Part I. Financial Information
Item
1. Financial Statements
Ballantyne
of Omaha, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2007
and December 31, 2006
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
18,654,909
|
|
$
|
22,622,654
|
|
Restricted cash
|
|
250,733
|
|
611,391
|
|
Accounts
receivable (less allowance for doubtful accounts of $508,946 in 2007 and
$498,783 in 2006)
|
|
7,134,516
|
|
7,468,533
|
|
Inventories, net
|
|
11,883,332
|
|
8,848,396
|
|
Deferred income
taxes
|
|
1,985,673
|
|
1,491,458
|
|
Other current
assets
|
|
2,251,092
|
|
1,019,007
|
|
Total current
assets
|
|
42,160,255
|
|
42,061,439
|
|
|
|
|
|
|
|
Investment in
joint venture
|
|
2,667,392
|
|
|
|
Property, plant
and equipment, net
|
|
4,527,843
|
|
4,854,508
|
|
Goodwill, net
|
|
1,169,960
|
|
1,794,426
|
|
Intangible
assets, net
|
|
580,169
|
|
486,003
|
|
Other assets
|
|
19,757
|
|
27,057
|
|
Deferred income
taxes
|
|
1,023,301
|
|
684,067
|
|
Total assets
|
|
$
|
52,148,677
|
|
$
|
49,907,500
|
|
|
|
|
|
|
|
Liabilities
and Stockholders Equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Current portion
of long-term debt
|
|
$
|
|
|
$
|
14,608
|
|
Accounts payable
|
|
4,249,918
|
|
3,257,948
|
|
Warranty
reserves
|
|
480,137
|
|
617,052
|
|
Accrued group
health insurance claims
|
|
228,306
|
|
276,405
|
|
Accrued bonuses
|
|
146,184
|
|
|
|
Other accrued
expenses
|
|
2,293,622
|
|
2,310,339
|
|
Customer
deposits
|
|
821,387
|
|
344,599
|
|
Income tax
payable
|
|
78,777
|
|
266,395
|
|
Total current
liabilities
|
|
8,298,331
|
|
7,087,346
|
|
Other accrued
expenses, net of current portion
|
|
662,396
|
|
431,207
|
|
Total
liabilities
|
|
8,960,727
|
|
7,518,553
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
Preferred stock,
par value $.01 per share;
|
|
|
|
|
|
Authorized
1,000,000 shares, none outstanding
|
|
|
|
|
|
Common stock,
par value $.01 per share;
|
|
|
|
|
|
Authorized 25,000,000
shares; issued 15,945,639 shares in 2007 and 15,824,389 shares in 2006
|
|
159,456
|
|
158,243
|
|
Additional
paid-in capital
|
|
34,509,806
|
|
34,216,227
|
|
Accumulated
other comprehensive income
|
|
14,746
|
|
14,746
|
|
Retained
earnings
|
|
23,819,396
|
|
23,315,185
|
|
|
|
58,503,404
|
|
57,704,401
|
|
Less 2,097,805
common shares in treasury, at cost
|
|
(15,315,454
|
)
|
(15,315,454
|
)
|
Total
stockholders equity
|
|
43,187,950
|
|
42,388,947
|
|
Total
liabilities and stockholders equity
|
|
$
|
52,148,677
|
|
$
|
49,907,500
|
|
See accompanying notes to
consolidated financial statements.
1
Ballantyne of Omaha, Inc. and
Subsidiaries
Consolidated Statements
of Operations
Three and Nine Months
Ended September 30, 2007 and 2006
(Unaudited)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net revenues
|
|
$
|
12,615,705
|
|
$
|
13,069,673
|
|
$
|
38,206,449
|
|
$
|
37,357,779
|
|
Cost of revenues
|
|
10,526,839
|
|
10,875,149
|
|
30,913,586
|
|
29,100,160
|
|
Gross profit
|
|
2,088,866
|
|
2,194,524
|
|
7,292,863
|
|
8,257,619
|
|
|
|
|
|
|
|
|
|
|
|
Selling and
administrative expenses:
|
|
|
|
|
|
|
|
|
|
Selling
|
|
787,270
|
|
718,213
|
|
2,279,622
|
|
2,157,917
|
|
Administrative
|
|
1,312,779
|
|
1,226,067
|
|
4,339,829
|
|
3,680,785
|
|
Goodwill
impairment
|
|
|
|
|
|
639,466
|
|
|
|
Total selling
and administrative expenses
|
|
2,100,049
|
|
1,944,280
|
|
7,258,917
|
|
5,838,702
|
|
Gain on the
transfer of assets
|
|
|
|
|
|
234,557
|
|
|
|
Gain (loss) on
disposal of fixed assets, net
|
|
|
|
(3,457
|
)
|
(11,004
|
)
|
37,546
|
|
Income (loss)
from operations
|
|
(11,183
|
)
|
246,787
|
|
257,499
|
|
2,456,463
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
211,305
|
|
203,292
|
|
636,548
|
|
572,306
|
|
Interest expense
|
|
(11,531
|
)
|
(11,676
|
)
|
(30,685
|
)
|
(40,118
|
)
|
Equity in loss
of joint venture
|
|
(79,754
|
)
|
|
|
(153,134
|
)
|
|
|
Other (income)
expense, net
|
|
(39,075
|
)
|
11,775
|
|
(111,827
|
)
|
(28,432
|
)
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes
|
|
69,762
|
|
450,178
|
|
598,401
|
|
2,960,219
|
|
Income tax
benefit (expense)
|
|
58,876
|
|
(75,465
|
)
|
(94,190
|
)
|
(943,323
|
)
|
Net income
|
|
$
|
128,638
|
|
$
|
374,713
|
|
$
|
504,211
|
|
$
|
2,016,896
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
per share
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.04
|
|
$
|
0.15
|
|
Diluted earnings
per share
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.04
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
13,836,537
|
|
13,635,064
|
|
13,805,506
|
|
13,540,737
|
|
Diluted
|
|
14,110,477
|
|
14,029,604
|
|
14,096,263
|
|
14,007,988
|
|
See
accompanying notes to consolidated financial statements.
2
Ballantyne
of Omaha, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
Nine Months Ended
September 30, 2007 and 2006
(Unaudited)
|
|
2007
|
|
2006
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
504,211
|
|
$
|
2,016,896
|
|
Adjustments to
reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Provision for
doubtful accounts
|
|
31,583
|
|
86,288
|
|
Provision for
obsolete inventory
|
|
520,773
|
|
515,806
|
|
Depreciation of
other assets
|
|
707,833
|
|
352,498
|
|
Depreciation of
property, plant and equipment
|
|
807,068
|
|
807,902
|
|
Amortization of
intangibles
|
|
70,834
|
|
23,557
|
|
Equity in loss
of joint venture
|
|
153,134
|
|
|
|
Goodwill
impairment
|
|
639,466
|
|
|
|
Gain on sale of
fixed assets
|
|
|
|
(37,546
|
)
|
Loss on disposal
of fixed assets
|
|
11,004
|
|
|
|
Deferred income
taxes
|
|
(833,449
|
)
|
(562,753
|
)
|
Share-based
compensation
|
|
69,562
|
|
75,414
|
|
Excess tax
benefits from stock options exercised
|
|
(173,888
|
)
|
(371,350
|
)
|
Changes in
assets and liabilities, net of effect of business acquisition:
|
|
|
|
|
|
Accounts
receivable
|
|
302,434
|
|
573,967
|
|
Inventories
|
|
(6,016,116
|
)
|
582,860
|
|
Other current
assets
|
|
(1,939,918
|
)
|
(1,013,825
|
)
|
Accounts payable
|
|
991,970
|
|
208,209
|
|
Warranty
reserves
|
|
(136,915
|
)
|
(19,647
|
)
|
Accrued group
health insurance claims
|
|
(48,099
|
)
|
(33,181
|
)
|
Accrued bonuses
|
|
146,184
|
|
(914,985
|
)
|
Other accrued
expenses
|
|
50,399
|
|
437,454
|
|
Customer
deposits
|
|
476,788
|
|
(376,582
|
)
|
Current income
taxes
|
|
(13,730
|
)
|
520,377
|
|
Other assets
|
|
7,300
|
|
|
|
Net cash
provided by (used in) operating activities
|
|
(3,671,572
|
)
|
2,871,359
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
Acquisition, net
of cash acquired
|
|
(183,364
|
)
|
(1,391,258
|
)
|
Investment in
joint venture
|
|
(276,755
|
)
|
|
|
(Increase) decrease
in restricted investments
|
|
360,658
|
|
(602,984
|
)
|
Proceeds from
sale of assets
|
|
|
|
265,401
|
|
Capital
expenditures
|
|
(421,407
|
)
|
(470,394
|
)
|
Net cash used in
investing activities
|
|
(520,868
|
)
|
(2,199,235
|
)
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
Payments on
notes payable
|
|
|
|
(206,504
|
)
|
Payments on
long-term debt
|
|
(14,608
|
)
|
(20,643
|
)
|
Proceeds from
exercise of stock options
|
|
65,415
|
|
302,017
|
|
Excess tax
benefits from stock options exercised
|
|
173,888
|
|
371,350
|
|
Net cash
provided by financing activities
|
|
224,695
|
|
446,220
|
|
|
|
|
|
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
(3,967,745
|
)
|
1,118,344
|
|
Cash and cash
equivalents at beginning of period
|
|
22,622,654
|
|
19,628,348
|
|
Cash and cash
equivalents at end of period
|
|
$
|
18,654,909
|
|
$
|
20,746,692
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
Ballantyne of Omaha, Inc. and
Subsidiaries
Notes to Consolidated Financial
Statements
Three and Nine Months Ended
September 30, 2007 and 2006
(Unaudited)
1.
Company
Ballantyne of Omaha, Inc., a Delaware corporation (Ballantyne or the Company),
and its wholly-owned subsidiaries Strong Westrex, Inc., Design &
Manufacturing, Inc. and Strong Technical Services, Inc., design, develop,
manufacture, service and distribute motion picture and digital projection
equipment and lighting systems. The
Companys products are distributed to movie exhibition companies, sports
arenas, auditoriums, amusement parks and special venues. Refer to the Business Segment Section (note
21) for further information.
2. Summary
of Significant Accounting Policies
The principal accounting policies upon which the accompanying
consolidated financial statements are based are summarized as follows:
a. Basis of Presentation and Principles of Consolidation
The consolidated financial statements included herein are
presented in accordance with the requirements of Form 10-Q and consequently do
not include all of the disclosures normally required by accounting principles
generally accepted in the United States of America for annual reporting
purposes or those made in the Companys annual Form 10-K filing. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Companys Form 10-K for fiscal 2006.
In the opinion of management, the unaudited consolidated
financial statements of the Company reflect all adjustments of a normal
recurring nature necessary to present a fair statement of the financial
position and the results of operations and cash flows for the respective
interim periods. The results for interim
periods are not necessarily indicative of trends or results expected for a full
year.
b.
