UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,
2008
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number: 1-13906
BALLANTYNE
OF OMAHA, INC.
(Exact Name of
Registrant as Specified in Its Charter)
Delaware
|
|
47-0587703
|
(State or Other
Jurisdiction of
|
|
(IRS Employer
|
Incorporation or
Organization)
|
|
Identification
Number)
|
4350
McKinley Street, Omaha, Nebraska
|
|
68112
|
(Address of
Principal Executive Offices)
|
|
Zip Code
|
(402)
453-4444
Registrants
telephone number, including area code:
Indicate by check mark
whether the registrant: (1) has
filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding twelve months (or for such
shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated filer, and smaller reporting company
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting
company
o
|
(Do not check if a
smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
Indicate the number of
shares outstanding of each of the issuers classes of common stock as of the
latest practicable date:
Class
|
|
Outstanding as of May 6, 2008
|
Common Stock,
$.01, par value
|
|
13,858,438
shares
|
Item 1. Financial Statements
Ballantyne of Omaha, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2008 and December 31, 2007
|
|
March 31,
2008
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
4,514,328
|
|
$
|
4,220,355
|
|
Restricted cash
|
|
1,191,747
|
|
1,191,747
|
|
Short-term
investments
|
|
|
|
13,000,000
|
|
Accounts
receivable (less allowance for doubtful accounts of $540,895 in 2008 and
$534,526 in 2007)
|
|
8,196,942
|
|
7,841,348
|
|
Inventories, net
|
|
11,074,144
|
|
9,883,555
|
|
Recoverable
income taxes
|
|
1,645,315
|
|
1,365,530
|
|
Deferred income
taxes
|
|
1,892,102
|
|
1,695,926
|
|
Consignment
inventory
|
|
695,834
|
|
2,767,899
|
|
Other current
assets
|
|
758,231
|
|
322,102
|
|
Total current
assets
|
|
29,968,643
|
|
42,288,462
|
|
|
|
|
|
|
|
Investments in
securities
|
|
11,957,280
|
|
|
|
Investment in
Digital Link II joint venture
|
|
3,626,588
|
|
3,727,485
|
|
Property, plant
and equipment, net
|
|
3,702,518
|
|
3,633,124
|
|
Goodwill
|
|
2,420,869
|
|
2,420,993
|
|
Intangible
assets, net
|
|
1,879,783
|
|
2,047,185
|
|
Other assets
|
|
18,757
|
|
23,099
|
|
Total assets
|
|
$
|
53,574,438
|
|
$
|
54,140,348
|
|
|
|
|
|
|
|
Liabilities
and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,048,173
|
|
$
|
6,134,703
|
|
Warranty
reserves
|
|
392,159
|
|
381,710
|
|
Accrued group
health insurance claims
|
|
185,681
|
|
201,687
|
|
Accrued bonuses
|
|
78,550
|
|
54,178
|
|
Other accrued
expenses
|
|
2,777,632
|
|
2,151,413
|
|
Customer
deposits
|
|
1,250,110
|
|
974,910
|
|
Total current
liabilities
|
|
10,732,305
|
|
9,898,601
|
|
|
|
|
|
|
|
Deferred income
taxes
|
|
76,538
|
|
98,532
|
|
Other accrued
expenses, net of current portion
|
|
1,169,351
|
|
1,101,517
|
|
Total
liabilities
|
|
11,978,194
|
|
11,098,650
|
|
|
|
|
|
|
|
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 15,956,243 shares in 2008 and 2007
|
|
159,562
|
|
159,562
|
|
Additional
paid-in capital
|
|
34,648,836
|
|
34,637,868
|
|
Accumulated
other comprehensive income (loss):
|
|
|
|
|
|
Foreign currency
translation adjustment
|
|
(218,693
|
)
|
(59,427
|
)
|
Pension
liability adjustment, net of tax
|
|
75,833
|
|
75,833
|
|
Unrealized loss
on investments in securities
|
|
(1,042,720
|
)
|
|
|
Retained
earnings
|
|
23,288,880
|
|
23,543,316
|
|
|
|
56,911,698
|
|
58,357,152
|
|
Less 2,097,805
common shares in treasury, at cost
|
|
(15,315,454
|
)
|
(15,315,454
|
)
|
Total
stockholders equity
|
|
41,596,244
|
|
43,041,698
|
|
Total
liabilities and stockholders equity
|
|
$
|
53,574,438
|
|
$
|
54,140,348
|
|
See accompanying notes
to consolidated financial statements.
1
Ballantyne of Omaha, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended March 31, 2008 and 2007
(Unaudited)
|
|
2008
|
|
2007
|
|
Net revenues
|
|
$
|
14,197,172
|
|
$
|
12,930,750
|
|
Cost of revenues
|
|
11,887,291
|
|
10,208,966
|
|
Gross profit
|
|
2,309,881
|
|
2,721,784
|
|
|
|
|
|
|
|
Selling and
administrative expenses:
|
|
|
|
|
|
Selling
|
|
787,802
|
|
782,616
|
|
Administrative
|
|
2,025,296
|
|
1,433,047
|
|
Total selling
and administrative expenses
|
|
2,813,098
|
|
2,215,663
|
|
Gain on the
transfer of assets
|
|
|
|
233,327
|
|
Loss on disposal
of assets, net
|
|
(1,285
|
)
|
(11,004
|
)
|
Income (loss)
from operations
|
|
(504,502
|
)
|
728,444
|
|
|
|
|
|
|
|
Interest income
|
|
146,186
|
|
218,313
|
|
Interest expense
|
|
(8,535
|
)
|
(10,257
|
)
|
Equity in loss
of joint venture
|
|
(112,991
|
)
|
|
|
Other income
(expense), net
|
|
26,792
|
|
(48,021
|
)
|
Income (loss)
before income taxes
|
|
(453,050
|
)
|
888,479
|
|
Income tax
benefit (expense)
|
|
198,614
|
|
(315,740
|
)
|
Net income
(loss)
|
|
$
|
(254,436
|
)
|
$
|
572,739
|
|
Basic earnings
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
0.04
|
|
Diluted earnings
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
0.04
|
|
Weighted average
shares outstanding:
|
|
|
|
|
|
Basic
|
|
13,858,440
|
|
13,765,897
|
|
Diluted
|
|
13,858,440
|
|
14,065,208
|
|
See accompanying notes to
consolidated financial statements.
