of outdoor displays. Included in this segment are the
custom sports (which the Company sold during the first quarter of 2003), catalog
sports, retail and commercial markets. In addition, on April 28, 2004, the
Company sold its Australian operations, effective as of February 29, 2004. The
Company has accounted for the Australian operations as a discontinued operation.
Accordingly, the consolidated financial statements reflect the assets and
liabilities of the discontinued operation and the operations for the current and
prior periods are reported as a discontinued operation (see Note 4). Also, on
June 3, 2004, the Company entered into a sale/leaseback of its Norwalk,
Connecticut headquarters. The Entertainment/Real Estate segment includes the
operations of the motion picture theatres in the western Mountain States and
income-producing real estate properties.
Results of Operations
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30,
2003
Total revenues for the nine months ended September 30, 2004 decreased 8.7% to
$39.5 million from $43.3 million for the nine months ended September 30, 2003,
principally due to the sale of the custom sports business during the first
quarter of 2003. As a result of the sale, the Company is reporting lower
revenues (see Note 4). The operations and cash flows of the custom sports
business were not clearly distinguishable from other components of the outdoor
display segment and therefore have not been reported as a discontinued
operation.
Indoor display revenues decreased $176,000 or 1.3%. Of this decrease, Indoor
display equipment rentals and maintenance revenues decreased $579,000 or 6.4%,
primarily due to disconnects and non-renewals of equipment on rental and
maintenance on existing contracts in the financial services and energy markets,
offset by an increase in Indoor display equipment sales of $403,000 or 8.5%, due
to an increase in sales in the gaming market. The financial services market
continues to be negatively impacted due to the downturn in the economy,
resulting in consolidation within that industry. Although the market conditions
appear to be improving, installations of new equipment tend to lag any economic
turnaround.
9
Outdoor display revenues decreased $3.4 million or 17.4%. Of this decrease,
Outdoor display equipment sales decreased $2.9 million or 20.1%, primarily in
the custom outdoor sports sector, which decrease was primarily a result of the
sale of the custom sports business during the first quarter of 2003 and a
decrease in catalog sports sales. Outdoor display equipment rentals and
maintenance revenues decreased $464,000 or 9.5%, primarily due to the continued
expected revenue decline in the outdoor equipment rentals and maintenance bases
previously acquired, although the decline has lessened.
Entertainment/real estate revenues decreased $201,000 or 2.0%. Gross box office
and concession revenue is ahead of last year, but is offset by a decrease in
film booking income. In April 2004, the Company expanded one of its Durango,
Colorado theatres from a five-plex to a seven-plex. In January 2003, the
Company closed its older non-profitable Lake Dillon theatre for a net payment of
$34,000 to the landlord. In connection with its newer six-plex theatre in
Dillon, Colorado, which currently is in the process of a two screen expansion,
the Company entered into a 15-year non-compete agreement for $450,000, which was
paid in 2003.
Total operating income for the nine months ended September 30, 2004 increased
15.6% to $5.3 million from $4.6 million for the nine months ended September 30,
2003, principally due to the sale of the custom sports business during the first
quarter of 2003, and certain cost savings measures initiated by the Company
during the second quarter of 2003.
Indoor display operating income increased $354,000 or 18.3%, primarily as a
result of the increase in revenues in the gaming market combined with lower
general and administrative costs. The cost of indoor displays represented 61.9%
of related revenues in 2004 compared to 60.2% in 2003. The cost of indoor
displays as a percentage of related revenues increased primarily due to the
relationship between field service costs of equipment rentals and maintenance
decreasing and the revenues from indoor equipment rentals and maintenance also
decreasing but not at the same rate. The Company initiated certain cost saving
measures in 2003 to reduce field service costs and continues to strategically
address the field service costs. Indoor display cost of equipment sales
increased $123,000 or 1.5%, primarily due to volume mix. Indoor display cost of
equipment rentals and maintenance remained constant, largely due to certain cost
savings measures initiated during the second quarter of 2003, such as a
reduction in field service costs payroll, benefits and overhead expenses.
Indoor display general and administrative expenses decreased $653,000 or 18.4%
due to continued reduction of certain overhead costs such as sales salaries and
travel expenses. Cost of indoor equipment rentals and maintenance includes
field service expenses, plant repair costs, maintenance and depreciation.
