-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KanlJRfr6MKVJC027vRMT0RbsUMN5xlvetCG1uSE954ghCePWhYnmjChnML6mwbZ HhhVkA3wU6dO/TzbPC402w== 0000099106-07-000006.txt : 20070402 0000099106-07-000006.hdr.sgml : 20070402 20070402170931 ACCESSION NUMBER: 0000099106-07-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070402 DATE AS OF CHANGE: 20070402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANS LUX CORP CENTRAL INDEX KEY: 0000099106 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 131394750 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-02257 FILM NUMBER: 07740243 BUSINESS ADDRESS: STREET 1: 110 RICHARDS AVE CITY: NORWALK STATE: CT ZIP: 06856-5090 BUSINESS PHONE: 2038534321 MAIL ADDRESS: STREET 1: 110 RICHARDS AVENUE CITY: NORWALK STATE: CT ZIP: 06856-5090 10-K 1 tlx10k06.txt FORM 10-K FOR YEAR ENDED 12/31/2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006 ----------------- 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 Registrant's principal executive offices) (Zip code) Registrant's telephone number, including area code: (203) 853-4321 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- Common Stock, $1.00 par value American Stock Exchange 8 1/4% Limited Convertible Senior Subordinated Notes due 2012 American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasonal issuer, as defined in Rule 405 of the Securities Act. Yes No X --- --- Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X --- --- 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 --- --- CONTINUED TRANS-LUX CORPORATION 2006 Form 10-K Cover Page Continued Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (check one) Large accelerated filer Accelerated filer Non-accelerated filer X --- --- --- Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- As of the close of business on March 30, 2007, there were outstanding, 2,019,355 shares of the Registrant's Common Stock and 286,814 shares of its Class B Stock. Based on the closing stock price of the Common Stock on the American Stock Exchange of $5.95 on June 30, 2006, the last business day of the Registrant's most recently completed second fiscal quarter, the aggregate market value of the Registrant's Common and Class B Stock held by non-affiliates of the Registrant was $5,977,000. (The value of a share of Common Stock is used as the value for a share of Class B Stock, as there is no established market for Class B Stock, which is convertible into Common Stock on a share-for-share basis.) DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 31, 2007, to be filed with the Commission within 120 days of the Registrant's fiscal year end (the "Proxy Statement"), are incorporated by reference into Part III, Items 10-14 of this Form 10-K to the extent stated herein. TRANS-LUX CORPORATION 2006 Form 10-K Annual Report Table of Contents PART I Page ITEM 1. Business 1 ITEM 1A. Risk Factors 5 ITEM 1B. Unresolved Staff Comments 7 ITEM 2. Properties 7 ITEM 3. Legal Proceedings 7 ITEM 4. Submission of Matters to a Vote of Security Holders 8 PART II ITEM 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 8 ITEM 6. Selected Financial Data 9 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 15 ITEM 8. Financial Statements and Supplementary Data 15 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 55 ITEM 9A. Controls and Procedures 55 ITEM 9B. Other Information 55 PART III ITEM 10. Directors, Executive Officers and Corporate Governance 56 ITEM 11. Executive Compensation 56 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 56 ITEM 13. Certain Relationships and Related Transactions, and Director Independence 57 ITEM 14. Principal Accounting Fees and Services 57 PART IV ITEM 15. Exhibits and Financial Statement Schedules 58 Signatures 60 PART I ITEM 1. BUSINESS Unless the context otherwise requires, the term "Company" as used herein refers to Trans-Lux Corporation and its subsidiaries. The Company 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 the Company manufactures, distributes and services. These display systems utilize LED (light emitting diode), plasma and LCD technologies. Designed to meet the evolving communications needs of both the indoor and outdoor markets, these display products include text, graphic and video displays for stock and commodity exchanges, financial institutions, college and high school sports stadiums, schools, casinos, convention centers, corporate, government, theatres, retail, airports, billboard sites and numerous other applications. In addition to its core display business, the Company also owns and operates a chain of motion picture theatres in the western Mountain States and income-producing real estate properties. ELECTRONIC INFORMATION DISPLAY PRODUCTS - --------------------------------------- The Company's high performance electronic information displays are used to communicate messages and information in a variety of indoor and outdoor applications. The Company's product line encompasses a wide range of state-of-the-art electronic displays in various shape, size and color configurations. Most of the Company's display products include hardware components and sophisticated software. In both the indoor and outdoor markets in which the Company serves, the Company adapts basic product types and technologies for specific use in various niche market applications. The Company also operates a direct service network throughout the United States and parts of Canada, which performs on-site project management, installation, service and maintenance for its customers and others. The Company employs a modular engineering design strategy, allowing basic "building blocks" of electronic modules to be easily combined and configured in order to meet the broad application requirements of the industries it serves. This approach ensures product flexibility, reliability, ease of service and minimum spare parts requirements. The Company's electronic information display market is broken down into two distinct segments: the Indoor division and the Outdoor division. Electronic information displays are used by financial institutions, including brokerage firms, banks, energy companies, insurance companies and mutual fund companies; by sports stadiums and venues; by educational institutions; by outdoor advertising companies; by corporate and government communication centers; by retail outlets; by casinos, race tracks and other gaming establishments; in airports, train stations, bus terminals and other transportation facilities; on highways and major thoroughfares; by movie theatres; by health maintenance organizations and in various other applications. Indoor Division: The indoor electronic display market is currently dominated by three categories of users: financial, government and private sector, and gaming. The financial sector, which includes trading floors, exchanges, brokerage firms, banks, mutual fund companies and energy companies, has long been a user of electronic information displays due to the need for real-time dissemination of data. The major stock and commodity exchanges depend on reliable information displays to post stock and commodity prices, trading volumes, interest rates and other financial data. Brokerage firms use electronic ticker displays for both customers and brokers; they have also installed other larger displays to post major headline news events in their brokerage offices to enable their sales force to stay up-to-date on events affecting general market conditions and specific stocks. Bank and other financial institutions also use information displays to advertise product offerings to consumers. The Indoor division has a new line of advanced last sale price displays, full color LED tickers, graphic and video displays. The government and private sector includes applications found in major corporations, public utilities and government agencies for the display of real-time, critical data in command/control centers, data centers, help desks, visitor centers, lobbies, inbound/outbound telemarketing centers, retail applications to attract customers and for employee communications. Electronic displays have found acceptance in applications for the healthcare industry such as outpatient pharmacies, military hospitals and HMOs to automatically post patient names when prescriptions are ready for pick up. Theatres use electronic displays to post current box office and ticket information, directional information and promote concession sales. Information displays are consistently used in airports, bus terminals and train stations to post arrival and departure, gate and baggage claim information, all of which help to guide passengers through these facilities. The gaming sector includes casinos, Indian gaming establishments and racetracks. These establishments generally use large information displays to post odds for race and sporting events and to display timely information such as results, track conditions, jockey weights and scratches. Casinos and racetracks also use electronic displays throughout their facilities 1 to advertise to and attract gaming patrons. Equipment for the Indoor display segment generally has a lead-time of 30 to 120 days depending on the size and type of equipment ordered and material availability. Outdoor Division: The outdoor electronic display market is even more diverse than the Indoor division. Displays are being used by schools, sports stadiums, sports venues, gas stations, highway departments and outdoor advertisers, such as digital billboards, attempting to capture the attention of passers- by. The Outdoor division has a new line of LED message centers, scoreboards and video displays available in monochrome and full color. The Company has utilized its strong position in the Indoor display market combined with several acquisitions to enhance its presence in the Outdoor display market. Outdoor displays are installed in amusement parks, entertainment facilities, high schools, college sports stadiums, city park and recreational facilities, churches, racetracks, military installations, bridges and other roadway installations, automobile dealerships, banks and other financial institutions. This division generally sells through distributors and dealers. Equipment for the Outdoor display segment generally has a lead-time of 10 to 120 days depending on the size and type of equipment ordered and material availability. Sales Order Backlog (excluding leases): The amount of sales order backlog at December 31, 2006 and 2005 was approximately $3.4 million and $3.9 million, respectively. The December 31, 2006 backlog will be recognized in 2007. These amounts include only the sale of products; they do not include new lease orders or renewals of existing lease agreements that may be presently in-house. ENGINEERING AND PRODUCT DEVELOPMENT - ----------------------------------- The Company's ability to compete and operate successfully depends on its ability to anticipate and respond to the changing technological and product needs of its customers, among other factors. For this reason, the Company continually develops enhancements to its existing product line and examines and tests new display technologies. During 2006 the Company's Outdoor display division continued to enhance CaptiVue(TM), a line of outdoor full matrix LED message centers. CaptiVue offers greater design flexibility, modularity and increased clarity at an economical price, and is being well received in the commercial marketplace. Recent enhancements include full color, monochrome blue configurations, higher resolution and larger configurations for digital billboard applications. The Company continued enhancements to its line of LED Fuel Price Changer displays, which use CaptiVue technology, allow gasoline stations, truck stops, and convenience stores to update fuel prices instantaneously to one facility or many via their point-of-purchase systems without the use of ladders and other manual equipment. In 2005, the Company supplemented its LED product line with third-party LED products to remain competitive in price, product offerings and performance. The Company signed agreements with two leading providers of advanced LED video display products under which Trans-Lux distributes their lines of display products to its catalog sports market and non-sports markets, respectively. Trans-Lux is private-labeling a portion of these products to non-sports markets for both indoor and outdoor applications under the name CaptiVision(TM). CaptiVision jumbo video monitors have the capability to deliver brilliant full motion video and animation in billions of colors to corporate, financial and entertainment markets where the presentation of multimedia, live-action, advertising and promotions is of major importance. The Company continued enhancements to its line of economical full-matrix indoor graphic display products. GraphixWall(R) fixed size displays and GraphixMax(TM) tileable displays for larger, custom sizes feature versatile functionality at a lower cost, presenting line art, graphics and variable-sized text at a competitive price. Applications for GraphixWall and GraphixMax displays include flight information, baggage claim and way-funding at airports, automatic call directories at contact centers, order processing support at manufacturing facilities and for posting prices and promoting products in financial and retail environments. Recent enhancements include a full color version for additional color flexibility and impact. Continued development of new indoor products includes new monochrome and tricolor ticker displays utilizing improved LED display technology; curved and flexible displays; higher speed processors for faster data access and improved update speed; greater integration of blue LEDs to provide full color text, graphics and video displays; wireless controlled displays; and new graphic interface to display more data at higher resolutions. As part of its ongoing development efforts, the Company seeks to package certain products for specific market segments as well as to continually track emerging technologies that can enhance its products. Full color, live video and digital input technologies continue to be improved. The Company continued to expand its PromoWall(R) product line, which combines several different display technologies in attractive, self-contained enclosures. By combining the long distance 2 readability of a text-based LED display with the eye-catching motion of a traveling display and the colorful graphic ability of LCD or plasma display, promotional advertising and custom messages becomes even more dynamic. The Company maintains a staff of 23 people who are responsible for product development and support. The engineering, product enhancement and development efforts are supplemented by outside independent engineering consulting organizations and colleges where required. Engineering expense and product enhancement and development amounted to $1,990,000, $2,213,000 and $2,449,000 in 2006, 2005 and 2004, respectively. MARKETING AND DISTRIBUTION - -------------------------- The Company markets its indoor and outdoor electronic information display products in the U.S. and Canada using a combination of distribution channels, including 24 direct sales representatives, three telemarketers and a network of independent dealers and distributors. By working with software vendors and using the internet to expand the quality and quantity of multimedia content that can be delivered to our electronic displays, we are able to offer customers relevant, timely information, content management software and display hardware in the form of turnkey display communications packages. The Company employs a number of different marketing techniques to attract new customers, including direct marketing efforts by its sales force to known and potential users of information displays; internet marketing; advertising in industry publications; and exhibiting at approximately 19 domestic and international trade shows annually. Internationally, the Company uses a combination of internal sales people and independent distributors to market its products outside the U.S. The Company has existing relationships with approximately 17 independent distributors worldwide covering Europe, the Middle East, South and Central America, Canada, the Far East and Australia. Foreign sales have represented less than 10% of total revenues in the past three years but the Company believes that it is well positioned for expansion. Headquartered in Norwalk, Connecticut, the Company has major sales and service offices in New York, New York; Des Moines, Iowa; Las Vegas, Nevada; Toronto, Ontario; and Brampton, Ontario; as well as approximately 22 satellite offices in the U.S. The Company's equipment is both leased and sold. A significant portion of the electronic information display revenues is from equipment rentals with current lease terms ranging from 30 days to ten years. The Company's revenues in 2006, 2005 and 2004 did not include any single customer that accounted for more than 10% of total revenues. MANUFACTURING AND OPERATIONS - ---------------------------- The Company's production facilities are located in Norwalk, Connecticut and Des Moines, Iowa, and consist principally of the manufacturing, assembly and testing of display units, and related components. The Company performs most subassembly and all final assembly of its products. All product lines are design engineered by the Company and controlled throughout the manufacturing process. The Company has the ability to produce printed circuit board fabrications, very large sheet metal fabrications, cable assemblies, and surface mount and through-hole designed assemblies. Some of the subassembly processes are outsourced. The Company's production of many of the subassemblies and all of the final assemblies gives the Company the control needed for on-time delivery to its customers. The Company has the ability to rapidly modify its product lines. The Company's displays are designed with flexibility in mind, enabling the Company to customize its displays to meet different applications with a minimum of lead-time. The Company designs certain of its materials to match components furnished by suppliers. If such suppliers were unable to provide the Company with those components, the Company would have to contract with other suppliers to obtain replacement sources. Such replacement might result in engineering design changes, as well as delays in obtaining such replacement components. The Company believes it maintains suitable inventory and has contracts providing for delivery of sufficient quantities of such components to meet its needs. The Company also believes there presently are other qualified vendors of these components. The Company does not acquire significant amount of purchases directly from foreign suppliers, but certain components such as the LEDs are manufactured by foreign sources. 3 The Company is ISO-9001-2000 registered by Underwriters Laboratories at its Norwalk manufacturing facility. The Company's products are also third-party certified as complying with applicable safety, electromagnetic emissions and susceptibility requirements worldwide. The Company believes these distinctions in its industry give it a competitive advantage in the global marketplace. SERVICE AND SUPPORT - ------------------- The Company emphasizes the quality and reliability of its products and the ability of its field service personnel and third-party agents to provide timely and expert service to the Company's installed base. The Company believes that the quality and timeliness of its on-site service personnel are important components in the Company's ongoing and future success. The Company provides turnkey installation and support for the products it leases and sells in the United States and Canada. The Company provides training to end-users and provides ongoing support to users who have questions regarding operating procedures, equipment problems or other issues. The Company provides installation and service to those who purchase and lease equipment. In the market segments covered by the Company's dealers and distributors, they offer support for the products they sell. Personnel based in regional and satellite service locations throughout the United States and Canada provide high quality and timely on-site service for the installed rental equipment and maintenance base and other types of customer-owned equipment. Purchasers or lessees of the Company's larger products, such as financial exchanges, casinos and sports stadiums, often retain the Company to provide on-site service through the deployment of a service technician who is on-site daily or for the scheduled event. The Company operates its National Technical Services and Repair Center from its Des Moines, Iowa facility. Equipment repairs are performed in Des Moines and service technicians are dispatched nationwide from the Des Moines facility. The Company's field service is augmented by various service companies in the United States, Canada and overseas. From time to time the Company uses various third-party service agents to install, service and/or assist in the service of certain displays for reasons that include geographic area, size and height of displays. COMPETITION - ----------- The Company's offer of short and long-term leases to customers and its nationwide sales, service and installation capabilities are major competitive advantages in the display business. The Company believes that it is the largest supplier of large-scale stock, commodity, sports and race book gaming displays in the United States, as well as one of the larger outdoor electronic display and service organizations in the country. The Company competes with a number of competitors, both larger and smaller than itself, and with products based on different forms of technology. There are several companies whose current products utilize similar technology and who possess the resources necessary to develop competitive and more sophisticated products in the future. THEATRE OPERATIONS - ------------------ The Company currently operates 65 screens in 10 locations in the western Mountain States, which includes a fourteen-plex theatre in Loveland, Colorado, which is a 50% owned joint venture partnership. In 2006, the Company closed a non-profitable single screen theatre in Santa Fe, New Mexico to lease to the New Mexico Department of Cultural Affairs for a motion picture museum. In 2005, the Company expanded its Dillon, Colorado location by adding two additional screens and purchased land in Silver City, New Mexico to construct a new multiplex theatre. In 2004, the Company expanded its Durango, Colorado location by adding two additional screens. The Company's theatre revenues are generated from box office admissions, theatre concessions, theatre rentals and other sales. Theatre revenues are generally seasonal and coincide with the release dates of major films during the summer and holiday seasons. The Company is not currently operating any multimedia entertainment venues, but continues to stay abreast of innovations in this area of technology and continues to investigate new opportunities. The Company's motion picture theatres are subject to varying degrees of competition in the geographic areas in which they operate. In one area, theatres operated by a national circuit compete with the Company's theatre. The Company's theatres also face competition from all other forms of entertainment competing for the public's leisure time and disposable income. 