10-Q 1 sep0510q.txt 10-Q FOR PERIOD END 09/30/05 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, 2005 ------------------ 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 -------- ------------------------------ ------------------ 11/10/05 Common Stock - $1.00 Par Value 973,598 11/10/05 Class B Stock - $1.00 Par Value 286,814 (Immediately convertible into a like number of shares of Common Stock.) TRANS-LUX CORPORATION AND SUBSIDIARIES Table of Contents Page No. Part I - Financial Information (unaudited) -------- Item 1. Consolidated Balance Sheets - September 30, 2005 and December 31, 2004 (audited) 1 Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2005 and 2004 2 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2005 and 2004 3 Notes to Consolidated Condensed Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Item 4. Controls and Procedures 16 Part II - Other Information Item 5. Other Information 17 Item 6. Exhibits 17 Signatures 18 Exhibits
Part I - Financial Information ------------------------------ TRANS-LUX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) September 30 December 31 In thousands, except share data 2005 2004 ------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 8,020 $ 12,398 Available-for-sale securities 438 388 Receivables, less allowance of $959 - 2005 and $711 - 2004 7,982 5,989 Unbilled receivables 1,309 585 Inventories 7,140 6,565 Prepaids and other 735 534 ------- -------- Total current assets 25,624 26,459 ------- -------- Rental equipment 94,114 90,938 Less accumulated depreciation 58,387 52,538 ------- -------- 35,727 38,400 ------- -------- Property, plant and equipment 39,424 37,747 Less accumulated depreciation and amortization 9,927 8,787 ------- -------- 29,497 28,960 Goodwill 1,004 1,004 Other assets 6,506 6,291 ------- -------- TOTAL ASSETS $98,358 $101,114 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,594 $ 2,413 Accrued liabilities 6,858 8,536 Current portion of long-term debt 1,861 1,744 ------- -------- Total current liabilities 11,313 12,693 ------- -------- Long-term debt: 7 1/2% convertible subordinated notes due 2006 12,309 12,309 8 1/4% limited convertible senior subordinated notes due 2012 17,868 17,868 9 1/2% subordinated debentures due 2012 1,057 1,057 Notes payable 25,742 25,562 ------- -------- 56,976 56,796 Deferred credits, deposits and other 2,753 2,776 Deferred income taxes 3,592 4,244 ------- -------- Stockholders' equity: Capital stock Common - $1 par value - 5,500,000 shares authorized, 2,453,591 shares issued in 2005 and 2,452,942 shares issued in 2004 2,453 2,453 Class B - $1 par value - 1,000,000 shares authorized, 286,814 shares issued in 2005 and 287,463 shares issued in 2004 287 287 Additional paid-in-capital 13,901 13,901 Retained earnings 19,908 20,852 Accumulated other comprehensive loss (985) (1,050) ------- -------- 35,564 36,443 Less treasury stock - at cost - 1,480,050 shares in 2005 and 1,479,714 shares in 2004 (excludes additional 286,814 shares held in 2005 and 287,463 shares held in 2004 for conversion of Class B stock) 11,840 11,838 ------- -------- Total stockholders' equity 23,724 24,605 ------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $98,358 $101,114 ======= ======== ------------------------------------------------------------------------------------------------------------ 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 ------------------- -------------------- In thousands, except per share data 2005 2004 2005 2004 ----------------------------------------------------------------------------------------------------------------------- Revenues: Equipment rentals and maintenance $ 3,837 $ 4,211 $11,442 $12,830 Equipment sales 8,283 6,605 19,395 16,707 Theatre receipts and other 3,236 3,249 9,632 9,969 ------- ------- ------- ------- Total revenues 15,356 14,065 40,469 39,506 ------- ------- ------- ------- Operating expenses: Cost of equipment rentals and maintenance 3,188 3,386 9,379 9,930 Cost of equipment sales 5,602 4,363 13,090 11,241 Cost of theatre receipts and other 2,425 2,511 7,072 7,460 ------- ------- ------- ------- Total operating expenses 11,215 10,260 29,541 28,631 ------- ------- ------- ------- Gross profit from operations 4,141 3,805 10,928 10,875 General and administrative expenses 3,198 2,843 9,819 9,627 Interest income 63 80 264 132 Interest expense (1,076) (952) (3,116) (2,841) Gain on sale of assets - - 108 2,536 Other income 22 5 74 49 ------- ------- ------- ------- Income (loss) from continuing operations before income taxes, income from joint venture and discontinued operation (48) 95 (1,561) 1,124 Provision (benefit) for income taxes 15 64 (496) 598 Income from joint venture 74 48 253 303 ------- ------- ------- ------- Income (loss) from continuing operations 11 79 (812) 829 Income from discontinued operation, net of income taxes - - - 127 ------- ------- ------- ------- Net income (loss) $ 11 $ 79 $ (812) $ 956 ======= ======= ======= ======= Earnings (loss) per share continuing operations: Basic $ 0.01 $ 0.06 $ (0.64) $ 0.66 Diluted $ 0.01 $ 0.06 $ (0.64) $ 0.50 Earnings per share discontinued operation: Basic $ - $ - $ - $ 0.10 Diluted $ - $ - $ - $ 0.03 Total earnings (loss) per share: Basic $ 0.01 $ 0.06 $ (0.64) $ 0.76 Diluted $ 0.01 $ 0.06 $ (0.64) $ 0.53 Average common shares outstanding: Basic 1,260 1,261 1,261 1,261 Diluted 1,260 1,261 1,261 3,863 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 2005 2004 --------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income (loss) $ (812) $ 956 Income from discontinued operation - 127 ------- -------- Income (loss) from continuing operations (812) 829 Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 7,229 7,258 Income from joint venture (253) (303) Deferred income taxes (640) 810 Gain on sale of assets (108) (2,536) Gain on sale of available-for-sale securities (1) (11) Changes in operating assets and liabilities: Receivables (2,717) (2,652) Inventories (575) (513) Prepaids and other assets (272) (145) Accounts payable and accruals (1,429) 135 Deferred credits, deposits and other (23) 228 ------- -------- Net cash provided by operating activities 399 3,100 ------- -------- Cash flows from investing activities Equipment manufactured for rental (3,176) (3,304) Purchases of property, plant and equipment (1,757) (1,958) Purchases of available-for-sale securities (114) (239) Proceeds from sale of available-for-sale securities 32 100 Proceeds from (payments to) joint venture (125) 150 Proceeds from sale of assets 200 7,028 ------- -------- Net cash provided by (used in) investing activities (4,940) 1,777 ------- -------- Cash flows from financing activities Proceeds from long-term debt 1,753 19,582 Payments of long-term debt (1,456) (24,736) Cash dividends (132) (133) Purchase of treasury stock (2) (1) ------- -------- Net cash provided by (used in) financing activities 163 (5,288) ------- -------- Net cash used in discontinued operation - (529) ------- -------- Net decrease in cash and cash equivalents (4,378) (940) Cash and cash equivalents at beginning of year 12,398 12,022 ------- -------- Cash and cash equivalents at end of period $ 8,020 $ 11,082 ======= ======== --------------------------------------------------------------------------------------------------------------------- Interest paid $ 3,106 $ 2,405 Interest received 264 110 Income taxes paid 346 29 --------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
3 TRANS-LUX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS September 30, 2005 (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, 2005 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, 2004. Certain reclassifications of prior years' amounts have been made to conform to the current year's presentation. 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 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123 (revised 2004)"). SFAS 123 (revised 2004) establishes standards that require companies to record the cost resulting from all share-based payment transactions using the fair value method. Transition under SFAS 123 (revised 2004) requires using a modified version of prospective application under which compensation costs are recorded for all unvested share-based payments outstanding or a modified retrospective method under which all prior periods impacted by SFAS 123 are restated. SFAS 123 (revised 2004) is effective, for the Company, as of January 1, 2006, with early adoption permitted. 4 The following table illustrates the effect on net income (loss) and earnings (loss) per share for the three and nine months ended September 30, 2005 and 2004 if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation using the binomial options-pricing model: Three months ended Nine months ended September 30 September 30 In thousands, except per share data 2005 2004 2005 2004 ----------------------------------------------------------------------------------------------- Net income (loss), as reported $ 11 $ 79 $ (812) $ 956 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax 1 3 8 9 ----- ----- ------ ----- Pro forma net income (loss) $ 10 $ 76 $ (820) $ 947 ===== ===== ====== ===== Earnings (loss) per share: As reported: Basic $0.01 $0.06 $(0.64) $0.76 ----- ----- ------ ----- Diluted $0.01 $0.06 $(0.64) $0.53 ----- ----- ------ ----- Pro forma: Basic $0.01 $0.06 $(0.66) $0.75 ----- ----- ------ ----- Diluted $0.01 $0.06 $(0.66) $0.53 ----- ----- ------ -----
Note 2 - Inventories Inventories consist of the following: September 30 December 31 In thousands 2005 2004 ----------------------------------------------------------- Raw materials and spare parts $4,485 $4,704 Work-in-progress 1,994 1,357 Finished goods 661 504 ------ ------ $7,140 $6,565 ====== ======
