10-Q 1 mar0410q.txt 10Q FOR PERIOD ENDED MARCH 30, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 -------------- Commission file number 1-2257 TRANS-LUX CORPORATION ------------------------------------------------------ (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 ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) (203) 853-4321 ---------------------------------------------------- (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 05/12/04 Common Stock - $1.00 Par Value 973,243 05/12/04 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. Part I - Financial Information (unaudited) Item 1. Consolidated Balance Sheets - March 31, 2004 and December 31, 2003 1 Consolidated Statements of Operations - Three Months Ended March 31, 2004 and 2003 2 Consolidated Statements of Cash Flows - Three Months Ended March 31, 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 12 Item 4. Controls and Procedures 12 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Exhibits
Part I - Financial Information TRANS-LUX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited)
March 31 December 31 In thousands, except share data 2004 2003 ---------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 12,898 $ 12,022 Available-for-sale securities 544 393 Receivables, less allowance of $998 - 2004 and $1,092 - 2003 6,070 5,170 Unbilled receivables 751 729 Inventories 5,167 5,647 Prepaids and other 1,144 956 Assets of discontinued operation 1,658 1,930 -------- -------- Total current assets 28,232 26,847 -------- -------- Rental equipment 90,355 89,560 Less accumulated depreciation 50,577 48,654 -------- -------- 39,778 40,906 -------- -------- Property, plant and equipment 42,718 41,742 Less accumulated depreciation and amortization 12,173 11,763 -------- -------- 30,545 29,979 Goodwill 1,035 1,035 Other assets 3,276 3,255 -------- -------- TOTAL ASSETS $102,866 $102,022 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,133 $ 1,535 Accrued liabilities 6,402 6,578 Current portion of long-term debt 3,113 2,637 Liabilities of discontinued operation 400 414 -------- -------- Total current liabilities 11,048 11,164 -------- -------- Long-term debt: 7 1/2% convertible subordinated notes due 2006 30,177 30,177 9 1/2% subordinated debentures due 2012 1,057 1,057 Notes payable 29,386 29,271 -------- -------- 60,620 60,505 Deferred revenue, deposits and other 2,624 2,052 Deferred income taxes 4,560 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 20,483 20,490 Accumulated other comprehensive loss (1,273) (1,258) -------- -------- 35,851 35,873 Less treasury stock - at cost - 1,479,688 shares in 2004 and 2003 (excludes additional 287,505 shares held in 2004 and 2003 for conversion of Class B stock) 11,837 11,837 -------- -------- Total stockholders' equity 24,014 24,036 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $102,866 $102,022 ======== ======== ----------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
1 TRANS-LUX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED MARCH 31 -------------------- In thousands, except per share data 2004 2003 ------------------------------------------------------------------------------------------------------------- Revenues: Equipment rentals and maintenance $ 4,248 $ 4,982 Equipment sales 4,860 7,104 Theatre receipts and other 3,221 3,107 ------- ------- Total revenues 12,329 15,193 ------- ------- Operating expenses: Cost of equipment rentals and maintenance 3,151 3,502 Cost of equipment sales 3,255 5,606 Cost of theatre receipts and other 2,298 2,320 ------- ------- Total operating expenses 8,704 11,428 ------- ------- Gross profit from operations 3,625 3,765 General and administrative expenses 2,812 4,179 Interest income 33 29 Interest expense (948) (1,002) Gain on sale of assets - 1,578 Other income 12 - ------- ------- Income (loss) from continuing operations before income taxes, income from joint venture and discontinued operation (90) 191 Provision for income taxes 19 246 Income from joint venture 132 98 ------- ------- Income from continuing operations 23 43 Income from discontinued operation, net of income taxes 15 224 ------- ------- Net income $ 38 $ 267 ======= ======= Earnings per share continuing operations - basic and diluted $ 0.02 $ 0.03 Earnings per share discontinued operation - basic and diluted 0.01 0.18 ------- ------- Total earnings per share - basic and diluted $ 0.03 $ 0.21 ======= ======= Average common shares outstanding - basic and diluted 1,261 1,261 ======= ======= Cash dividends per share: Common stock $ 0.035 $ 0.035 Class B stock $0.0315 $0.0315 ------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
2 TRANS-LUX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
THREE MONTHS ENDED MARCH 31 ------------------ In thousands 2004 2003 ------------------------------------------------------------------------------------------------------------ Cash flows from operating activities Net income $ 38 $ 267 Income from discontinued operation 15 224 ------- -------- Income from continuing operations 23 43 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,444 2,915 Income from joint venture (132) (98) Deferred income taxes 295 491 Gain on sale of assets - (1,578) Gain on sale of securities (11) - Changes in operating assets and liabilities: Receivables (922) (431) Inventories 480 164 Prepaids and other assets (188) (488) Accounts payable and accruals (161) 44 Deferred revenue, deposits and other 572 (174) ------- -------- Net cash provided by operating activities 2,400 888 ------- -------- Cash flows from investing activities Equipment manufactured for rental (795) (943) Purchases of property, plant and equipment (976) (422) Purchases of available-for-sale securities (239) - Proceeds from sale of securities 100 - Proceeds from joint venture - 350 Proceeds from sale of assets - 3,757 ------- -------- Net cash provided by (used in) investing activities (1,910) 2,742 ------- -------- Cash flows from financing activities Proceeds from long-term debt 870 17,000 Payments of long-term debt (279) (18,474) Cash dividends (45) (45) ------- -------- Net cash provided by (used in) financing activities 546 (1,519) ------- -------- Net cash provided by (used in) discontinued operation (160) 228 Net increase in cash and cash equivalents 876 2,339 Cash and cash equivalents at beginning of year 12,022 8,270 ------- -------- Cash and cash equivalents at end of period $12,898 $ 10,609 ======= ======== ------------------------------------------------------------------------------------------------------------ Interest paid $ 290 $ 422 Interest received 36 52 Income taxes refunded 201 119 ------------------------------------------------------------------------------------------------------------ The accompanying notes are an integral part of these consolidated financial statements.
3 TRANS-LUX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 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 March 31, 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 prior years' 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. FIN 46R replaces FASB Interpretation No. 46, which was issued in January 2003. Before concluding that it is appropriate to apply 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 at fair market value 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 months ended March 31, 2004 and 2003 if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:
Three months ended March 31 In thousands, except per share data 2004 2003 -------------------------------------------------------------------------- Net income, as reported $ 38 $ 267 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax 2 10 ----- ----- Pro forma net income $ 36 $ 257 Earnings per share: ----- ----- As reported - basic and diluted $0.03 $0.21 ----- ----- Pro forma - basic and diluted $0.03 $0.20 ----- -----
4 Note 2 - Inventories Inventories consist of the following:
March 31 December 31 In thousands 2004 2003 ----------------------------------------------------------------- Raw materials and spare parts $3,524 $3,767 Work-in-progress 1,097 1,234 Finished goods 546 646 ------ ------ $5,167 $5,647 ------ ------
Note 3 - Long-Term Debt During the three months ended March 31, 2004, long-term debt, including current portion, increased $591,000, primarily due to $870,000 of advances on a construction loan to expand the Company's movie theatre in Durango, Colorado, offset by regular scheduled payments of long-term debt. 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% (3.43% at March 31, 2004) and maturing September 30, 2005. At March 31, 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 net income. At March 31, 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 for each $1,000 principal amount of its 7 1/2% Convertible Subordinated Notes due 2006 (see Note 10). Note 4 - Sale of Assets and Discontinued Operation 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. 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, which was 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 current and prior periods are reported as a discontinued operation. 5 The following table presents the financial results of the discontinued operation:
Three months ended March 31 In thousands 2004 2003 ----------------------------------------------------------------------------- Revenues $ 135 $ 297 Operating expenses 126 181 ----- ----- Gross profit 9 116 General and administrative expenses (126) (108) Foreign currency gain 141 249 Interest income 3 18 Income tax provision (12) (51) ----- ----- Income from discontinued operation $ 15 $ 224 ----- ----- Earnings per share - basic and diluted $0.01 $0.18 ----- -----
The following table presents the principal assets and liabilities of the discontinued operation:
March 31 December 31 In thousands 2004 2003 -------------------------------------------------------------------------------- Accounts receivable $ 566 $ 870 Inventories 121 114 Property and equipment, net 679 690 Other assets 292 256 ------ ------ Total assets of discontinued operation 1,658 1,930 Accrued expenses, accounts and income taxes payable 400 414 Intercompany payable (eliminated in consolidation) $1,486 $1,924
Note 5 - Reporting Comprehensive Income Total comprehensive income for the three months ended March 31, 2004 and 2003 is as follows:
Three months ended March 31 In thousands 2004 2003 ---------------------------------------------------------------------------- Net income $38 $267 Other comprehensive income: --- ---- Unrealized foreign currency translation gain 16 46 Unrealized holding gain on securities 1 35 Income taxes related to other comprehensive income items - (14) --- ---- Total other comprehensive income, net of taxes 17 67 --- ---- Comprehensive income $55 $334 --- ----
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. 6 Information about the Company's operations in its three business segments for the three months ended March 31, 2004 and 2003 is as follows:
Three months ended March 31 In thousands 2004 2003 ------------------------------------------------------------------------------ Revenues: Indoor display $ 4,133 $ 4,809 Outdoor display (1) 4,975 7,277 Entertainment/real estate 3,221 3,107 ------- ------- Total revenues 12,329 15,193 ------- ------- Operating income (loss): Indoor display 694 981 Outdoor display 311 (521) Entertainment/real estate 943 675 ------- ------- Total operating income from continuing operations 1,948 1,135 Other income 12 1,578 Corporate general and administrative expenses (1,003) (1,451) Interest expense-net (915) (973) Income tax provision (19) (246) ------- ------- Income from continuing operations 23 43 Income from discontinued operation, net of income taxes 15 224 ------- ------- Net income $ 38 $ 267 ------- ------- (1) Decrease primarily related to the sale of the custom sports business in March 2003.