2
Ballantyne of Omaha, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2008 and 2007
(Unaudited)
|
|
2008
|
|
2007
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(254,236
|
)
|
$
|
572,739
|
|
Adjustments to
reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
Provision for
doubtful accounts
|
|
20,031
|
|
24,750
|
|
Provision for
obsolete inventory
|
|
174,925
|
|
137,950
|
|
Depreciation of
consignment inventory
|
|
299,441
|
|
257,400
|
|
Depreciation of
property, plant, and equipment
|
|
219,566
|
|
269,978
|
|
Amortization of
intangibles
|
|
110,768
|
|
17,667
|
|
Equity in loss
of joint venture
|
|
112,991
|
|
|
|
Loss on disposal
of fixed assets
|
|
1,285
|
|
11,004
|
|
Deferred income
taxes
|
|
(200,609
|
)
|
(285,874
|
)
|
Share-based
compensation expense
|
|
18,498
|
|
29,338
|
|
Excess tax
benefits from stock options exercised
|
|
|
|
(77,252
|
)
|
Changes in
assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
(399,623
|
)
|
(1,382,677
|
)
|
Inventories
|
|
(1,397,141
|
)
|
(4,426,102
|
)
|
Consignment
inventory
|
|
1,772,624
|
|
(67,235
|
)
|
Other current
assets
|
|
(398,911
|
)
|
(355,593
|
)
|
Accounts payable
|
|
(82,786
|
)
|
5,562,455
|
|
Warranty
reserves
|
|
10,891
|
|
(38,349
|
)
|
Accrued group
health insurance claims
|
|
(16,006
|
)
|
24,407
|
|
Accrued bonus
|
|
24,372
|
|
|
|
Other accrued
expenses
|
|
694,042
|
|
207,647
|
|
Customer
deposits
|
|
277,285
|
|
(72,543
|
)
|
Current income
taxes
|
|
(318,458
|
)
|
244,418
|
|
Other assets
|
|
|
|
7,300
|
|
Net cash
provided by operating activities
|
|
668,949
|
|
661,428
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
Increase in
acquisition costs
|
|
(46,969
|
)
|
(183,364
|
)
|
Investment in
joint venture
|
|
(12,096
|
)
|
|
|
Increase in
restricted investments
|
|
|
|
(4,483
|
)
|
Capital
expenditures
|
|
(299,180
|
)
|
(109,565
|
)
|
Proceeds from
sales of investment securities
|
|
|
|
2,500,000
|
|
Net cash (used
in) provided by investing activities
|
|
(358,245
|
)
|
2,202,588
|
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
Payments on
long-term debt
|
|
|
|
(7,241
|
)
|
Proceeds from
exercise of stock options
|
|
|
|
32,339
|
|
Excess tax
benefits from stock options exercised
|
|
|
|
77,252
|
|
Net cash
provided by financing activities
|
|
|
|
102,350
|
|
|
|
|
|
|
|
Effect of
exchange rate changes on cash and cash equivalents
|
|
(16,731
|
)
|
|
|
Net increase in
cash and cash equivalents
|
|
293,973
|
|
2,966,366
|
|
Cash and cash
equivalents at beginning of year
|
|
4,220,355
|
|
2,622,654
|
|
Cash and cash
equivalents at end of year
|
|
$
|
4,514,328
|
|
$
|
5,589,020
|
|
See accompanying notes to
consolidated financial statements.
3
Ballantyne
of Omaha, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Three
Months Ended March 31, 2008 and 2007
(Unaudited)
1. Company
Ballantyne of Omaha, Inc.,
a Delaware corporation (Ballantyne or the Company), and its wholly-owned
subsidiaries Strong Westrex, Inc., Strong Technical Services, Inc.,
and Strong Digital Systems, Inc., design, develop, manufacture, service
and distribute theatre and lighting systems. The Companys products are
distributed to movie exhibition companies, sports arenas, auditoriums,
amusement parks and special venues. Sales during the first quarter of 2008 were
distributed as follows: Theatre 91%,
Lighting 8% and Other 1%. Refer to the Business Segment Section (note
22) 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 include the accounts of the Company and all majority-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in 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 2007.
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 $540,895 and $534,526 at March 31,
2008 and December 31, 2007, 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 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.
Intangible assets with
estimatable useful 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.
h.
Income Taxes
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.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some 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
5
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 items(s) equals the total arrangement consideration less
the aggregate fair value of the undelivered item.
j. Fair Value of
Financial Instruments
Effective January 1,
2008, the Company adopted the provisions of SFAS No. 157, Fair Value
Measurements (SFAS 157) which defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value measurements
with respect to financial assets and liabilities. Under SFAS No. 157, fair
value is the price to sell an asset or transfer a liability between market
participants as of the measurement date. Fair value measurements assume the
asset or liability is exchanged in an orderly manner; the exchange is in the
principal market for that asset or liability (or in the most advantageous
market when no principal market exists); and the market participants are
independent, knowledgeable, able and willing to transact an exchange.
SFAS No. 157
establishes a hierarchy for fair value measurements based upon observable
independent market inputs and unobservable market assumptions. Inputs refer
broadly to the assumptions that market participants would use in pricing the
asset or liability, including assumptions about risk. Considerable judgment is
required in interpreting market data used to develop the estimates of fair
value. The following represents the three categories of inputs used in
determining the fair value of financial assets and liabilities:
Level 1: Quoted market prices in active markets for
identical assets or liabilities.
Level 2: Observable market based inputs or
unobservable inputs that are corroborated by market data.
Level 3: Unobservable
inputs that are used in the measurement of assets and liabilities. Unobservable
inputs require management to make certain projections and assumptions about the
information that would be used by market participants in pricing the asset or
liability.
Financial
instruments recorded by the Company at fair value include investments in
available-for-sale securities which are reported in the Consolidated Balance
Sheets.
In
February 2008, the FASB issued FASB Staff Position No. 157-2 (FSP 157-2),
Effective date of FASB Statement No. 157. FSP 157-2 delayed for one year the
applicability of SFAS No. 157s fair value measurements for certain
nonfinancial assets and liabilities. Certain
non-financial assets and non-financial liabilities measured at fair value on a
recurring basis include reporting units measured at fair value in the first
step of a goodwill impairment test.
Certain non-financial assets measured at fair value on a non-recurring
basis include non-financial assets and non-financial liabilities measured at
fair value in the second step of a goodwill impairment test, as well as
intangible assets and other non-financial long-lived assets measured at fair value
for impairment assessment.
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.
6
l.
Investments
The Company holds
investments in auction-rate securities which are considered available-for-sale
securities. Interest rates on these auction-rate securities are reset through
an auction process that resets the applicable interest at pre-determined
intervals every seven days. The Company accounts for its investments in
accordance with Statement of Accounting Standards Board (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities. In accordance with the
SFAS No. 115, the Company has classified its investments in auction-rate
securities as noncurrent assets within the Consolidated Balance sheet.
When
events or circumstances exist that require the Company to record an impairment
on its investments, the Company will determine whether the impairment should be
classified as temporary
or other-than-temporary.
A temporary impairment charge results in an unrealized loss being recorded in
the other comprehensive
income
(loss) component of stockholders equity. Such an unrealized loss does not
affect net income (loss) for the applicable accounting
period. An other-than-temporary impairment
charge is recorded as a realized loss in the consolidated statement of
operations
and reduces net income
(loss) for the applicable accounting period.
The differentiating factors
between temporary and other-than-temporary
impairment
are primarily the length of the time and the extent to which the market value
has been less than cost, the financial
condition
and near-term prospects of the issuer and the intent and ability of the Company
to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated
recovery in market value.
m.