Note 3 - Long-Term Debt During the nine months ended September 30, 2005, long-term debt, including current portion, increased $297,000, due to a $903,000 construction loan to expand the Company's movie theatre in Dillon, Colorado and borrowing $850,000 against the revolving loan facility to fund the purchase of land in Silver City, New Mexico for the construction of a new theatre, offset by regular scheduled payments of long-term debt. During the fourth quarter of 2004, the Company completed an amendment of its senior debt, which included a term loan of $10.0 million, a non-revolving line of credit of up to $6.2 million for the purpose of financing 50% of the redemption and/or purchase of its outstanding Old Notes on a matching basis and a revolving loan of up to $5.0 million at variable interest rates ranging from LIBOR plus 2.25% to Prime plus 0.25% (ranging from 6.315% to 6.852% at September 30, 2005). The term loan, non-revolving line of credit and revolving loan mature on January 1, 2012, January 1, 2007 and January 1, 2008, respectively. Upon maturity of the non-revolving line of credit, it is 5 convertible into a converted term loan maturing January 1, 2012. At September 30, 2005, the non-revolving line of credit was fully available as none had been drawn and $4.1 million was available under the revolving loan facility. The credit agreement requires an annual facility fee on the unused commitment of 0.25%, and requires compliance with certain financial covenants, which include a fixed charge coverage ratio of 1.1 to 1.0, a loan-to-value ratio of not more than 50%, a leverage ratio of 3.0 to 1.0, maintaining a tangible net worth of not less than $20.8 million plus 50% of net income and maintaining accounts with an average monthly compensating balance of not less than $750,000. At September 30, 2005, 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, are 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 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 current and prior periods are reported as a discontinued operation. 6 The following table presents the financial results of the discontinued operation: Nine months ended In thousands, except per share data September 30, 2004 --------------------------------------------------------------- Revenues $ 135 Operating expenses 126 Gross profit 9 General and administrative expenses (126) Foreign currency gain 141 Interest income 3 Gain on sale of assets 112 Income tax provision (12) ----- Income from discontinued operation $ 127 ===== Earnings per share: Basic $0.10 ----- Diluted $0.03 -----
Note 5 - Reporting Comprehensive Income (Loss) Total comprehensive income (loss) for the three and nine months ended September 30, 2005 and 2004 is as follows: Three months ended September 30 Nine months ended September 30 In thousands 2005 2004 2005 2004 ---------------------------------------------------------------------------------------------------------------- Net income (loss) $ 11 $ 79 $(812) $ 956 ---- ---- ----- ------ Other comprehensive income: Unrealized foreign currency translation gain 126 127 86 233 Unrealized holding gain (loss) on securities (14) 26 (32) (11) Income taxes related to other comprehensive income (loss) items 5 (11) 12 5 ---- ---- ----- ------ Total other comprehensive income, net of tax 117 142 66 227 ---- ---- ----- ------ Comprehensive income (loss) $128 $221 $(746) $1,183 ==== ==== ===== ======
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. 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. Of the total goodwill of $1,004,000, $938,000 relates to the outdoor display segment and $66,000 relates to the indoor display segment. 7 Information about the Company's operations in its three business segments for the three and nine months ended September 30, 2005 and 2004 is as follows: Three months ended September 30 Nine months ended September 30 In thousands 2005 2004 2005 2004 ----------------------------------------------------------------------------------------------------------------------- Revenues: Indoor display $ 4,080 $ 4,666 $11,322 $13,591 Outdoor display 8,040 6,150 19,515 15,946 Entertainment/real estate 3,236 3,249 9,632 9,969 ------- ------- ------- ------- Total revenues 15,356 14,065 40,469 39,506 ======= ======= ======= ======= Operating income: Indoor display 353 749 1,052 2,285 Outdoor display 911 462 1,451 619 Entertainment/real estate 712 658 2,330 2,404 ------- ------- ------- ------- Total operating income 1,976 1,869 4,833 5,308 Other income 22 5 182 2,585 Corporate general and administrative expenses (959) (859) (3,471) (3,757) Interest expense-net (1,013) (872) (2,852) (2,709) Income tax benefit (provision) (15) (64) 496 (598) ------- ------- ------- ------- Income (loss) from continuing operations 11 79 (812) 829 Income from discontinued operation, net of tax - - - 127 ------- ------- -------- ------- Net income (loss) $ 11 $ 79 $ (812) $ 956 ======= ======== ======== =======
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 periods ended September 30, 2005 and 2004. The following table presents the components of net periodic pension cost: Nine months ended September 30 Nine months ended September 30 In thousands 2005 2004 2005 2004 ---------------------------------------------------------------------------------------------------- Interest cost $ 156 $ 152 $ 468 $ 456 Expected return on plan assets (156) (148) (468) (444) Amortization of prior service cost 4 5 12 15 Amortization of net actuarial loss 67 61 201 183 ----- ----- ----- ----- Net periodic pension cost $ 71 $ 70 $ 213 $ 210 ===== ===== ===== =====