4 INTELLECTUAL PROPERTY - --------------------- The Company owns or licenses a number of patents and holds a number of trademarks for its display equipment and theatrical enterprises and considers such patents, licenses and trademarks important to its business. EMPLOYEES - --------- The Company has approximately 431 employees as of February 28, 2007, of which approximately 253 employees support the Company's electronic display business. Approximately 13% of the employees are unionized. The Company believes its employee relations are good. ITEM 1A. RISK FACTORS LEVERAGE - -------- As of December 31, 2006, the Company's total long-term debt (including current portion) was $54.7 million. We expect we will incur indebtedness in connection with the implementation of our growth strategy. Our ability to satisfy our obligations will be dependent upon our future performance, which is subject to prevailing economic conditions and financial, business and other factors, including factors beyond our control. There can be no assurance that our operating cash flows will be sufficient to meet our debt service requirements or refinance indebtedness at maturity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." RELIANCE ON KEY SUPPLIERS - ------------------------- We design certain of our materials to match components furnished by suppliers. If such suppliers were unable or unwilling to provide us with those components, we would have to contract with other suppliers to obtain replacement sources. In particular, we purchase almost all of the LED module blocks used in our electronic information displays from three suppliers. We do not have long-term supply contracts with these suppliers. A change in suppliers of either LED module blocks or certain other components may result in engineering design changes, as well as delays in obtaining such replacement components. We believe there are presently other qualified vendors of these components. Our inability to obtain sufficient quantities of certain components as required, or to develop alternative sources at acceptable prices and within a reasonable time, could result in delays or reductions in product shipments that could have a materially adverse effect on our business and results of operations. COMPETITION - ----------- Our electronic information displays compete with a number of competitors, both larger and smaller than us, and with products based on different forms of technology. In addition, there are several companies whose current products utilize similar technology and who possess the resources to develop competitive and more sophisticated products in the future. Our success is somewhat dependent upon our ability to anticipate technological changes in the industry and to successfully identify, obtain, develop and market new products that satisfy evolving industry requirements. There can be no assurance that competitors will not market new products which have perceived advantages over our products or which, because of pricing strategies, render the products currently sold by us less marketable or otherwise adversely affect our operating margins. Our motion picture theatres are subject to varying degrees of competition in the geographic areas in which they operate. Our theatres also face competition from all other forms of entertainment competing for the public's leisure time and disposable income. NATURE OF LEASING AND MAINTENANCE REVENUES - ------------------------------------------ We derive a substantial percentage of our revenues from the leasing of our electronic information displays, generally pursuant to leases that have an average term of one to five years. Consequently, our future success is at least partly dependent on our ability to obtain the renewal of existing leases or to enter into new leases as existing leases expire. We also derive a significant percentage of our revenues from maintenance agreements relating to our display products. The average term of such agreements is generally one to five years. A portion of the maintenance agreements are cancelable upon 30 days notice. There can be no assurance that we will be successful in obtaining renewal of existing leases or maintenance 5 agreements, obtaining replacement leases or realizing the value of assets currently under leases that are not renewed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations." DEPENDENCE ON KEY PERSONNEL - --------------------------- We believe that our President and Co-Chief Executive Officer, Michael R. Mulcahy, and our Co-Chief Executive Officer and Executive Vice President, Thomas Brandt, play a significant role in the success of the Company and the loss of the services of either could have an adverse effect on the Company. There can be no assurance that the Company would be able to find a suitable replacement for either Mr. Mulcahy or Mr. Brandt. The Company has employment agreements with Mr. Mulcahy and Mr. Brandt which expire in 2010 and 2009, respectively, which may be extended by the employees in case of a change-in-control approved by the present Board of Directors. The Company believes that in addition to the above referenced key personnel, there is a core group of executives that also plays a significant role in the success of the Company. EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS AND CONTROL BY EXISTING STOCKHOLDERS - ------------------------------------------------------------------------------- Our Restated Certificate of Incorporation contains certain provisions that could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire control of us. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of our Common Stock, thus making it less likely that a stockholder will receive a premium on any sale of shares. Under our Restated Certificate of Incorporation, we have two classes of common stock outstanding, Common Stock and Class B Stock, each with its own rights and preferences. Each share of Class B Stock receives ten votes per share on all matters submitted to a vote of the stockholders versus the one vote received for each share of Common Stock. The Class B Stock is entitled to vote separately as a class on any proposal for merger, consolidation and certain other significant transactions. Moreover, our Board of Directors is divided into three classes, each of which serves for a staggered three-year term, making it more difficult for a third party to gain control of our Board. Our Restated Certificate of Incorporation also has a provision that requires a four-fifths vote on any merger, consolidation or sale of assets with or to an "Interested Person" or "Acquiring Person." Additionally, we are authorized to issue 500,000 shares of Preferred Stock containing such rights, preferences, privileges and restrictions as may be fixed by our Board of Directors which may adversely affect the voting power or other rights of the holders of Common Stock or delay, defer or prevent a change in control of the Company, or discourage bids for the Common Stock at a premium over its market price or otherwise adversely affect the market price of the Common Stock. Our Board of Directors is also authorized to issue 3,000,000 shares of Class A Stock, which is identical to the Common Stock but is non-voting and is entitled to a 10% higher dividend than the Common Stock. As of December 31, 2006, 14 stockholders who are executive officers and/or directors of the Company beneficially own approximately 81.96% of our outstanding Class B Stock, 18.65% of all classes and 64% of the voting power. As a result, these stockholders collectively will continue to have the ability to elect all of our directors and to veto major transactions for which a stockholder vote is required under Delaware law, including mergers, consolidations and certain other significant transactions. These stockholders could also block tender offers for our Common Stock that could give stockholders the opportunity to realize a premium over the then prevailing market price for their shares of Common Stock. LIMITED TRADING VOLUME AND VOLATILITY OF STOCK PRICE - ---------------------------------------------------- Our Common Stock is not widely held and the volume of trading has been low and sporadic. Accordingly, the Common Stock is subject to increased price volatility and reduced liquidity. There can be no assurance a more active trading market for the Common Stock will develop, or be sustained if it does develop. The limited public float of our Common Stock could cause the market price for the Common Stock to fluctuate substantially. In addition, stock markets have experienced wide price and volume fluctuations in recent periods and these fluctuations often have been unrelated to the operating performance of the specific companies affected. Any of these factors could adversely affect the market price of the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE - ------------------------------- Future sales of Common Stock in the public market by current stockholders of the Company could adversely affect the market price for the Common Stock. 325,870 shares of Common Stock (including Class B Stock if converted into equal amounts of Common Stock) may be sold in the public market by executive officers and directors, subject to the limitations contained in Rule 144 under the Securities Act of 1933, as amended. Sales of substantial amounts of the shares of Common Stock in the public market, or even the potential for such sales, could adversely affect the prevailing market price of our 6 Common Stock. See Note 15 - Stockholders' Equity with respect to additional shares of Common Stock issued in exchange for the 8 1/4% Notes. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES The Company's headquarters and principal executive offices are located at 110 Richards Avenue, Norwalk, Connecticut. In June 2004, the Company entered into a sale/leaseback of its 102,000 square foot facility located at such site, which is occupied by the Company and is used for administration, sales, engineering, production and assembly of its indoor display products. The Company leased back the entire building for four years, after which a three-year lease for part of the building will take effect. Approximately 9,500 square feet of the building is currently subleased to others. The Company owns a facility in Des Moines, Iowa and theatre properties in: Sahuarita, Arizona Dillon, Colorado Durango, Colorado Espanola, New Mexico Los Lunas, New Mexico Santa Fe, New Mexico Taos, New Mexico Laramie, Wyoming The Company also owns land in Silver City, New Mexico, on which the Company expects to construct and operate a multiplex movie theatre and other commercial uses. The Company leases eight premises throughout North America for use as sales, service and/or administrative operations, and leases three theatre locations. The aggregate rental expense was $908,000, $1,053,000 and $737,000 for the years ended December 31, 2006, 2005 and 2004, respectively. ITEM 3. LEGAL PROCEEDINGS 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (a) The Company's Common Stock is traded on the American Stock Exchange under the symbol "TLX." Sales prices are set forth in (d) below. (b) The Company had approximately 617 holders of record of its Common Stock and approximately 59 holders of record of its Class B Stock as of March 26, 2007. (c) The Board of Directors approved one quarterly cash dividend of $0.035 per share for Common Stock and $0.0315 per share for Class B Stock during the first quarter of 2006. Further quarterly cash dividends were not declared in order to conserve cash and pay down debt. Management and the Board of Directors will continue to review payment of quarterly cash dividends. (d) The range of Common Stock prices on the American Stock Exchange are set forth in the following table: High Low ---- --- 2006 ---- First Quarter $6.60 $5.50 Second Quarter 6.55 5.50 Third Quarter 6.05 5.50 Fourth Quarter 7.85 6.00 2005 ---- First Quarter $7.59 $7.00 Second Quarter 7.00 6.40 Third Quarter 7.00 6.00 Fourth Quarter 6.10 5.55
(e) The Company did not purchase any of its equity securities during any month of the fourth fiscal quarter of 2006. 8 ITEM 6. SELECTED FINANCIAL DATA (a) The following table sets forth selected consolidated financial data with respect to the Company for the five years ended December 31, 2006, which were derived from the audited consolidated financial statements of the Company and should be read in conjunction with them. Years Ended 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------------------- In thousands, except per share data Revenues $53,911 $ 54,368 $ 52,579 $ 56,022 $ 73,206 Income (loss) from continuing operations (1,647) (1,793) 412 365 34 Income from discontinued operation - - 127 689 394 Net income (loss) (1,647) (1,793) 539 1,054 428 Earnings (loss) per share - continuing operations: Basic $ (1.31) $ (1.42) $ 0.33 $ 0.29 $ 0.03 Diluted (1.31) (1.42) 0.33 0.29 0.03 Earnings per share - discontinued operation: Basic $ - $ - $ 0.10 $ 0.55 $ 0.31 Diluted - - 0.03 0.20 0.12 Total earnings (loss) per share: Basic $ (1.31) $ (1.42) $ 0.43 $ 0.84 $ 0.34 Diluted (1.31) (1.42) 0.43 0.70 0.34 Cash dividends per share: Common stock $ 0.035 $ 0.14 $ 0.14 $ 0.14 $ 0.14 Class B stock 0.0315 0.126 0.126 0.126 0.126 Average common shares outstanding 1,260 1,261 1,261 1,261 1,261 Total assets $88,472 $100,550 $101,114 $100,092 $109,433 Long-term debt 51,537 48,365 56,796 60,505 67,209 Stockholders' equity 20,174 22,396 24,605 24,036 23,025
(b) The following table sets forth quarterly financial data for years ended December 31, 2006 and December 31, 2005: Quarter Ended March 31 June 30 September 30 December 31 ------------- -------- ------- ------------ ----------- In thousands, except per share data 2006 Revenues $11,610 $13,709 $15,437 $13,155 Gross profit 2,723 3,347 4,097 2,690 Net income (loss) (1,073) (393) 61 (242) Earnings (loss) per share (0.85) (0.31) 0.04 (0.19) Cash dividends per share: Common stock 0.035 - - - Class B stock 0.0315 - - - 2005 Revenues $11,649 $13,464 $15,356 $13,899 Gross profit 3,137 3,650 4,141 2,706 Net income (loss) (422) (401) 11 (981) Earnings (loss) per share (0.33) (0.32) 0.01 (0.78) Cash dividends per share: Common stock 0.035 0.035 0.035 0.035 Class B stock 0.0315 0.0315 0.0315 0.0315
9 ITEM 7. MANGEMENT'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 catalog sports, retail and commercial markets. 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 prior periods are reported as a discontinued operation (see Note 6 - Sale of Assets and Discontinued Operation). In addition, on June 3, 2004, the Company entered into a sale/leaseback of its Norwalk, Connecticut headquarters (see Note 6 - Sale of Assets and Discontinued Operation). The Entertainment/real estate segment includes the operations of the motion picture theatres in the western Mountain States and income-producing real estate properties. Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to percentage of completion, uncollectable accounts, inventories, goodwill and intangible assets, income taxes, warranty obligations, benefit plans, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Senior management has discussed the development and selection of these accounting estimates and the related disclosures with the audit committee of the Board of Directors. Management believes the following critical accounting policies, among others, involve its more significant judgments and estimates used in the preparation of its consolidated financial statements: Percentage of Completion: The Company recognizes revenue on long-term equipment sales contracts using the percentage of completion method based on estimated incurred costs to the estimated total cost for each contract. Should actual total cost be different from estimated total cost, an addition or a reduction to cost of sales may be required. Uncollectable Accounts: The Company maintains allowances for uncollectable accounts for estimated losses resulting from the inability of its customers to make required payments. Should non-payment by customers differ from the Company's estimates, a revision to increase or decrease the allowance for uncollectable accounts may be required. Inventories: The Company writes down its inventory for estimated obsolescence equal to the difference between the carrying value of the inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Goodwill and Intangible Assets: The Company evaluates goodwill and intangible assets for possible impairment annually for goodwill and when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable for other intangible assets. The Company uses the fair market value approach to test for impairment of its goodwill and other factors that are considered in the review for impairment include, economic trends, and our market capitalization relative to net book value. The fair market valuations used for the impairment tests can be affected by changes in the estimates of revenue multiples and the discount rate used in the calculations. No impairment resulted from the annual 10 reviews performed in 2006, 2005 or 2004. Future adverse changes in market conditions or poor operating results of underlying assets could result in an inability to recover the carrying value of the assets, thereby possibly requiring an impairment charge in the future. Income Taxes: The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. While the Company has considered future taxable income and ongoing feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. Warranty Obligations: The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, including evaluating the quality of the component suppliers, the warranty obligation is affected by product failure rates. Should actual product failure rates differ from the Company's estimates, revisions to increase or decrease the estimated warranty liability may be required. Benefit Plans: The Company is required to make estimates and assumptions to determine benefit plan liabilities, which include investment returns, rates of salary increases and discount rates. During 2006 and 2005, the Company recorded an after tax minimum pension liability adjustment in other comprehensive loss of $567,000 and $301,000, respectively. Estimates and assumptions are reviewed annually with the assistance of external actuarial professionals and adjusted as circumstances change. At December 31, 2006, plan assets were invested 48.8% in guaranteed investment contracts, 48.8% in equity and index funds, 2.1% in bonds and 0.3% in money market funds. The investment return assumption takes the asset mix into consideration. The assumed discount rate reflects the rate at which the pension benefits could be settled. At December 31, 2006, the weighted average rates used for the computation of benefit plan liabilities were: investment returns, 8.75%; rates of salary increases, 3.00%; and discount rate, 6.00%. Net periodic cost for 2007 will be based on the December 31, 2006 valuation. The defined benefit plan periodic cost was $285,000 in 2006, $261,000 in 2005 and $280,000 in 2004. At December 31, 2006, assuming no change in the other assumptions, a one percentage point change in investment returns would affect the net periodic cost by $75,000 and a one percentage point change in the discount rate would affect the net periodic cost by $105,000. As of December 31, 2003, the benefit service under the defined benefit plan had been frozen and, accordingly, there is no service cost for each of the three years ended December 31, 2006. Quantitative and Qualitative Disclosures About Market Risks The Company's cash flows and earnings are subject to fluctuations from changes in interest rates and foreign currency exchange rates. The Company manages its exposures to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of interest-rate swap agreements and forward exchange contracts. At December 31, 2006, long-term debt outstanding of $34.9 million was at variable rates of interest ranging from 7.13% to 8.25% and $19.8 million was at fixed rates ranging from 7.0% to 9.5%. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes and, at December 31, 2006, was not involved in any derivative financial instruments. Results of Operations 2006 Compared to 2005 Total revenues for the year ended December 31, 2006 decreased 0.8% to $53.9 million from $54.4 million for the year ended December 31, 2005, principally due to a decrease in Indoor display equipment rentals and maintenance revenues offset by an increase in Outdoor display sales revenues. Indoor display revenues decreased $1.4 million or 9.2%. Of this decrease, Indoor display equipment rentals and maintenance revenues decreased $1.1 million or 11.8%, 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 consolidations within that industry. Although the market conditions appear to be slowly improving, installations of new equipment tend to lag any economic turnaround. Indoor display equipment sales decreased $291,000 or 5.0%, primarily due to a reduction in sales to the corporate sector. Outdoor display revenues increased $865,000 or 3.4%. Of this increase, Outdoor display equipment sales increased $1.0 million or 5.0%, primarily in the outdoor catalog sports market. This increase was offset by a $150,000 or 2.7% decrease in the Outdoor display equipment rentals and maintenance revenues, primarily due to the continued expected gradual revenue decline in the older Outdoor display equipment rental and maintenance bases acquired in the early 1990s. 11 Entertainment/real estate revenues increased slightly. While box office revenues remained level, there was an increase in concession sales, even though the Company closed its single screen theatre in Santa Fe, New Mexico in April 2006. Total operating income for the year ended December 31, 2006 decreased 7.8% to $4.2 million from $4.5 million for the year ended December 31, 2005, principally due to the reduction in revenues in the Indoor display segment. Indoor display operating income decreased $1.5 million to a loss of $361,000 in 2006 compared to an operating income of $1.1 million in 2005, primarily as a result of the decrease in revenues in the financial services market and a decrease in the gross margin of sold equipment due to the product mix. The cost of Indoor displays represented 75.0% of related revenues in 2006 compared to 66.4% in 2005. 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 monitor and address the cost of its field service operations to bring it in line with the revenues. The dispatch, help desk and repair functions have been centralized into the Des Moines, Iowa facility. Field service costs for the year ended December 31, 2006 compared to 2005 were reduced by approximately $160,000. Indoor display cost of equipment rentals and maintenance decreased $298,000 or 3.9%, 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 cost of equipment sales increased $565,000 or 22.2%, primarily due to reduced margins of the Indoor display equipment sales due to product mix of sales to the transportation market. Indoor display general and administrative expenses decreased $172,000 or 4.3% due to a $102,000 decrease in the allowance for uncollectable accounts receivable and a decrease in salaries and benefits. Outdoor display operating income increased $874,000 or 168.5%, primarily as a result of the increase in volume of sales in the catalog scoreboard business and a decrease in field service costs. The cost of Outdoor displays represented 78.3% of related revenues in 2006 compared to 80.5% in 2005. Outdoor display cost of equipment sales increased $613,000 or 4.0%, principally due to the increase in volume. Outdoor display cost of equipment rentals and maintenance decreased $499,000 or 9.5%, primarily due to a decrease in field service costs. Field service costs for the year ended December 31, 2006 compared to 2005 were reduced by approximately $525,000. Cost of Outdoor display equipment rentals and maintenance includes field service expenses, plant repair costs, maintenance and depreciation. Outdoor display general and administrative expenses decreased $123,000 or 2.7%, primarily due to a decrease in certain sales overhead costs in the commercial outdoor business such as trade shows, salaries, related benefits and travel. Entertainment/real estate operating income increased $272,000 or 9.5%, primarily due to an increase in MetroLux Theatres joint venture income of $218,000 to $344,000 in 2006 from $126,000 in 2005. This increase was attributable to a $264,000 impairment loss recorded in 2005 on the sale of the old theatre building held for sale, which was sold in February 2006. MetroLux Theatres relocated to a new state-of-the-art location in October 2005. The cost of Entertainment/real estate represented 73.0% of related revenues in 2006 compared to 73.9% in 2005. Cost of theatre receipts and other, which includes film rental costs and depreciation expense, decreased slightly, principally due to film rental costs. Entertainment/real estate general and administrative expenses increased $87,000 or 11.6%, primarily due to increased salaries and related benefits. Corporate general and administrative expenses decreased $306,000 or 8.57%, primarily due to staff reductions, overall decreases in salaries and related benefits and a $105,000 increase in the currency exchange gain in 2006. Net interest expense increased $356,000 or 9.2%, due to an increase in the interest rates of the variable rate debt. The gain on sale of assets in 2005 relates to the sale of vacant land in Taos, New Mexico. The effective tax rate for the years ended December 31, 2006 and 2005 was 49.6% and 34.9%, respectively. The 2006 effective tax rate was affected by the reversal of a deferred tax liability related to prior repurchases of the Company's convertible debt. 2005 Compared to 2004 Total revenues for the year ended December 31, 2005 increased 3.4% to $54.4 million from $52.6 million for the year ended December 31, 2004, principally due to an increase in Outdoor display sales revenues offset by a decrease in Indoor display revenues. Indoor display revenues decreased $2.1 million or 12.1%. Of this decrease, Indoor display equipment rentals and maintenance revenues decreased $1.6 million or 14.6%, 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. Indoor display equipment sales decreased $486,000 or 7.7%, primarily due to a reduction in sales from the financial services and gaming markets. 12 Outdoor display revenues increased $3.9 million or 17.8%. Of this increase, Outdoor display equipment sales increased $4.3 million or 27.2%, with increases in volume of sale in both the catalog scoreboard business and commercial business. Outdoor display equipment rentals and maintenance revenues decreased $453,000 or 7.7%, primarily due to the continued expected revenue decline in the older Outdoor display equipment rental and maintenance bases acquired in the early 1990s. Entertainment/real estate revenues remained level, which is better than the decline the industry experienced in 2005. 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 and two additional screens to its existing five-plex in Durango, Colorado in April 2004. Total operating income for the year ended December 31, 2005 decreased 24.0% to $4.5 million from $5.9 million for the year ended December 31, 2004, principally due to the reduction in revenues in the Indoor display segment. Indoor display operating income decreased $1.3 million or 53.3%, primarily as a result of the decrease in revenues in the financial services and gaming markets. The cost of Indoor displays represented 66.4% of related revenues in 2005 compared to 62.4% 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 for the year ended December 31, 2005 compared to 2004 were reduced by approximately $106,000. Indoor display cost of equipment rentals and maintenance decreased $69,000 or 0.9%. Cost of Indoor display equipment rentals and maintenance includes field service expenses, plant repair costs, maintenance and depreciation. Indoor display cost of equipment sales decreased $640,000 or 20.1%, primarily due to the decrease in revenues and the volume mix. Indoor display general and administrative expenses decreased $89,000 or 2.2%. Outdoor display operating income increased $133,000 or 34.7%, 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 80.5% of related revenues in 2005 compared to 80.6% in 2004. Outdoor display cost of equipment sales increased $3.6 million or 30.4%, principally due to the increase in volume. Outdoor display cost of equipment rentals and maintenance decreased $499,000 or 8.7%, primarily due to a decrease in field service costs. Field service costs for the year ended December 31, 2005 compared to 2004 were reduced by approximately $555,000. 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 $640,000 or 16.6%, due to an increase in marketing expense and an increase in commercial outdoor sales payroll, related benefits and travel. Entertainment/real estate operating income decreased $260,000 or 8.3%, primarily due to a 1.4% decrease in box office revenue, which is actually better than the industry-wide trend for the year, and a decrease in MetroLux Theatres joint venture income of $270,000 to $126,000 in 2005. This decrease was attributable to an impairment loss of $264,000 on the old theatre building held for sale, which was sold subsequent to year end. MetroLux Theatres relocated to a new state-of-the-art location (also in Loveland, Colorado) in October 2005. The cost of Entertainment/real estate represented 73.9% of related revenues in 2005 compared to 75.4% in 2004. Cost of theatre receipts and other, which includes film rental costs and depreciation expense, decreased $191,000 or 1.9%, primarily due to the reduction in admissions. Entertainment/real estate general and administrative expenses increased $180,000 due to increased payroll and related benefits. Corporate general and administrative expenses decreased $389,000 or 9.8%, due to reductions in insurance expense, payroll and related benefits. Net interest expense increased $141,000 or 3.8%, due to an increase in the interest rates of the variable rate debt and an increase in long-term debt at December 31, 2005. The gain on sale of assets relates to the sale of vacant land in Taos, New Mexico in 2005. 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 years ended December 31, 2005 and 2004 was 34.9% and 50.9%, respectively. The rates were affected by the Canadian subsidiary's income being taxed at higher rates than the domestic tax benefit. Liquidity and Capital Resources The Company has a bank Credit Agreement, which was modified subsequent to year end to extend the maturity from January 1, 2008 to April 1, 2008, which provides for a term loan of $10.0 million, a non-revolving line of credit of up to $6.2 million to finance purchases and/or redemptions of one-half of the 7 1/2% Convertible Subordinated Notes due 2006 (the "7 1/2% Notes"), and a revolving loan of up to $5.0 million at variable interest rates ranging from LIBOR plus 2.25% to Prime (ranging from 7.60% to 8.25% at December 31, 2006). The Credit Agreement matures on April 1, 2008. $6.1 million of the non-revolving line of credit was drawn to finance one-half of the redemption of the 7 1/2% Notes and as of December 31, 2006, has converted into a four-year term loan also maturing April 1, 2008. At December 31, 2006, the entire revolving loan facility had been drawn. The Credit Agreement requires an annual facility fee on the unused commitment of 0.25%, and 13 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 $18.5 million and maintaining accounts with an average monthly compensating balance of not less than $750,000. As of December 31, 2006, the Company was in compliance with the forgoing financial covenants, but the Company was not in compliance with the cap on capital expenditures, which its senior lender waived subsequent to year end. The Company continues to be in discussion with its senior lender to further extend the maturity of the Credit Agreement. Although the Company has incurred losses for the last two years, it believes that cash generated from operations together with cash and cash equivalents on hand should be sufficient to fund its anticipated current and near term cash requirements. The Company is in discussions with its senior lender to restructure its existing Credit Agreement, which includes the revolving loan facility, that matures April 1, 2008. The Company continually evaluates the need and availability of long-term capital in order to meet its cash requirements and fund potential new opportunities. On March 13, 2006 and April 14, 2004, the Company completed two separate offers to exchange $1,000 principal amount of its 8 1/4% Limited Convertible Senior Subordinated Notes due 2012 (the "8 1/4% Notes") for each $1,000 principal amount of its 7 1/2% Notes. A total of $18.0 million principal amount of 7 1/2% Notes were exchanged ($0.1 million in 2006 and $17.9 million in 2004), leaving $12.2 million principal amount of 7 1/2% Notes outstanding. The 8 1/4% Notes provide for a higher interest rate, which is payable semi-annually, have a longer term, were convertible into Common Stock at a lower conversion price of $9.00 per share until March 1, 2007, may be redeemed by the Company, in whole or in part, at declining premiums and were senior to the 7 1/2% Notes and are senior to the Company's 9 1/2% Subordinated Debentures due 2012 (the "Debentures"). On March 15, 2007, the Company completed an offer to exchange 133 shares of its Common Stock for each $1,000 principal amount of its 8 1/4% Notes. The exchange offer commenced February 14, 2007 and expired on March 15, 2007. The offer was for up to $9,000,000 principal amount, or approximately 50% of the $18.0 million principal amount outstanding of the 8 1/4% Notes. A total of $7.8 million principal amount of the 8 1/4% Notes were exchanged, leaving $10.1 million principal amount of the 8 1/4% Notes outstanding. Cash and cash equivalents decreased $7.8 million in 2006 compared to increases of $1.2 million and $376,000 in 2005 and 2004, respectively. The decrease in 2006 is primarily attributable to the reduction of long-term debt of $7.8 million, investment in equipment manufactured for rental of $4.3 million and purchases of property, plant and equipment of $0.7 million, offset by increases from operating activities of $3.8 million, proceeds from the Company's joint venture of $1.0 million and proceeds from the sale of available-for-sale securities of $0.3 million. The increase in 2005 was primarily attributable to an increase of long-term debt of $4.0 million, proceeds from the Company's joint venture of $0.3 million and operating activities of $3.9 million, offset by the investment in equipment manufactured for rental of $4.8 million and purchases of property, plant and equipment of $2.0 million, which included expansion of the Company's movie theatre in Dillon, Colorado and purchase of land in Silver City, New Mexico. The increase in 2004 was primarily attributable to proceeds received from sales of assets of $7.0 million, proceeds from the sale of available-for-sale securities of $0.3 million, proceeds received from construction loan borrowings of $1.5 million, proceeds from the Company's joint venture of $0.2 million and operating activities of $5.1 million, offset by the investment in equipment manufactured for rental of $5.3 million, purchases of property, plant and equipment, including expansion of the Company's movie theatres in Durango and Dillon, Colorado, of $3.0 million, purchases of available-for-sale securities of $0.3 million, reduction in long-term debt of $6.1 million, payments of dividends of $0.2 million and cash used by the discontinued operation of $0.5 million. The Company experiences a favorable collection cycle on its trade receivables. Under various agreements, the Company is obligated to make future cash payments in fixed amounts. These include payments under the Company's long-term debt agreements, employment and consulting agreement payments and rent payments required under operating lease agreements. The Company's long-term debt requires interest payments. The Company has both variable and fixed interest rate debt. Interest payments are projected based on actual interest payments incurred in 2006 until the underlying debts matures. The following table summarizes the Company's fixed cash obligations as of December 31, 2006 over the next five fiscal years: In thousands 2007 2008 2009 2010 2011 - -------------------------------------------------------------------------------------------- Long-term debt, including interest $7,464 $21,666 $3,865 $3,826 $3,747 Employment and consulting agreement obligations 1,604 1,371 796 419 349 Operating lease payments 750 514 315 293 136 ------------------------------------------------------ Total $9,818 $23,551 $4,976 $4,538 $4,232 - --------------------------------------------------------------------------------------------
14 Off-Balance Sheet Arrangements: The Company has no majority-owned subsidiaries that are not included in the consolidated financial statements nor does it have any interests in or relationships with any special purpose off-balance sheet financing entities. The Company has guaranteed $0.7 million (75%) of a $0.9 million business loan to finance theatre equipment held by its joint venture, MetroLux Theatres, until May 2011, and accordingly, has recognized a liability for $33,000. The unrelated 50% partner of MetroLux Theatres also guaranteed $0.7 million (75%) of the $0.9 million business loan. The assets of MetroLux Theatres collateralize this business loan. Safe Harbor Statement under the Private Securities 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 7A. 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. The fair value of the Company's fixed rate long-term debt is disclosed in Note 9 to the consolidated financial statements. A one-percentage point change in interest rates would result in an annual interest expense fluctuation of approximately $334,000. In addition, the Company is exposed to foreign currency exchange rate risk mainly as a result of investment in its Canadian subsidiary. A 10% change in the Canadian dollar relative to the U.S. dollar would result in a currency exchange expense fluctuation of approximately $17,000, based on dealer quotes, considering current exchange rates. The Company does not enter into derivatives for trading or speculative purposes and did not hold any derivative financial instruments at December 31, 2006. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary financial information are set forth below: 15 Consolidated Statements of Operations In thousands, except per share data Years ended December 31 2006 2005 2004 - ------------------------------------------------------------------------------------------------------ Revenues: Equipment rentals and maintenance $13,621 $14,882 $16,944 Equipment sales 26,845 26,121 22,269 Theatre receipts and other 13,445 13,365 13,366 ----------------------------------- Total revenues 53,911 54,368 52,579 ----------------------------------- Operating expenses: Cost of equipment rentals and maintenance 12,033 12,830 13,398 Cost of equipment sales 19,201 18,023 15,052 Cost of theatre receipts and other 9,820 9,881 10,072 ----------------------------------- Total operating expenses 41,054 40,734 38,522 ----------------------------------- Gross profit from operations 12,857 13,634 14,057 General and administrative expenses 12,328 12,843 12,501 Interest income 279 353 184 Interest expense (4,507) (4,225) (3,915) Gain on sale of assets - 128 2,536 Other income 87 71 82 ----------------------------------- Income (loss) from continuing operations before income taxes, income from joint venture and discontinued operation (3,612) (2,882) 443 Provision (benefit) for income taxes: Current 234 370 366 Deferred (1,855) (1,333) 61 ----------------------------------- Total provision (benefit) for income taxes (1,621) (963) 427 ----------------------------------- Income from joint venture 344 126 396 ----------------------------------- Income (loss) from continuing operations (1,647) (1,793) 412 Income from discontinued operation, net of income taxes - - 127 ----------------------------------- Net income (loss) $(1,647) $(1,793) $ 539 ==================================== Earnings (loss) per share - continuing operations: Basic $ (1.31) $ (1.42) $ 0.33 Diluted $ (1.31) $ (1.42) $ 0.33 Earnings per share - discontinued operation: Basic $ - $ - $ 0.10 Diluted $ - $ - $ 0.03 Total earnings (loss) per share: Basic $ (1.31) $ (1.42) $ 0.43 Diluted $ (1.31) $ (1.42) $ 0.43 Weighted average common shares outstanding: Basic 1,260 1,261 1,261 Diluted 1,260 1,261 3,932 - ------------------------------------------------------------------------------------------------------ The accompanying notes are an integral part of these consolidated financial statements.