Outdoor display operating income increased $326,000 to $619,000 from $293,000,
primarily as a result of the sale of the custom outdoor sports business, which
was sold during the first quarter of 2003. The cost of outdoor displays
represented 80.0% of related revenues in 2004 compared to 81.5% in 2003. This
improvement is due to a reduction in field service costs of approximately
$277,000, the sale of the custom outdoor sports business and a reduction in the
cost of raw materials. Outdoor display cost of equipment sales decreased $3.0
million or 18.9%, principally due to the decrease in volume, as a result of the
sale of the custom sports business during the first quarter of 2003. Outdoor
display cost of equipment rentals and maintenance decreased $261,000 or 5.8%,
primarily due to a decrease in field service costs payroll, benefits and
overhead expenses. Outdoor display general and administrative expenses
decreased $723,000 or 22.0%, primarily due to sale of the custom sports business
during the first quarter of 2003 and collections of previously reserved accounts
receivable. Cost of outdoor equipment rentals and maintenance includes field
service expenses, plant repair costs, maintenance and depreciation.
10
Entertainment/real estate operating income increased $35,000 or 1.5%, primarily
due to a decrease in operating expenses. The cost of entertainment/real estate
represented 74.8% of related revenues in 2004 compared to 75.2% in 2003. This
improvement is due to reduction of certain operating expenses such as payroll
and benefits. Cost of entertainment/real estate, which includes film rental
costs and depreciation expense, decreased $184,000 or 2.4%. Entertainment/real
estate general and administrative expenses decreased $172,000 due to continued
reduction of certain overhead costs such as salaries and travel expenses.
Corporate general and administrative expenses decreased $840,000 or 18.3%,
principally resulting from certain cost saving measures initiated during the
second quarter of 2003 and reduction in certain overhead costs primarily in
pension and benefit costs offset by a $81,000 positive impact of the effect of
foreign currency rates in 2004 compared to a $132,000 positive impact in 2003.
Net interest expense decreased $234,000, which is primarily attributable to a
decrease in long-term debt due to the assumption of debt by the purchaser of the
custom sports business, use of proceeds from the sale of its Australian
subsidiary in April 2004, the sale/leaseback of its headquarters facility in
June 2004 and regular scheduled payments of long-term debt offset by an increase
in variable interest rates. The gain on sale of assets in 2004 relates to the
sale/leaseback of its Norwalk, Connecticut headquarters. The gain on sale of
assets in 2003 relates to the sale of the custom sports business and the sale of
vacant land, also in Norwalk, Connecticut. The income from joint venture
relates to the operations of the theatre joint venture, MetroLux Theatres, in
Loveland, Colorado, which decreased due to additional competition in the area.
The effective tax rate for the nine months ended September 30, 2004 and 2003 was
41.9% and 64.9%, respectively. The higher rate in 2003 was due principally to
the non-deductibility of a $229,000 write-off of goodwill resulting from the
sale of the custom sports business.
Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003
Total revenues for the three months ended September 30, 2004 decreased 3.2% to
$14.1 million from $14.5 million for the three months ended September 30, 2003.
Indoor display revenues increased $468,000 or 11.1%. Of this increase, Indoor
display equipment sales increased $594,000 or 42.6%, due to an increase in sales
in the gaming market offset by a decrease in Indoor display equipment rentals
and maintenance revenues of $126,000 or 4.5%, primarily due to disconnects and
non-renewals of equipment on rental and maintenance on existing contracts in the
financial services and energy markets. The financial services market continues
to be negatively impacted due to the downturn in the economy, resulting in
consolidation within that industry. Although the market conditions appear to be
improving, installations of new equipment tend to lag any economic turnaround.
Outdoor display revenues decreased $553,000 or 8.3%. Of this decrease, Outdoor
display equipment sales decreased $450,000 or 8.9%, primarily in the catalog
sports business, although the backlog remains strong. Outdoor display equipment
rentals and maintenance revenues decreased $103,000 or 6.3%, primarily due to
the continued expected revenue decline in the outdoor equipment rentals and
maintenance bases previously acquired, although the decline has lessened.