The Company previously disclosed, in its financial statements for the year ended December 31, 2004, that it expected to contribute $56,000 to its pension plan in 2005. The Company has elected to contribute an increased amount of $685,000, which was contributed in July 2005. 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. 8 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, 2005 and 2004, and summary balance sheet information relates to MetroLux as of September 30, 2005 and December 31, 2004: Three months ended September 30 Nine months ended September 30 In thousands 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------------ Revenues $765 $778 $2,360 $2,666 Gross profit 443 412 1,366 1,485 Net income 149 96 507 606 Company's share of partnership net income 74 48 253 303 ------------------------------------------------------------ September 30 December 31 In thousands 2005 2004 ---------------------------------------------------------------------- Current assets $ 140 $ 606 Noncurrent assets 4,859 3,897 ------ ------ Total assets 4,999 4,503 ====== ====== Current liabilities 469 608 Noncurrent liabilities 1,468 1,635 ------ ----- Total liabilities 1,937 2,243 ====== ====== Company's equity in partnership net assets $1,535 $1,133 ------ ------
The Company's equity in partnership net assets is reflected in other assets in the consolidated balance sheets. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Trans-Lux is a full service, worldwide provider of integrated electronic display solutions for today's communications environments. Incorporated in 1920, Trans-Lux specializes in the design, manufacture, installation and service of large-scale indoor and outdoor LED electronic display systems for applications in the financial, banking, gaming, corporate, transportation, entertainment and sports industries. Trans-Lux offers unique control systems as well as content through its partnerships with key data suppliers in the markets the Company serves. Trans-Lux has display equipment installed at thousands of locations around the world, including the world's major financial exchanges. 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 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 Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004 Total revenues for the nine months ended September 30, 2005 increased $963,000 or 2.4% to $40.5 million from $39.5 million for the nine months ended September 30, 2004, principally due to an increase in Outdoor display sales revenues offset by decreases in Indoor display revenues. Indoor display revenues decreased $2.3 million or 16.7%. Of this decrease, Indoor display equipment sales decreased $1.1 million or 21.4%, primarily due to a reduction in sales from the gaming market and the timing of recognizing percentage of completion sales, as the September 30, 2005 backlog is approximately $1.1 million greater than last year. Indoor display equipment rentals and maintenance revenues decreased $1.2 million or 13.8%, primarily due to disconnects and non-renewals of equipment on rental and maintenance on existing contracts in the financial services market. The financial services market continues to be negatively impacted by the current investment climate, resulting in consolidation within that industry. Although the market conditions appear to be improving, installations of new equipment tend to lag any economic turnaround. 10 Outdoor display revenues increased $3.6 million or 22.4%. Of this increase, Outdoor display equipment sales increased $3.8 million or 32.9%, in both the catalog scoreboard business and commercial business. Outdoor display equipment rentals and maintenance revenues decreased $223,000 or 5.1%, primarily due to the continued expected revenue decline in the Outdoor display equipment rentals and maintenance bases previously acquired. Entertainment/Real Estate revenues decreased $337,000 or 3.4%, primarily due to a decrease in overall admissions, which is actually better than the industry-wide trend this year. The Company expanded two of its theatre locations with the opening of two additional screens to it existing five-plex in Durango, Colorado in April 2004 and two additional screens to its existing six-plex in Dillon, Colorado in January 2005. Total operating income for the nine months ended September 30, 2005 decreased 8.9% to $4.8 million from $5.3 million for the nine months ended September 30, 2004, principally due to the reduction in revenues in the Indoor display segment. Indoor display operating income decreased $1.2 million or 54.0%, primarily as a result of the decrease in revenues in the financial services and gaming markets. The cost of Indoor displays represented 64.9% of related revenues in 2005 compared to 61.9% in 2004. 