Consignment Inventory
Digital
and film projection equipment is provided to potential customers for
consignment and demonstration purposes. Additionally, during 2007, the Company
entered into operating lease agreements with third party customers for the use
of the projection equipment of which a majority of the projection equipment was
sold during the first quarter of 2008. Digital and film projection equipment on
consignment amounted to approximately $0.7 million and $2.8 million
at March 31, 2008 and December 31, 2007, respectively.
n.
Earnings (Loss) Per
Common Share
The Company computes and
presents earnings (loss) per share in accordance with SFAS No. 128, Earnings
Per Share. Basic earnings (loss) per share has been computed on the basis of
the weighted average number of shares of common stock outstanding. Diluted
earnings (loss) 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 income (loss) per share:
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Basic earnings
(loss) per share:
|
|
|
|
|
|
Income (loss)
applicable to common stock
|
|
$
|
(254,436
|
)
|
$
|
572,739
|
|
Weighted average
common shares outstanding
|
|
13,858,440
|
|
13,765,897
|
|
Basic earnings
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
0.04
|
|
|
|
|
|
|
|
Diluted earnings
(loss) per share:
|
|
|
|
|
|
Income (loss)
applicable to common stock
|
|
$
|
(254,436
|
)
|
$
|
572,739
|
|
Weighted average
common shares outstanding
|
|
13,858,440
|
|
13,765,897
|
|
Assuming
conversion of options outstanding
|
|
|
|
299,311
|
|
Weighted average
common shares outstanding, as adjusted
|
|
13,858,440
|
|
14,065,208
|
|
Diluted earnings
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
0.04
|
|
For the three months
ended March 31, 2008, options outstanding were not included in the
computation of diluted loss per share as the Company reported a loss from
continuing operations available to common stockholders. For the
three months ended March 31, 2007, options to purchase 181,388 shares of
common stock at a weighted average price of
7
$9.89 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.
o. Stock
Compensation Plans
The Company accounts for
awards of share-based compensation in accordance with 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. The
Company recognizes compensation expense for stock-based awards 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 $18,498 and
$29,338 for the three months ended March 31, 2008 and 2007, respectively.
No share-based compensation cost was capitalized as a part of inventory as of March 31,
2008.
p. 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 by 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 $3.7 million at March 31, 2008. 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 March 31,
2008.
q.
Foreign
Currency Translation
For foreign operations,
local currencies are considered the functional currency. The assets and
liabilities of foreign subsidiaries are translated into the United States
dollar at the foreign exchange rates in effect at the end of the period.
Revenue and expenses of foreign subsidiaries are translated using an average of
the foreign exchange rates in effect during the period. Translation adjustments
are not included in determining net income (loss) but are disclosed and
accumulated in comprehensive income (loss) within the Consolidated Statements
of Stockholders Equity.
Transaction
gains and losses that arise from foreign exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the statements of operations as incurred.
8
r.
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, when events dictate that additional accruals are
necessary. The following table summarizes warranty activity for the periods
indicated below:
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Warranty accrual
at beginning of period
|
|
$
|
381,710
|
|
$
|
617,052
|
|
Charged to
expense
|
|
48,999
|
|
43,250
|
|
Amounts written
off, net of recoveries
|
|
(38,550
|
)
|
(81,599
|
)
|
Warranty accrual
at end of period
|
|
$
|
392,159
|
|
$
|
578,703
|
|
s.
Reclassifications
Certain amounts in the
accompanying Consolidated Financial Statements and notes thereto have been
reclassified to conform to the 2008 presentation.
t.
Adoption of New
Accounting Pronouncements
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 did not elect the
fair value option for any eligible items.
u.
Recently Issued
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)).
SFAS No. 141(R) establishes principles and requirements for how an
acquirer in a business combination recognizes and measures in its financial
statements the identifiable assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. The provisions of SFAS No. 141(R) will
be effective for the Companys business combinations occurring on or after January 1,
2009. Adoption on January 1, 2009 will impact the Companys accounting for
future acquisitions and related transaction costs.
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 March 31, 2008, total
current and non-current assets of the joint venture amounted to approximately
$0.3 million and $9.0 million respectively. Total liabilities and
equity at March 31, 2008 amounted to $0.7 million and
$8.6 million, respectively. The joint venture reported a net loss for the
period in the amount of $0.3 million which primarily resulted from
depreciation expense related to projection equipment on consignment to third
party customers.
The Companys investment
balance in the joint venture represents the retained interest in the cost basis
of the projectors transferred or sold to the joint venture in addition to
capital contributions and the Companys portion of equity earnings or losses in
the LLC. As part of the initial transaction in 2007, the Company
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 gain on the initial transfer of equipment was approximately
$0.2 million. No revenue was recorded in conjunction with this transaction.
Subsequently, during 2007, the Company sold $2.6 million of equipment and
related services to the LLC. The Company deferred a portion of the gross
profit related to the transaction which represented 44.4% of total gross profit
to be recorded on the sale. The additional gross profit on these transactions
will be recognized upon sale of the equipment by the joint venture to the third
party exhibitors. No sales transactions have been made in 2008. The total
investment in the LLC amounted to $3.6 million at March 31,
2008.
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 $0.1 million for the period ended March 31,
2008.
4.
Acquisition
of Technobeam
During the first quarter
of 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 determined at the
date of acquisition. During the fourth quarter of 2007, the Company completed
the valuation of identifiable intangible assets that resulted from the
acquisition. Based on the valuation, the
Company allocated $26,000 to intangibles related to the Technobeam trademark,
$51,000 relating to customer relationships and $12,000 relating to the
non-competition agreement.
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
|
|
89,000
|
|
Goodwill
|
|
91,000
|
|
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 are expected to be deductible for tax
purposes. The results of Technobeams operations
have been included in the consolidated financial statements for the periods
ended March 31, 2008 and 2007.
10
5. Acquisition of Marcel Desrochers, Inc.
On October 12,
2007, the Company, through a wholly-owned subsidiary, Strong Digital Systems, Inc.,
acquired 100% of the outstanding shares of Marcel Desrochers, Inc. (MDI),
a manufacturer and supplier of film and digital cinema screens, for cash
consideration. As a result of the acquisition, MDI will form a core
business established to supply cinema screens to the digital and film cinema
marketplace.
The total purchase price
of MDI at the date of acquisition was $2.5 million including cash
acquired. The purchase price excluded an additional $0.9 million of
restricted funds that were placed in escrow to secure certain indemnification
and other obligation contingencies. Funds for the purchase were provided by
internally generated cash flows. Direct transaction costs related to the
acquisition amounted to $0.4 million.
The following table
summarizes the estimated fair value of the assets acquired and liabilities
assumed at the date of acquisition.