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 March 31, 2004. The following table presents the components of net periodic pension cost:
Three months ended March 31 In thousands 2004 2003 ------------------------------------------------------------------------ Service cost $ - $ 127 Interest cost 152 148 Expected return on plan assets (148) (134) Amortization of prior service cost 5 5 Amortization of net actuarial loss 61 55 Curtailment - 16 ------ ------ Net periodic pension cost $ 70 $ 217 ------ ------
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 has elected to contribute an increased amount of $524,000, which it anticipates contributing 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. 7 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 months ended March 31, 2004 and 2003, and summary balance sheet information relates to MetroLux as of March 31, 2004 and December 31, 2003.
Three months ended March 31 In thousands 2004 2003 ---------------------------------------------------------------------------- Revenues $ 957 $ 850 Gross profit 545 473 Net income 264 196 Company's share of partnership net income 132 98 March 31 December 31 In thousands 2004 2003 ---------------------------------------------------------------------------- Current assets $ 443 $ 341 Noncurrent assets 3,877 3,937 ------ ------ Total assets 4,320 4,278 ------ ------ Current liabilities 529 653 Noncurrent liabilities 1,760 1,859 ------ ------ Total liabilities 2,289 2,512 ------ ------ Company's equity in partnership net assets $1,016 $ 888 ------ ------
The Company's equity in partnership net assets is reflected in other assets in the consolidated balance sheet. Note 10 - Subsequent Event 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. 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). The Entertainment/Real Estate segment includes the operations of the motion picture theatres in the western Mountain States and income-producing real estate properties. Results of Operations Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 Total revenues for the three months ended March 31, 2004 decreased 18.9% to $12.3 million from $15.2 million for the three months ended March 31, 2003, principally due to the sale of the custom sports business during the first quarter of 2003 and is therefore 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 $676,000 or 14.1%. Of this decrease, Indoor display equipment rentals and maintenance revenues decreased $776,000 or 23.6%, primarily due to disconnects and non-renewals of equipment on rental and maintenance on existing contracts in the financial services and energy markets, while Indoor display equipment sales increased $100,000 or 6.6%, due to sales in the retail and transportation 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 are improving, installations of new equipment tend to lag any economic turnaround. Outdoor display revenues decreased $2.3 million or 31.6%. Of this decrease, Outdoor display equipment sales decreased $2.3 million or 41.9%, primarily in the custom outdoor sports sector, which decrease was a result of the sale of the custom sports business during the first quarter of 2003. Outdoor display equipment rentals and maintenance revenues increased $41,000 or 2.4%, primarily due to equipment maintenance contract renewals on existing contracts. 9 Entertainment/real estate revenues increased $114,000 or 3.7%. This increase is primarily from an increase in overall admissions and concessions. 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, the Company entered into a 15-year non-compete agreement for $450,000, which was paid in 2003. Total operating income for the three months ended March 31, 2004 increased 71.6% to $1.9 million from $1.1 million for the three months ended March 31, 2003, principally due to the sale of the custom sports business during the first quarter of 2003, which operated at a loss, and certain cost savings measures initiated by the Company during the second quarter of 2003. Indoor display operating income decreased $287,000 or 29.3%, primarily as a result of the decrease in revenues in the financial services and energy markets. The cost of indoor displays represented 63.4% of related revenues in 2004 compared to 57.0% 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 continues to strategically address the field service costs and initiated certain cost saving measures in 2003 to reduce field service cost. Field service costs in the first quarter of 2004 compared to the first quarter of 2003 were reduced by approximately $105,000. Indoor display cost of equipment sales decreased $50,000 or 6.2%, primarily due to volume mix. Indoor display cost of equipment rentals and maintenance decreased $72,000 or 3.7%, 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 $267,000 or 24.6% due to continued reduction of certain overhead costs such as sales salaries and travel expenses. Cost of indoor and outdoor equipment rentals and maintenance includes field service expenses, plant repair costs, maintenance and depreciation. Outdoor display operating income increased $832,000 to $311,000 from a loss of $521,000, primarily as a result of a decrease in outdoor display equipment sales attributable to the sale of the custom outdoor sports business, which was sold during the first quarter of 2003, which operated at