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 display equipment rentals and maintenance also decreasing but not at the same rate. The Company has been working to restructure its field service operations and has centralized the dispatch and help desk functions to its Des Moines, Iowa facility and realigned its field service staff. Field service costs in the first nine months of 2005 compared to the first nine months of 2004 were reduced by approximately $108,000. Indoor display cost of equipment sales decreased $932,000 or 34.8%, primarily due to the decrease in revenues and the volume mix. Indoor display cost of equipment rentals and maintenance decreased $129,000 or 2.3%, largely due to the reduction in the rentals and maintenance bases. Cost of Indoor display equipment rentals and maintenance includes field service expenses, plant repair costs, maintenance and depreciation. Indoor display general and administrative expenses increased $25,000 or 0.9%. Outdoor display operating income increased $832,000 to $1.5 million, primarily as a result of the increase in equipment sales. This increase is primarily due to the increase in volume of sales in both the catalog scoreboard business and commercial business. The cost of outdoor displays represented 77.5% of related revenues in 2005 compared to 80.0% in 2004. Outdoor display cost of equipment sales increased $2.8 million or 32.5%, principally due to the increase in volume. Outdoor display cost of equipment rentals and maintenance decreased $422,000 or 10.0%, primarily due to a decrease in field service costs. Field service costs in the first nine months of 2005 compared to the first nine months of 2004 were reduced by approximately $491,000. Cost of Outdoor display equipment rentals and maintenance includes field service expenses, plant repair costs, maintenance and depreciation. Outdoor display general and administrative expenses increased $378,000 or 14.7%, due to an increase in marketing expense, an increase in commercial outdoor sales payroll and travel and an increase in the allowance for uncollectible accounts. 11 Entertainment/Real Estate operating income decreased $74,000 or 3.1%, primarily due to a decrease in overall admissions, which is actually better than the industry-wide trend this year. The cost of Entertainment/real estate represented 73.4% of related revenues in 2005 compared to 74.8% in 2004. Cost of Entertainment/real estate, which includes film rental costs and depreciation expense, decreased $388,000 or 5.2%, primarily due to the reduction in revenues. Entertainment/Real Estate general and administrative expenses increased $75,000 due to increased payroll and related benefits. Corporate general and administrative expenses decreased $286,000 or 7.6%, due to reductions in insurance expense and payroll benefits. Net interest expense increased $143,000 or 5.3%, due to an increase in the interest rates of the variable rate debt and an increase in long-term debt at September 30, 2005. The gain on sale of assets relates to the sale of vacant land in Taos, New Mexico in 2005; and the sale/leaseback of the Company's Norwalk, Connecticut facility in 2004. The income from joint venture relates to the operations of the theatre joint venture, MetroLux Theatres, in Loveland, Colorado, which decreased $50,000 or 16.5%, due to a decrease in overall admissions, which is actually better than the industry-wide trend, and a competitive situation in the area. The effective tax rate for the nine months ended September 30, 2005 and 2004 was 37.9% and 41.9%, respectively. Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004 Total revenues for the three months ended September 30, 2005 increased 9.2% to $15.4 million from $14.1 million for the three months ended September 30, 2004, principally due to an increase in Outdoor display sales revenues, offset by decreases in Indoor display revenues. Indoor display revenues decreased $586,000 or 12.6%. Of this decrease, Indoor display equipment sales decreased $277,000 or 13.9%, primarily due to a reduction in sales from the gaming market and the timing of recognizing percentage of completion sales, as the September 30, 2005 backlog is approximately $1.1 million greater than last year. Indoor display equipment rentals and maintenance revenues decreased $309,000 or 11.5%, primarily due to disconnects and non-renewals of equipment on rental and maintenance on existing contracts in the financial services market. The financial services market continues to be negatively impacted by the current investment climate, resulting in consolidation within that industry. Outdoor display revenues increased $1.9 million or 30.7%. Of this increase, Outdoor display equipment sales increased $2.0 million or 42.3%, in both the catalog scoreboard business and commercial business. Outdoor display equipment rentals and maintenance revenues decreased slightly. Entertainment/Real Estate revenues decreased $13,000 or 0.4%, primarily due to a decrease in overall admissions, which is actually better than the industry-wide trend this year. The Company expanded two of its theatre locations with the opening of two additional screens to its existing six-plex in Dillon, Colorado in January 2005. 