Entertainment/real estate revenues decreased $379,000 or 10.3%. This decrease
is primarily from a decrease in overall admissions and concessions affected by
not as many strong film releases toward the end of the quarter.
11
Total operating income for the three months ended September 30, 2004 decreased
$653,000 to $1.9 million from $2.5 million for the three months ended September
30, 2003, principally due to a decrease in outdoor catalog sports sales and
lower theatre admissions offset by an increase in indoor display gaming market.
Indoor display operating income increased $238,000 or 46.6%, primarily as a
result of an increase in revenues in the gaming market. The cost of indoor
displays represented 64.9% of related revenues in 2004 compared to 64.5% in
2003. The Company initiated certain cost saving measures in 2003 to reduce
field service costs and continues to strategically address the field service
costs. Indoor display cost of equipment sales increased $270,000 or 32.8%,
primarily due to volume mix. Indoor display cost of equipment rentals and
maintenance increased slightly. Indoor display general and administrative
expenses decreased $88,000 or 9.0% due to continued reduction of certain
overhead costs such as sales salaries and travel expenses. Cost of indoor
equipment rentals and maintenance includes field service expenses, plant repair
costs, maintenance and depreciation.
Outdoor display operating income decreased $603,000 to $462,000 from $1.1
million. The principal factor contributing to such decrease was a reduction in
Outdoor display equipment sales in the catalog sports market and a decrease in
profit margins of the outdoor display business. The cost of outdoor displays
represented 76.8% of related revenues in 2004 compared to 69.8% in 2003.
Outdoor display cost of equipment sales decreased $106,000 or 3.1%, principally
due to the decrease in volume. Outdoor display cost of equipment rentals and
maintenance increased $152,000 or 11.7%, primarily due to an increase in field
service costs, payroll, benefits and overhead expenses. Outdoor display general
and administrative expenses remained constant. Cost of outdoor equipment
rentals and maintenance includes field service expenses, plant repair costs,
maintenance and depreciation.
Entertainment/real estate operating income decreased $288,000 or 30.4%,
primarily due to a decrease in overall admissions and an increase in operating
expenses. The cost of entertainment/real estate represented 77.3% of related
revenues in 2004 compared to 73.3% in 2003. Cost of entertainment/real estate,
which includes film rental costs and depreciation expense, decreased $150,000 or
5.6% primarily due to film rental costs. Entertainment/real estate general and
administrative expenses decreased $55,000 due to continued reduction of certain
overhead costs such as salaries and travel expenses.
Corporate general and administrative expenses decreased $556,000 or 39.3%,
principally resulting from a reduction in certain overhead costs primarily in
pension and benefit costs and a $169,000 positive impact of the effect of
foreign currency rates in 2004 compared to a $6,000 positive impact in 2003.
Net interest expense decreased $105,000, which is primarily attributable to a
decrease in long-term debt due to the use of proceeds from the sale of its
Australian subsidiary in April 2004, the sale/leaseback of its headquarters
facility in June 2004 and regular scheduled payments of long-term debt offset by
an increase in variable interest rates. The income from joint venture relates
to the operations of the theatre joint venture, MetroLux Theatres, in Loveland,
Colorado.
The effective tax rate for the three months ended September 30, 2004 and 2003
was 44.8% and 59.3%, respectively. The 2003 rate was due principally to an
increase in the provision for foreign and state taxes.
Liquidity and Capital Resources
The regular quarterly cash dividend for the third quarter of 2004 of $0.035 per
share on the Company's Common Stock and $0.0315 per share on the Company's Class
B Stock was declared by the Board of Directors on September 23, 2004, payable to
stockholders of record as of October 8, 2004, and was paid October 29, 2004.
12
During the first quarter of 2003, the Company refinanced its senior debt. The
refinancing consisted of two term loans totaling $17.0 million and a revolving
line of credit of up to $5.0 million at variable interest rates ranging from
LIBOR plus 1.75% to Prime plus 0.25% and matures October 1, 2005. The Company
is in discussions with lenders to seek longer term financing of its senior debt.