Use of Estimates
The preparation of consolidated financial
statements in conformity with U.S. generally accepted accounting principles
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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results and changes in facts and circumstances may alter such estimates and
affect results of operations and financial position in future periods.
c.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do
not bear interest. Amounts collected on trade accounts receivable are included
in net cash provided by operating activities in the consolidated statements of
cash flows.
The Company maintained an allowance for doubtful
accounts of $508,946 and $498,783 at September 30, 2007 and December 31,
2006, respectively. This allowance is developed based on several factors
including overall customer credit quality, historical write-off experience and
a specific analysis that projects the ultimate collectibility of the account.
As such, these factors may change over time causing the reserve level to adjust
accordingly.
4
d. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and include appropriate elements of material, labor and manufacturing
overhead. Inventory balances are net of
reserves of slow moving or obsolete inventory estimated based on managements
review of inventories on hand compared to estimated future usage and sales.
e. Goodwill
and Other Intangible Assets
Goodwill
represents the excess of cost over the fair value of assets of businesses
acquired through purchase business combinations in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets
. Goodwill and intangible assets that are
determined to have an indefinite useful life are not amortized but instead
tested for impairment at least annually as well as when events and
circumstances indicate that an impairment may have occurred. Certain factors that may occur and indicate
that an impairment exists include, but are not limited to, operating results
that are lower than expected and adverse industry or market economic trends.
The impairment
testing requires management to estimate the fair value of the assets or
reporting unit. The estimate of the fair
value of the assets is determined on the basis of discounted cash flows. In estimating the fair value, management must
make assumptions and projections regarding such items as future cash flows,
future revenues, future earnings in addition to other factors. The fair value of the reporting unit is then
compared to the carrying amount of the assets to quantify an impairment charge
as of the assessment date for the excess of the carrying amount of the
reporting units assets over the fair value of the reporting units assets.
Identifiable
intangible assets with definite lives are amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144,
Accounting
for Impairment or Disposal of Long-Lived Assets
.
f. Property, Plant and Equipment
Significant expenditures for the replacement or expansion of property,
plant and equipment are capitalized.
Depreciation of property, plant and equipment is provided over the
estimated useful lives of the respective assets using the straight-line method. For financial reporting purposes, assets are
depreciated over the estimated useful lives of 20 years for buildings and
improvements, 3 to 10 years for machinery and equipment, 7 years for furniture
and fixtures and 3 years for computers and accessories. The Company generally uses accelerated
methods of depreciation for income tax purposes.
g. Major
Maintenance Activities
The Company incurs maintenance costs on all its major
equipment. Repair and maintenance costs
are expensed as incurred.
5
h. Income Taxes
Income taxes are accounted for under the asset and liability
method. The Company uses an estimate of
its annual effective rate at each interim period based on the facts and
circumstances at the time while the actual effective rate is calculated at year-end. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Based on the Companys assessment of
estimated future taxable income, management considers whether it is more likely
than not that a portion or all of the deferred tax assets will not be realized.
i. Revenue
Recognition
The Company recognizes revenue from product sales upon
shipment to the customer when collectibility is reasonably assured. Revenues related to services are recognized
as earned over the terms of the contracts or delivery of the service to the
customer.
The Company enters into transactions that represent
multiple element arrangements, which may include a combination of services and
asset sales. Under EITF 00-21,
Revenue Arrangements with Multiple Deliverables
, multiple
element arrangements are assessed to determine whether they can be separated
into more than one unit of accounting. A
multiple element arrangement is separated into more than one unit of accounting
if all of the following criteria are met.
The delivered item(s) has value on a standalone basis;
There is objective and reliable evidence of the fair value of the
undelivered item(s);
If the arrangement includes a general right of return relative to the
delivered item(s), delivery or performance of the undelivered item(s) is
considered probable and substantially in the control of the Company.
If these criteria are not met, then revenue is deferred until such
criteria are met or until the period(s) over which the last undelivered element
is delivered. If there is objective and
reliable evidence of fair value for all units of accounting in an arrangement,
the arrangement consideration is allocated to the separate units of accounting
based on each units relative fair value.
There may be cases, however, in which there is objective and reliable
evidence of fair value of the undelivered item(s) but no such evidence for the
delivered item(s). In those cases, the
residual method is used to allocate the arrangement consideration. Under the residual method, the amount of
consideration allocated to the delivered item(s) equals the total arrangement
consideration less the aggregate fair value of the undelivered item.
j. Fair
Value of Financial Instruments
The fair value of a financial instrument is the amount
at which the instruments could be exchanged in a current transaction between
willing parties. All financial
instruments reported in the consolidated balance sheets equal or approximate
their fair values.
6
k. Cash and
Cash Equivalents
All highly liquid financial instruments with
maturities of three months or less from date of purchase are classified as cash
equivalents in the consolidated balance sheets and statements of cash flows.
l. Other
Current Assets
Other current assets include digital projection
equipment provided to potential customers for consignment and demonstration
purposes. During the current period, the
Company entered into a short-term operating lease agreement with a third party
customer for the use of twenty-four digital projectors. The digital projection equipment, in the
amount of approximately $1.5 million is recorded in other current assets for
three and nine months ended September 30, 2007.
m. Earnings
Per Common Share
The Company computes and
presents earnings per share in accordance with SFAS No. 128,
Earnings Per Share
.
Basic earnings per share has been computed on the basis of the weighted
average number of shares of common stock outstanding. Diluted earnings per share has been computed
on the basis of the weighted average number of shares of common stock
outstanding after giving effect to potential common shares from dilutive stock options. The following table provides a reconciliation
between basic and diluted earnings per share:
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Basic earnings
per share:
|
|
|
|
|
|
|
|
|
|
Income
applicable to common stock
|
|
$
|
128,638
|
|
$
|
374,713
|
|
$
|
504,211
|
|
$
|
2,016,896
|
|
Weighted average
common shares outstanding
|
|
13,836,537
|
|
13,635,064
|
|
13,805,506
|
|
13,540,737
|
|
Basic earnings
per share
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.04
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
per share:
|
|
|
|
|
|
|
|
|
|
Income applicable
to common stock
|
|
$
|
128,638
|
|
$
|
374,713
|
|
$
|
504,211
|
|
$
|
2,016,896
|
|
Weighted average
common shares outstanding
|
|
13,836,537
|
|
13,635,064
|
|
13,805,506
|
|
13,540,737
|
|
Assuming
conversion of options outstanding
|
|
273,940
|
|
394,540
|
|
290,757
|
|
467,251
|
|
Weighted average
common shares outstanding, as adjusted
|
|
14,110,477
|
|
14,029,604
|
|
14,096,263
|
|
14,007,988
|
|
Diluted earnings
per share
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.04
|
|
$
|
0.14
|
|
For the three and nine months ended September 30,
2007, options to purchase 101,063 shares of common stock at a weighted average
price of $9.71 per share were outstanding, but were not included in the
computation of diluted earnings per share as the options exercise price was
greater than the average market price of the common shares. These options expire between October 2007 and
December 2008. For the three and nine
months ended September 30, 2006, options to purchase 268,800 shares of common
stock at a weighted average price of $8.43 per share were outstanding, but were
not included in the computation of diluted earnings per share as the options
exercise price was greater than the average market price of the common shares.
n. Stock
Option Plans
Effective January 1, 2006, the Company adopted FASB
Statement No. 123(R),
Share-Based Payment
(SFAS No. 123(R)). This statement
replaced FASB Statement No. 123, Accounting for Stock-Based Compensation
(Statement 123) and supersedes APB No. 25.
Statement 123(R) requires that all stock-based compensation be
recognized as an expense in the financial statements and that such cost be
measured at the fair value of the award.
This statement was adopted using the modified prospective method of
application, which requires the Company to recognize compensation cost on a
prospective basis. Therefore, prior
years financial statements were not restated.
Under this method, the Company recorded stock-based compensation expense
for awards granted prior to, but not yet vested as of January 1, 2006, using
the fair value amounts determined for pro forma disclosures under Statement
123. For stock-based awards granted
after January 1, 2006, the Company recognizes compensation expense based on
estimated grant date fair value using the Black-Scholes option-pricing
model. In a change from previous standards,
Statement 123(R) also requires that excess tax benefits related to stock option
exercises be reflected as financing cash inflows.
7
Share-based compensation cost that has been included
in income from operations amounted to $69,562 and $75,414 for the nine months
ended September 30, 2007 and 2006, respectively. No share-based compensation
cost was capitalized as a part of inventory as of September 30, 2007.
o. Impairment of Long-Lived Assets
The Company reviews long-lived assets, exclusive of
goodwill, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable in accordance with
SFAS No. 144,
Accounting for the Impairment or Disposal of
Long-Lived Assets
.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the assets
exceeds their fair value. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
The Companys most significant long-lived assets
subject to these periodic assessments of recoverability are property, plant and
equipment, which have a net book value of $4.5 million at September 30, 2007.
Because the
recoverability of property, plant and equipment is based on estimates of future
undiscounted cash flows, these estimates may vary due to a number of factors,
some of which may be outside of managements control. To the extent that the Company is unable to
achieve managements forecasts of future income, it may become necessary to
record impairment losses for any excess of the net book value of property,
plant and equipment over its fair value.
In addition, the Company has long-lived assets which consist of the
Companys equity method investment in a joint venture. The Company would recognize a loss when there
is a loss in value of the equity method investment which is other than a
temporary decline. No impairment existed
at September 30, 2007.
p. Warranty
Reserves
The Company generally grants a warranty to its
customers for a one-year period following the sale of all new equipment, and on
selected repaired equipment for a one-year period following the repair. The warranty period is extended under certain
circumstances and for certain products.
The Company accrues for these costs at the time of sale or repair, or
when events dictate that additional accruals are necessary.
The following table summarizes warranty activity for the
periods indicated below:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Warranty accrual
at beginning of period
|
|
$
|
516,201
|
|
$
|
705,247
|
|
$
|
617,052
|
|
$
|
680,017
|
|
Charged to
expense
|
|
44,115
|
|
33,217
|
|
137,058
|
|
148,719
|
|
Amounts written
off, net of recoveries
|
|
(80,179
|
)
|
(78,094
|
)
|
(273,973
|
)
|
(168,366
|
)
|
Warranty accrual
at end of period
|
|
$
|
480,137
|
|
$
|
660,370
|
|
$
|
480,137
|
|
$
|
660,370
|
|
q. Reclassifications
Certain amounts in the
accompanying consolidated financial statements have been reclassified to
conform to the 2007 presentation.
8
r. Adoption
of New Accounting Pronouncements
On July 13, 2006,
the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109 (FIN 48). FIN
48 clarifies the accounting for uncertainty in income taxes by prescribing a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in
a tax return. The interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods and
disclosure. The adoption of this interpretation as of January 1, 2007, did
not have a material impact on the Companys consolidated financial position or
results of operations.