12 Total operating income for the three months ended September 30, 2005 increased 5.7% to $2.0 million from $1.9 million for the three months ended September 30, 2004, principally due to the increase in revenues in the Outdoor display segment offset by the decrease in revenues in the Indoor display segment. Indoor display operating income decreased $396,000 or 52.9%, primarily as a result of the decrease in revenues in the financial services and gaming markets. The cost of Indoor displays represented 66.8% of related revenues in 2005 compared to 64.9% in 2004. 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 display equipment rentals and maintenance also decreasing, but not at the same rate. The Company continues to strategically address the field service costs and has centralized the dispatch and help desk functions to its Des Moines, Iowa facility and realigned its field service staff. Indoor display cost of equipment sales decreased $280,000 or 25.6%, primarily due to the decrease in revenues and the volume mix. Indoor display cost of equipment rentals and maintenance decreased $20,000 or 1.0%, largely due to the reduction in the rentals and maintenance bases. Cost of Indoor display equipment rentals and maintenance includes field service expenses, plant repair costs, maintenance and depreciation. Indoor display general and administrative expenses increased $110,000 or 12.4%, due primarily to an increase in the allowance for uncollectible accounts. Outdoor display operating income increased $449,000 to $911,000, primarily as a result of the increase in equipment sales. This change is primarily due to the increase in volume of sales in both the catalog scoreboard business and commercial business. The cost of outdoor displays represented 75.4% of related revenues in 2005 compared to 76.8% in 2004. Outdoor display cost of equipment sales increased $1.5 million or 46.4%, principally due to the increase in volume. Outdoor display cost of equipment rentals and maintenance decreased $178,000 or 12.3%, primarily due to a decrease in field service costs offset by an increase in depreciation expense. Field service costs in the third quarter of 2005 compared to the third quarter of 2004 were reduced by approximately $198,000. Cost of Outdoor display equipment rentals and maintenance includes field service expenses, plant repair costs, maintenance and depreciation. Outdoor display general and administrative expenses increased $100,000 or 10.4%, due to an increase in marketing expense, an increase in commercial outdoor sales payroll and travel and an increase in the allowance for uncollectible accounts. Entertainment/Real Estate operating income increased $54,000 or 8.2% to $712,000, primarily due to cost reductions. The cost of Entertainment/real estate represented 74.9% of related revenues in 2005 compared to 77.3% in 2004. Cost of Entertainment/real estate, which includes film rental costs and depreciation expense, decreased $86,000 or 3.4%, primarily due to the reduction in revenues. Entertainment/Real Estate general and administrative expenses increased $45,000 or 35.2%, due to an increase and payroll and related benefits. Corporate general and administrative expenses increased $100,000 or 11.6%, due to an increase in certain benefit costs and a reduction in the foreign currency gain of $30,000 compared to the prior year. 13 Net interest expense increased $141,000 or 16.2%, due to an increase in the interest rates of the variable rate debt and an increase in long-term debt at September 30, 2005. The income from joint venture relates to the operations of the theatre joint venture, MetroLux Theatres, in Loveland, Colorado, which increased $26,000 or 54.2%, due to a reduction in certain overhead costs. The effective tax rate for the three months ended September 30, 2005 and 2004 was 57.7% and 44.8%, respectively. Liquidity and Capital Resources The regular quarterly cash dividend for the third quarter of 2005 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 26, 2005, payable to stockholders of record as of October 7, 2005, and was paid October 28, 2005. During the fourth quarter of 2004, the Company completed an amendment of its senior debt, which included a term loan of $10.0 million, a non-revolving line of credit of up to $6.2 million for the purpose of financing 50% of the redemption and/or purchase of its outstanding Old Notes on a matching basis and a revolving loan of up to $5.0 million at variable interest rates ranging from LIBOR plus 2.25% to Prime plus 0.25% (ranging from 6.315% to 6.852% at September 30, 2005). The term loan, non-revolving line of credit and revolving loan mature on January 1, 2012, January 1, 2007 and January 1, 2008, respectively. Upon maturity of the non-revolving line of credit, it is convertible into a converted term loan maturing January 1, 2012. At September 30, 2005, the non- revolving