At September 30, 2004, $9.3 million was outstanding under the term loans and the
entire revolving credit facility was available as none had been drawn. The bank
credit agreement contains certain financial covenants, which include a fixed
charge coverage ratio of 1.0 to 1.0, a total funded ratio of 5.0 to 1.0, a
leverage ratio of 3.0 to 1.0 and maintaining a tangible net worth of not less
than $20.0 million, plus 50% of net income. At September 30, 2004, the Company
was in compliance with such financial covenants. The Company continues to
evaluate the need and availability of long-term capital.
The Company successfully completed its offer to exchange $1,000 principal amount
of its new 8 1/4% Limited Convertible Senior Subordinated Notes due 2012 for
each $1,000 principal amount of its 7 1/2% Convertible Subordinated Notes due
2006 (the "Exchange Offer"). The Exchange Offer commenced March 2, 2004 and
expired on April 14, 2004. A total of $17.9 million principal amount of Old
Notes were exchanged. The New Notes provide for a higher interest rate, have a
longer term, will be convertible into Common Stock at a lower conversion price
of $9.00 per share until 2007 and are senior to the Old Notes and the Company's
9 1/2% Subordinated Debentures due 2012.
Payments of long-term debt due, including the $9.3 million term loans that
mature October 1, 2005, and the 7 1/2% convertible subordinated notes not
exchanged in the Exchange Offer that mature December 1, 2006, employment and
consulting agreement payments and the future minimum lease payments due under
operating leases for the remainder of 2004 and the next four years are as
follows:
Remainder of
In thousands 2004 2005 2006 2007 2008
- ------------ ---- ---- ---- ---- ----
Long-term debt $ 664 $10,057 $13,582 $1,294 $2,999
Employment and consulting
agreement obligations 435 1,085 463 393 393
Operating leases 188 720 680 517 383
------ ------- ------- ------ ------
Total $1,287 $11,862 $14,725 $2,204 $3,775
====== ======= ======= ====== ======
Cash and cash equivalents decreased $940,000 for the nine months ended September
30, 2004 compared to an increase of $3.6 million in 2003. The decrease in 2004
is primarily attributable to investment in equipment for rental of $3.3 million,
purchases of property, plant and equipment, including expansion of the Company's
movie theatre in Durango, Colorado, of $2.0 million, purchases of
available-for-sale securities of $0.2 million, payments of long-term debt of
$6.9 million, payments of dividends of $0.1 million and cash used by
discontinued operation of $0.5 million offset by cash provided by operating
activities from continuing operations of $3.1 million, proceeds from the sale of
assets of $7.0 million, proceeds received from construction loan borrowings of
$1.7 million and proceeds from the Company's joint venture of $0.2 million. The
increase in 2003 is primarily attributable to proceeds received from the sale of
the custom sports business and the sale of vacant land in Norwalk, Connecticut,
offset by investment in equipment for rental and a repayment of long-term debt.
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.
13
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 and previously, its Australian 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, 2004, 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 $250,000. A 10% change in the
Canadian dollar relative to the U.S. dollar would result in a currency exchange
expense fluctuation of approximately $243,000, based on dealer quotes,
considering current exchange rates.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. The Company's President
and Co-Chief Executive Officer, Michael R. Mulcahy, the Company's Executive
Vice President and Co-Chief Executive Officer, Thomas Brandt, and the Company's
Executive Vice President and Chief Financial Officer, Angela D. Toppi, have
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this quarterly
report. The Company's disclosure controls and procedures are designed to ensure
that material information required to be disclosed by the Company in the reports
that are filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. Based on this
evaluation, the Company's Co-Chief Executive Officers and Chief Financial
Officer have concluded that these controls and procedures are effective.
Changes in Internal Control over Financial Reporting. There has been no
change in the Company's internal controls over financial reporting, that
occurred in the fiscal quarter, that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
14
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Extension of Maturity for Credit Facilities letter
agreement dated September 30, 2004 among Trans-Lux
Corporation, People's Bank as Agent and People's Bank and
The Bank of New York.
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.
(b) Reports on Form 8-K. During the quarter for which this report on
Form 10-Q is filed, the registrant filed the following:
Form 8-K dated August 16, 2004, press release pertaining to the
financial performance for the second quarter of 2004.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRANS-LUX CORPORATION
---------------------
(Registrant)
Date: November 12, 2004
by /s/ Angela D. Toppi
----------------------------
Angela D. Toppi
Executive Vice President and
Chief Financial Officer
16