Cash acquired
|
|
$
|
100,118
|
|
Accounts
receivable
|
|
583,245
|
|
Inventories
|
|
909,789
|
|
Property and
equipment
|
|
205,714
|
|
Other current
assets
|
|
26,098
|
|
Amortizable
intangible assets
|
|
1,658,908
|
|
Goodwill
|
|
1,193,161
|
|
|
|
|
|
Total assets
acquired
|
|
4,677,033
|
|
|
|
|
|
Current
liabilities
|
|
(836,856
|
)
|
Non-current
liabilities
|
|
(1,012,604
|
)
|
|
|
|
|
Total
liabilities assumed
|
|
(1,849,460
|
)
|
|
|
|
|
Net assets
acquired
|
|
$
|
2,827,573
|
|
The
assets acquired and liabilities assumed were recorded at estimated fair values
as determined by Companys management based on information currently available
and preliminary independent appraisals. Based on the preliminary analysis,
$1.7 million of acquired intangible assets is subject to amortization
using a weighted-average useful life of 4.7 years. 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 for
intangibles. Goodwill represents the excess of the purchase price over the fair
value of the net tangible and intangible assets acquired and are expected to be
deductible for tax purposes.
11
6. Investments
The
Company has certain investments in auction-rate securities which are classified
as available-for-sale securities. Interest rates on these auction-rate
securities are reset through an auction process that resets the applicable
interest at pre-determined intervals every seven days. The investment
securities are held within closed-end funds that continue to be AAA rated and
fully collateralized at a minimum 200% net asset to fund ratio. The
auction-rate securities are perpetual investments with no stated contractual
maturity date. The Company accounts for its investments in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
During
the current period, the market for the Companys investments in auction-rate
securities began experiencing a liquidity issue when the failure of auctions
for all of the securities held by the Company occurred due to an imbalance of
buyers and sellers for the securities. The Company cannot predict how long the
current imbalance in the auction-market will continue. As a result, for a
period of time, the Company may be unable to liquidate the auction rate
securities held until a successful auction occurs or the securities are
redeemed by the issuer of the investments. Based on the continued unsuccessful
auctions of these investments, the investment securities were reclassified to
noncurrent assets within the Consolidated Balance Sheet at March 31, 2008.
Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair
Value Measurements (SFAS No. 157) which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements with respect to financial assets and liabilities.
Financial
assets and liabilities measured at fair value on a recurring basis as of March 31,
2008 are summarized in the following table by the type of inputs applicable to
the fair value measurements under the provisions of SFAS No. 157:
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
Description
|
|
3/31/08
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Available-for-sale
securities
|
|
$
|
11,957,280
|
|
$
|
|
|
$
|
|
|
$
|
11,957,280
|
|
Total
|
|
$
|
11,957,280
|
|
$
|
|
|
$
|
|
|
$
|
11,957,280
|
|
While the Company continues to earn interest on its
investments at a maximum contractual default rate, these investments are not
currently trading and therefore do not currently have a readily determinable
fair value using market observables (Level 1). Therefore, in accordance with
SFAS No. 157, Fair Value Measurement, the Company used a cash flow model
to determine the estimated fair value of its auction-rate securities (Level 3). The assumptions used in preparing this model
included, among other items, estimates for interest rates, default and recovery
rates, illiquidity risk and an estimate for the timing of full redemption of
the securities.
A
reconciliation of assets and liabilities measured at fair value on a recurring
basis with the use of significant unobservable inputs (Level 3) from January 1,
2008 to March 31, 2008 are as follows:
|
|
Fair
Value
Measurements
Using
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
Investments in
Auction-Rate
securities
|
|
Beginning
balance
|
|
$
|
13,000,000
|
|
Total gains or
losses (realized/unrealized)
|
|
|
|
Included in
earnings (or changes in net assets)
|
|
|
|
Included in
other comprehensive income (loss)
|
|
(1,042,720
|
)
|
Purchases,
issuances and settlements
|
|
|
|
Transfers in
and/or out of Level 3
|
|
|
|
Ending balance
|
|
$
|
11,957,280
|
|
|
|
|
|
The amount of
total gains or losses for the period included in earnings (or changes in net
assets) attributable to the change in unrealized gains or losses relating to
assets still held at the reporting date
|
|
|
|
The
impairment in the fair value of the Companys investments of approximately $1.0
million was deemed a temporary impairment and recorded as an unrealized loss
within other comprehensive income (loss).
12
7. Intangible Assets
As of March 31,
2008 and December 31, 2007, the Company had unamortized identifiable net
assets of $1,879,783 and $2,047,185, respectively. The following table details amounts relating
to amortizable net assets:
|
|
March 31,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Amortizable
intangible assets:
|
|
|
|
|
|
Customer
relationships
|
|
$
|
1,758,127
|
|
$
|
1,810,072
|
|
Trademarks
|
|
236,853
|
|
246,202
|
|
Non-competition
agreement
|
|
166,910
|
|
167,658
|
|
|
|
$
|
2,161,890
|
|
$
|
2,223,932
|
|
Accumulated
amortization:
|
|
|
|
|
|
Customer
relationships
|
|
$
|
(215,546
|
)
|
$
|
(137,958
|
)
|
Trademarks
|
|
(36,930
|
)
|
(17,870
|
)
|
Non-competition
agreement
|
|
(55,631
|
)
|
(46,919
|
)
|
|
|
$
|
(308,107
|
)
|
$
|
(202,747
|
)
|
Additionally, the
Company had intangible net assets of $26,000 as of March 31, 2008 and December 31,
2007 with an indefinite life and therefore will not be amortized.
Intangible assets, other
than goodwill, with definite lives are amortized over their useful lives.
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
relationships are being amortized over a useful life of four years and
non-compete intangibles are being amortized over a useful life of three years.
During 2007, the
Company, through a wholly-owned subsidiary Strong Digital Systems, purchased
certain intangible assets pertaining to the stock acquisition of Marcel
Desrochers, Inc. These assets were recorded at fair value. Customer
relationships and the non-competition agreement are being amortized over useful
lives of five years and the trademark is being amortized over three years.
The Company recorded
amortization expense relating to other identifiable intangible assets of
$110,768 and $17,667 for the three months ended March 31, 2008 and 2007,
respectively.
13
8.
Goodwill
As
of March 31, 2008 and December 31, 2007, the Company had unamortized
goodwill of $2,420,869 and $2,420,993, respectively, resulting in a net
decrease of $124. The change in goodwill resulted from an increase in goodwill
of $46,969 for additional costs incurred in relation to the acquisition of
Marcel Desrochers, Inc. The increase was offset by a decrease of $47,093
related to foreign currency translation on goodwill recorded as part of the
acquisition of Marcel Desrochers, Inc.
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.
9.
Inventories
Inventories
consist of the following:
|
|
March 31,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Raw materials
and components
|
|
$
|
6,412,883
|
|
$
|
4,911,345
|
|
Work in process
|
|
1,154,647
|
|
772,055
|
|
Finished goods
|
|
3,506,614
|
|
4,200,155
|
|
|
|
$
|
11,074,144
|
|
$
|
9,883,555
|
|
|
|
|
|
|
|
|
|
|
The
inventory balances are net of reserves of approximately $2,130,000 and
$1,901,000 as of March 31, 2008 and December 31, 2007, respectively.