16 Consolidated Balance Sheets In thousands, except share data December 31 2006 2005 - -------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 5,765 $ 13,610 Available-for-sale securities 199 431 Receivables, less allowance of $1,034 - 2006 and $935 - 2005 6,721 6,321 Unbilled receivables 962 842 Inventories 6,467 5,658 Prepaids and other 858 1,149 -------------------- Total current assets 20,972 28,011 -------------------- Rental equipment 88,903 91,648 Less accumulated depreciation 56,946 56,280 -------------------- 31,957 35,368 -------------------- Property, plant and equipment 39,459 39,188 Less accumulated depreciation 10,948 9,850 -------------------- 28,511 29,338 Goodwill 1,004 1,004 Other assets 6,028 6,829 -------------------- TOTAL ASSETS $88,472 $100,550 - -------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,412 $ 2,821 Accrued liabilities 6,929 6,986 Current portion of long-term debt 3,162 14,145 -------------------- Total current liabilities 12,503 23,952 -------------------- Long-term debt: 8 1/4% Limited convertible senior subordinated notes due 2012 17,958 17,868 9 1/2% Subordinated debentures due 2012 1,057 1,057 Notes payable 32,522 29,440 -------------------- 51,537 48,365 Deferred credits, deposits and other 3,782 2,859 Deferred income taxes 476 2,978 Commitments and contingencies Stockholders' equity: Capital stock Common - $1 par value - 5,500,000 shares authorized, 2,453,591 shares issued in 2006 and 2005 2,453 2,453 Class B - $1 par value - 1,000,000 shares authorized, 286,814 shares issued in 2006 and 2005 287 287 Additional paid-in-capital 13,897 13,901 Retained earnings 17,193 18,883 Accumulated other comprehensive loss (1,853) (1,287) -------------------- 31,977 34,237 Less treasury stock - at cost - 1,475,588 shares in 2006 and 1,480,045 shares in 2005 (excludes additional 286,814 shares held in 2006 and 2005 for conversion of Class B stock) 11,803 11,841 -------------------- Total stockholders' equity 20,174 22,396 -------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $88,472 $100,550 - -------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
17 Consolidated Statements of Cash Flows In thousands Years ended December 31 2006 2005 2004 - ----------------------------------------------------------------------------------------------------- (restated) Cash flows from operating activities Net income (loss) $ (1,647) $(1,793) $ 539 Income from discontinued operation - - 127 ---------------------------------------- Income (loss) from continuing operations (1,647) (1,793) 412 Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 9,543 9,685 9,852 Income from joint venture (344) (126) (396) Deferred income taxes (1,855) (1,332) 61 Gain on sale of assets - (108) (2,536) Loss (gain) on sale of available-for-sale securities 15 (1) (27) Cash used in discontinued operation - - (1,734) Changes in operating assets and liabilities: Receivables (520) (894) (675) Inventories (809) (43) (918) Prepaids and other assets 58 (335) (239) Accounts payable and accruals (380) 39 1,581 Deferred credits, deposits and other (302) (1,220) (310) ---------------------------------------- Net cash provided by operating activities 3,759 3,872 5,071 ---------------------------------------- Cash flows from investing activities Equipment manufactured for rental (4,317) (4,831) (5,284) Purchases of property, plant and equipment (673) (1,978) (3,039) Purchases of available-for-sale securities - (114) (282) Proceeds from sale of available-for-sale securities 257 32 307 Proceeds from joint venture, net 953 250 150 Proceeds from sale of assets - 190 7,028 Cash provided by discontinued operation - - 1,205 ---------------------------------------- Net cash provided by (used in) investing activities (3,780) (6,451) 85 ---------------------------------------- Cash flows from financing activities Proceeds from long-term debt 6,250 6,020 20,596 Payments of long-term debt (14,043) (2,050) (25,198) Purchase of treasury stock - (3) (1) Proceeds from exercise of stock options 12 - - Cash dividends (43) (176) (177) ---------------------------------------- Net cash provided by (used in) financing activities (7,824) 3,791 (4,780) ---------------------------------------- Net increase (decrease) in cash and cash equivalents (7,845) 1,212 376 Cash and cash equivalents at beginning of year 13,610 12,398 12,022 ---------------------------------------- Cash and cash equivalents at end of year $ 5,765 $13,610 $ 12,398 - ----------------------------------------------------------------------------------------------------- Interest paid $ 4,083 $ 3,106 $ 3,172 Income taxes paid 253 354 41 Supplemental disclosures of non-cash financing activities: Exchange of 7 1/2% Notes 108 - 17,868 - ----------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
18 Consolidated Statements of Stockholders' Equity Accumulated Additional Other In thousands, except share data Common Stock Class B Paid-in Treasury Retained Comprehensive For the three years ended December 31, 2006 Shares Amount Shares Amount Capital Stock Earnings Income (Loss) - ---------------------------------------------------------------------------------------------------------------------------------- Balance January 1, 2004 2,452,900 $2,453 287,505 $287 $13,901 $(11,837) $20,490 $(1,258) Net income - - - - - - 539 - Cash dividends - - - - - - (177) - Common stock acquired (26 shares) - - - - - (1) - - Other comprehensive income (loss), net of tax: Unrealized foreign currency translation - - - - - - - 329 Unrealized holding loss on securities - - - - - - - (4) Minimum pension liability adjustment - - - - - - - (117) Class B conversion to common stock 42 - (42) - - - - - ---------------------------------------------------------------------------------- Balance December 31, 2004 2,452,942 2,453 287,463 287 13,901 (11,838) 20,852 (1,050) Net loss - - - - - - (1,793) - Cash dividends - - - - - - (176) - Common stock acquired (366 shares) - - - - - (3) - - Other comprehensive income (loss), net of tax: Unrealized foreign currency translation - - - - - - - 88 Unrealized holding loss on securities - - - - - - - (24) Minimum pension liability adjustment - - - - - - - (301) Class B conversion to common stock 649 - (649) - - - - - ---------------------------------------------------------------------------------- Balance December 31, 2005 2,453,591 2,453 286,814 287 13,901 (11,841) 18,883 (1,287) Net loss - - - - - - (1,647) - Cash dividends - - - - - - (43) - Stock option compensation expense - - - - 4 - - - Common stock issued (2,000 shares) - - - - - 18 - - Stock options exercised (2,500 shares) - - - - (8) 20 - - Other comprehensive income (loss), net of tax: Unrealized foreign currency translation - - - - - - - (23) Unrealized holding gain on securities - - - - - - - 24 Minimum pension liability adjustment - - - - - - - 354 Pension liability adjustment - SFAS 158 - - - - - - - (921) ---------------------------------------------------------------------------------- Balance December 31, 2006 2,453,591 $2,453 286,814 $287 $13,897 $(11,803) $17,193 $(1,853) - ---------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Comprehensive Income (Loss) In thousands Years ended December 31 2006 2005 2004 - ----------------------------------------------------------------------------------- Net income (loss) $(1,647) $(1,793) $ 539 ----------------------------- Other comprehensive income (loss): Unrealized foreign currency translation (23) 88 329 Unrealized holding gain (loss) on securities 40 (40) (7) Minimum pension liability adjustment 306 (219) (196) Pension liability adjustment - SFAS 158 (1,536) - - Income tax benefit (expense) related to items of other comprehensive income (loss) 647 (66) 82 ----------------------------- Total other comprehensive income (loss), net of tax (566) (237) 208 ----------------------------- Comprehensive income (loss) $(2,213) $(2,030) $ 747 - ----------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
19 Notes To Consolidated Financial Statements 1. Summary of Significant Accounting Policies Trans-Lux Corporation is a leading manufacturer and supplier of programmable electronic information displays and owner/operator of cinemas. Principles of consolidation: The consolidated financial statements include the accounts of Trans-Lux Corporation, a Delaware corporation, and all wholly-owned subsidiaries (the "Company"). The investment in a 50% owned joint venture partnership, MetroLux Theatres, is reflected under the equity method and is included in other assets in the Consolidated Balance Sheets and is recorded as income from joint venture in the Consolidated Statements of Operations. Intercompany balances and transactions have been eliminated in consolidation. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the financial statements in the period in which they are determined to be necessary. Estimates are used when accounting for such items as costs of long-term sales contracts, allowance for uncollectable accounts, inventory valuation allowances, depreciation and amortization, intangible assets, income taxes, warranty obligation, benefit plans, contingencies and litigation. Cash and cash equivalents: The Company considers all highly liquid investments with a maturity of three months or less, when purchased, to be cash equivalents. The Company's credit facility with its senior lender requires maintaining accounts with an average monthly compensating balance of not less than $750,000. Available-for-sale securities: Available-for-sale securities consist of mutual fixed income funds and are stated at fair value based on quoted market prices. The Company determines realized gains and losses on the specific identification basis. Unrealized gains and losses on investments available-for-sale are reflected in accumulated other comprehensive loss in the Consolidated Balance Sheets and as a separate item in the Consolidated Statements of Comprehensive Income (Loss). Accounts receivable: Receivables are carried at net realizable value. Reserves for uncollectable accounts are provided based on historical experience and current trends. The Company evaluates the adequacy of these reserves regularly. The following is a summary of the allowance for uncollectable accounts at December 31: In thousands 2006 2005 2004 - ------------------------------------------------------------------- Balance at beginning of year $ 935 $ 711 $1,092 Provisions 258 360 213 Deductions (159) (136) (594) -------------------------------- Balance at end of year $1,034 $ 935 $ 711 - -------------------------------------------------------------------
Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers and relatively small account balances within the majority of the Company's customer base, and their dispersion across different businesses. The Company periodically evaluates the financial strength of its customers and currently believes that its credit risk exposure is limited. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market value. Valuation allowances for slow moving and obsolete inventories are provided based on historical experience and demand for servicing of the displays. The Company evaluates the adequacy of these valuation allowances regularly. Rental equipment and property, plant and equipment: Rental equipment and property, plant and equipment are stated at cost and depreciated over their respective useful lives using straight line or 150% declining balance methods. Leaseholds and improvements are amortized over the lesser of the useful lives or term of the lease. 20 The estimated useful lives are as follows: Years - -------------------------------------------- Rental equipment 10 - 15 Buildings and improvements 10 - 40 Machinery, fixtures and equipment 4 - 15 Leaseholds and improvements 5 - 27 - --------------------------------------------
When rental equipment and property, plant and equipment are fully depreciated, retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the accounts. Goodwill and intangibles: Goodwill and intangible assets are accounted for in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized, but are reviewed annually for impairment, or more frequently if indications of possible impairment exist. Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired. Identifiable intangible assets are recorded at cost and amortized over their estimated useful life on a straight line basis; noncompete agreements over their term of 10 years; deferred financing costs over the life of the related debt of two to 20 years; and other intangibles over 10 years. 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. The Company annually evaluates the value of its goodwill and determines if it is impaired by comparing the carrying value of goodwill to its estimated fair value. The Company performed the annual impairment tests for goodwill as of October 1, 2006, 2005 and 2004, and determined that goodwill was not impaired as of those dates. The Company also periodically evaluates the value of its other intangible assets by comparing the carrying value with estimated future cash flows. Other intangible assets are evaluated when indicators of impairment exist. Impairment or disposal of long-lived assets: The Company evaluates whether there has been an impairment in any of its long-lived assets, excluding goodwill, if certain circumstances indicate that a possible impairment may exist. An impairment in value may exist when the carrying value of a long- lived asset exceeds its undiscounted cash flows. If it is determined that an impairment in value has occurred, the carrying value is written down to its fair value. Maintenance contracts: Purchased maintenance contracts are stated at cost and are being amortized over their economic lives of 15 years using an accelerated method, which contemplates contract expiration, fall-out and non-renewal. Revenue recognition: Revenue from rental of equipment and revenue from maintenance contracts are recognized as they accrue during the term of the respective agreements, which generally run for periods of one month to 10 years. At December 31, 2006, the future minimum lease payments due the Company under operating leases that expire at varying dates through 2016 for its rental equipment and maintenance contracts, assuming no renewals of existing leases or any new leases, aggregating $20,441,000 was as follows: $9,986,000 - 2007, $4,876,000 - 2008, $2,782,000 - 2009, $1,483,000 - 2010, $737,000 - 2011, $577,000 - thereafter. The Company recognizes revenues on long-term equipment sales contracts, which require more than three months to complete, using the percentage of completion method. The Company records unbilled receivables representing amounts due under these long-term equipment sales contracts, which have not been billed to the customer. Income is recognized based on the percentage of incurred costs to the estimated total costs for each contract. The determination of the estimated total costs is susceptible to change on these sales contracts. Revenues on equipment sales, other than long-term equipment sales contracts, are recognized upon shipment when title and risk of loss passes to the customer. Theatre receipts and other revenues are recognized at the time service is provided. Warranty obligations: The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, including evaluating the quality of the component suppliers, the warranty obligation is affected by product failure rates. Should actual product failure rates differ from the Company's estimates, revisions to increase or decrease the estimated warranty liability may be required. Taxes on income: The Company computes income taxes using the asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the assets and liabilities. Foreign currency: The functional currency of the Company's non-U.S. business operation is the applicable local currency. The assets and liabilities of such operation are translated into U.S. dollars at the year-end rate of exchange, and the income and cash flow statements are converted at the average annual rate of exchange. The resulting translation adjustment is recorded in accumulated other comprehensive loss in the Consolidated Balance Sheets and Concolidated Statements of Comprehensive Income (Loss). Gains and losses related to the settling of transactions not denominated in the functional currency are recorded as a component of general and administrative expenses in the Consolidated Statements of Operations. Derivative financial instruments: The Company has limited involvement with derivative financial instruments and does not use them for trading purposes; they are only used to manage and fix well-defined interest rate risks. The Company was not involved in any derivative financial instruments during the three years ended December 31, 2006. 21 Share-based compensation plans: On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123R"), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. Under the fair value recognition provisions of SFAS 123R compensation is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. The Company has used the binomial options-pricing valuation model to estimate fair value of share-based awards, which requires various assumptions including estimating stock price volatility, expected life of the stock option and risk free interest rate. For details on the accounting effect of share-based compensation see Note 13 - Share-Based Compensation. The Company elected the "modified prospective method" of transition as permitted by SFAS 123R. Under this transition method, the Company is required to record compensation expense or all awards granted after the date of adoption and for the unvested portion of previously granted awards that were outstanding at the date of adoption, and accordingly, periods prior to adoption were not restated. SFAS 123R required the Company to apply an estimated forfeiture rate in calculating the period expense, as opposed to recognizing forfeitures as an expense reduction as they occur. The Company has not experienced any forfeitures that would need to be taken into consideration in SFAS 123R calculations. Prior to January 1, 2006, the Company accounted for stock options granted in accordance with the provisions and related interpretations of APB 25 as permitted by Statement of Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). Therefore, there was no share-based compensation recorded in the Consolidated Statements of Operations related to employee and director stock options for the years ended December 31, 2005 and 2004. Recent accounting pronouncements: In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3." This Statement requires, unless impracticable, retrospective application to the prior periods' financial statements as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. The provisions of this Statement are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this Statement in 2006 did not have a material impact on the Company's financial position or results of operations. In April 2006, the FASB issued FSP FIN 46R-6, "Determining the Variability to Be Considered in Applying FASB Interpretation No. 46R," which requires the variability of an entity to be analyzed based on the design of the entity. The nature and risks in the entity, as well as the purpose for the entity's creation are examined to determine the variability in applying FIN 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"). The variability is used in applying FIN 46R to determine whether an entity is a variable interest entity, which interests are variable interests in the entity, and who is the primary beneficiary of the variable interest entity. This Statement is effective for all reporting periods beginning after June 15, 2006. The adoption of this Statement in 2006 did not have a material impact on the Company's financial position or results of operations. In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, "Accounting for Income Taxes." The interpretation clearly scopes out income tax positions related to FASB Statement No. 5, "Accounting for Contingencies." The Company will adopt the provisions of this Statement in 2007. The cumulative effect of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings. Management does not anticipate that the adoption of this statement will have a material effect on the Company's financial condition and results of operations. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157") that defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands the disclosures about fair value measurement. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management is assessing the potential impact of SFAS 157 on the Company's financial condition and results of operations. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Plans and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). SFAS 158 requires an employer to recognize on its balance sheet the funded status of a benefit plan. Gains or losses and prior service costs or credits that arise during the period as a component of other comprehensive income are also required to be recognized. In addition, SFAS 158 requires that the measurement date of defined benefit plan assets and obligations must coincide with the year-end date and certain disclosures are required in the notes to the consolidated financial statements. The Company adopted SFAS 158 effective December 31, 2006. For details on the accounting effect of the defined benefit plan, see Note 12 - Pension Plan. 22 Reclassifications: Certain reclassifications of prior years' amounts have been made to conform to the current year's presentation. 2. Available-for-Sale Securities Available-for-sale securities are carried at estimated fair values and the unrealized holding gains and losses are excluded from earnings and reported net of income taxes in accumulated other comprehensive income (loss) until realized. An adjustment of $40,000 was recorded to reflect the unrealized loss on available-for-sale securities at December 31, 2006 and an adjustment of $40,000 was recorded to reflect the unrealized gains on available-for-sale securities at December 31, 2005. Management believes that these changes in the fair value of securities are temporary. The Company realized a loss of $15,000 during 2006 and a gain of $1,000 during 2005 on the sales of available-for-sale securities. Previously, an unrealized loss of $23,000 and $1,000, respectively, had been recorded in accumulated other comprehensive income (loss) for these sold available-for-sale securities. Available-for-sale securities consist of the following: In thousands 2006 2005 - ------------------------------------------------------------- Fair Unrealized Fair Unrealized Value Losses Value Losses ---------------------------------------- Mutual funds $199 $17 $284 $48 Equity securities - - 147 9 --------------------------------------- $199 $17 $431 $57 - -------------------------------------------------------------