During 2006, the Emerging
Issues Task Force issued EITF Issue No. 06-3, How Taxes Collected
from Customers and Remitted to Governmental Authorities Should be Presented in
the Income Statement (that is, gross versus net presentation) for tax receipts
on the face of their income statements. The scope of this guidance includes any
tax assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer and may include,
but is not limited to, sales, use, value added and some excise taxes (gross
receipts taxes are excluded). The Company has historically presented such taxes
on a net basis.
In May 2007, the FASB
issued FSP FIN 48-1, Definition of Settlement in FASB Interpretation No. 48. FSP FIN 48-1 provides guidance on how an
enterprise should determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is applied retrospectively to the
Company's initial adoption of FIN 48 on January 1, 2007. The adoption of FSP FIN 48-1 did not have a
material impact on the consolidated financial statements.
s. Recently Issued Accounting Pronouncements
In September 2006,
the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The Company has not yet completed its evaluation of the
impact of adopting SFAS No. 157.
In February 2007, the
FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are reported
in earnings. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company is
currently assessing the impact of SFAS No. 159 on its consolidated financial
position and results of operations.
9
3.
Investment
in Digital Link II Joint Venture
On March 6, 2007,
the Company entered into an agreement with RealD to form an operating entity
Digital Link II, LLC (the LLC). Under the agreement, the LLC was formed with
the Company and RealD as the only two members with membership interests of
44.4% and 55.6%, respectively. The LLC was formed for purposes of
commercializing certain 3D technology and to fund the deployment of digital
projector systems and servers to exhibitors.
As of September 30,
2007, Ballantyne has transferred $6.2 million of equipment and related services
to the LLC in exchange for a 44.4% ownership interest in the LLC and cash
considerations. The Companys investment
balance in the joint venture represents the retained interest in the cost basis
of the projectors transferred to the joint venture in addition to capital
contributions and the Companys portion of equity earnings or losses in the
LLC. The total investment in the LLC
amounted to $2.7 million at September 30, 2007.
The gain on the transfer of equipment was approximately $0.2
million. An additional gain will be
recognized upon sale of the equipment by the joint venture to the third party
exhibitors. No revenue was recorded in
conjunction with the transaction.
The Company accounts
for its investment by the equity method. Under this method, the Company records
its proportionate share of Digital Link IIs net income or loss based on the
most recently available financial statements. The Companys portion of losses
of the LLC amounted to approximately $0.2 million for the nine months ended
September 30, 2007.
4. Acquisition
of National Cinema Service Corp.
On
May 31, 2006, the Company acquired certain assets and assumed certain
liabilities of National Cinema Service Corp. (NCSC). The total purchase price
of NCSC at the date of acquisition was $1.7 million including cash acquired.
The Company entered into an agreement to pay the former owner of NCSC, $150,000
in consideration for a five-year covenant not to compete, of which $25,000 was
paid at closing, with the remaining $125,000 being placed in escrow to be paid over
five-years. The payments are contingent upon the satisfaction of the
requirement to not compete with the Company in the cinema service business over
a five-year period. As of September 30, 2007, $100,000 remained in the escrow
account to be paid out over the remainder of the contract term.
The purchase price initially excluded an
additional $0.5 million of restricted funds that were placed in escrow for
contingent payments. These contingencies related to certain aged accounts
receivable and inventories deemed to have a heightened risk of becoming
obsolete and certain contingent sales tax liabilities. During 2006, the
satisfaction of the terms outlined in the purchase agreement related to aged
accounts receivable, inventories and certain sales tax liabilities were
satisfied, however, there are still $0.2 million of contingencies pertaining
primarily to sales tax liabilities at September 30, 2007.
Funds for the purchase
were provided by internally generated cash flows. Direct transaction costs were
not material to the transaction.
10
5.
Acquisition of
Technobeam
During 2007, the
Company acquired certain assets of a business in the lighting segment from High
End Systems, Inc. The Company made an initial payment of $0.2 million.
Additional consideration to be paid of up to $150,000 is contingent upon
satisfaction and attainment of certain future sales of the business product
line. Direct transaction costs were not material to the acquisition.
The assets acquired
and liabilities assumed were recorded at estimated fair values as determined by
the Companys management based on information currently available, assumptions
as to future operations and preliminary independent appraisals. The allocation of the purchase price is
subject to revision, which is not expected to be material, based on the final
determination of appraised and other fair values. The following table summarizes the estimated
fair value of the assets acquired at the date of the acquisition:
Inventory
|
|
$
|
83,364
|
|
Property and
equipment
|
|
70,000
|
|
Amortizable
intangible assets
|
|
165,000
|
|
Goodwill
|
|
15,000
|
|
Total assets
acquired
|
|
333,364
|
|
Long-term
liabilities
|
|
(150,000
|
)
|
Net assets
acquired
|
|
$
|
183,364
|
|
Goodwill
represents the excess of the purchase price over the fair value of the net
tangible and intangible assets acquired and is expected to be deductible for
tax purposes.
6. Intangible Assets
As
of September 30, 2007 and December 31, 2006, the Company had unamortized
identifiable intangible assets of $580,169 and $486,003, respectively. The following table details amounts relating
to those assets.
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Amortizable
intangible assets:
|
|
|
|
|
|
Customer
relationships
|
|
$
|
511,265
|
|
$
|
391,265
|
|
Trademarks
|
|
25,000
|
|
|
|
Non-competition
agreement
|
|
155,962
|
|
135,962
|
|
|
|
$
|
692,227
|
|
$
|
527,227
|
|
Accumulate
amortization:
|
|
|
|
|
|
Customer
relationships
|
|
$
|
(69,960
|
)
|
$
|
(25,360
|
)
|
Trademarks
|
|
(2,500
|
)
|
|
|
Non-competition
agreement
|
|
(39,598
|
)
|
(15,864
|
)
|
|
|
$
|
(112,058
|
)
|
$
|
(41,224
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, other than goodwill, with
definite lives are amortized over their useful lives.
During 2006, the Company purchased certain
intangible assets pertaining to an asset purchase agreement between the Company
and National Cinema Service Corporation. The assets were recorded at fair
value. Customer relationships are being amortized over useful lives of nine
years and the non-competition agreement is being amortized over a useful life
of five years.
During 2007, the Company purchased certain
intangible assets pertaining to an agreement between High End Systems and the
Company. The assets were recorded at fair value. Customer relationship and
trademark intangibles will be amortized over a useful life of five years and a
non-competition agreement will be amortized over three years.
11
The
Company recorded amortization expense relating to other identifiable intangible
assets of $70,834 and $23,557 for the nine months ended September 30, 2007 and
2006, respectively.
7. Goodwill
As
of September 30, 2007 and December 31, 2006, the Company had unamortized
goodwill of $1,169,960 and $1,794,426, respectively, resulting in a net
decrease of $624,466. The change in
goodwill was primarily due to a decrease of $639,466, which resulted from an
impairment charge that occurred in the second quarter relating to a reporting
unit within the theatre segment which is discussed below.
Goodwill
represents the excess of cost over the fair value of assets of businesses
acquired through purchase business combinations in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS)
No. 142,
Goodwill and Other Intangible
Assets
. Goodwill and intangible assets that are determined to have
an indefinite useful life are not amortized but instead tested for impairment
at least annually as well as when events and circumstances indicate that an
impairment may have occurred. Certain factors that may occur and indicate that
impairment exists include, but are not limited to, operating results that are
lower than expected and adverse industry or market economic trends.
The
impairment testing requires management to estimate the fair value of the assets
or reporting unit. The estimate of the fair value of the assets is determined
on the basis of discounted cash flows. In estimating the fair value, management
must make assumptions and projections regarding such items as future cash
flows, future revenues, future earnings in addition to other factors. The fair
value of the reporting unit is then compared to the carrying amount of the
assets to quantify an impairment charge as of the assessment date for the
excess of the carrying amount of the reporting units assets over the fair
value of the reporting units assets.
As a result of an
analysis conducted during the second quarter pursuant to SFAS No. 142,
Ballantyne recorded a pre-tax impairment charge on a portion of the Companys
goodwill pertaining to a reporting unit within the Theatre segment bringing the
goodwill attributable to this unit to zero.
The analysis took into consideration the ongoing transition taking place
in the Companys strategy and operations, moving from the manufacture of
traditional film equipment to a business model focused on the distribution and
service of digital projectors. Accordingly,
the Company has taken a 2007 non-cash charge amounting to $639,466, or $0.03
per diluted share after tax.
8. Inventories
Inventories consist of
the following:
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Raw materials
and components
|
|
$
|
4,650,402
|
|
$
|
6,041,409
|
|
Work in process
|
|
1,339,203
|
|
769,575
|
|
Finished goods
|
|
5,893,727
|
|
2,037,412
|
|
|
|
$
|
11,883,332
|
|
$
|
8,848,396
|
|
The inventory
balances are net of reserves for slow moving or obsolete inventory of
approximately $1,973,000 and $1,535,000 as of September 30, 2007 and December
31, 2006, respectively.
12
9. Property, Plant and Equipment
Property, plant
and equipment include the following:
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Land
|
|
$
|
343,500
|
|
$
|
343,500
|
|
Buildings and
improvements
|
|
4,726,309
|
|
4,699,981
|
|
Machinery and
equipment
|
|
9,361,035
|
|
9,150,422
|
|
Office furniture
and fixtures
|
|
2,597,671
|
|
2,427,577
|
|
|
|
17,028,515
|
|
16,621,480
|
|
Less accumulated
depreciation
|
|
12,500,672
|
|
11,766,972
|
|
Net property,
plant and equipment
|
|
$
|
4,527,843
|
|
$
|
4,854,508
|
|
Depreciation expense amounted to $270,547 and $807,068 for the three
and nine months ended September 30, 2007, respectively, as compared to $257,506
and $807,902 for the three and nine months ended September 30, 2006.
10. Income Tax
Income taxes are accounted for under the asset and liability method.
The Company uses an estimate of its annual effective rate based on the facts
and circumstances at the time while the actual effective rate is calculated at
year-end. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. Based on the Companys assessment of estimated future taxable income,
management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
The Companys uncertain tax positions are related to tax years that
remain subject to examination by the relevant taxable authorities. The Company has
examinations not yet initiated for Federal purposes for fiscal years 2004
through 2006. In most cases, the Company has examinations open for State or
local jurisdictions based on the particular jurisdictions statute of
limitations. The Company does not currently have any examinations in
process. As of January 1, 2007, the
Company had $0.3 million of unrecognized tax benefits. If recognized, the tax benefits would be
recorded as a component of income tax expense.
Estimated amounts related to estimated underpayment of income taxes,
including interest and penalties, are classified as a component of tax expense
in the consolidated statements of operations and were not material for the
quarter ended September 30, 2007.
Amounts accrued for estimated underpayment of income taxes amounted to
$0.3 million as of January 1, 2007 and $0.2 million as of September 30, 2007,
respectively. The accruals largely
related to state tax matters.