10. Property, Plant and Equipment
Property,
plant and equipment include the following:
|
|
March 31,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Land
|
|
$
|
313,500
|
|
$
|
313,500
|
|
Buildings and
improvements
|
|
3,962,989
|
|
3,962,989
|
|
Machinery and
equipment
|
|
7,417,967
|
|
7,199,257
|
|
Office furniture
and fixtures
|
|
1,707,274
|
|
1,662,578
|
|
|
|
13,401,730
|
|
13,138,324
|
|
Less accumulated
depreciation
|
|
(9,699,212
|
)
|
(9,505,200
|
)
|
Net property,
plant and equipment
|
|
$
|
3,702,518
|
|
$
|
3,633,124
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense of property, plant and equipment amounted to approximately $220,000 and
$270,000 for the three months ended March 31, 2008 and 2007, respectively.
14
11. Income Taxes
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 (loss) 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.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
The
Company has adopted the provisions of FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an 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
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.
Estimated
interest and penalties related to the underpayment of income taxes are
classified as a component of tax expense in the consolidated statements of
operations. Accrued interest and penalties were $0.2 million as of March 31,
2008 and December 31, 2007, respectively. The accruals largely related to
state tax matters.
12.
Debt
The
Company is a party to a revolving credit facility (the Original Credit
Facility) with First National Bank of Omaha expiring August 28, 2008. The
Original 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 March 31, 2008. No amounts are currently outstanding.
The Company pays interest on outstanding amounts equal to the Prime Rate plus
0.25% (5.5% at March 31, 2008) and pay a fee of 0.125% on the unused
portion.
Effective
March 31, 2008, the Company entered into a Seventh Amendment to its
Original Credit Facility to allow an interim extension of credit (the Interim
Credit Facility) in the amount of $10.4 million in addition to the $4.0
million allowed under the Original Credit Facility. The Interim Credit Facility
is evidenced by a Promissory Note with an interest rate set at a floating rate
set to after-tax interest income received on certain investment securities as
defined in the Seventh Amendment. The Interim Credit Facility expires on March 30,
2009. The credit facilities contain certain restrictions primarily related to
restrictions on acquisitions and dividends. All of the Companys personal
property and certain stock in its subsidiaries secure the credit
facilities. No amounts are currently outstanding under either of the
credit facilities.
13.
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 March 31, 2008, $423,470 is due from
Digital Link. Only the payments received since inception in 2006 on the note
receivable totaling $356,530 were recorded as revenue with the remaining
amounts to be recognized as revenue in future periods when payment is received
from Digital Link as described in the note receivable arrangement or when
collections from Digital Link can be reasonably assured. Additionally, until
collections from Digital Link can be reasonably assured, no receivable will be
recorded on this transaction. The costs incurred with the sale of projectors to
Digital Link were expensed during 2006 with no future associated costs to be
incurred.
15
14.
Supplemental
Cash Flow Information
Supplemental
disclosures to the consolidated statements of cash flows are as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Cash paid during
the period for:
|
|
|
|
|
|
Interest
|
|
$
|
1,278
|
|
$
|
5,383
|
|
Income taxes
|
|
$
|
281,782
|
|
$
|
357,196
|
|
|
|
|
|
|
|
Non-cash
investing activities:
|
|
|
|
|
|
Non-cash
investment in joint venture
|
|
$
|
|
|
$
|
2,358,251
|
|
15.
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.
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 March 31,
2008.
No
stock options were granted during the three months ended March 31, 2008
and 2007.
The
Company accounts for awards of share-based compensation in accordance with FASB
Statement No. 123(R), Share Based Payment (SFAS No. 123(R)). As a
result, 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
(loss) before income taxes included $10,968 and $24,519 of share-based
compensation expense related to stock options, with associated tax benefits of
approximately $3,800 and $9,100 for the three months ended March 31, 2008
and 2007, respectively.
SFAS
No. 123(R) requires the cash flows resulting from tax deductions in
excess of the compensation costs recognized for share-based payments (excess
tax benefits) to be classified as financing cash flows. As such, excess tax
benefits of $77,252 were classified as financing cash flows for the three
months ended March 31, 2007. No excess tax benefits were recognized for
the period ended March 31, 2008.
16
The
following table summarizes the Companys activities with respect to its stock
options for the three months ended March 31, 2008:
|
|
Number of
Options
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic Value
|
|
Options outstanding at December 31, 2007
|
|
443,750
|
|
$
|
2.33
|
|
$
|
3.41
|
|
$
|
1,594,983
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Outstanding at
March 31, 2008
|
|
443,750
|
|
$
|
2.33
|
|
$
|
3.16
|
|
$
|
1,105,079
|
|
Exercisable at
March 31, 2008
|
|
428,000
|
|
$
|
2.26
|
|
$
|
3.16
|
|
$
|
1,100,826
|
|
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 March 31, 2008.
No
options were exercised during the three months ended March 31, 2008. Cash
received from option exercises under all plans for the three months ended March 31,
2007 was $32,339. The actual tax benefit realized for the tax deductions from
option exercises under all plans totaled $77,252 for the three months ended March 31,
2007. The Company currently uses authorized and un-issued shares to satisfy
share award exercises.
The
following table summarizes information about stock options outstanding and
exercisable at March 31, 2008:
|
|
Options Outstanding at
March 31, 2008
|
|
Exercisable at
March 31, 2008
|
|
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
|
|
3.76
|
|
$
|
0.67
|
|
283,625
|
|
3.76
|
|
$
|
0.67
|
|
$4.25 to $4.75
|
|
118,125
|
|
2.57
|
|
4.55
|
|
102,375
|
|
2.47
|
|
4.60
|
|
$7.30
|
|
42,000
|
|
0.76
|
|
7.30
|
|
42,000
|
|
0.76
|
|
7.30
|
|
$0.62 to $7.30
|
|
443,750
|
|
3.16
|
|
$
|
2.33
|
|
428,000
|
|
3.16
|
|
$
|
2.26
|
|
As
of March 31, 2008, the total unrecognized compensation cost related to
non-vested stock option awards was approximately $2,437 and is expected to be
recognized over a weighted average period of 2 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 March 31, 2008, 123,746 shares of common stock
remained available for issuance under the Plan. The Plan expires in October 2010.
The Company recorded $7,530 and $4,819 of share-based compensation expense
pertaining to the stock
17
purchase
plan with associated tax benefits of approximately $1,100 for the three months
ended March 31, 2008 and 2007, respectively. At March 31, 2008, the
total unrecognized estimated compensation cost pertaining to the stock purchase
plan was $8,229 which is expected to be recognized over a period of seven
months.
The
fair value of option grants of $1.94 and $1.82 during the three months ended March 31,
2008 and 2007, respectively, was estimated using the following weighted average
assumptions:
|
|
2008
|
|
2007
|
|
Expected
dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
Risk-free
interest rate
|
|
1.55
|
%
|
4.90
|
%
|
Expected
volatility
|
|
41.56
|
%
|
36.2
|
%
|
Expected life
(in years)
|
|
1.0
|
|
1.0
|
|
16.