3. Inventories Inventories consist of the following: In thousands 2006 2005 - ---------------------------------------- Raw materials $4,508 $3,740 Work-in-progress 1,358 1,411 Finished goods 601 507 ---------------- $6,467 $5,658 - ----------------------------------------
4. Property, Plant and Equipment Property, plant and equipment consist of the following: In thousands 2006 2005 - ------------------------------------------------------ Land, buildings and improvements $31,706 $31,239 Machinery, fixtures and equipment 6,765 6,969 Leaseholds and improvements 988 980 ------------------ $39,459 $39,188 - ------------------------------------------------------
Land, buildings and equipment having a net book value of $25.6 million and $26.6 million at December 31, 2006 and 2005, respectively, were pledged as collateral under various mortgage agreements. 23 5. Other Assets Other assets consist of the following: In thousands 2006 2005 - ------------------------------------------------------------------ Receivable - sale/leaseback of facility $2,580 $2,580 Deferred financing costs, net of accumulated amortization of $641 - 2006 and $1,167 - 2005 798 878 Spare parts 750 850 Investment in joint venture (see Note 17) 444 1,099 Prepaids 347 374 Noncompete agreements, net of accumulated amortization of $186 - 2006 and $271 - 2005 274 320 Maintenance contracts, net of accumulated amortization of $2,303 - 2006 and $2,256 - 2005 84 131 Deposits and other 751 597 --------------- $6,028 $6,829 - ------------------------------------------------------------------
The receivable - sale/leaseback of facility relates to a long-term receivable secured by a purchase money mortgage subordinated to a $3.5 million first mortgage in favor of the purchaser of the Norwalk, Connecticut facility (see Note 6). Deferred financing costs relate to the issuance of the 8 1/4% limited convertible senior subordinated notes, the 9 1/2% subordinated debentures, mortgages and other financing agreements. Noncompete agreements relate to the acquisition of theatre leases and a $450,000 restrictive covenant agreement relating to a theatre acquisition. Maintenance contracts represent the present value of acquired agreements to service outdoor display equipment. Future amortization expense of intangible assets over the next five years is expected as follows: $279,000 - 2007, $199,000 - 2008, $157,000 - 2009, $156,000 - 2010, $153,000 - 2011. 6. Sale of Assets and Discontinued Operation Sale of Assets On June 3, 2004, the Company entered into a sale/leaseback of its Norwalk, Connecticut facility 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 property will take effect. The $2.6 million receivable is included in other assets in the Consolidated Balance Sheets. 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 and is included in deferred credits, deposits and other in the Consolidated Balance Sheets. The $2.6 million balance of the purchase price 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. 24 The following table presents the financial results of the discontinued operation: In thousands 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 - ---------------------------------------------
7. Taxes on Income The components of income tax expense (benefit) are as follows: In thousands 2006 2005 2004 - --------------------------------------------------------------- Current: Federal $ - $ - $ - State and local - 78 60 Foreign 234 292 306 --------------------------- 234 370 366 --------------------------- Deferred: Federal (1,562) (1,122) 44 State and local (293) (211) 17 --------------------------- (1,855) (1,333) 61 --------------------------- Total income tax expense (benefit) $(1,621) $ (963) $427 - ---------------------------------------------------------------
Income (loss) from continuing operations before income taxes is from the United States ($3,734) and ($3,396) and Canada $466 and $640 for the years ended December 31, 2006 and 2005, respectively. 25 Income taxes provided differed from the expected federal statutory rate of 34.0% as follows: 2006 2005 2004 - --------------------------------------------------------------------------- Statutory federal income tax (benefit) rate (34.0%) (34.0%) 34.0% State income taxes, net of federal benefit (5.9) (3.1) 6.0 Foreign income taxed at different rates 2.3 2.7 8.8 Gain on purchase of the Company's 9% subordinated debentures (11.4) - - Other (0.6) (0.5) 2.1 ----------------------------- Effective income tax rate (49.6%) (34.9%) 50.9% - ---------------------------------------------------------------------------
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: In thousands 2006 2005 - ----------------------------------------------------------------- Deferred tax asset: Tax credit carryforwards $1,038 $ 1,040 Operating loss carryforwards 5,932 5,363 Net pension costs 1,207 429 Bad debts 361 332 Other 482 657 Valuation allowance (56) (58) -------------------- 8,964 7,763 -------------------- Deferred tax liability: Depreciation 8,930 9,830 Gain on purchase of the Company's 9% subordinated debentures - 439 Other 510 472 -------------------- 9,440 10,741 -------------------- Net deferred tax liability $ 476 $ 2,978 - -----------------------------------------------------------------
Tax credit carryforwards primarily relate to federal alternative minimum taxes of $0.9 million paid by the Company, which may be carried forward indefinitely and applied against regular federal taxes. Operating tax loss carryforwards primarily relate to U.S. federal net operating loss carryforwards of approximately $14.3 million, which begin to expire in 2019. A valuation allowance has been established for the amount of deferred tax assets related to state net operating loss carryforwards and job credits, which management estimates will more likely than not expire unused. 8. Accrued Liabilities Accrued liabilities consist of the following: In thousands 2006 2005 - ---------------------------------------------------------- Deferred revenues $1,678 $1,693 Compensation and employee benefits 1,115 931 Interest payable 943 700 Taxes payable 482 703 Warranty obligations 186 212 Pension liability (see Note 12) 95 198 Other 2,430 2,549 ------------------ $6,929 $6,986 - ----------------------------------------------------------
Warranty obligations: The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, including evaluating the quality of the component suppliers, the warranty obligation is affected by product failure rates. Should actual product failure rates differ from the 26 Company's estimates, revisions to increase or decrease the estimated warranty liability may be required. A summary of the warranty liabilities at December 31, follows: In thousands 2006 2005 2004 - ------------------------------------------------------- Balance at beginning of year $ 212 $ 260 $308 Provisions 139 100 - Deductions (165) (148) (48) ----------------------- Balance at end of year $ 186 $ 212 $260 - -------------------------------------------------------
9. Long-Term Debt Long-term debt consist of the following: In thousands 2006 2005 - ----------------------------------------------------------------------- 7 1/2% Convertible subordinated notes due 2006 $ - $12,309 8 1/4% Limited convertible senior subordinated notes due 2012 17,958 17,868 9 1/2% Subordinated debentures due 2012 1,057 1,057 Term loan - bank secured, due in quarterly installments through 2008 14,350 9,000 Revolving loan - secured 5,000 5,000 Real estate mortgages - secured, due in monthly installments through 2024 16,200 17,231 Loans payable - CEBA, secured, due in monthly installments through 2007 134 45 ----------------- 54,699 62,510 Less portion due within one year 3,162 14,145 ----------------- Long-term debt $51,537 $48,365 - -----------------------------------------------------------------------
Payments of long-term debt due for the next five years are: In thousands 2007 2008 2009 2010 2011 - --------------------------------------------------------------------------- $3,162 $18,257 $1,202 $1,246 $1,255 - ---------------------------------------------------------------------------
The 7 1/2% Convertible Subordinated Notes (the "7 1/2% Notes") were due December 1, 2006. On June 15, 2006, the $12.2 million principal amount of outstanding 7 1/2% Notes were redeemed at par. Interest was payable semi-annually. The 7 1/2% Notes were convertible at the option of the holder into shares of Common Stock, $1 par value per share, of the Company at any time prior to the close of business on June 14, 2006 at the rate of $14.013 per share, which conversion rate was substantially above the market price of the Common Stock. The Company utilized $6.1 million of its non-revolving line of credit to finance one-half of the redemption of the 7 1/2% Notes and utilized $6.1 million of cash for the remaining one-half. On March 13, 2006 and April 14, 2004, the Company completed two separate offers to exchange $1,000 principal amount of its 8 1/4% Limited Convertible Senior Subordinated Notes due 2012 (the "8 1/4% Notes") for each $1,000 principal amount of its 7 1/2% Notes. A total of $18.0 million principal amount of the 7 1/2% Notes were exchanged, ($0.1 million in 2006 and $17.9 million in 2004) leaving $12.2 million principal amount of 7 1/2% Notes outstanding. The 8 1/4% Notes provide for a higher interest rate, which is payable semi-annually, have a longer term, were convertible into Common Stock at a lower conversion price of $9.00 per share until March 1, 2007, may be redeemed by the Company, in whole or in part, at declining premiums and were senior to the 7 1/2% Notes and are senior to the Company's 9 1/2% Subordinated Debentures due 2012 (the "Debentures"). On March 15, 2007, the Company completed an offer to exchange 133 shares of its Common Stock for each $1,000 principal amount of its 8 1/4% Notes. The exchange offer commenced February 14, 2007 and expired on March 15, 2007. The offer was for up to $9,000,000 principal amount, or approximately 50% of the $18.0 million principal amount outstanding of the 8 1/4% Notes. A total of $7.8 million principal amount of the 8 1/4% Notes were exchanged, leaving $10.1 million principal amount of the 8 1/4% Notes outstanding. The Debentures are due in annual sinking fund payments of $105,700 beginning in 2009, with the remainder due in 2012. Interest is payable semi-annually. The Debentures may be redeemed by the Company, in whole or in part, at declining premiums. 27 The Company has a bank Credit Agreement, which was modified subsequent to year end to extend the maturity from January 1, 2008 to April 1, 2008, which provides for a term loan of $10.0 million, a non-revolving line of credit of up to $6.2 million to finance purchases and/or redemptions of one-half of the 7 1/2% Notes, and a revolving loan of up to $5.0 million at variable interest rates ranging from LIBOR plus 2.25% to Prime (ranging from 7.60% to 8.25% at December 31, 2006). The Credit Agreement matures on April 1, 2008. $6.1 million of the non-revolving line of credit was drawn to finance one-half of the redemption of the 7 1/2% Notes and as of December 31, 2006, was converted into a four-year term loan maturing April 1, 2008. At December 31, 2006, the entire revolving loan facility had been drawn. The Credit Agreement requires an annual facility fee on the unused commitment of 0.25%, and requires compliance with certain financial covenants, which include a fixed charge coverage ratio of 1.1 to 1.0, a loan-to-value ratio of not more than 50%, a leverage ratio of 3.0 to 1.0, maintaining a tangible net worth of not less than $18.5 million and maintaining accounts with an average monthly compensating balance of not less than $750,000. The amounts outstanding under the Credit Agreement are collateralized by all of the Display division assets. As of December 31, 2006, the Company was in compliance with the forgoing financial covenants, but the Company was not in compliance with the cap on capital expenditures, which its senior lender waived subsequent to year end. The Company has mortgages on certain of its facilities at variable rates of interest, which are payable in monthly installments, the last of which extends to 2024. At December 31, 2006, such variable interest rates ranged from 7.13% to 8.25%. During 1999, the Company received $400,000 structured as forgivable loans from the State of Iowa, City of Des Moines and Polk County, which were classified as deferred credits, deposits and other in the Consolidated Balance Sheets prior to December 31, 2002 and in long-term debt between January 1, 2003 and September 30, 2005. The loans are forgiven on a pro-rata basis when predetermined employment levels are attained. At December 31, 2002, the Company had not met the maximum specified employment levels and, accordingly, would have been required to pay the non-forgiven portion, but the agreement had been amended in 2005 to allow the Company until December 31, 2007 to meet the specified employment levels. In addition, during 2006, the Company received $150,000 from the State of Iowa and City of Des Moines as a zero percent interest loan, amortizing on a straight-line basis for five years. At December 31, 2006, the present value of this loan, assuming a 6% interest rate, the rate of previous loans from the State of Iowa and City of Des Moines, is $116,000. The $21,000 premium is being amortized using the effective interest method and is included in the carrying value of the loan. During 2006, the Company incurred interest costs of $4.5 million. At December 31, 2006, the estimated fair value of the 8 1/4% Notes and the Debentures was $17.6 million and $1.0 million, respectively. The estimated fair value of the remaining long-term debt approximates the carrying value. At December 31, 2006, the Company was not involved in any derivative financial instruments. 10. Stockholders' Equity During 2006, the Board of Directors declared one quarterly cash dividend of $0.035 per share on the Company's Common Stock and $0.0315 per share on the Company's Class B Stock, which was paid in April 2006. The Board of Directors did not declare any further quarterly cash dividends on the Company's Common Stock or on the Company's Class B Stock in order to preserve cash and pay down debt. Each share of Class B Stock is convertible at any time into one share of Common Stock and has ten votes per share, as compared to Common Stock, which has one vote per share but receives a 10% higher dividend. The Company has 3.0 million shares of authorized and unissued capital stock designated as Class A Stock, $1.00 par value. Such shares have no voting rights except as required by law and would receive a 10% higher dividend than the Common Stock. The Company also has 0.5 million shares of authorized and unissued capital stock designated as Preferred Stock, $1.00 par value. The stockholders previously approved an increase in the authorized shares of Common Stock to 11.0 million and Class A Stock to 6.0 million. A Certificate of Amendment increasing the authorized shares will be filed when deemed necessary. Shares of Common Stock reserved for future issuance in connection with convertible securities and stock option plans were 2.1 million and 2.9 million at December 31, 2006 and 2005, respectively. On March 15, 2007, 1,041,257 shares of Common Stock were issued in exchange for $7,829,000 principal amount of the 8 1/4% Notes. 28 11. Engineering Development Engineering development expense was $449,000, $383,000 and $443,000 for 2006, 2005, and 2004, respectively, which is included in general and administrative expenses in the Consolidated Statements of Operations. 12. Pension Plan On September 29, 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158"). SFAS 158 requires, among other things, an employer to recognize the funded status of its benefit plans in its balance sheet. The Company adopted SFAS 158 as of December 31, 2006. The following table summarizes the effect of required changes in the adoption of SFAS 158 in our Consolidated Balance Sheet as of December 31, 2006: Before adoption After adoption of SFAS 158 Adjustments of SFAS 158 - --------------------------------------------------------------------------------------------------------- Prepaids and other current assets $ 951 $ (93) $ 858 Total Assets 88,565 (93) 88,472 Deferred credits, deposits and other noncurrent liabilities 2,340 1,442 3,782 Deferred income taxes 1,090 (614) 476 Accumulated other comprehensive loss, net of tax (932) (921) (1,853) Total stockholders' equity 21,095 (921) 20,174 Total Liabilities and Stockholders' Equity 88,565 (93) 88,472 - ---------------------------------------------------------------------------------------------------------
All eligible salaried employees of Trans-Lux Corporation and certain of its subsidiaries are covered by a non-contributory defined benefit pension plan. Pension benefits vest after five years of service and are based on years of service and final average salary. The Company's general funding policy is to contribute at least the required minimum amounts sufficient to satisfy regulatory funding standards, but not more than the maximum tax-deductible amount. As of December 31, 2003, the benefit service under the pension plan had been frozen and, accordingly, there is no service cost for each of the three years ended December 31, 2006. For 2006 and 2005, due primarily to a drop in the discount rate and the effect of the plan's investment experience at the December 31 measurement dates on the valuation of plan assets, the accrued benefit obligation of the plan exceeded the fair value of plan assets. The Company's pension obligations for this plan exceeded plan assets by $3.0 million at December 31, 2006. The Company employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by outperforming plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. The portfolio contains a diversified blend of equity and fixed income investments. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews. At December 31, 2006 and 2005, the Company's pension plan weighted average asset allocations by asset category are as follows: 2006 2005 - ---------------------------------------------------- Guaranteed investment contracts 48.8% 55.5% Equity and index funds 48.8 42.3 Bonds 2.1 2.1 Money market funds 0.3 0.1 -------------- 100.0% 100.0% - ----------------------------------------------------
Bonds include $167,000 of the Company's 9 1/2% subordinated debentures for 2006 and 2005. 29 The funded status of the plan as of December 31, 2006 and 2005 is as follows: In thousands 2006 2005 - --------------------------------------------------------------------------- Change in benefit obligation: Projected benefit obligation at beginning of year $11,024 $10,665 Interest cost 611 619 Actuarial loss 9 366 Benefits paid (738) (626) -------------------- Projected benefit obligation at end of year $10,906 $11,024 -------------------- Change in plan assets: Fair value of plan assets at beginning of year $ 7,862 $ 7,380 Actual return on plan assets 754 423 Company contributions - 685 Benefits paid (738) (626) -------------------- Fair value of plan assets at end of year $ 7,878 $ 7,862 -------------------- Funded status: Funded status (underfunded) $(3,028) $(3,162) Net actuarial loss 3,790 4,192 Unrecognized prior service cost 93 110 -------------------- Net amount $ 855 $ 1,140 -------------------- Amounts recognized in the balance sheet consist of: Accrued benefit liability $(1,585) $(1,622) Unrecognized prior service cost 93 110 Accumulated other comprehensive loss 2,347 2,652 -------------------- Net amount $ 855 $ 1,140 -------------------- Weighted average assumptions as of December 31: Discount rate: Components of cost 5.75% 6.00% Benefit obligations 6.00% 5.75% Expected return on plan assets 8.75% 8.75% Rate of compensation increase 3.00% 3.00% - ---------------------------------------------------------------------------