13
11. Debt
The Company is a party to a revolving credit facility with First
National Bank of Omaha expiring August 28, 2008. The Company expects to renew the credit
facility in the ordinary course of business.
The credit facility provides for borrowings up to the lesser of $4.0
million or amounts determined by an asset based lending formula, as defined.
Borrowings available under the credit facility amounted to $4.0 million at
September 30, 2007. No amounts are
currently outstanding. The Company would pay interest on outstanding amounts
equal to the Prime Rate plus 0.25% (8.0% at September 30, 2007) and pays a fee
of 0.125% on the unused portion. The
credit facility contains certain restrictive covenants primarily related to
maintaining certain earnings, as defined, and restrictions on acquisitions and
dividends. All of the Companys personal
property and stock in its subsidiaries secure this credit facility.
12. Note Receivable
During July 2006,
the Company entered into a note receivable arrangement with Digital Link LLC (Digital
Link) pertaining to the sale and installation of digital projectors. The sale
amounted to $780,000 of which 25% was due upon installation and was collected.
The remaining amounts are due over a 5-year period at an 8% interest
rate. At September 30, 2007, $467,905 remains due from Digital Link. The
payments received during 2007 on the note receivable totaling $76,476 were
recorded as revenue during 2007 with the remaining amounts to be recognized as
revenue in future periods when the cash is received from Digital Link as
described in the note receivable arrangement or when collections from Digital
Link can be reasonably assured. The costs incurred with the sale of projectors
to Digital Link were expensed during the third quarter of 2006 with no future associated
costs to be incurred.
13. Supplemental Cash Flow Information
Supplemental
disclosures to the consolidated statements of cash flows are as follows:
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
Cash paid during
the period for:
|
|
|
|
|
|
Interest
|
|
$
|
21,154
|
|
$
|
10,467
|
|
Income taxes
|
|
$
|
941,370
|
|
$
|
985,699
|
|
|
|
|
|
|
|
Non-cash
investing activities:
|
|
|
|
|
|
Non-cash
investment in joint venture
|
|
$
|
2,543,771
|
|
$
|
|
|
14.
Stock Compensation
Options
The Company currently maintains a 2001 Non-Employee
Directors Stock Option Plan (2001 Directors Plan) which has not been approved
by the Companys stockholders. The plan exists to provide incentive to
non-employee directors to serve on the Board and exert their best efforts. The
2001 Directors Plan provides an option to purchase common stock in lieu of all
or part of the retainer paid to directors for their services. The Board of
Directors fix the amount of the retainer fee for the coming year at least
thirty days prior to beginning of plan year. At that time, each non-employee
director may elect to receive stock options for all or part of the retainer fee
to be provided.
In addition, the Company currently maintains a
2005 Outside Directors Stock Option Plan (2005 Outside Directors Plan) which
has been approved by the Companys stockholders. The Company also maintained a
1995 Employee Stock Option Plan and a 1995 Directors Stock Plan which both
expired in 2005, however, there are outstanding stock options remaining under
these two expired plans.
14
All past and future grants under the Companys
stock option plans were granted at prices based on the fair market value of the
Companys common stock on the date of grant. The outstanding options generally
vest over periods ranging from zero to three years from the grant date and
expire between 5 and 10 years after the grant date.
A total of 1,105,690
shares of common stock have been reserved for issuance pursuant to the Companys
stock option plans for directors at September 30, 2007.
No stock options were
granted during the nine months ended September 30, 2007. The Company granted 47,250 stock options
during the nine months ended September 30, 2006.
On January 1, 2006, the Company adopted SFAS No.
123(R), Share Based Payment (SFAS No. 123(R)).
As a result of the adoption of SFAS No. 123(R), the Company records
compensation expense for stock options based on the estimated fair value of the
options on the date of grant using the Black-Scholes option-pricing model. The
Company uses historical data among other factors to estimate the expected price
volatility, the expected option life and the expected forfeiture rate. The
risk-free rate is based on the U.S. Treasury yield in effect at the time of
grant for the estimated life of the option. The Company has not and is not
expected to pay cash dividends in the future. The Company policy is to record
the fair value of the options to selling, general and administrative expenses
on a straight-line basis over the requisite service period.
Earnings before income
taxes included $55,489 and $55,282 of share-based compensation expense related
to stock options, with associated tax benefits of approximately $20,808 and
$20,399 for the nine months ended September 30, 2007 and 2006, respectively.
SFAS No. 123(R)
requires the cash flows resulting from tax deductions in excess of the
compensation cost recognized for share-based payments (excess tax benefits)
to be classified as financing cash flows. As such, excess tax benefits of
$173,888 and $371,350 were classified as financing cash flows for the nine
months ended September 30, 2007 and 2006, respectively.
The following table summarizes the
Companys activities with respect to its stock options for the nine months
ended September 30, 2007:
|
|
Number of
Options
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic Value
|
|
Options
outstanding at December 31, 2006
|
|
720,925
|
|
$
|
3.77
|
|
3.30
|
|
$
|
1,906,462
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(121,250
|
)
|
$
|
0.54
|
|
|
|
|
|
Forfeited
|
|
(96,863
|
)
|
$
|
9.78
|
|
|
|
|
|
Outstanding at
September 30, 2007
|
|
502,812
|
|
$
|
3.40
|
|
3.23
|
|
$
|
1,637,166
|
|
Exercisable at
September 30, 2007
|
|
487,063
|
|
$
|
3.37
|
|
3.21
|
|
$
|
1,611,415
|
|
The aggregate intrinsic value in the table above
represents the total that would have been received by the option holders if all
in-the-money options had been exercised on September 30, 2007. The total
intrinsic value for options exercised during the three and nine months ended September
30, 2007 amounted to $132,182 and $613,274, respectively. The total intrinsic value for options
exercised during the three and nine months ended September 30, 2006 amounted to
$626,100 and $1,062,417, respectively.
Cash received from option exercises under all
plans for the nine months ended September 30, 2007 and 2006 was $65,415 and
$302,017, respectively. The Company currently uses authorized and un-issued
shares to satisfy share award exercises.
15
The following table
summarizes information about stock options outstanding and exercisable at
September 30, 2007:
|
|
Options Outstanding at
September 30, 2007
|
|
Exercisable at
September 30, 2007
|
|
Range of option
exercise price
|
|
Number of
options
|
|
Weighted
average
remaining
contractual
life
|
|
Weighted
average
exercise
price per
option
|
|
Number
of options
|
|
Weighted
average
remaining
contractual
life
|
|
Weighted
average
exercise
price per
option
|
|
$0.62 to
1.19
|
|
|
283,625
|
|
4.26
|
|
$
|
0.67
|
|
283,625
|
|
4.26
|
|
$
|
0.67
|
|
4.25
to 4.75
|
|
|
118,124
|
|
3.07
|
|
4.55
|
|
102,375
|
|
2.97
|
|
4.60
|
|
7.30
to 11.43
|
|
|
101,063
|
|
0.52
|
|
9.71
|
|
101,063
|
|
0.52
|
|
9.71
|
|
$0.62 to 11.43
|
|
|
502,812
|
|
3.23
|
|
$
|
3.40
|
|
487,063
|
|
3.21
|
|
$
|
3.37
|
|
As of September 30,
2007, the total unrecognized compensation cost related to non-vested stock
option awards was approximately $9,749 and is expected to be recognized over a
weighted average period of 8 months.
Restricted Stock Plan
During 2005, the
Company adopted and the stockholders approved, the 2005 Restricted Stock Plan.
Under terms of the plan, the compensation committee of the Board of Directors
selects which employees of the Company are to receive restricted stock awards
and the terms of such awards. The total number of shares reserved for issuance
under the plan is 250,000 shares. There have been no shares issued under the
plan since inception. The plan expires in September 2010.
Employee Stock Purchase Plan
The Companys Employee
Stock Purchase Plan, approved by the stockholders, provides for the purchase of
shares of Ballantyne common stock by eligible employees at a per share purchase
price equal to 85% of the fair market value of a share of Ballantyne common
stock at either the beginning or end of the offering period, as defined, whichever
is lower. Purchases are made through payroll deductions of up to 10% of each
participating employees salary. The maximum number of shares that can be
purchased by participants in any offering period is 2,000 shares. Additionally,
the Plan has set certain limits, as defined, in regard to the number of shares
that may be purchased by all eligible employees during an offering period. At
September 30, 2007, 134,350 shares of common stock remained available for
issuance under the Plan. The Plan expires in October 2010. The Company
recorded $14,073 and $20,132 of share-based compensation expense pertaining to
the stock purchase plan with associated tax benefits of approximately $3,281
and $2,907 for the nine months ended September 30, 2007 and 2006, respectively.
At September 30, 2007, the total unrecognized estimated compensation cost
pertaining to the stock purchase plan was $757 which is expected to be
recognized over a period of one month.
The fair value of
option grants of $1.71 and $1.79 during the nine months ended September 30,
2007 and 2006, respectively, was estimated using the following weighted average
assumptions:
|
|
2007
|
|
2006
|
|
Expected
dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
Risk-free
interest rate
|
|
4.05
|
%
|
4.91
|
%
|
Expected
volatility
|
|
31.49
|
%
|
36.3
|
%
|
Expected life
(in years)
|
|
1.0
|
|
1.0
|
|
16
15.
Stockholder Rights Plan
On May 26, 2000, the Board of Directors of the Company adopted a
Stockholder Rights Plan (the Rights Plan).
Under terms of the Rights Plan, which expires June 9, 2010, the Company
declared a distribution of one right for each outstanding share of common
stock. The rights become exercisable
only if a person or group (other than certain exempt persons, as defined)
acquires 15 percent or more of Ballantyne common stock or announces a tender
offer for 15 percent or more of Ballantynes common stock. Under certain circumstances, the Rights Plan
allows stockholders, other than the acquiring person or group, to purchase the
Companys common stock at an exercise price of half the market price.
16. Postretirement
Health Care
In accordance with SFAS No. 132,
Disclosures
About Pensions and Other Postretirement Benefits
, the following
table sets forth the components of the net period benefit cost for the three
and nine months ended September 30, 2007 and 2006:
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2,979
|
|
$
|
3,116
|
|
$
|
8,937
|
|
$
|
9,348
|
|
Interest cost
|
|
5,416
|
|
6,083
|
|
16,254
|
|
18,249
|
|
Amortization of
prior-service cost
|
|
5,598
|
|
6,717
|
|
16,793
|
|
20,153
|
|
Amortization of
loss
|
|
|
|
|
|
|
|
|
|
Net periodic
benefit cost
|
|
$
|
13,993
|
|
$
|
15,916
|
|
$
|
41,984
|
|
$
|
47,750
|
|
The Company expects to pay $22,415 under the plan in
2007. As of September 30, 2007, benefits of $5,677 have been paid.
17. Subsequent Event
On October 12, 2007, the
Company acquired 100% of the shares of Marcel Desrochers, Inc. (MDI), a
privately-held Canadian-based manufacturer of cinema projection screens, for
$3.4 million in cash, subject to certain post-closing adjustments. A portion of the purchase price amounting to
approximately $0.9 million will be held in an escrow and represents security
for certain indemnification items. The
seller will be entitled to receive any amount remaining in escrow in annual
installments to occur over the next three years
.