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.
17.
Postretirement
Health Care
Components
of the net period benefit cost for the Companys post retirement health care
plan includes:
|
|
2008
|
|
2007
|
|
Net periodic
benefit cost:
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
$
|
2,979
|
|
Interest cost
|
|
4,974
|
|
5,418
|
|
Amortization of
prior-service cost
|
|
|
|
5,598
|
|
Amortization of
loss
|
|
|
|
|
|
Total net
periodic benefit cost
|
|
$
|
4,974
|
|
$
|
13,995
|
|
The
Company expects to pay $20,874 of benefits under its postretirement benefit
plan in 2008. As of March 31, 2008, benefits of $1,511 have been paid.
18. Subsequent Event
On April 9, 2008 the Company sold its Coater and
Marinade product line for $275,000 which is expected to result in a pre-tax
gain of approximately $247,000 ($152,000 after-tax). The transaction will be
recorded in the second quarter of fiscal year 2008. The product line was sold
to a shareholder who is a former Chief Financial Officer of the Company.
19.
Concentrations
The
Companys top ten customers accounted for approximately 55% of 2008
consolidated net revenues and were primarily from the theatre segment. Trade
accounts receivable from these customers represented approximately 54% of net
consolidated receivables at March 31, 2008. Sales to Regal Cinemas, Inc.
and Cinemark USA each represented over 10% of consolidated sales. Additionally,
receivables from Vari International and Cinemark USA each represented over 10%
of net consolidated receivables at March 31, 2008. 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 its 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.
18
Financial
instruments that potentially expose the Company to a concentration of credit
risk primarily consist of accounts receivables. The Company sells product to a
large number of customers in many different geographic regions. To minimize
credit concentration risk, the Company performs ongoing credit evaluations of
its customers financial condition.
20. Self-Insurance
The
Company is self-insured up to certain stop loss limits for group health
insurance. Accruals for claims incurred but not paid as of March 31, 2008
and December 31, 2007 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.
21.
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.
22.
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 March 31, 2008, 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 and 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. All
intercompany sales and costs are eliminated in consolidation.
19
Summary
by Business Segments
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Net revenue
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
Products
|
|
$
|
12,212,937
|
|
$
|
10,792,161
|
|
Services
|
|
766,761
|
|
935,380
|
|
Total theatre
|
|
12,979,698
|
|
11,727,541
|
|
Lighting
|
|
1,075,217
|
|
1,044,368
|
|
Other
|
|
142,257
|
|
158,841
|
|
Total revenue
|
|
$
|
14,197,172
|
|
$
|
12,930,750
|
|
Gross profit
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
Products
|
|
$
|
2,215,100
|
|
$
|
2,178,541
|
|
Services
|
|
(265,614
|
)
|
217,883
|
|
Total theatre
|
|
1,949,486
|
|
2,396,424
|
|
Lighting
|
|
299,573
|
|
253,576
|
|
Other
|
|
60,822
|
|
71,784
|
|
Total gross
profit
|
|
2,309,881
|
|
2,721,784
|
|
Selling and
administrative expenses:
|
|
|
|
|
|
Selling
|
|
(787,802
|
)
|
(782,616
|
)
|
Administrative
|
|
(2,025,296
|
)
|
(1,433,047
|
)
|
Gain on transfer
of assets
|
|
|
|
233,327
|
|
Loss on disposal
of assets, net
|
|
(1,285
|
)
|
(11,004
|
)
|
Income (loss)
from operations
|
|
(504,502
|
)
|
728,444
|
|
Net interest
income
|
|
137,651
|
|
208,056
|
|
Equity in loss
of joint venture
|
|
(112,991
|
)
|
|
|
Other income
(expense), net
|
|
26,792
|
|
(48,021
|
)
|
Income before
income taxes
|
|
$
|
(453,050
|
)
|
$
|
888,479
|
|
|
|
|
|
|
|
Expenditures on
capital equipment
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
Products
|
|
$
|
175,174
|
|
$
|
72,224
|
|
Services
|
|
114,319
|
|
31,732
|
|
Total theatre
|
|
289,493
|
|
103,956
|
|
Lighting
|
|
9,687
|
|
5,609
|
|
Total
|
|
$
|
299,180
|
|
$
|
109,565
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
Products
|
|
$
|
555,171
|
|
$
|
486,095
|
|
Services
|
|
57,618
|
|
45,150
|
|
Total theatre
|
|
612,789
|
|
531,245
|
|
Lighting
|
|
16,986
|
|
13,800
|
|
Total
|
|
$
|
629,775
|
|
$
|
545,045
|
|
|
|
|
|
|
|
Loss on disposal
of long-lived assets
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
Products
|
|
$
|
1,285
|
|
$
|
11,004
|
|
Services
|
|
|
|
|
|
Total theatre
|
|
1,285
|
|
11,004
|
|
Lighting
|
|
|
|
|
|
Total
|
|
$
|
1,285
|
|
$
|
11,004
|
|
20
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Gain on transfer
of assets
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
Products
|
|
$
|
|
|
$
|
233,327
|
|
Services
|
|
|
|
|
|
Total theatre
|
|
|
|
233,327
|
|
Lighting
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
233,327
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Identifiable
assets
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
Products
|
|
$
|
47,144,736
|
|
$
|
47,442,283
|
|
Services
|
|
1,944,123
|
|
2,195,660
|
|
Total theatre
|
|
49,088,859
|
|
49,637,943
|
|
Lighting
|
|
4,098,498
|
|
3,970,457
|
|
Other
|
|
387,081
|
|
531,948
|
|
Total
identifiable assets
|
|
$
|
53,574,438
|
|
$
|
54,140,348
|
|
Summary
by Geographical Area
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Net revenue
|
|
|
|
|
|
United States
|
|
$
|
10,170,981
|
|
$
|
10,454,244
|
|
Canada
|
|
493,553
|
|
75,380
|
|
Asia
|
|
1,777,785
|
|
1,338,105
|
|
Latin America
|
|
1,255,311
|
|
638,313
|
|
Europe
|
|
402,654
|
|
423,831
|
|
Other
|
|
96,888
|
|
877
|
|
Total
|
|
$
|
14,197,172
|
|
$
|
12,930,750
|
|
|
|
March 31, 2008
|
|
December 31, 2007
|
|
Identifiable assets
|
|
|
|
|
|
United States
|
|
$
|
45,075,869
|
|
$
|
45,359,184
|
|
Canada
|
|
5,641,333
|
|
5,762,761
|
|
Asia
|
|
2,857,236
|
|
3,018,403
|
|
Total
|
|
$
|
53,574,438
|
|
$
|
54,140,348
|
|
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.
21
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.
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.
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.
We have two primary reportable core operating
segments: theatre and lighting. Approximately 91% of fiscal year 2008 revenues
were from theatre products, 8% were lighting products and 1% were from other
products.