The accumulated benefit obligation at December 31, 2006 and 2005 was $9.5 million. The minimum required contribution for 2007 is expected to be $95,000. Expected projected benefit payments due for the next five years are: In thousands 2007 2008 2009 2010 2011 - ------------------------------------------------------------- $141 $545 $441 $509 $1,071 - -------------------------------------------------------------
The following table presents the components of the net periodic pension cost for the three years ended December 31, 2006: In thousands 2006 2005 2004 - --------------------------------------------------------- Interest cost $ 611 $ 619 $ 609 Expected return on plan assets (654) (643) (591) Amortization of prior service cost 17 17 17 Amortization of net actuarial loss 311 268 245 --------------------- Net periodic pension cost $ 285 $ 261 $ 280 - ---------------------------------------------------------
The Company does not offer any post-retirement benefits other than the pension retirement benefits described herein. 30 13. Share-Based Compensation Effective January 1, 2006, the Company adopted the provisions of SFAS 123R, which establishes the accounting for stock-based awards exchanged for employee services. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be measured at fair value and expensed in the Consolidated Statements of Operations over the service period (generally the vesting period). The Company elected the "modified prospective method" of transition as permitted by SFAS 123R. Under this transition method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that were outstanding at the date of adoption, and accordingly, periods prior to adoption were not restated. SFAS 123R required the Company to apply an estimated forfeiture rate in calculating the period expense, as opposed to recognizing forfeitures as an expense reduction as they occur. The Company has not experienced any forfeitures that would need to be taken into consideration in SFAS 123R calculations. The Company previously accounted for share-based compensation plans under APB 25 and the related interpretations and provided the required SFAS 123 pro forma disclosures for employee stock options. The Company has four stock option plans. Under the 1995 Stock Option Plan and the 1992 Stock Option Plan, 125,000 and 50,000 shares of Common Stock, respectively, were authorized for grant to key employees. Under the Non-Employee Director Stock Option Plan, 30,000 shares of Common Stock were authorized for grant. Under the Non-Statutory Stock Option Agreement, 10,000 shares of Common Stock were authorized and issued to the former Chairman of the Board. Changes in the stock option plans are as follows: Weighted Number of Shares Average ---------------------------------- Exercise Authorized Granted Available Price - ------------------------------------------------------------------------------ Balance January 1, 2004 160,739 79,539 81,200 $ 6.62 Terminated (4,500) (5,500) 1,000 10.29 Granted - 7,000 (7,000) 6.81 ------------------------------- Balance December 31, 2004 156,239 81,039 75,200 6.39 Terminated (73,439) (11,739) (61,700) 8.10 Granted - 2,000 (2,000) 6.25 ------------------------------- Balance December 31, 2005 82,800 71,300 11,500 6.10 Terminated - (2,000) 2,000 6.08 Exercised (2,500) (2,500) - 4.95 Granted - 500 (500) 5.95 ------------------------------- Balance December 31, 2006 80,300 67,300 13,000 6.15 - ------------------------------------------------------------------------------
Under the 1995 and 1992 Stock Option Plans, option prices must be at least 100% of the market value of the Common Stock at time of grant. No option may be exercised prior to one year after date of grant. Exercise periods are for ten years from date of grant (five years if the optionee owns more than 10% of the voting power) and terminate at a stipulated period of time after an employee's termination of employment. At December 31, 2006 under the 1995 Plan, options for 46,300 shares with exercise prices ranging from $5.40 to $15.1875 per share were outstanding, all of which were exercisable. During 2006, no options were exercised, granted or expired. During 2005, no options were exercised, and options for 9,739 shares expired. During 2004, options for 5,000 shares were granted with an exercise price of $7.00 per share, no options were exercised, and no options expired. No additional options can be granted under the 1995 Plan. Under the 1992 Plan, no additional options can be granted and at December 31, 2006, no options were outstanding. During 2004, no options were exercised, and options for 4,500 shares expired. Under the Non-Employee Director Stock Option Plan, option prices must be at least 100% of the market value of the Common Stock at time of grant. No option may be exercised prior to one year after date of grant and the optionee must be a director of the Company at time of exercise, except in certain cases as permitted by the Compensation Committee. Exercise periods are for six years from date of grant and terminate at a stipulated period of time after an optionee ceases to be a director. At December 31, 2006, options for 11,000 shares with exercise prices ranging from $4.025 to $7.00 per share were outstanding, 10,500 of which were exercisable. During 2006, options for 500 shares were granted with an exercise price of $5.95 per share, 2,500 options were exercised, which had an intrinsic value of $7,000 determined as a difference between the market price at the date of exercise and the exercise price, and options for 1,500 shares expired. During 2005, options for 2,000 shares were granted with an exercise price of $6.25 per share, no options were exercised, and options for 2,000 shares expired. During 2004, options for 2,000 shares were granted with an exercise price of $6.35 per share, no options were exercised, and options for 1,000 shares expired. Under the Non-Statutory Stock Option Agreement for the former Chairman of the Board, the option price must be at least 100% of the market value of the Common Stock at time of grant and the exercise period is for 10 years from date of 31 grant. At December 31, 2006, the options for 10,000 shares with an exercise price of $4.025 were outstanding and exercisable. During 2006, 2005 and 2004, no options were exercised and no options expired. The following tables summarize information about stock options outstanding at December 31, 2006: Weighted Average Weighted Aggregate Range of Number Remaining Average Intrinsic Exercise Prices Outstanding Contractual Life Exercise Price Value - ---------------------------------------------------------------------------------- $ 4.03 - $ 5.39 14,500 3.7 $ 4.15 $ 32,000 5.40 - 6.15 30,500 4.9 5.49 82,000 6.16 - 7.00 8,500 5.8 6.76 31,000 7.01 - 9.00 12,500 1.7 9.00 56,000 9.01 - 11.44 1,000 0.2 11.44 4,000 11.45 - 15.19 300 0.8 15.19 1,000 ------ -------- 67,300 4.1 6.15 $206,000 - ---------------------------------------------------------------------------------- Weighted Aggregate Range of Number Average Intrinsic Exercise Prices Exercisable Exercise Price Value - ---------------------------------------------------------------------------------- $ 4.03 - $ 5.39 14,500 $ 4.15 $ 32,000 5.40 - 6.15 30,000 5.48 81,000 6.16 - 7.00 8,500 6.76 31,000 7.01 - 9.00 12,500 9.00 56,000 9.01 - 11.44 1,000 11.44 4,000 11.45 - 15.19 300 15.19 1,000 ------ -------- 66,800 6.15 $205,000 - ----------------------------------------------------------------------------------
As of December 31, 2006 there was $1,000 of total unrecognized compensation cost related to non-vested options granted under the Plans. That cost will be recognized in 2007. The estimated fair value of options granted during 2006, 2005 and 2004 was $2.86, $2.66 and $3.26 per share, respectively. The fair value of options granted under the Company's stock option plans during 2006, 2005 and 2004 was estimated on dates of grant using the binomial options-pricing model with the following weighted average assumptions used: 2006 2005 2004 - ------------------------------------------------------------------- Dividend yield - 2.06% 2.04% Expected volatility 42.17% 43.00% 44.00% Risk free interest rate 4.76% 4.59% 4.92% Expected lives of option grants (years) 4.0 4.0 4.0 - -------------------------------------------------------------------
Prior to the adoption of SFAS 123R, the Company provided the disclosures required under SFAS 123. The Company did not recognize stock option-based compensation cost in our Consolidated Statements of Operations for the periods prior to the adoption of SFAS 123R, as all options granted had an exercise price equal to the market price of our Common Stock on the date of grant. 32 The following table illustrates the effect on net income (loss) and earnings (loss) per share for the years ended December 31, 2005 and 2004 as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation: In thousands, except per share data 2005 2004 - ----------------------------------------------------------------------------- Net income (loss), as reported $(1,793) $ 539 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax 9 7 ------------------- Pro forma net income (loss) $(1,802) $ 532 ------------------- Earnings (loss) per share: Basic, as reported $ (1.42) $0.43 Diluted, as reported $ (1.42) $0.43 Basic, pro forma $ (1.43) $0.42 Diluted, pro forma $ (1.43) $0.42 - -----------------------------------------------------------------------------
14. Earnings (Loss) Per Common Share Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. The Company's diluted earnings per common share is calculated by adjusting net income (loss) for the after-tax interest expense on convertible debt and dividing that amount by the weighted average number of common shares outstanding, adjusted for shares that would be assumed outstanding after convertible debt conversion and stock options vested under the treasury stock method. At December 31, 2006, outstanding debt convertible into 1,994,000 shares of Common Stock and outstanding stock options to purchase 67,300 shares of Common Stock were excluded from the calculation of diluted earnings per share because their impact would have been anti-dilutive. 33 The following table sets forth the computation of basic and diluted earnings (loss) per share: In thousands, except per share data 2006 2005 2004 - -------------------------------------------------------------------------------------------- Numerator: Income (loss) from continuing operations $(1,647) $(1,793) $ 412 Income from discontinued operation - - 127 --------------------------- Net income (loss) (1,647) (1,793) 539 Add interest expense on 7 1/2% convertible subordinated notes and 8 1/4% limited convertible senior subordinated notes, net of tax - - 1,757 --------------------------- Net income (loss), adjusted $(1,647) $(1,793) $2,296 --------------------------- Denominator: Basic - weighted average common shares outstanding 1,260 1,261 1,261 Dilutive effect of: Convertible notes - - 2,658 Stock options - - 13 --------------------------- Diluted shares outstanding 1,260 1,261 3,932 --------------------------- Earnings (loss) per share - continuing operations: Basic $ (1.31) $ (1.42) $ 0.33 Diluted $ (1.31) $ (1.42) $ 0.33 Earnings per share - discontinued operation: Basic $ - $ - $ 0.10 Diluted $ - $ - $ 0.03 Total earnings (loss) per share: Basic $ (1.31) $ (1.42) $ 0.43 Diluted $ (1.31) $ (1.42) $ 0.43 - --------------------------------------------------------------------------------------------
15. Commitments and Contingencies Commitments: The Company has employment agreements with certain executive officers, which expire at various dates through March 2010 and a consulting agreement, with a private consulting company owned by the family of a certain board member who is a former officer of the Company and performs the consulting services on behalf of the consulting company, which expires December 2011, unless extended in accordance with its terms. At December 31, 2006, the aggregate commitment for future salaries and consulting fees, excluding bonuses, was approximately $4.5 million. Contingencies: 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. Operating leases: Theatre and other premises are occupied under operating leases that expire at varying dates through 2044. Certain of these leases provide for the payment of real estate taxes and other occupancy costs. Future minimum lease payments due under operating leases at December 31, 2006 aggregating $3,042,000 are as follows: $750,000 - 2007, $514,000 - 2008, $315,000 - 2009, $293,000 - 2010, $136,000 - 2011, $1,034,000 - thereafter. Rent expense was $908,000, $1,053,000 and $737,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Guarantees: The Company has guaranteed $0.7 million (75%) of a $0.9 million business loan to finance theatre equipment held by its joint venture, MetroLux Theatres, until May 2011, and, accordingly has recognized a liability for $33,000. The unrelated 50% partner of MetroLux Theatres also guaranteed $0.7 million (75%) of the $0.9 million business loan. The assets of MetroLux Theatres collateralize this business loan. 16. Business Segment Data Operating segments are based on the Company's business components about which separate financial information is available, and are evaluated regularly by the Company's chief operating decision makers in deciding how to allocate resources and in assessing performance. 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- 34 time electronic information displays. Both operating segments are conducted on a global basis, primarily through operations in the U.S. The Company also has operations in Canada. The Indoor display and Outdoor display segments are differentiated primarily by the customers they serve. The Entertainment/real estate segment owns a chain of motion picture theatres in the western Mountain States and income-producing real estate properties. Segment operating income is shown after operating expenses and sales, general and administrative expenses directly associated with the segment and the Entertainment/real estate segment includes the operating results of the theatre joint venture, MetroLux Theatres. Corporate general and administrative items relate to costs that are not directly identifiable with a segment. There are no intersegment sales. Foreign revenues represent less than 10% of the Company's revenues and therefore are not separately disclosed. The foreign operation does not manufacture their own equipment; the domestic operation provides the equipment that the foreign operation leases or sells. The foreign operation operates similarly to the domestic operation and has similar profit margins. 35 Information about the Company's operations in its three business segments as of December 31, 2006 and 2005 and for the three years ended December 31, 2006 is as follows: In thousands 2006 2005 2004 - ---------------------------------------------------------------------------------- Revenues: Indoor display $13,859 $ 15,261 $17,356 Outdoor display 26,607 25,742 21,857 Entertainment/real estate 13,445 13,365 13,366 ----------------------------- Total revenues $53,911 $ 54,368 $52,579 ----------------------------- Operating income (loss): Indoor display $ (361) $ 1,136 $ 2,433 Outdoor display 1,393 520 386 Entertainment/real estate 3,135 2,862 3,123 ----------------------------- Total operating income 4,167 4,518 5,942 Other income 87 199 2,618 Corporate general and administrative expenses (3,294) (3,601) (3,990) Interest expense - net (4,228) (3,872) (3,731) Income tax benefit (provision) 1,621 963 (427) ----------------------------- Income (loss) from continuing operations (1,647) (1,793) 412 Income from discontinued operation, net of taxes - - 127 ----------------------------- Net income (loss) $(1,647) $ (1,793) $ 539 ----------------------------- Assets: Indoor display $31,529 $ 33,546 Outdoor display 23,287 24,105 Entertainment/real estate 27,691 28,858 ------------------ Total identifiable assets 82,507 86,509 General corporate 5,965 14,041 ------------------ Total assets $88,472 $100,550 ------------------ Depreciation and amortization: Indoor display $ 5,709 $ 5,894 $ 5,970 Outdoor display 2,532 2,521 2,463 Entertainment/real estate 1,038 1,016 955 General corporate 264 254 464 ----------------------------- Total depreciation and amortization $ 9,543 $ 9,685 $ 9,852 ----------------------------- Capital expenditures: Indoor display $ 3,690 $ 4,270 $ 4,082 Outdoor display 748 883 1,476 Entertainment/real estate 551 1,654 2,703 General corporate 1 2 62 ----------------------------- Total capital expenditures $ 4,990 $ 6,809 $ 8,323 - ----------------------------------------------------------------------------------
36 17. 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 years ended December 31, 2006, and balance sheet summary information as of December 31, 2006 and 2005: In thousands 2006 2005 2004 - ---------------------------------------------------------------------------------- Revenues $5,235 $3,656 $3,548 Gross profit 909 929 938 Other income (expense) (121) (616) (78) Net income 688 252 794 Company's share of partnership net income 344 126 396 - ---------------------------------------------------------------------------------- Current assets 634 3,623 Noncurrent assets 1,851 2,021 ----------------- Total assets 2,485 5,644 ----------------- Current liabilities 859 2,654 Noncurrent liabilities 832 980 ----------------- Total liabilities 1,691 3,634 ----------------- Company's equity in partnership net assets $ 412 $1,047 - ----------------------------------------------------------------------------------
The Company's equity in partnership net assets is reflected in other assets in the Consolidated Balance Sheets. 18. Statements of Cash Flows During 2005, the Company changed the presentation of its Consolidated Statements of Cash Flows to separately present the cash flows from the discontinued operation within the categories of operating and investing activities. There were no cash flows from financing activities related to the discontinued operation. A summary of the effects of the change in presentation in the Consolidated Statements of Cash Flows for the year ended December 31, 2004 is as follows: In thousands 2004 - ---------------------------------------------------------------------------------- Net cash provided by operating activities as previously reported $ 6,805 Cash used in discontinued operation (1,734) ------- Net cash provided by operating activities as currently reported $ 5,071 ------- Net cash flows used in investing activities as previously reported $(1,120) Cash provided by discontinued operation 1,205 ------- Net cash provided by investing activities as currently reported $ 85 - ----------------------------------------------------------------------------------