18. Concentrations
The Companys top ten
customers accounted for approximately 44% of 2007 consolidated net revenues and
were from the theatre segment. Trade
accounts receivable from these customers represented approximately 50% of net
consolidated receivables at September 30, 2007.
While the Company believes its relationships with such customers are
stable, most arrangements are made by purchase order and are terminable at will
by either party. A significant decrease
or interruption in business from the Companys significant customers could have
a material adverse effect on the Companys business, financial condition and
results of operations. It could also be
adversely affected by such factors as changes in foreign currency rates and
weak economic and political conditions in each of the countries in which it
sells its products. In addition,
advancing technologies, such as digital cinema, could disrupt historical
customer relationships.
17
19. Self-Insurance
The Company is
self-insured up to certain loss limits for group health insurance. Accruals for claims incurred but not paid as
of September 30, 2007 and December 31, 2006 are included in accrued group
health insurance claims in the accompanying consolidated balance sheets. The Companys policy is to accrue the
employee health benefit accruals based on historical information along with
certain assumptions about future events.
20. Litigation
Ballantyne is
currently a defendant in an asbestos case entitled
Larry C.
Stehman and Leila Stehman v. Asbestos Corporation, Limited and Ballantyne of
Omaha, Inc. individually and as successor in interest to Strong
International, Strong Electric Corporation and Century Projector Corporation,
et al
, filed December 8, 2006 in the Superior Court of the
State of California, County of San Francisco. The Company believes that it has
strong defenses and intends to defend the suit vigorously. It is not possible
at this time to predict the outcome of this case, or the amount of damages, if
any, that a jury may award. The plaintiffs have made no monetary demand upon
Ballantyne. It is possible that an adverse resolution of this case could have a
material adverse effect on the Companys financial position.
Ballantyne
is a party to various other legal actions which are ordinary routine litigation
matters incidental to the Companys business, such as products liability. Based
on currently available information, management believes that the ultimate
outcome of these matters individually and in the aggregate, will not have a
material adverse effect on the Companys results of operations, financial
position or cash flow.
21. Business Segment Information
The presentation of
segment information reflects the manner in which management organizes segments
for making operating decisions and assessing performance.
As of September 30, 2007,
the Companys operations were conducted principally through two business
segments: Theatre and Lighting. Theatre
operations include the design, manufacture, assembly, sale and service of
motion picture projectors, xenon lamphouses, power supplies, sound systems,
film handling equipment and the sale and service of xenon lamps, lenses and
digital projection equipment. The
lighting segment operations include the design, manufacture, assembly and sale
of follow spotlights, stationary searchlights and computer operated lighting
systems for the motion picture production, television, live entertainment,
theme parks and architectural industries.
The Company allocates resources to business segments and evaluates the
performance of these segments based upon reported segment gross profit.
However, certain key operations of a particular segment are tracked on the
basis of operating profit. There are no significant intersegment sales. All
intersegment transfers are recorded at historical cost.
18
Summary
by Business Segments
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
10,521,596
|
|
$
|
11,263,145
|
|
$
|
31,885,555
|
|
$
|
33,078,945
|
|
Services
|
|
854,223
|
|
983,463
|
|
2,711,926
|
|
1,231,802
|
|
Total Theatre
|
|
11,375,819
|
|
12,246,608
|
|
34,597,481
|
|
34,310,747
|
|
Lighting
|
|
1,064,562
|
|
634,817
|
|
3,082,435
|
|
2,493,761
|
|
Other
|
|
175,324
|
|
188,248
|
|
526,533
|
|
553,271
|
|
Total revenue
|
|
$
|
12,615,705
|
|
$
|
13,069,673
|
|
$
|
38,206,449
|
|
$
|
37,357,779
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,564,677
|
|
$
|
1,731,278
|
|
$
|
5,969,057
|
|
$
|
7,062,896
|
|
Services
|
|
79,303
|
|
192,607
|
|
301,230
|
|
209,150
|
|
Total Theatre
|
|
1,643,980
|
|
1,923,885
|
|
6,270,287
|
|
7,272,046
|
|
Lighting
|
|
367,878
|
|
188,288
|
|
791,602
|
|
748,956
|
|
Other
|
|
77,008
|
|
82,351
|
|
230,974
|
|
236,617
|
|
Total gross
profit
|
|
2,088,866
|
|
2,194,524
|
|
7,292,863
|
|
8,257,619
|
|
Selling and
administrative expenses
|
|
(2,100,049
|
)
|
(1,944,280
|
)
|
(6,619,451
|
)
|
(5,838,702
|
)
|
Goodwill
impairment
|
|
|
|
|
|
(639,466
|
)
|
|
|
Gain on transfer
of assets
|
|
|
|
|
|
234,557
|
|
|
|
Gain (loss) on
disposal of fixed assets, net
|
|
|
|
(3,457
|
)
|
(11,004
|
)
|
37,546
|
|
Operating income
(loss)
|
|
(11,183
|
)
|
246,787
|
|
257,499
|
|
2,456,463
|
|
Net interest
income
|
|
199,774
|
|
191,616
|
|
605,863
|
|
532,188
|
|
Equity in loss
in joint venture
|
|
(79,754
|
)
|
|
|
(153,134
|
)
|
|
|
Other income
(expense), net
|
|
(39,075
|
)
|
11,775
|
|
(111,827
|
)
|
(28,432
|
)
|
Income (loss)
before income taxes
|
|
$
|
69,762
|
|
$
|
450,178
|
|
$
|
598,401
|
|
$
|
2,960,219
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures on
capital equipment
|
|
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
116,640
|
|
$
|
79,948
|
|
$
|
240,978
|
|
$
|
355,914
|
|
Services
|
|
87,826
|
|
100,266
|
|
160,931
|
|
100,266
|
|
Total theatre
|
|
204,466
|
|
180,214
|
|
401,909
|
|
456,180
|
|
Lighting
|
|
10,163
|
|
2,039
|
|
19,498
|
|
14,214
|
|
Total
|
|
$
|
214,629
|
|
$
|
182,253
|
|
$
|
421,407
|
|
$
|
470,394
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
222,072
|
|
$
|
232,997
|
|
$
|
671,903
|
|
$
|
734,053
|
|
Services
|
|
52,977
|
|
42,758
|
|
148,078
|
|
50,982
|
|
Total theatre
|
|
275,049
|
|
275,755
|
|
819,981
|
|
785,035
|
|
Lighting
|
|
22,081
|
|
5,308
|
|
57,921
|
|
46,424
|
|
Total
|
|
$
|
297,130
|
|
$
|
281,063
|
|
$
|
877,902
|
|
$
|
831,459
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on
disposal of fixed assets
|
|
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
|
|
$
|
(3,457
|
)
|
$
|
(11,004
|
)
|
$
|
35,746
|
|
Services
|
|
|
|
|
|
|
|
|
|
Total theatre
|
|
|
|
(3,457
|
)
|
(11,004
|
)
|
35,746
|
|
Lighting
|
|
|
|
|
|
|
|
1,800
|
|
Total
|
|
$
|
|
|
$
|
(3,457
|
)
|
$
|
(11,004
|
)
|
$
|
37,546
|
|
19
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Gain on transfer
of assets
|
|
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
|
|
$
|
|
|
$
|
234,557
|
|
$
|
|
|
Services
|
|
|
|
|
|
|
|
|
|
Total Theatre
|
|
|
|
|
|
234,557
|
|
|
|
Lighting
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
$
|
234,557
|
|
$
|
|
|
|
|
At
September 30,
|
|
At
December 31,
|
|
|
|
2007
|
|
2006
|
|
Identifiable assets
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
Products
|
|
$
|
45,864,652
|
|
$
|
42,994,728
|
|
Services
|
|
2,245,114
|
|
3,040,227
|
|
Total Theatre
|
|
48,109,766
|
|
46,034,955
|
|
Lighting
|
|
3,580,304
|
|
3,387,523
|
|
Other
|
|
458,607
|
|
485,022
|
|
Total identifiable assets
|
|
$
|
52,148,677
|
|
$
|
49,907,500
|
|
Summary by
Geographical Area
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
8,604,208
|
|
$
|
9,086,921
|
|
$
|
28,852,669
|
|
$
|
27,312,098
|
|
Canada
|
|
328,402
|
|
159,842
|
|
574,706
|
|
578,812
|
|
Asia
|
|
1,964,677
|
|
2,499,440
|
|
4,856,952
|
|
5,558,366
|
|
Mexico and South
America
|
|
1,317,107
|
|
665,998
|
|
2,634,584
|
|
2,597,075
|
|
Europe
|
|
401,311
|
|
656,536
|
|
1,085,261
|
|
1,256,854
|
|
Other
|
|
|
|
936
|
|
202,277
|
|
54,574
|
|
Total
|
|
$
|
12,615,705
|
|
$
|
13,069,673
|
|
$
|
38,206,449
|
|
$
|
37,357,779
|
|
|
|
|
|
|
|
At
September 30,
|
|
At
December 31,
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Identifiable
assets
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
$
|
49,755,191
|
|
$
|
47,975,865
|
|
Asia
|
|
|
|
|
|
2,393,486
|
|
1,931,635
|
|
Total
|
|
|
|
|
|
$
|
52,148,677
|
|
$
|
49,907,500
|
|
Net revenues by
business segment are to unaffiliated customers. Identifiable assets by
geographical area are based on location of facilities. Net sales by
geographical area are based on destination of sales.
20
Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be
read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this report. Managements discussion and
analysis contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act of 1934 that involve risks and uncertainties, including but not
limited to: quarterly fluctuations in results; customer demand for our
products; the development of new technology for alternate means of motion
picture presentation; domestic and international economic conditions; the
achievement of lower costs and expenses; the continued availability of
financing in the amounts and on the terms required to support our future
business; credit concerns in the theatre exhibition industry; and other risks
detailed from time to time in our other Securities and Exchange Commission
filings. Actual results may differ materially from managements expectations.
The risks included here are not exhaustive. Other sections of this report may
include additional factors which could adversely affect our business and
financial performance. Moreover, we operate in a very competitive and rapidly
changing environment. New risk factors emerge from time to time and it is not
possible for management to predict all such risk factors, nor can it assess the
impact of all such risk factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
Investors should also be aware that while we do
communicate with securities analysts from time to time, it is against our
policy to disclose to them any material non-public information or other
confidential information. Accordingly, investors should not assume that we
agree with any statement or report issued by any analyst irrespective of the
content of the statement or report. Furthermore, we have a policy against
issuing or confirming financial forecast or projections issued by others.
Therefore, to the extent that reports issued by securities analysts contain any
projections, forecasts or opinions, such reports are not the responsibility of
Ballantyne.