a loss. The cost of outdoor displays represented 76.1% of related revenues in 2004 compared to 87.5% in 2003. This improvement is due to a reduction in field service costs of approximately $275,000 primarily due to the sale of the custom outdoor sports business and a reduction in field service costs such as payroll and related benefits. Outdoor display cost of equipment sales decreased $2.3 million or 47.9%, 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 $279,000 or 17.8%, primarily due to a decrease in field service costs payroll, benefits and overhead expenses. Outdoor display general and administrative expenses decreased $555,000 or 38.8%, primarily due to sale of the custom sports business during the first quarter of 2003. Cost of indoor and outdoor equipment rentals and maintenance includes field service expenses, plant repair costs, maintenance and depreciation. Entertainment/real estate operating income increased $268,000 or 39.7%, primarily due to an increase in overall admissions and a decrease in operating expenses. The cost of entertainment/real estate represented 71.3% of related revenues in 2004 compared to 74.7% in 2003. Cost of entertainment/real estate, which includes film rental costs and depreciation expense, decreased $23,000 or 1.0%. Entertainment/real estate general and administrative expenses decreased $97,000 due to continued reduction of certain overhead costs such as salaries and travel expenses. 10 Corporate general and administrative expenses decreased $448,000 or 30.9%, principally resulting from certain cost saving measures initiated during the second quarter of 2003 and reduction in certain overhead costs in medical and general insurance costs, pension and benefit costs offset by a $3,000 positive impact of the effect of foreign currency rates in 2004 compared to a $95,000 positive impact in 2003. Net interest expense decreased $58,000, 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 and regular scheduled payments of long-term debt. The gain on sale of assets, in 2003, relates to the sale of the custom sports business. 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 March 31, 2004 and 2003 was 45.0% and 52.7%, 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. Liquidity and Capital Resources The regular quarterly cash dividend for the first 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 March 24, 2004, payable to stockholders of record as of April 20, 2004, and was paid April 30, 2004. 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 September 30, 2005. At March 31, 2004, $15.1 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 March 31, 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 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 $15.1 million term loans that mature September 30, 2005, and the 7.5% convertible subordinated notes not exchanged 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 $2,359 $14,974 $13,598 $1,310 $3,013 Employment and consulting agreement obligations 1,286 1,085 463 393 393 Operating leases 324 382 295 119 96 ------ ------- ------- ------ ------ Total $3,969 $16,441 $14,356 $1,822 $3,502 ====== ======= ======= ====== ======
11 Cash and cash equivalents increased $876,000 for the three months ended March 31, 2004 compared to an increase of $2.3 million in 2003. The increase in 2004 is primarily attributable to cash provided by operating activities from continuing operations of $2.4 million, proceeds received from construction loan borrowings and proceeds from the sale of available-for-sale securities, offset by investment in equipment for rental, expansion of the Company's movie theatre in Durango, Colorado, purchases of available-for-sale securities and scheduled payments of long-term debt. The increase in 2003 is primarily attributable to proceeds received from the sale of the custom sports business, 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. 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 March 31, 2004, the Company did not hold in any derivative financial instruments. A one percentage point change in interest rates would result in an annual interest expense fluctuation of approximately $307,000. A 10% change in the Canadian dollar relative to the U.S. dollar would result in a currency exchange expense fluctuation of approximately $202,000, 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. 12 Changes in Internal Control over Financial Reporting. There has been no change in the Company's internal control over financial reporting that occurred in the first fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Part II - Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of Michael R. Mulcahy, President and Co-Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Thomas Brandt, Executive Vice President and Co-Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.3 Certification of Angela D. Toppi, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 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 March 24, 2004, press release pertaining to the financial performance for the fourth quarter of 2003 and annual results. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRANS-LUX CORPORATION --------------------- (Registrant) Date: May 13, 2004 by /s/ Angela D. Toppi -------------------- Angela D. Toppi Executive Vice President and Chief Financial Officer 14