___________________________ 37 Reports of Independent Registered Public Accounting Firms To the Board of Directors and Stockholders of Trans-Lux Corporation We have audited the consolidated balance sheets of Trans-Lux Corporation and its subsidiaries (the "Company") as of December 31, 2006 and 2005 and the related consolidated statements of operations, stockholders' equity, comprehensive income (loss) and cash flows for each of the years in the two-year period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements enumerated above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2006 and 2005, and the consolidated results of their operations and their consolidated cash flows for each of the years in the two-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 12 to the consolidated financial statements, the Company recognized the funded status of its benefit plans in its consolidated balance sheet effective December 31, 2006, in adopting the new accounting standard for Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans. Eisner LLP New York, New York April 2, 2007 To the Board of Directors and Stockholders of Trans-Lux Corporation Norwalk, CT We have audited the accompanying consolidated statements of operations, stockholders' equity, comprehensive income and cash flows for the year ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Trans-Lux Corporation and subsidiaries for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 18, in 2005, the Company changed the presentation of its consolidated statements of cash flows to present the cash flows from operating and investing activities of the discontinued operation within the respective categories of operating and investing activities of the Company and retroactively restated the consolidated statement of cash flows for the year ended December 31, 2004, for the change. Deloitte & Touche LLP Stamford, CT March 29, 2005 (March 27, 2006 as to Note 18) 38 METROLUX THEATRES FINANCIAL STATEMENTS DECEMBER 31, 2006, 2005 AND 2004 39 CONTENTS Page INDEPENDENT AUDITORS' REPORT 41 FINANCIAL STATEMENTS: Balance Sheets 42 Statements of Income 43 Statements of Partners' Equity 44 Statements of Cash Flows 45-46 NOTES TO THE FINANCIAL STATEMENTS 47-54 40 GUILLEN, SUEDE AND COMPANY A PROFESSIONAL CORPORATION OF CERTIFIED PUBLIC ACCOUNTANTS 23480 Park Sorrento, Suite 100B, Calabasas, CA 91302 TEL: (818) 348-4800 FAX: (818) 348-6326 WEB: www.gsandcocpa.com Board of Directors MetroLux Theatres Norwalk, Connecticut Independent Auditors' Report We have audited the accompanying balance sheets of MetroLux Theatres as of December 31, 2006, 2005 and 2004, and the related statements of income, partners' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MetroLux Theatres as of December 31, 2006, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Guillen, Suede and Company March 9, 2007 41 METROLUX THEATRES BALANCE SHEETS DECEMBER 31, 2006, 2005 AND 2004 (Dollars in thousands) ASSETS 2006 2005 2004 ------ ------ ------ CURRENT ASSETS: Cash $ 499 $ 465 $ 541 Concession supplies 25 21 13 Prepaid expenses and other current assets 110 85 52 Long-lived assets held for sale - 3,052 - ------ ------ ------ Total current assets 634 3,623 606 PROPERTY AND EQUIPMENT, net 1,841 1,990 3,882 INTANGIBLE ASSETS, NET 10 31 15 ------ ------ ------ $2,485 $5,644 $4,503 ====== ====== ====== LIABILITIES AND PARTNERS' EQUITY CURRENT LIABILITIES: Film rentals payable $ 201 $ 192 $ 127 Accounts payable and accrued expenses 336 280 165 Current portion of long-term debt 179 2,053 225 Deferred revenues 115 103 82 Due to Partners 28 26 9 ------ ------ ------ Total current liabilities 859 2,654 608 DEFERRED LEASE LIABILITY 131 97 - LONG-TERM DEBT, net of current portion 701 883 1,635 ------ ------ ------ Total liabilities 1,691 3,634 2,243 COMMITMENTS - - - PARTNERS' EQUITY 794 2,010 2,260 ------ ------ ------ $2,485 $5,644 $4,503 ====== ====== ====== The accompanying notes are an integral part of the financial statements
42 METROLUX THEATRES STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Dollars in thousands) 2006 2005 2004 ------ ------ ------ OPERATING REVENUES: Theatre operations Admissions $3,464 $2,419 $2,401 Concessions 1,701 1,177 1,077 Other operating revenues 70 60 70 ------ ------ ------ Total operating revenues 5,235 3,656 3,548 ------ ------ ------ OPERATING EXPENSES: Theatre operations Film costs and advertising 1,918 1,333 1,389 Cost of concessions 262 189 209 Other operating expenses 2,146 1,205 1,012 Administrative expenses 100 61 66 ------ ------ ------ Total operating expenses 4,426 2,788 2,676 ------ ------ ------ INCOME FROM OPERATIONS 809 868 872 ------ ------ ------ OTHER (EXPENSE) INCOME: Interest income 1 6 1 Interest expense (92) (94) (79) Impairment loss - long-lived assets held for sale - (528) - Loss on sale of property and equipment (30) - - ------ ------ ------ Net other (expense) (121) (616) (78) ------ ------ ------ NET INCOME $ 688 $ 252 $ 794 ====== ====== ====== The accompanying notes are an integral part of the financial statements
43 METROLUX THEATRES STATEMENTS OF PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Dollars in thousands) Trans-Lux Metro Colorado Loveland Corporation Corporation Total -------------- ------------ --------- PARTNERS' EQUITY, December 31, 2003 $ 883 $ 883 $ 1,766 EQUITY CONTRIBUTION FROM LEASE GUARANTEE 17 17 34 PARTNERSHIP DISTRIBUTIONS (167) (167) (334) NET INCOME 397 397 794 ------ ------ ------- PARTNERS' EQUITY, December 31, 2004 1,130 1,130 2,260 EQUITY CONTRIBUTION FROM LEASE GUARANTEE 16 16 32 PARTNERSHIP DISTRIBUTIONS (267) (267) (534) NET INCOME 126 126 252 ------ ------ ------- PARTNERS' EQUITY, December 31, 2005 1,005 1,005 2,010 EQUITY CONTRIBUTION FROM LEASE GUARANTEE 17 17 34 PARTNERSHIP DISTRIBUTIONS (969) (969) (1,938) NET INCOME 344 344 688 ------ ------ ------- PARTNERS' EQUITY, December 31, 2006 $ 397 $ 397 $ 794 ====== ====== ======= The accompanying notes are an integral part of the financial statements
44 METROLUX THEATRES STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Dollars in thousands) 2006 2005 2004 ------ ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 688 $ 252 $ 794 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 270 174 164 Impairment loss - long-lived assets held for sale - 528 - Loss on sale of property and equipment 30 - - Changes in assets and liabilities: Concession supplies (4) (8) - Prepaid expenses and other current assets 9 (1) (3) Film rentals payable 9 65 (32) Accounts payable and accrued expenses 97 115 (6) Deferred revenues 12 21 (3) Due to Partners 2 17 23 Deferred lease liability 34 97 - ------ ------ ------ Net cash provided by operating activities 1,147 1,260 937 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of property and equipment 1,381 - - Acquisition of property and equipment (136) (1,857) (124) Acquisition of intangible assets - (21) - ------ ------ ------ Net cash provided by (used in) investing activities 1,245 (1,878) (124) ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payment on long-term debt (420) (224) (237) Proceeds from new long-term debt - 1,300 - Partnership distributions (1,938) (534) (334) ------ ------ ------ Net cash (used in) provided by financing activities (2,358) 542 (571) ------ ------ ------ NET INCREASE (DECREASE) IN CASH 34 (76) 242 CASH, beginning of year 465 541 299 ------ ------ ------ CASH, end of year $ 499 $ 465 $ 541 ====== ====== ====== 45 METROLUX THEATRES STATEMENTS OF CASH FLOWS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Dollars in thousands) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 92 $ 90 $ 75 ====== ====== ======
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES: In February 2006, the Company completed the sale of its previous facility for the gross selling price of $3,200. As part of the sales transaction, the Company paid off the remaining balance of its real estate loan with a bank of $1,636, and property tax and other cost allocations that totaled $41. The net proceeds received from the sale, after the selling expenses, totaled $1,381. During the year ended December 31, 2005, the Company moved its operations into a new leased theatre facility and adopted a plan to sell the previous facility's land and building. The Company reclassified the land, building and improvements with total original cost of $4,612, and the related accumulated depreciation of $1,032 as long-lived assets held for sale, and recorded an impairment loss of $528 to adjust the net book value of the assets to fair value. During the years ended December 31, 2006, 2005 and 2004, the Company recorded prepaid rent through an increase in equity in the amounts of $34, $32 and $34, respectively (See Note 8). The accompanying notes are an integral part of the financial statements 46 METROLUX THEATRES NOTES TO THE FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Nature of Operations -------------------- MetroLux Theatres (the "Company") is a general partnership between Metro Colorado Corporation, a California corporation ("Metro Colorado"), and Trans-Lux Loveland Corporation, a Colorado corporation ("Trans-Lux"). The Partnership was created for the purpose of engaging in the business of constructing, purchasing, owning and performing all functions in relation to the operation of a multi-screen movie theatre, ancillary real estate and other entertainment uses in Loveland, Colorado. Prior to November 2005, the Company operated a 12 screen movie theatre located in property owned by the Company. Beginning in November 2005, the Company moved into a 14 screen movie theatre leased under a long-term lease. Property and Equipment ---------------------- Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided utilizing straight-line and accelerated methods over the estimated useful lives of the assets as follows: Buildings and improvements 10-39 years Theatre equipment 5-10 years Software 3 years Major repairs and replacements are capitalized and ordinary maintenance and repairs are charged to operations as incurred. Intangible Assets ----------------- Intangible assets consist of loan fees net of accumulated amortization. Amortization is provided utilizing the straight-line method over the term of the loan. Income Taxes ------------ The Company is treated as a partnership for federal and state income tax purposes. Consequently, federal and state income taxes are not payable, or provided for, by the Company. Partners are taxed individually on their share of the Company's earnings. The Company's net income or loss is allocated among the Partners in accordance with their percentage of ownership. 47 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED ------------------------------------------------------ Revenue and Expense Recognition ------------------------------- The Company recognizes revenue when admission tickets and concession goods are sold. Revenue from gift certificates and group activity is recognized when they are redeemed. Film rental costs are recognized based on the applicable box office receipts and mutually agreed film licensing arrangements. Advertising (Dollars in thousands) ---------------------------------- The Company's advertising costs are expensed as incurred. The advertising costs for the years ended December 31, 2006, 2005 and 2004 totaled $58, $84 and $68, respectively. Lease Accounting ---------------- The Company accounts for leased properties under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases", and other authoritative accounting literature. The Company determined that its facility lease is an operating lease, and recognizes the lease expense on a straight-line basis over the lease term. The differences between lease payments and recognized expense are charged to deferred lease liability. Concentration of Credit Risk (Dollars in thousands) --------------------------------------------------- Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash. The Company places its cash with high credit quality financial institutions. Total amounts for the years ended December 31, 2006, 2005 and 2004 in excess of the FDIC limit amounted to approximately $308, $307 and $519, respectively. Services from Partners ---------------------- The Partners provide management and administrative services to the Company. Trans-Lux provides oversight over the Company's movie theatre operations and Metro Colorado provides accounting, payroll, human resources and other management and administrative services. The services provided by the Partners are deemed to be of equal value and are not recognized on the financial statements of the Company. 48 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED ------------------------------------------------------ Management Estimates -------------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications ----------------- Certain amounts on the 2004 and 2005 financial statements have been reclassified to conform to 2006 presentation. NOTE 2 - PROPERTY AND EQUIPMENT (Dollars in thousands) --------------------------------------------- Property and equipment consist of the following for the years ended December 31: 2006 2005 2004 ------ ------ ------ Buildings $ - $ - $4,027 Improvements 1,657 1,532 66 Theatre equipment 670 662 231 Land - - 519 Construction in progress - 18 124 Software 9 9 9 ------ ------ ------ 2,336 2,221 4,976 Less: accumulated depreciation and amortization 495 231 1,094 ------ ------ ------ $1,841 $1,990 $3,882 ====== ====== ======
Depreciation and amortization expense for the years ended December 31, 2006, 2005 and 2004 was approximately $264, $169 and $159, respectively. 49 NOTE 3 - LONG-LIVED ASSETS HELD FOR SALE (Dollars in thousands) ------------------------------------------------------ On October 28, 2005, the Company moved its operations into a new theatre facility in Loveland, Colorado, and adopted a plan to sell its previously used facility. The Company reclassified the net book value of the assets to be sold as long-lived assets held for sale, and adjusted the net book value of the assets to the estimated fair value, which resulted in an asset impairment loss of $528. The sale was completed in February 2006, and resulted in an additional loss of $30. As of December 31, 2005, long-lived assets held for sale consisted of the following: Buildings $4,027 Improvements 66 Land 519 ------ 4,612 Less: accumulated depreciation 1,032 ------ 3,580 Less: asset impairment loss 528 ------ $3,052 ======
NOTE 4 - INTANGIBLE ASSETS (Dollars in thousands) ---------------------------------------- Intangible assets consist of the following for the years ended December 31: 2006 2005 2004 ---- ---- ---- Loan fees $35 $50 $29 Less: accumulated amortization 25 19 14 --- --- --- $10 $31 $15
Amortization expense related to intangible assets amounted to $6, $5 and $5, for the years ended December 31, 2006, 2005 and 2004, respectively. 50 NOTE 5 - DUE TO PARTNERS (Dollars in thousands) -------------------------------------- As of December 31, 2006, 2005 and 2004, the net advances due to the general partners were approximately $28, $26 and $9, respectively. These advances represent the difference between allocations and reimbursements of certain shared costs, and are unsecured, non-interest bearing and are expected to be repaid within the next year. During the years ended December 31, 2006, 2005 and 2004, the Company made net advances to the general partners of approximately $2, $17 and $23, respectively. NOTE 6 - LONG-TERM DEBT (Dollars in thousands) ------------------------------------- Long-term debt consists of the following for the years ended December 31: 2006 2005 2004 ------ ------ ------ A $2.5 million real estate loan with a bank. Borrowings under the term loan bear interest at the bank's prime rate minus 0.30% (6.95% and 4.95% at December 31, 2005 and 2004, respectively). Payments under the agreement are in equal monthly installments of approximately $26 of principal and interest, maturing January 2009 with the remaining unpaid principal due upon maturity. The loan is collateralized by the assets of the Company and 60% of the debt is guaranteed by each of the Partners. The loan was paid off in full upon the sale of the land and building on February 28, 2006. The entire loan balance is included in current portion of long-term debt at December 31, 2005. $ - $1,636 $1,860 51 NOTE 6 - LONG-TERM DEBT (Dollars in thousands) - CONTINUED ------------------------------------------------- Long-term debt consists of the following for the years ended December 31: 2006 2005 2004 ------ ------ ------ A $1.3 million bank loan obtained in November 2005. Borrowings under the loan bear interest at LIBOR rate plus 2.0% (7.32% at December 31, 2006). The loan requires a $325 payment upon the sale of the old theatre facility, 59 equal monthly payments of principal and interest of $19 beginning in June 2006, with the remaining unpaid principal due upon maturity in May 2011. The loan is collateralized by the assets of the Company and 75% of the debt is guaranteed by each of the Partners. 880 1,300 - ---- ------ ------ 880 2,936 1,860 Less: current portion 179 2,053 225 ---- ------ ------ $701 $ 883 $1,635 ==== ====== ======
Maturities of long-term debt outstanding at December 31, 2006 are as follows: Year Ending December 31, ------------ 2007 $175 2008 188 2009 202 2010 218 2011 97 ---- $880 ====
The bank loan obtained in 2005 includes various restrictive covenants, including, among others, provisions relating to maintenance of certain financial ratios and reporting covenants. 52 NOTE 7 - DEFERRED REVENUES (Dollars in thousands) ---------------------------------------- Deferred revenues at December 31, 2006, 2005 and 2004 consist of gift certificates and group activity passes that are used for concession goods and admission at theatres, respectively. The breakdown is as follows at December 31: 2006 2005 2004 ------ ------ ------ Gift certificates $107 $ 96 $75 Group activity passes 8 7 7 ---- ---- --- $115 $103 $82 ==== ==== ===
NOTE 8 - COMMITMENTS (Dollars in thousands) ---------------------------------- In August 2004, the Company entered into a lease for a new multi-screen movie theatre, which opened on October 28, 2005. The initial lease term is for 15 years and may be extended for a total of three extension periods of 5 years each. The lease requires minimum annual rent payments beginning in January 2006, ranging from $500 to $600 and contains a provision for an additional rent equal to 10% of the amount by which gross annual revenue exceeds a certain threshold. The lease is guaranteed by Metropolitan Theatres Corporation ("MTC"), a parent of Metro Colorado Corporation. The future minimum rent payments are as follows: Year Ending December 31, ------------ 2007 $ 500 2008 500 2009 500 2010 500 2011 546 2012-2016 2,796 2017-2021 2,442 ------ $7,784 ======
The Company subleases space for certain exhibits and meetings on a month-to-month basis to unrelated parties. For the years ending December 31, 2006, 2005 and 2004, the revenue recognized for such rentals totaled $22, $18 and $18, respectively. 53 NOTE 8 - COMMITMENTS (Dollars in thousands) - CONTINUED ---------------------------------------------- In connection with a guarantee by MTC, in 2006, 2005 and 2004, Trans-Lux paid MTC $17, $16 and $17, respectively, in consideration for the guarantee of the new lease. In accordance with FASB Interpretation No. 45 - "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", the Company recorded the payment by Trans-Lux, and the respective value of the guarantee for Metro Colorado, as an equity contribution by the Partners, and an increase in prepaid rent in the accompanying financial statements. NOTE 9 - PENSION PLAN (Dollars in thousands) ----------------------------------- The Company's employees may elect to participate in a 401(k) pension plan sponsored by the parent of Metro Colorado, after they meet certain period of service and age eligibility requirements. Participating employees may contribute 1% to 100% of their salary, subject to limits based on the applicable tax regulations. The pension plan elected Safe Harbor provisions, where the Company provides a matching of 100% of the first 3% of the employee's contribution and matches 50% of the next 2% of the employee's contribution up to a maximum of 4% of the employee's gross salary. The contributions are fully vested when funded. The Company's matching contributions totaled $3 for each of the years ended December 31, 2006, 2005 and 2004. 54 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES (a) 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 a date within 90 days of the filing date of this annual report. The Company's disclosure controls and procedures are designed to ensure that 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. Our disclosure controls and procedures include components of our internal controls over financial reporting. Management's assessment of the effectiveness of our 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. Based on this evaluation, the Company's Co-Chief Executive Officers and Chief Financial Officer have concluded that these controls are effective. (b) 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 fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION All information required to be reported in a report on Form 8-K during the fourth quarter covered by this Form 10-K has been reported. 55 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE (a) The information required by this Item with respect to directors is incorporated herein by reference to the Section entitled "Election of Directors" in the Company's Proxy Statement. (b) The following executive officers were elected by the Board of Directors for the ensuing year and until their respective successors are elected. Name Office Age ----------------------- ---------------------------------------- --- Michael R. Mulcahy President and Co-Chief Executive Officer 58 Thomas Brandt Executive Vice President and Co-Chief 43 Executive Officer Matthew Brandt Executive Vice President 43 Al L. Miller Executive Vice President 61 Angela D. Toppi Executive Vice President, Treasurer, 51 Secretary and Chief Financial Officer Karl P. Hirschauer Senior Vice President 61 John Long Senior Vice President 60 Thomas F. Mahoney Senior Vice President 59
Messrs. Mulcahy, T. Brandt, M. Brandt, Miller, Hirschauer, Mahoney and Ms. Toppi have been associated in an executive capacity with the Company for more than five years. Mr. Long was elected Senior Vice President in charge of Outdoor Operations on March 24, 2004 and has been employed by the Company since 1997. Mr. Long served as Senior Vice President of Outdoor Display Subsidiaries between March 27, 2002 and March 24, 2004 and served as Vice President of Trans-Lux Midwest Corporation between December 10, 1998 and March 27, 2002. (c) The information required by Items 405, 406 and 407 of Regulation S-K is incorporated herein by reference to the Sections entitled Compliance with Section 16(a) of the Securities Exchange Act of 1934," "Code of Ethics" and "Corporate Governance" in the Company's Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the Section entitled "Executive Compensation and Transactions with Management" in the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated herein by reference to the Section entitled "Security Ownership of Certain Beneficial Owners, Directors and Executive Officers" in the Company's Proxy Statement. Equity Compensation Plan Information ------------------------------------ Securities Weighted Securities to be issued average available for December 31, 2006 upon exercise exercise price future issuance - ---------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by stockholders 57,300 $6.52 13,000 Equity compensation plans not approved by stockholders 10,000 $4.03 - ------ ------ Total 67,300 $6.15 13,000 - ----------------------------------------------------------------------------------------------------------------