Overview
We are a manufacturer, distributor and service
provider for the theatre exhibition industry on a worldwide basis. We also
design, develop, manufacture and distribute lighting systems to the worldwide
entertainment lighting industry through our Strong Entertainment lighting
segment.
Critical Accounting
Policies and Estimates
General
Managements Discussion and Analysis of
Financial Condition and Results of Operations is based upon the consolidated
financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial
statements requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue and expenses, and the
related disclosure of contingent assets and liabilities. Management bases its
estimates on historical experience and on various other assumptions 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. Senior management
has discussed the development, selection and disclosure of these estimates with
the Audit Committee of the Board of Directors. Actual results may differ from
these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if
it requires an accounting estimate to be made based on assumptions about
matters that are uncertain at the time the estimate is made, and if different
estimates that reasonably could have been used, or changes in the accounting
estimates that are reasonably likely to occur periodically, could materially
impact the consolidated financial statements.
Our
accounting policies are discussed in note 2 to the consolidated financial
statements in this report. Management believes the following critical
accounting policies reflect its more significant estimates and assumptions used
in the preparation of the consolidated financial statements.
21
Revenue Recognition
We normally recognize revenue upon shipment of
goods or delivery of the service to customers when collectibility is reasonably
assured. In certain circumstances revenue is not recognized until the goods are
received by the customer or upon installation and customer acceptance based on
the terms of the sale agreement. We have adopted the provisions of EITF 00-21,
Revenue Arrangements with Multiple
Deliverables
(EITF 00-21). EITF 00-21 addresses certain
aspects of revenue recognition on contracts with multiple deliverable elements.
We permit product returns from customers under certain circumstances and also
allow returns under Ballantynes warranty policy. Allowances for product
returns are estimated and recorded at the time revenue is recognized. The return
allowance is recorded as a reduction to revenues for the estimated sales value
of the projected returns and as a reduction in cost of products for the
corresponding cost amount.
Allowance for Doubtful
Accounts
We make judgments about the credit worthiness of
both current and prospective customers based on ongoing credit evaluations
performed by our credit department. These evaluations include, but are not
limited to, reviewing customers prior payment history, analyzing credit
applications, monitoring the aging of receivables from current customers and
reviewing financial statements, if applicable. The allowance for doubtful
accounts is developed based on several factors including overall customer
credit quality, historical write-off experience and a specific account analysis
that project the ultimate collectibility of the accounts. As such, these
factors may change over time causing the reserve level to adjust accordingly.
When it is determined that a customer is unlikely to pay, a charge is recorded to
bad debt expense in the consolidated statements of operations and the allowance
for doubtful accounts is increased. When it becomes certain the customer cannot
pay, the receivable is written off by removing the accounts receivable amount
and reducing the allowance for doubtful accounts accordingly.
At September 30, 2007, there were approximately
$7.6 million in gross outstanding accounts receivable and $0.5 million recorded
in the allowance for doubtful accounts to cover potential future customer
non-payments. At December 31, 2006, there were approximately $8.0 million
in gross outstanding accounts receivable and $0.5 million recorded in the
allowance for doubtful accounts. If economic conditions deteriorate
significantly or if one of our large customers were to declare bankruptcy, a
larger allowance for doubtful accounts might be necessary.
Inventory Valuation
Inventories are stated at the lower of cost
(first-in, first-out) or market and include appropriate elements of material,
labor and overhead. Our policy is to evaluate all inventory quantities for
amounts on-hand that are potentially in excess of estimated usage requirements,
and to write down any excess quantities to estimated net realizable value.
Inherent in the estimates of net realizable values are managements estimates
related to our future manufacturing schedules, customer demand and the
development of digital technology, which could make our theatre products
obsolete, among other items. Management has managed these risks in the past and
believes that it can manage them in the future, however, operating margins may
suffer if they are unable to effectively manage these risks. At September 30,
2007 we had recorded gross inventory of approximately $13.9 million and $2.0
million of inventory reserves. This compared to $10.3 million and $1.5 million,
respectively, at December 31, 2006.
Warranty
Our products must meet certain product quality
and performance criteria. In addition to known claims or warranty issues, we
estimate future claims on recent sales. We rely on historical product claims
data to estimate the cost of product warranties at the time revenue is
recognized. In determining the accrual for the estimated cost of warranty
claims, we consider experience with: 1) costs for replacement parts; 2) costs
of scrapping defective products; 3) the number of product units subject to
warranty claims and 4) other direct costs associated with warranty claims. If
the cost to repair a product or the number of products subject to warranty
claims is greater than originally estimated, our accrued cost for warranty
claims would increase.
At
September 30, 2007, the warranty accrual amounted to $0.5 million and amounts
charged to expense were $0.01 million. At September 30, 2006, the warranty
accrual amounted to $0.7 million and amounts charged to expense amounted to
$0.1 million.
22
Long-lived Assets
We review long-lived assets, exclusive of
goodwill, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds their
fair value. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Our most significant long-lived assets subject
to these periodic assessments of recoverability are property, plant and
equipment, which have a net book value of $4.5 million at September 30, 2007.
Because the recoverability of property, plant and equipment is based on
estimates of future undiscounted cash flows, these estimates may vary due to a
number of factors, some of which may be outside of managements control. To the
extent that we are unable to achieve managements forecasts of future income,
it may become necessary to record impairment losses for any excess of the net
book value of property, plant and equipment over its fair value.
Goodwill
In accordance with SFAS No. 142, we
evaluate our goodwill for impairment on an annual basis based on values at the
end of the fourth quarter or whenever indicators of impairment exist. As a
result of an analysis conducted in our annual year-end review of goodwill, we
recorded a pre-tax impairment charge of $1.25 million on a portion of our
goodwill pertaining to a reporting unit within the theatre segment during the
fourth quarter of 2006. During the second quarter of 2007, we reevaluated the
recoverability of the remaining goodwill of this reporting unit. The impairment resulting from the current
test was due to current operating results within the segment being below the
expectations reflected in the test performed in the fourth quarter of 2006 and
other factors. As a result, we recorded
a pre-tax impairment charge of $0.6 million during the second quarter. The
analyses took into consideration the ongoing transition taking place in our
strategy and operations, moving from the manufacture of traditional film
equipment to a business model focused on the distribution and service of
digital projectors.
Goodwill totaling $1.2 million and $1.8 million
was included in the consolidated balance sheets at September 30, 2007 and
December 31, 2006, respectively. Managements assumptions about future
cash flows for the reporting units require significant judgment and actual cash
flows in the future may differ significantly from those forecasted today.
Deferred Income Taxes
Income taxes are accounted for under the asset
and liability method. We use an estimate of our annual effective rate at each
interim period based on the facts and circumstances known at the time, while
the actual effective rate is calculated at year-end. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Self-insurance
Reserves
We are partially self-insured for certain
employee health benefits. The related liabilities are included in the
accompanying consolidated financial statements. Our policy is to accrue the
liabilities based on historical information along with certain assumptions
about future events.
Stock-based
Compensation
Effective
January 1, 2006, we adopted FASB Statement No. 123(R),
Share-Based Payment
(SFAS No. 123(R)). This statement
replaced FASB Statement No. 123,
Accounting for Stock-Based
Compensation
(Statement 123) and supersedes
APB No. 25. Statement 123(R) requires that all stock-based
compensation be recognized as an expense in the financial statements and that
such cost be measured at the fair value of the award. This statement was
adopted using the modified prospective
23
method of application. Under this method, we
recorded stock-based compensation expense for awards granted prior to, but not
yet vested as of January 1, 2006, using the fair value amounts determined
for pro forma disclosures under Statement 123. For stock-based awards granted
after January 1, 2006, we recognized compensation expense based on
estimated grant date fair value using the Black-Scholes option-pricing model.
Share-based compensation cost that has been
included in income from operations amounted to $69,562 and $75,414 for the nine
months ended September 30, 2007 and 2006, respectively. No share-based
compensation cost was capitalized as a part of inventory as of September 30,
2007, respectively.
Recent Accounting
Pronouncements
In September 2006, the FASB issued SFAS
No. 157, Fair Value Measurements. SFAS No. 157 establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This Statement
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We have
not yet completed our evaluation of the impact of adopting SFAS No. 157.
In
February 2007, the FASB issued SFAS No. 159 The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159
permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized
gains and losses on items for which the fair value option has been elected are
reported in earnings. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. We are currently
assessing the impact of SFAS No. 159 on our consolidated financial position and
results of operations.
24
Nine Months Ended September 30, 2007
Compared to the Nine Months Ended September 30, 2006
Revenues
Net revenues rose to
$38.2 million during the nine months ended September 30, 2007 (2007) from
$37.4 million for the nine months ended September 30, 2006 (2006).
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
Theatre
|
|
|
|
|
|
Products
|
|
$
|
31,885,555
|
|
$
|
33,078,945
|
|
Services
|
|
2,711,926
|
|
1,231,802
|
|
Total theatre
revenues
|
|
34,597,481
|
|
34,310,747
|
|
Lighting
|
|
3,082,435
|
|
2,493,761
|
|
Other
|
|
526,533
|
|
553,271
|
|
Total net
revenues
|
|
$
|
38,206,449
|
|
$
|
37,357,779
|
|
Theatre Segment
Sales of theatre products and services increased
to $34.6 million in 2007 from $34.3 million in 2006. The increase resulted from service revenues
pertaining to the acquisition of National Cinema Service Corp in June of 2006
which was rolled into a wholly-owned subsidiary named Strong Technical
Services, Inc. (STS). Revenues generated from STS amounted to $3.4 million
during the year of which $0.7 million were parts revenues and $2.7 million were
service revenues. We owned STS for four
months in the year-ago period resulting in parts sales of $0.6 million and
service revenues of $1.1 million.
We did experience lower demand for film
projection equipment during the year which declined to $17.7 million from $20.3
million a year-ago. Revenues from film replacement parts also declined to $5.7
million in 2007 (including the $0.7 million generated by STS) compared to $6.2
million in 2006 (including the $0.6 million generated by STS). The decrease in film projection equipment and
parts pertains to the theatre exhibition industry being in the initial stages
of the conversion to digital cinema projectors. Theatre owners are evaluating
their options as they plan capital expenditures relative to new or used film
projectors or digital equipment. To that end we experienced higher sales of
digital products during 2007 with sales increasing to $2.5 million in 2007
compared to $0.7 million in 2006.
Sales of lenses declined 22.7% in 2007 to $1.3
million from $1.6 million a year-ago. The decrease pertains to fewer sales of
film projectors and a general decrease in demand related to the uncertainty
regarding digital cinema.
Sales of xenon lamps rose 6.0% to $4.7 million
from $4.4 million a year-ago reflecting market share gains. The uncertainty
regarding digital cinema has not yet impacted lamp sales as they are a
necessary replacement item for both digital and film equipment.
Our top ten theatre
customers accounted for approximately 48% of total theatre revenues in 2007 as
compared to 50% of total theatre revenues in 2006.