Critical Accounting Policies and Estimates
In
preparing the Companys consolidated financial statements in conformity with
U.S. generally accepted accounting principles, management must make a variety
of decisions which impact the reported amounts and the related disclosures.
These decisions include the selection of the appropriate accounting principles
to be applied and the assumptions on which to
22
base accounting
estimates. In making these decisions, management applies its judgment based on
its understanding and analysis of the relevant circumstances and the Companys
historical experience.
Our
accounting policies and estimates that are most critical to the presentation of
the Companys results of operations and financial condition, and which require
the greatest use of judgments and estimates by management, are designated as
our critical accounting policies. See further discussion of the Companys
critical accounting policies under Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations in the Companys
Annual Report on Form 10-K for the Companys year ended December 31,
2007. We periodically re-evaluate and adjust our critical accounting policies
as circumstances change. There were no significant changes in the Companys
critical accounting policies during the three months ended March 31, 2008.
Recently
Issued Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)).
SFAS No. 141(R) establishes principles and requirements for how an
acquirer in a business combination recognizes and measures in its financial
statements the identifiable assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also
establishes disclosures requirements to enable the evaluation of the nature and
financial effects of the business combination. The provisions of SFAS No. 141(R) are
effective for the Companys business combinations occurring on or after January 1,
2009. Adoption on January 1, 2009 will impact the Companys accounting for
future acquisitions and related transaction costs.
Three Months Ended March 31, 2008 Compared to the Three
Months Ended March 31, 2007
Revenues
Net revenues during the three months ended March 31,
2008 increased to $14.2 million from $13.0 million in 2007.
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Theatre
|
|
|
|
|
|
Products
|
|
$
|
12,212,937
|
|
$
|
10,792,161
|
|
Services
|
|
766,761
|
|
935,380
|
|
Total theatre
revenues
|
|
12,979,698
|
|
11,727,541
|
|
Lighting
|
|
1,075,217
|
|
1,044,368
|
|
Other
|
|
142,257
|
|
158,841
|
|
|
|
|
|
|
|
Total net
revenues
|
|
$
|
14,197,172
|
|
$
|
12,930,750
|
|
Theatre Segment
Sales of theatre products increased to
$13.0 million in 2008 from $11.7 million in 2007 reflecting sales of
digital projection equipment which increased to $4.4 million from
$0.7 million in 2007. This increase was primarily due to recording revenue
in 2008 for orders secured in 2007 and shipped during the fourth quarter of 2007
and the first quarter of 2008 on deferred payment terms. The remaining revenue
increase resulted from the purchase of Marcel Desrochers, Inc. (MDI), a
Canadian-based manufacturer of cinema projection screens, during the fourth
quarter of 2007 and which generated $1.0 million of revenue (excluding
intercompany revenue) during the quarter.
23
Other theatre products experiencing higher sales
included lenses which increased to $0.5 million from $0.4 million a year-ago.
Sales of xenon lamps also rose during the quarter to $1.9 million from
$1.6 million a year ago reflecting market share gains and increased
business with one of the large theatre chains.
We did experience lower sales of film projection equipment
which declined to $2.7 million in 2008 from $6.1 million a year-ago.
The decline in sales resulted from a combination of equipment which could not
be shipped due to credit considerations, customers delaying shipment dates and
a general decline in demand due to the industry transition to digital cinema.
Included in film equipment revenues were sales of used equipment which amounted
to $0.4 million compared to $0.5 million a year-ago. These used units were
obtained from theatre chains which have converted their film auditoriums to
digital and had no further use for the film projectors. We see a short-term
opportunity to buy and resell these units as they become available and which
are in a suitable condition for us to be able to refurbish them in a profitable
manner.
Service
revenues also declined in 2008 to $0.8 million from $0.9 million a year-ago as
the division is feeling the effects of the decline in the traditional film
business without a corresponding increase in digital service due to the delay
in the digital rollout.
Sales of replacement parts were also impacted by the
industry transition falling to $1.7 million from $2.0 million during 2007.
Our top ten theatre customers accounted for
approximately 60% of total theatre revenues compared to 53% a year-ago.
Lighting Segment
Sales of lighting products increased to
$1.1 million in 2008 from $1.0 million a year-ago due to increased
demand for follow spotlight sales which rose to $0.7 million from
$0.5 million during 2007.
Replacement parts were flat at $0.2 million for both
2008 and 2007 periods.
Sky-Tracker sales declined to less than $0.1 million
during 2008 from $0.2 million a year-ago.
Sales of all other lighting products, including but
not limited to, xenon lamps, britelights and nocturns amounted to $0.2 million
in 2008 from $0.1 million in 2007.
Export Revenues
Sales outside the United States (mainly theatre sales)
rose to $4.0 million in 2008 from $2.5 million in 2007 resulting
primarily from increased demand in Latin America and Asia. In addition, MDI, the
Canadian subsidiary we purchased in late 2007 helped increase sales in Canada
from $0.1 million in 2007 to $0.5 million in 2008. 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.
24
Gross Profit
Consolidated gross profit decreased to
$2.3 million in 2008 from $2.7 million in 2007 and as a percent of
revenue declined to 16.3% from 21.0% in 2007 due to the reasons discussed
below.
Gross profit in the theatre segment fell to
$1.9 million in 2008 from $2.4 million in 2007 and as a percentage of
sales declined to 15.0% from 20.4% a year-ago. The margin reflects the
transition to digital technology that is taking place in the theatre industry.
During 2008 we sold $4.4 million of digital equipment which we distribute
through an agreement with NEC Corporation of America. The gross margin on these
sales is significantly lower than the margin we currently experience on our
film projectors. However, the sales price on the digital projectors is higher
than what we receive on film projectors which causes the gross margin dollars
to be more comparable. Our 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 at the same time, we are growing the infrastructure in anticipation of the
upcoming digital cinema rollout. This combination is resulting in the division
experiencing negative margins putting pressure on our overall margin. 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. Gross margins also continue to be impacted by higher manufacturing
costs pertaining to purchasing in lower quantities, rising raw material costs
and less manufacturing throughput in the Omaha plant to cover fixed overhead
costs.
The gross profit in the lighting segment was
comparable to the year-ago period at $0.3 million but as a percent of
revenues rose to 27.9% from 24.3% a year-ago. The results reflect a product mix
consisting of the higher-margin spotlight business.
Selling and Administrative Expenses
Selling and administrative expenses increased to
$2.8 million in 2008 from $2.2 million in 2007 and as a percent of
revenue increased to 19.8% in 2008 from 17.1% in 2007.
Administrative costs increased to $2.0 million or
14.3% of revenues compared to $1.4 million or 11.1% a year-ago. During
2008, we experienced higher costs pertaining to our year-end audit and for
Sarbanes/Oxley compliance resulting in additional costs of $0.3 million
compared to a year-ago. In addition we experienced an increase in professional
fees pertaining to due diligence work performed on a terminated acquisition.