56 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item is incorporated herein by reference to the Section entitled "Executive Compensation and Transactions with Management" in the Company's Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTING FIRM FEES AND SERVICES The information required by this Item is incorporated herein by reference to the Section entitled "Ratification of the Selection of Independent Registered Accounting Firm" in the Company's Proxy Statement. 57 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: (1) Consolidated Financial Statements of Trans-Lux Corporation Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004 Consolidated Balance Sheets as of December 31, 2006 and 2005 Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2006, 2005 and 2004 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004 Notes to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firms Financial statements of MetroLux Theatres, a 50% owned entity, accounted for by the equity method: Independent Auditors' Report Balance Sheets as of December 31, 2006 and 2005 Statements of Income for the Years Ended December 31, 2006, 2005 and 2004 Statements of Partners' Equity for the Years Ended December 31, 2006, 2005 and 2004 Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004 Notes to Financial Statements (2) Financial Statement Schedules: None. (3) Exhibits: 3(a) Form of Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of Registration No. 333-15481). (b) By-Laws of the Registrant (incorporated by reference to Exhibit 3(b) of Form 10-K for the year ended December 31, 2001). 4(a) Indenture dated as of December 1, 1994 (form of said indenture is incorporated by reference to Exhibit 6 of Schedule 13E-4 Amendment No. 2 dated December 23, 1994). (b) Indenture dated as of March 1, 2004 (form of said indenture is incorporated by reference to Exhibit 12(d) of Schedule TO dated March 2, 2004). 10.1 Form of Indemnity Agreement - Directors (form of said agreement is incorporated by reference to Exhibit 10.1 of Registration No. 333-15481). 10.2 Form of Indemnity Agreement - Officers (form of said agreement is incorporated by reference to Exhibit 10.2 of Registration No. 333-15481). 10.3 Amended and Restated Pension Plan dated January 1, 2001 and Amendment No. 1 dated as of April 1, 2002 (incorporated by reference to Exhibit 10.3 of Form 10-K for the year ended December 31, 2001). Amendment No. 2 dated as of December 31, 2002 (incorporated by reference to Exhibit 10.3 of Form 10-K for the year ended December 31, 2002). Amendment No. 3 dated as of December 31, 2003 (incorporated by reference to Exhibit 10.3 of Form 10-K for the year ended December 31, 2003). 10.4(a) 1989 Non-Employee Director Stock Option Plan, as amended (incorporated by reference to Exhibit 10.4(a) of Form 10-K for the year ended December 31, 1999). (b) 1995 Stock Option Plan, as amended (incorporated by reference to Proxy Statement dated April 7, 2000). 58 10.5 Amended and Restated Commercial Loan and Security Agreement with People's Bank dated December 23, 2004 (incorporated by reference to Exhibit 10(a) of Form 8-K filed December 28, 2004). Amendment No. 1 dated as of December 31, 2005 (incorporated by reference to Exhibit 10.2 of Form 10-Q for the quarter ended March 31, 2006). Letter amendments dated as of September 30, 2006 and December 31, 2006, filed herewith. 10.6 Consulting Agreement with Moving Images, LLC dated as of December 1, 2004 and termination letter with Richard Brandt (incorporated by reference to Exhibit 10.6 of Form 10-K for the year ended December 31, 2004). Amendment dated December 7, 2005 (incorporated by reference to Exhibit 10.6 of Form 10-K for the year ended December 31, 2005). 10.7 Employment Agreement with Michael R. Mulcahy dated as of April 1, 2005 (incorporated by reference to Exhibit 10.7 of Form 10-K for the year ended December 31, 2004). 10.8 Employment Agreement with Thomas Brandt dated as of April 1, 2005 (incorporated by reference to Exhibit 10.8 of Form 10-K for the year ended December 31, 2004). 10.9 Employment Agreement with Angela D. Toppi dated as of April 1, 2005 (incorporated by reference to Exhibit 10.9 of Form 10-K for the year ended December 31, 2004). 10.10 Employment Agreement with Matthew Brandt dated as of April 1, 2005 (incorporated by reference to Exhibit 10.10 of Form 10-K for the year ended December 31, 2004). 10.11 Employment Agreement with Al Miller dated as of April 1, 2005 (incorporated by reference to Exhibit 10.1 of Form 10-Q for the quarter ended June 30, 2005). 10.12 Employment Agreement with Karl Hirschauer dated as of April 1, 2006 (incorporated by reference to Exhibit 10.1 of Form 10-Q for the quarter ended March 31, 2006). 10.13 Employment Agreement with John Long dated as of April 1, 2005 (incorporated by reference to Exhibit 10.2 of Form 10-Q for the quarter ended June 30, 2005). 21 List of Subsidiaries, filed herewith. 31.1 Certification of Michael R. Mulcahy, President and Co-Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. 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, filed herewith. 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, filed herewith. 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, filed herewith. 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, filed herewith. 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, filed herewith. 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 by: /s/ Angela D. Toppi ------------------------- Angela D. Toppi Executive Vice President and Chief Financial Officer Dated: April 2, 2007 60 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: /s/ Gene F. Jankowski April 2, 2007 - ------------------------------------------ Gene F. Jankowski, Chairman of the Board /s/ Victor Liss April 2, 2007 - ------------------------------------------ Victor Liss, Vice Chairman of the Board /s/ Matthew Brandt April 2, 2007 - ------------------------------------------ Matthew Brandt, Executive Vice President and Director /s/ Richard Brandt April 2, 2007 - ------------------------------------------ Richard Brandt, Director /s/ Thomas Brandt April 2, 2007 - ------------------------------------------ Thomas Brandt, Executive Vice President and Co-Chief Executive Officer and Director /s/ Howard M. Brenner April 2, 2007 - ------------------------------------------ Howard M. Brenner, Director /s/ Jean Firstenberg April 2, 2007 - ------------------------------------------ Jean Firstenberg, Director /s/ Howard S. Modlin April 2, 2007 - ------------------------------------------ Howard S. Modlin, Director /s/ Michael R. Mulcahy April 2, 2007 - ------------------------------------------ Michael R. Mulcahy, President and Co-Chief Executive Officer and Director 61 EX-10.5 2 ex10_5.txt PEOPLE'S BANK AMENDMENTS Exhibit 10.5 people's bank People's Bank People's Financial Plaza 350 Bedford Street Stamford, Connecticut 06901 November 16, 2006 Ms. Angela Toppi Chief Financial Officer Trans-Lux Corporation 110 Richards Avenue Norwalk, CT 06854 Dear Ms. Toppi: Reference is made to the $21,150,000 Commercial Loan and Security dated December 23, 2004 between People's Bank and Trans-Lux Corporation and Amendment number 1 to amend and restate the commercial loan and security agreement dated May 9, 2006 between People's Bank and Trans-Lux Corporation. Upon your acknowledgement and effective the date of your acknowledgement and agreement below, the Bank agrees to amend and modify the following terms and conditions under the Loan Documents subject to the terms and conditions contained herein (the "Amendment and Modification"). Note that this letter may be superseded by an Amendment and Modification Agreement prepared by People's Bank counsel, subject to the sole discretion of People's Bank. Covenants: - --------- * The following covenants will be modified for the rolling 4 quarters ended September 30, 2006 and the rolling 4 quarters ending December 31, 2006 and all rolling 4 quarter periods thereafter: (1) The definition of Fixed Charge Coverage shall mean: Earnings before Interest Taxes Depreciation and Amortization minus total capital expenditures less $2,500,000, minus total dividends (the numerator), divided by total interest expense plus prior period current portion of long-term debt plus any provision for income taxes (the denominator). "Prior period current portion of long-term debt" shall mean current portion of long-term debt due during the 4 quarters then ended. (2) The Fixed Charge Coverage covenant shall be no less than 1.10x for the rolling 4 quarters ended September 30, 2006, the rolling 4 quarters ending December 31, 2006, and all quarters thereafter. (3) Tangible Net Work shall be no less than $18,500,000 at all times. Additional Conditions: - --------------------- * All other terms and conditions will remain unchanged. The undersigned agrees and acknowledges that the Amendment and Modification of the Loan Agreement may be superseded by a formal Amendment and Modification Agreement subject to the sole discretion of People's Bank to be prepared by People's Bank counsel. Failure to execute the formal Amendment and Modification Agreement, if required by People's Bank, within 5 business days of receipt of such agreement shall render the terms of this letter null and void. All related legal fees and closing costs in conjunction with the preparation of this letter and the legal documents to follow will be paid by the Borrower. Furthermore, the foregoing shall not be deemed a waiver of, or in prejudice to, any other rights of the Bank under the Loan Documents or any other documents executed in connection therewith. This Amendment and Modification shall be applicable only to the specific terms and conditions referred to herein and shall not modify any other obligations of Trans-Lux Corporation to the Bank. Upon your acceptance of the below, please sign and date and return a copy of this agreement along with a check made payable to People's Bank on the amount of $5,000.00 representing the "Amendment Fee" for this agreement. People's Bank By /s/ Martin Anderson ------------------- Martin H. Anderson Vice President Agreed and Accepted to: Trans-Lux Corporation - --------------------- By /s/ Angela D. Toppi Date: 11/16/06 ------------------- ---------- Angela Toppi, Chief Financial Officer, duly authorized people's bank People's Bank People's Financial Plaza 350 Bedford Street Stamford, Connecticut 06901 April 2, 2007 Ms. Angela Toppi Chief Financial Officer Trans-Lux Corporation 110 Richards Avenue Norwalk, CT 06854 Dear Ms. Toppi: Reference is made to the $21,150,000 Commercial Loan and Security dated December 23, 2004 between People's Bank and Trans-Lux Corporation, Amendment Number 1 to Amend and Restate the Commercial Loan and Security Agreement dated May 9, 2006 and the Amendment & Waiver Agreement dated November 16, 2006 between People's Bank and Trans-Lux Corporation. Upon your acknowledgement and effective the date of your acknowledgement and agreement below, the Bank hereby agrees to Extend, Waive and Modify the following terms and conditions under the Loan Documents subject to the terms and conditions contained herein (the "Extension, Waiver and Modification"). Note that this letter will be superseded by an Extension, Waiver and Modification Agreement prepared by People's Bank counsel, subject to the sole discretion of People's Bank. 1. The December 31, 2006 company-prepared compliance certificate reported capital expenditures of $1,681,000 for the 3-month period then ended. Amendment Number 1 to Amend and Restate the Commerical Loan and Security Agreement dated May 9, 2006 states that Capital Expenditures must not be more than $1,000,000 per quarter. 2. The maturity date of the loan agreement will be hereby extended from January 1, 2008 to April 1, 2008. As part of this extension agreement, the "Forbearance and Amendment Fee" of $350,000 will be enforced if there is an "Additional Mandatory Prepayment Event" of the loans on or prior to April 1, 2008. Additional Conditions: * All other terms and conditions will remain unchanged. The undersigned agrees and acknowledges that the Extension, Waiver and Modification of the Loan Agreement will be superseded by a formal Extension, Waiver and Modification Agreement subject to the sole discretion of People's Bank to be prepared by People's Bank counsel. Failure to execute the formal Amendment and Modification Agreement, if required by Peoples Bank, within 5 business days of receipt of such agreement shall render the terms of this letter null and void. All related legal fees and closing costs in conjunction with the preparation of this letter and the legal documents to follow will be paid by the Borrower. Furthermore, the foregoing shall not be deemed a waiver of, or in prejudice to, any other rights of the Bank under the Loan Documents or any other documents executed in connection therewith. This Extension, Waiver and Modification shall be applicable only to the specific terms and conditions referred to herein and shall not modify any other obligations of Trans-Lux Corporation to the Bank. Upon your acceptance of the below, please sign and date and return a copy of this agreement along with a check made payable to People's Bank in the amount of $22,500.00 representing the "Extension Fee" for this agreement. Upon executing the Formal Extension, Waiver and Modification prepared by People's Bank counsel, an additional $22,500.00 will be due and Payable to People's Bank. People's Bank By /s/ Martin H. Anderson ---------------------- Martin H. Anderson Vice President Agreed and Accepted to: Trans-Lux Corporation - --------------------- By /s/ Angela Toppi Date: 04/02/07 ---------------- -------------- Angela Toppi, Chief Financial Officer, duly authorized EX-21 3 ex21_06.txt LIST OF SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE COMPANY A. As of December 31, 2006 the following are subsidiaries more than 50% owned (included in the consolidated financial statements): Jurisdiction of Percentage Name Incorporation Owned - ------------------------------------------------------ --------------- ---------- Trans-Lux Canada Ltd. Canada 100% Trans-Lux Castle Rock Corporation (2) Colorado 100 Trans-Lux Cinema Consulting Corporation (3) California 100 Trans-Lux Cocteau Corporation (5) New Mexico 100 Trans-Lux Colorado Corporation (5) Colorado 100 Trans-Lux Desert Sky Corporation (5) Arizona 100 Trans-Lux Display Corporation Delaware 100 Trans-Lux DreamCatcher Corporation (5) New Mexico 100 Trans-Lux Durango Corporation (4) Colorado 100 Trans-Lux Experience Corporation New York 100 Trans-Lux Four Corners Corporation (4) New Mexico 100 Trans-Lux High Five Corporation (5) Colorado 100 Trans-Lux Investment Corporation Delaware 100 Trans-Lux Laramie Corporation (5) Wyoming 100 Trans-Lux Loma Corporation (5) New Mexico 100 Trans-Lux Los Lunas Corporation (4) New Mexico 100 Trans-Lux Loveland Corporation (5) Colorado 100 Trans-Lux Midwest Corporation Iowa 100 Trans-Lux Montezuma Corporation (4) New Mexico 100 Trans-Lux Movie Operations Corporation (3) Texas 100 Trans-Lux Multi-Media Corporation Connecticut 100 Trans-Lux Multimedia Corporation New York 100 Trans-Lux New Mexico Corporation (5) New Mexico 100 Trans-Lux Pennsylvania Corporation (2) Pennsylvania 100 Trans-Lux Real Estate Corporation (3) Texas 100 Trans-Lux Seaport Corporation New York 100 Trans-Lux Service Corporation New York 100 Trans-Lux Skyline Corporation (5) Colorado 100 Trans-Lux Southwest Corporation (5) New Mexico 100 Trans-Lux Starlight Corporation (5) New Mexico 100 Trans-Lux Storyteller Corporation (5) New Mexico 100 Trans-Lux Summit Corporation (4) Colorado 100 Trans-Lux Syndicated Programs Corporation New York 100 Trans-Lux Taos Corporation (4) New Mexico 100 Trans-Lux Theatres Corporation (1) Texas 100 Trans-Lux Valley Corporation (4) Arizona 100 Trans-Lux West Corporation Utah 100 Trans-Lux Wyoming Corporation (4) Wyoming 100 (1) Wholly-owned subsidiary of Trans-Lux Investment Corporation. (2) Wholly-owned subsidiary of Trans-Lux Theatres Corporation. (3) Wholly-owned subsidiary of Trans-Lux Multi-Media Corporation. (4) Wholly-owned subsidiary of Trans-Lux Real Estate Corporation. (5) Wholly-owned subsidiary of Trans-Lux Movie Operations Corporation.
B. Other entity (accounted for in the Consolidated Financial Statements under the equity method): MetroLux Theatres - A joint venture partnership in which Trans-Lux Loveland Corporation, listed in A. above as a wholly-owned subsidiary of the Registrant, is a 50% venture. Metro Colorado Corporation owns the remaining 50% of the joint venture and is unrelated to the Registrant. EX-31.1 4 mm06ex311.txt CERTIFICATION - M. MULCAHY EXHIBIT 31.1 CERTIFICATION I, Michael R. Mulcahy, President and Co-Chief Executive Officer of Trans-Lux Corporation certify that: 1. I have reviewed this Annual Report on Form 10-K (the "Report") of Trans-Lux Corporation; 2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the Registrant and have; a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and c) disclosed in this Report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ Michael R. Mulcahy ---------------------------------------- Date: April 2, 2007 Michael R. Mulcahy President and Co-Chief Executive Officer EX-31.2 5 tb06ex312.txt CERTIFICATION - T. BRANDT EXHIBIT 31.2 CERTIFICATION I, Thomas Brandt, Executive Vice President and Co-Chief Executive Officer of Trans-Lux Corporation certify that: 1. I have reviewed this Annual Report on Form 10-K (the "Report") of Trans-Lux Corporation; 2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the Registrant and have; a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and c) disclosed in this Report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ Thomas Brandt ---------------------------------------- Date: April 2, 2007 Thomas Brandt Executive Vice President and Co-Chief Executive Officer EX-31.3 6 at06ex313.txt CERTIFICATION - A. TOPPI EXHIBIT 31.3 CERTIFICATION I, Angela D. Toppi, Executive Vice President and Chief Financial Officer of Trans-Lux Corporation certify that: 1. I have reviewed this Annual Report on Form 10-K (the "Report") of Trans-Lux Corporation; 2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the Registrant and have; a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and c) disclosed in this Report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ Angela D. Toppi ---------------------------------------- Date: April 2, 2007 Angela D. Toppi Executive Vice President and Chief Financial Officer EX-32.1 7 mm06ex321.txt CERTIFICATION, SEC 906 - M. MULCAHY EXHIBIT 32.1 CERTIFICATION OF 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 I, Michael R. Mulcahy, President and Co-Chief Executive Officer of Trans-Lux Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 to the best of my knowledge, that: (1) The Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, (15 U.S.C. 78m or 78o(d)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael R. Mulcahy ---------------------------------------- Date: April 2, 2007 Michael R. Mulcahy President and Co-Chief Executive Officer This Certification accompanies this Form 10-K as an exhibit, but shall not be deemed as having been filed for purposes of Section 18 of the Securities Exchange Act of 1934 or as a separate disclosure document of the Company or the certifying officer. EX-32.2 8 tb06ex322.txt CERTIFICATION, SEC 906 - T. BRANDT EXHIBIT 32.2 CERTIFICATION OF 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 I, Thomas Brandt, Executive Vice President and Co-Chief Executive Officer of Trans-Lux Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 to the best of my knowledge, that: (1) The Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, (15 U.S.C. 78m or 78o(d)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Thomas Brandt ---------------------------------------- Date: April 2, 2007 Thomas Brandt Executive Vice President and Co-Chief Executive Officer This Certification accompanies this Form 10-K as an exhibit, but shall not be deemed as having been filed for purposes of Section 18 of the Securities Exchange Act of 1934 or as a separate disclosure document of the Company or the certifying officer. EX-32.3 9 at06ex323.txt CERTIFICATION, SEC 906 - A. TOPPI EXHIBIT 32.3 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Angela D. Toppi, Executive Vice President and Chief Financial Officer of Trans-Lux Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 to the best of my knowledge, that: (1) The Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, (15 U.S.C. 78m or 78o(d)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Angela D. Toppi ---------------------------------------- Date: April 2, 2007 Angela D. Toppi Executive Vice President and Chief Financial Officer This Certification accompanies this Form 10-K as an exhibit, but shall not be deemed as having been filed for purposes of Section 18 of the Securities Exchange Act of 1934 or as a separate disclosure document of the Company or the certifying officer. -----END PRIVACY-ENHANCED MESSAGE-----