Lighting Segment
Sales of lighting products increased 23.6% to
$3.1 million in 2007 from $2.5 million a year-ago.
Spotlight sales increased to $1.6 million in
2007 compared to $1.0 million a year-ago primarily resulting from an increase
in demand in arena construction which is the primary driver of demand for the
product line. Sales of Sky-tracker
lights rose to $0.5 million from $0.4 million a year-ago due to the timing of a
few large lights. Sales of replacement
parts also increased to $0.6 million in 2007 compared to $0.4 million in
2006. Sales of all other lighting
equipment and accessories decreased to $0.4 million in 2007 compared to $0.7
million in 2006 resulting primarily from a $0.2 million sale of lights used by
NASA in 2006 that did not reoccur in 2007.
There were also fewer lamp sales this year.
25
Export
Revenues
Sales outside the
United States (mainly theatre sales) decreased to $9.4 million in 2007 from
$10.0 million in 2006 resulting primarily from a decrease of sales in business
transacted in Asia. Export sales are sensitive to worldwide economic and
political conditions that can lead to volatility. Additionally, certain areas
of the world are more cost conscious than the U.S. market and there are
instances where our products are priced higher than local manufacturers making
it more difficult to generate sufficient profit to justify selling into these
regions. Additionally, foreign exchange rates and excise taxes sometimes make
it difficult to market our products overseas at reasonable selling prices.
Gross
Profit
Consolidated gross profit decreased to $7.3
million in 2007 from $8.3 million a year-ago and as a percent of revenue
declined to 19.1% from 22.1% in 2006 due to the reasons discussed below.
The gross profit in the theatre segment fell to
$6.3 million in 2007 from $7.3 million in 2006 and as a percentage of sales
declined to 18.1% from 21.2% a year-ago due to lower sales of film projectors. The margin also reflects $2.5 million of
digital equipment sales which we distribute through an agreement with NEC
Solutions America, Inc. The gross margin on these sales is significantly lower
than the margin we currently experience on our film projectors. We expect
digital sales to become a much larger part of the Company's revenues as
theatres convert their analog screens to digital. As such, revenues are
expected to rise due to a higher price point on the projectors, however, our
gross margin percentage will decrease
.
The
margin was also impacted by service revenues becoming a larger part of our
business. The current service business primarily relates to servicing film
projection equipment which is in a mature industry and as such, gross profit
percentages typically are lower than margins from film equipment sales. We
expect this business to transition to servicing more digital projectors in the
future when the digital cinema rollout accelerates. At that time, margins are expected to
increase. We also continue to depreciate certain digital projectors out at
customer locations for testing and demonstration purposes. During the first nine months of 2007, we
recorded approximately $0.7 million of expense compared to $0.4 million for the
nine-month period a year-ago. The results also reflect lower production demand
in the manufacturing plant in Omaha which resulted in certain manufacturing
inefficiencies and the Company not covering fixed overhead costs in as
profitable a manner.
The gross profit in the lighting segment
increased to $0.8 million in 2007 from $0.7 in 2006 but as a percent of
revenues fell to 25.7% from 30.0% a year-ago. The results reflect manufacturing
inefficiencies as the decline in theatre projection equipment sales had an
effect throughout the manufacturing plant in Omaha.
Selling
and Administrative Expenses
Selling expenses rose to $2.3 million from $2.2
million in 2006 and as a percent of revenues increased to 6.0% from 5.8% a year-ago
and reflects the addition of STS during June of 2006.
Administrative costs
amounted to $4.3 million or 11.4% of revenues in 2007 compared to $3.7 million
or 9.9% in 2006. The increase reflects the addition of STS, higher salaries and
benefits, Sarbanes-Oxley expenses and costs to upgrade our information
technology system. Offsetting these items were expenses which did not reoccur
during 2007, including severance costs incurred as a result of planned
workforce reduction as well as for legal expenses to settle an asbestos lawsuit
during 2006.
26
Digital Link II, LLC
On March 6, 2007,
we entered into an agreement with RealD to form an operating entity Digital
Link II, LLC (the LLC). Under the agreement, the LLC was formed with the
Company and RealD as the only two members with membership interests of 44.4%
and 55.6%, respectively. The LLC was formed for purposes of commercializing
certain 3D technology and to fund the deployment of digital projector systems
and servers to exhibitors. Ballantyne transferred $6.2 million of equipment and
services into the LLC and recorded a gain of $0.2 million, net of the
elimination of its 44.4% ownership. No revenue was recorded in conjunction with
the transaction. During 2007, we recorded our ownership percentage of the net
loss incurred by the LLC of approximately $0.2 million. The results primarily reflect the impact of
non-cash depreciation on the digital projection systems.
Other
Financial Items
Net other expense amounted to approximately $112,000
in 2007 compared to $28,000 in 2006 due to fewer sales of scrap during 2007 and
fewer cash discounts taken due to lower inventory purchases in the 2007 period.
We recorded interest income (net of expense) of
approximately $0.6 million in 2007 compared to $0.5 million a year-ago due to
rising interest rates.
We recorded income tax expense of $0.1 million
in 2007 compared to $0.9 million in 2006. The effective tax rate decreased to
15.7% in 2007 compared to 31.9% a year-ago due to the impact of tax-free
municipal bonds becoming a larger portion of income in 2007.
For the reasons
outlined herein, we earned net income of $0.5 million during 2007 (net of
non-cash pre-tax charges of $2.4 million) and basic and diluted earnings per
share of $0.04, respectively, compared to net income of $2.0 million (net of
non-cash pre-tax charges of $1.2 million) and basic and diluted earnings per
share of $0.15 and $0.14 a year-ago, respectively
.
27
Three Months Ended September 30, 2007
Compared to the Three Months Ended September 30, 2006
Revenues
Net revenues during the three months ended September
30, 2007 (2007) decreased to $12.6 million from $13.1 million during the
three months ended September 30, 2006 (2006).
|
|
Three Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
Products
|
|
$
|
10,521,596
|
|
$
|
11,263,145
|
|
Services
|
|
854,223
|
|
983,463
|
|
Total theatre
revenues
|
|
11,375,819
|
|
12,246,608
|
|
Lighting
|
|
1,064,562
|
|
634,817
|
|
Other
|
|
175,324
|
|
188,248
|
|
Total net
revenues
|
|
$
|
12,615,705
|
|
$
|
13,069,673
|
|
Theatre Segment
Sales of theatre products and services decreased to $11.4
million in 2007 from $12.3 million in 2006, due to a decline in demand for film
projection equipment where sales fell to $5.6 million from $7.0 million a
year-ago. These results reflect the theatre exhibition industrys transition to
digital cinema where theatre owners are evaluating their options as they plan
capital expenditures relative to new or used film projectors or digital
equipment. To that end, sales of digital
equipment rose to $1.1 million in 2007 from $0.4 million a year-ago.
Sales of replacement parts also fell during the
quarter from $2.2 million in 2006 (including the $0.5 million from STS) to $1.9
million in 2007 (including the $0.2 million from STS). Sales of lenses were also impacted by the
industrys transition falling to $0.3 million during the quarter from $0.4
million in 2006.
Sales generated from STS amounted to $1.0 million of
which $0.2 million were parts sales and $0.8 million were service
revenues. Revenues generated by STS in
2006 amounted to $1.3 million of which $0.5 million were parts sales and $0.8
million were service revenues. The
decrease in business from a year-ago pertains primarily to the expected loss of
a significant customer who transitioned to digital projectors using equipment
and service of a competitor.
Sales of xenon lamps rose to $1.6 million in 2007 from
$1.5 million in 2006. Sales of lamps have not been impacted by the uncertainty
regarding digital cinema as they will continue to be a needed replacement item
for both digital and film equipment.
Lighting Segment
Sales of lighting products rose 67.7% to $1.1 million
in 2007 from $0.6 million in 2006 as demand has increased across the board for
most of the lighting product lines.
Spotlight sales increased to $0.5 million in 2007 from $0.2 million a
year-ago. Sales of Sky-tracker lights
rose to $0.2 million in 2007 from $0.1 million a year-ago. Sales of replacement parts also experienced
increased demand rising from $0.1 million in 2006 to $0.2 million in 2007. Sales of all other lighting products were
steady at $0.2 million in both periods.
28
Export Revenues
Sales outside the United States (mainly theatre sales)
amounted to $4.0 million in both 2007 and 2006 periods. A decline in business in Europe and Asia was
offset by higher demand in Mexico.
Export sales are sensitive to worldwide economic and political
conditions that can lead to volatility.
Additionally, certain areas of the world are more cost conscious than
the U.S. market and there are instances where Ballantynes products are priced
higher than local manufacturers making it more difficult to generate sufficient
profit to justify selling into these regions.
Additionally, foreign exchange rates and excise taxes sometimes make it
difficult to market the Companys products overseas at reasonable selling
prices.
Gross Profit
Consolidated gross profit decreased to $2.1 million in
2007 from $2.2 million in 2006 and as a percent of revenue declined to 16.6%
from 16.8% in 2006.
Gross profit in the theatre segment fell to $1.6
million in 2007 from $1.9 million in 2006 and as a percentage of sales declined
to 14.5% from 15.7% a year-ago due to lower sales of film projectors. The margin also reflects $1.1 million of
digital equipment sales which carry lower margins compared to our film
projectors. We expect digital sales to
become a much more significant part of the Companys revenues as theatres
convert their analog screens to digital. As such, revenues are expected to rise
due to a higher price point on the projectors, however, our gross margin
percentage will decrease. The margin was
also impacted by service revenues becoming a larger part of our business. The current service business primarily
relates to servicing film projector equipment where gross margins are lower
than margins from equipment sales.
We expect this business to
transition to servicing more digital projectors in the future when the digital
cinema rollout accelerates. At that
time, margins are expected to increase.
The results also
reflect lower production demand in the manufacturing plant in Omaha which
resulted in certain manufacturing inefficiencies and the Company not covering
fixed overhead costs in as profitable a manner.
Gross profit in the lighting segment increased to $0.4
million in 2007 from $0.2 million in 2006 and as a percent of revenues rose to
34.6% from 29.7% a year-ago. The results
reflect the increase in sales of higher-margin items such as spotlights,
Sky-trackers and replacement parts.
Selling and Administrative Expenses
Selling expenses rose to $0.8 million in 2007 from
$0.7 million in 2006 and as a percent of revenues increased to 6.2% from 5.5%
in 2006.
Administrative costs increased to $1.3 million or
10.4% of revenue compared to $1.2 million or 9.4% a year-ago. The increase reflects higher salaries and
benefits, expenses incurred due to the implementation of Sarbanes-Oxley requirements
and costs to upgrade our information technology system.
Other Financial Items
Net other expense amounted to $39,100 in 2007 compared
to income of $11,800 in 2006 due primarily to fewer sales of scrap and fewer
cash discounts taken due to lower inventory purchases during the 2007 period.
We recorded net interest income of $0.2 million in
2007 and 2006. A reduction in cash was
offset by a higher effective rate.