line of credit was fully available as none had been drawn and $4.1 million was available under the revolving loan facility. The credit agreement requires an annual facility fee on the unused commitment of 0.25%, and requires compliance with certain financial covenants, which include a fixed charge coverage ratio of 1.1 to 1.0, a loan-to-value ratio of not more than 50%, a leverage ratio of 3.0 to 1.0, maintaining a tangible net worth of not less than $20.8 million, plus 50% of net income and maintaining accounts with an average monthly compensating balance of not less than $750,000. At September 30, 2005, the Company was in compliance with such financial covenants. During the second quarter of 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, are 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. 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, including the 7 1/2% Convertible Subordinated Notes not exchanged in the Exchange Offer that mature December 1, 2006, employment and consulting agreement payments and rent payments required under operating lease agreements. 14 The following table summarizes the Company's fixed cash obligations as of September 30, 2005 for the remainder of 2005 and the next four years: Remainder of In thousands 2005 2006 2007 2008 2009 ------------ ------ ------- ------ ------ ------ Long-term debt including interest $ 942 $18,119 $4,765 $7,944 $4,378 Employment and consulting agreement obligations 444 1,566 1,588 1,416 851 Operating leases 188 708 582 387 252 ------ ------- ------ ------ ------ Total $1,574 $20,393 $6,935 $9,747 $5,481 ====== ======= ====== ====== ======
Cash and cash equivalents decreased $4.4 million for the nine months ended September 30, 2005 compared to a decrease of $940,000 in 2004. The decrease in 2005 is primarily attributable to investment in equipment for rental, expansion of the Company's movie theatre in Dillon, Colorado, and scheduled payments of long-term debt. This decrease is offset by proceeds received from loan borrowings of $1.8 million and cash provided by operating activities of $399,000, which is $2.7 million less than the cash provided by operating activities of $3.1 million for 2004, largely due to the decrease in accounts payable and accruals. The increase in 2004 is primarily attributable to cash provided by operating activities of $3.1 million, proceed from the sale/leaseback of the Company's Norwalk, Connecticut facility, proceeds from the sale of the Company's Australian subsidiary and proceeds received from construction loan borrowings, offset by investment in equipment for rental, expansion of the Company's movie theatre in Durango, Colorado and scheduled payments 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 September 30, 2005, the Company did not hold any derivative financial instruments. 15 A one percentage point change in interest rates would result in an annual interest expense fluctuation of approximately $266,000. A 10% change in the Canadian dollar relative to the U.S. dollar would result in a currency exchange fluctuation of approximately $167,000, 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. Based on this evaluation, our Co-Chief Executive Officers and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective 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. The disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to the Co-Chief Executive Officers and Chief Financial Officer. The disclosure controls and procedures include components of our internal controls over financial reporting. The Company's Co-Chief Executive Officers' and Chief Financial Officer's assessment of the effectiveness of the internal controls over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met. Changes in Internal Control over Financial Reporting. There has been no change in the Company's internal control over financial reporting, that occurred in the third fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 16 Part II - Other Information Item 5. Other Information During the quarter for which this report on Form 10-Q is filed, the registrant filed a Form 8-K dated August 12, 2005, containing a press release pertaining to the financial performance for the second quarter of 2005. Item 6. Exhibits 31.1 Certification of Michael R. Mulcahy, President and Co-Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Thomas Brandt, Executive Vice President and Co-Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.3 Certification of Angela D. Toppi, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Michael R. Mulcahy, President and Co-Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Thomas Brandt, Executive Vice President and Co-Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.3 Certification of Angela D. Toppi, Executive Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRANS-LUX CORPORATION --------------------- (Registrant) Date: November 14, 2005 /s/ Angela D. Toppi ----------------------------- Angela D. Toppi Executive Vice President and Chief Financial Officer 18