We recorded an income tax benefit of $0.1 million in
2007 compared to income tax expense of $0.1 million in 2006 due to the impact
of tax-free municipal bonds becoming a larger portion of our taxable income
during 2007 and changes to the estimates of our annual effective rate.
29
For the reasons outlined herein, we generated net
income of $0.1 million and basic and diluted earnings per share of $0.01 in
2007 compared to net income of $0.4 million and basic and diluted earnings per
share of $0.03 in 2006, respectively.
Liquidity and Capital Resources
We are a party to a revolving credit facility with First National Bank
of Omaha expiring August 28, 2008. We
plan on renewing the credit facility in the ordinary course of business. The credit facility provides for borrowings
up to the lesser of $4.0 million or amounts determined by an asset-based
lending formula, as defined. Borrowings available under the credit facility
amounted to $4.0 million at September 30, 2007.
No amounts are currently outstanding. We pay interest on outstanding
amounts equal to the Prime Rate plus 0.25% (8.0% at September 30, 2007) and pay
a fee of 0.125% on the unused portion.
The credit facility contains certain restrictive covenants mainly
related to maintaining certain earnings, as defined, and restrictions on acquisitions
and dividends. All of our personal
property and stock in our subsidiaries secure this credit facility.
Net cash used in operating
activities amounted to $3.7 million in 2007 as compared to net cash provided by
operating activities of $2.9 million a year-ago. The decrease in operating cash flow was due
in part to the purchase of the projectors that were transferred to Digital Link
II, LLC in exchange for a non-controlling ownership interest in Digital Link
II, LLC and cash consideration. The subsequent
transfer of inventory up to the amount of the investment in Digital Link II of
$2.7 million was considered a non-cash transfer of assets. Therefore, the corresponding decrease in
inventory did not have an effect to cash flow.
A decrease in operating cash flow also resulted from additional
purchases of digital projection equipment made of approximately $4.4 million to
further expand our inventory to meet customer demand and to increase the amount
of projection equipment used for consignment and demonstration purposes.
Net cash used in investing activities decreased to $0.5 million in 2007
compared to $2.2 million in 2006. The
decrease primarily pertains to the 2006 purchase of National Cinema Service
Corp. for approximately $2.0 million, net of cash acquired during 2006. Additional investing activities in 2006
primarily related to capital expenditures of $0.5 million and proceeds from the
sale of assets of $0.3 million. During
2007, we purchased approximately $0.4 million of capital expenditures,
purchased a product line for approximately $0.2 million and made investments
into our joint venture in Digital Link II of approximately $0.3 million.
Net cash provided by financing activities amounted to
$0.2 million in 2007 compared to $0.4 million in 2006. We received proceeds of $0.1 million from our
employee stock option plans in 2007, recorded a $0.2 million income tax benefit
pertaining to these exercises and made debt payments of $14,600. During 2006, we received proceeds of $0.3
million from our stock plans, recorded a $0.4 million income tax benefit
pertaining to these exercises and made debt payments of $0.2 million.
Transactions with Related and Certain
Other Parties
There were no significant transactions with related
and certain other parties during 2007.
30
Internal Controls Over Financial Reporting
Current SEC rules implementing Section 404 of
the Sarbanes-Oxley Act of 2002 will require our Annual Report on Form 10-K for
fiscal 2007 to include a report on managements assessment of the effectiveness
of our internal controls over financial reporting and a statement that our
independent registered public accounting firm has issued a report on the
effectiveness of our internal controls over financial reporting. While we have
not yet identified any material weaknesses in internal controls over financial
reporting, there are no assurances that we will not discover deficiencies in our
internal controls as we implement new documentation and testing procedures to
comply with the Section 404 reporting requirement. If we discover deficiencies or are unable to
complete the work necessary to properly evaluate our internal controls over
financial reporting, there is a risk that management and/or our independent
registered public accounting firm may not be able to conclude that our internal
controls over financial reporting are effective.
Concentrations
Our top ten customers
accounted for approximately 44% of 2007 consolidated net revenues. Trade accounts receivable from these
customers represented approximately 50% of net consolidated receivables at
September 30, 2007. Sales to AMC
Theatres, Inc. (AMC) represented over 10% of consolidated revenues. While we believe our relationships with such
customers are stable, most arrangements are made by purchase order and are
terminable at will by either party. A
significant decrease or interruption in business from our significant customers
could have a material adverse effect on our business, financial condition and
results of operations. We could also be
adversely affected by such factors as changes in foreign currency rates and
weak economic and political conditions in each of the countries in which we
sell our products. In addition,
advancing technologies, such as digital cinema, could disrupt historical
customer relationships.
Financial instruments that potentially expose us to a
concentration of credit risk principally consist of accounts receivable. We sell product to a large number of
customers in many different geographic regions.
To minimize credit concentration risk, we perform ongoing credit
evaluations of our customers financial condition or use letters of credit.
Increased competition also results in continued
exposure to us. If we lose market share
or encounter more competition relating to the development of new technology for
alternate means of motion picture presentation such as digital technology, we
may be unable to lower our cost structure quickly enough to offset the lost
revenue. To counter these risks, we have
initiated a cost and inventory reduction program, continue to streamline our
manufacturing processes and are formulating a strategy to respond to the
digital marketplace. We are also
focusing on a growth and diversification strategy to find alternative product
lines to become less dependent on the theatre exhibition industry. However, no assurances can be given that this
strategy will succeed or that we will be able to obtain adequate financing to
take advantage of potential opportunities.
The principal raw materials and components used in our
manufacturing processes include aluminum, reflectors, electronic subassemblies
and sheet metal. We utilize a single
contract manufacturer for each of our intermittent movement components,
reflectors, certain aluminum castings, lenses and xenon lamps. Additionally, we utilize a single manufacturer
for our digital projection equipment.
Although we have not to-date experienced a significant difficulty in
obtaining these components and projectors, no assurance can be given that
shortages will not arise in the future.
The loss of any one or more of such contract manufacturers could have a
short-term adverse effect on us until alternative manufacturing arrangements are
secured. We are not dependent upon any
one contract manufacturer or supplier for the balance of our raw materials and
components. We believe that there are
adequate alternative sources of such raw materials and components of sufficient
quantity and quality.
31
Hedging and Trading Activities
We do not engage in any hedging activities, including
currency-hedging activities, in connection with our foreign operations and
sales. To date, all of our international
sales have been denominated in U.S. dollars, exclusive of Strong Westrex, Inc. sales,
which are denominated in Hong Kong dollars.
In addition, we do not have any trading activities that include
non-exchange traded contracts at fair value.
Off Balance Sheet Arrangements and
Contractual Obligations
Our
off balance sheet arrangements consist principally of leasing various assets
under operating leases. The future estimated payments under these arrangements
are summarized below along with our other contractual obligations:
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
Remaining
in 2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
Non-competition
agreement
|
|
$
|
100,000
|
|
|
|
25,000
|
|
25,000
|
|
|
|
50,000
|
|
|
|
Postretirement
benefits
|
|
235,632
|
|
16,738
|
|
24,101
|
|
25,745
|
|
20,725
|
|
21,934
|
|
126,389
|
|
Operating leases
|
|
61,797
|
|
14,939
|
|
40,216
|
|
6,642
|
|
|
|
|
|
|
|
Contractual cash
obligations
|
|
$
|
397,429
|
|
31,677
|
|
89,317
|
|
57,387
|
|
20,725
|
|
71,934
|
|
126,389
|
|
We
have a contractual obligation to pay up to $150,000 to High End Systems,
Inc. Payment is contingent on
satisfaction of certain future sales of the product line purchased as part of
the business. In addition, we have accrued approximately $0.2 million for the
estimated underpayment of income taxes we are obligated to pay. The accrual is primarily related to state tax
matters. There were no other contractual
obligations other than inventory and property, plant and equipment purchases in
the ordinary course of business.
Seasonality
Generally, our business exhibits a moderate level of
seasonality as sales of theatre products typically increase during the third
and fourth quarters. We believe that
such increased sales reflect seasonal increases in the construction of new
motion picture screens in anticipation of the holiday movie season.
Environmental and Legal
See note 2 to the
consolidated financial statements for a full description of all environmental
and legal matters.
Inflation
We believe that the relatively moderate rates of
inflation in recent years have not had a significant impact on our net revenues
or profitability. We did experience
higher than normal prices on certain raw materials during fiscal 2006 coupled
with higher freight costs as freight companies passed on a portion of higher
gas and oil costs. Historically, we have
been able to offset any inflationary effects by either increasing prices or
improving cost efficiencies.
32
2007 Outlook
We have begun to see evidence of the theatre
exhibition industrys expected transition to digital cinema during 2007. Theatre owners are now evaluating their
options as they plan capital expenditures relative to new or used film
projectors or digital equipment.
However, the extent and timing of the impact to Ballantynes 2007
revenues and operations is currently unclear.
Digital cinema remains an important component of our long-term growth
strategy, and we continue to work closely with our partner, NEC Solutions
(America), Inc., to launch this next generation technology within the
exhibition industry. We expect digital
sales to become a much more significant part of our revenues as theatres
convert their analog screens to digital.
We will experience lower margins on these revenues as we will not
manufacture the equipment. It is unclear at this time if this lower margin can
be offset by the expected increased sales and service revenue volume digital
cinema is expected to add when the rollout occurs. There are also other risks to us regarding
this industry transition. Item 1A, Risk
Factors of our 2006 Annual Report on Form 10-K includes a detailed discussion
of these risks.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
We market our products throughout the United States
and the world. As a result, we could be
adversely affected by such factors as changes in foreign currency rates and
weak economic conditions. Additionally,
as a majority of sales are currently denominated in U.S. dollars, a
strengthening of the dollar can and sometimes has made our products less
competitive in foreign markets. As
stated above, the majority of our foreign sales are denominated in U.S. dollars
except for our subsidiary in Hong Kong. We
purchased the majority of our lenses from a German manufacturer. Based on forecasted purchases during 2007, an
average 10% devaluation of the dollar compared to the Euro would cost us
approximately $0.1 million per annum.
We have also evaluated our exposure to fluctuations in
interest rates. If we would borrow up to
the maximum amount available under our variable interest rate credit facility,
a one percent increase in the interest rate would increase interest expense by
$40,000 per annum. No amounts are
currently outstanding under the credit facility. Interest rate risks from our other
interest-related accounts such as our postretirement obligations are deemed to
not be significant.
We have not historically and are not currently using
derivative instruments to manage the above risks.
Item 4. Controls and Procedures
We carried out an evaluation under the supervision and
with the participation of our management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that as of the end of the period covered by this report, our
disclosure controls and procedures are effective at ensuring that information
required to be disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934 (as amended) are recorded, processed,
summarized and reported within the time periods specified in the SECs rules
and forms. There have been no changes in
our internal control over financial reporting during the period covered by this
report that have materially affected, or are reasonably likely to materially
affect, such internal control over financial reporting.
33