Other items increasing administrative costs included hiring additional
personnel to assist with Sarbanes/Oxley Compliance and adding additional
management. Administrative expenses also rose by $0.2 million pertaining
to MDI, the Canadian subsidiary we purchased in the fourth quarter of 2007.
Selling expenses were comparable to 2007 at $0.8 million,
respectively, but as a percent of revenues declined to 5.5% from 6.1% a year-ago.
Other Financial Items
We recorded interest income of $146,000 during 2008
compared to $218,000 a year-ago as our average cash and investment balances
were lower. Interest expense decreased to $8,500 from $10,200 in 2007.
We recorded an income tax benefit of $0.2 million
in 2008 compared to income tax expense of $0.3 million in 2007. The change
primarily resulted from a decrease in pre-tax income and the impact of tax-free
interest income and foreign tax rates.
For the reasons outlined herein, we experienced a net
loss of $0.3 million and basic and diluted loss per share of $0.02 in 2008,
respectively, compared to net income of $0.6 million and basic and diluted
earnings per share of $0.04 a year-ago, respectively.
25
Liquidity and Capital Resources
During
the past several years, we have met our working capital and capital resource
needs from our operating cash flows. We ended the first quarter with total cash
and cash equivalents of $4.5 million. Additionally, we have approximately $12.0
million of investments in auction-rate securities (ARS) which are classified as
available-for-sale securities. The ARS investments are held within closed-end
funds which are AAA rated and fully collateralized at a minimum 200% net asset
to fund ratio. The ARS are perpetual investments with no stated contractual
maturity date. These investments are intended to provide liquidity via an
auction process that resets the applicable interest rate every seven days
allowing investors to either roll over their holdings or gain immediate
liquidity by selling such investments at par.
During
the current period, the market for our investments in auction-rate securities
began experiencing a liquidity issue when failure of the auctions occurred for
all securities we hold due to an imbalance of buyers and sellers for the securities.
We cannot predict how long the current imbalance in the auction market will
continue. As a result, for a period of time, we may be unable to liquidate the
auction-rate securities held until a successful auction occurs. Based on the
continued unsuccessful auctions of these investments, the investment securities
were reclassified to noncurrent assets within the Consolidated Balance Sheet at
March 31, 2008.
Effective January 1,
2008, we adopted the provisions of SFAS No. 157, Fair Value Measurements
(SFAS No.157) which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements with respect
to financial assets and liabilities. Under SFAS No. 157, fair value is the
price to sell an asset or transfer a liability between market participants as
of the measurement date. Fair value measurements assume the asset or liability
is exchanged in an orderly manner; the exchange is in the principal market for
that asset or liability (or in the most advantageous market when no principal
market exists); and the market participants are independent, knowledgeable,
able and willing to transact an exchange.
SFAS No.157 establishes a
hierarchy for fair value measurements based upon observable independent market
inputs and unobservable market assumptions. Inputs refer broadly to the
assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk. Considerable judgment is required
in interpreting market data used to develop the estimates of fair value. The
following represents the three categories of inputs used in determining the
fair value of financial assets and liabilities:
Level 1: Quoted market
prices in active markets for identical assets or liabilities.
Level 2: Observable
market based inputs or unobservable inputs that are corroborated by market
data.
Level 3: Unobservable
inputs that are used in the measurement of assets and liabilities. Unobservable
inputs require management to make certain projections and assumptions about the
information that would be used by market participants in pricing the asset or
liability.
Due to
the continued imbalance of buyers and sellers in the market for auction-rate
securities, quoted market prices in an active market or observable market based
inputs and unobservable inputs corroborated by market data are not available.
Therefore, to determine the fair value of the auction-rate securities, a third
party valuation was performed using a cash flow model that required management
to make certain projections and assumptions that would be used by market
participants in the pricing of the auction-rate securities. The assumptions
used in preparing this model included, among other items, estimates for
interest rates, default and recovery rates, illiquidity risk and an estimate
for the timing of full redemption of the securities. Based on the valuations
obtained, an impairment of approximately $1.0 million was recorded.
In
accordance with SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, an impairment in the fair value of the investment
securities should be classified as temporary or other than temporary.
The
differentiating factors between a temporary and an other-than temporary
impairment are primarily the length of
the time and the extent to which the market value has been less than cost, the
financial
condition and near-term
prospects of the issuer and the intent and ability of a Company to retain its
investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in market value.
Based on this guidance we determined the
impairment should be classified as temporary and will be recorded as an
unrealized loss which is excluded from earnings and recorded in the other
comprehensive
income (loss)
component of stockholders equity.
We
believe that as of March 31, 2008, there is sufficient capital to run our
business with our cash position and our ability to draw on our credit
facilities such that the current lack of liquidity in the auction-rate market
will not have a material impact on our ability to fund our operations or
interfere with our external growth plans. (See Note 6 to the Notes to
Consolidated Financial Statements). We continue to receive interest at a maximum
default rate on the auction-rate securities and believe, due to our ability to
fund our operations while a current lack of liquidity exists in the
auction-rate market and the attributes of the auction-rate securities held, the
full value of the auction-rate securities held will be realized upon settlement
in the future. However, if market conditions would deteriorate further, or the
anticipated recovery in market values does not occur, we may be required to
record additional unrealized losses in other comprehensive income (loss) or
impairment charges which could also impact our results of operations or
liquidity and capital resources in future periods.
26
We are a party to a revolving credit facility (the Original
Credit Facility) with First National Bank of Omaha expiring August 28,
2008. This 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 this credit facility amounted to
$4.0 million at March 31, 2008. No amounts are currently outstanding.
We pay interest on outstanding amounts equal to the Prime Rate plus 0.25% (5.5%
at March 31, 2008) and pay a fee of 0.125% on the unused portion.
Effective March 31, 2008, we entered into a Seventh Amendment to our
Original Credit Facility to allow an interim extension of credit (the Interim
Credit Facility) in the amount of $10.4 million in addition to the $4.0
million allowed under the Original Credit Facility. The Interim Credit Facility
is evidenced by a Promissory Note with an interest rate set at a floating rate
set to after-tax interest income received on certain investment securities as
defined in the Seventh Amendment. The Interim Credit Facility expires on March 30,
2009. The credit facilities contain certain restrictions primarily related to
restrictions on acquisitions and dividends. All of our personal property and
certain stock in our subsidiaries secure the credit facilities. No amounts are
currently outstanding under either of the credit facilities.
Net cash provided by operating activities amounted to
$0.7 million in both the 2008 and 2007 quarters. We achieved this despite
experiencing a loss from operations due to turning a significant amount of our
consignment inventory into cash resulting in a net inflow of cash of $1.8
million from this inventory.
Net
cash used in investing activities amounted to $0.4 million in 2008
compared to cash provided by investing activities of $2.2 million in 2007.
During 2008 we incurred $0.3 million of capital expenditures and invested $0.1
million in our MDI subsidiary and our Joint Venture with RealD (Digital Link
II). During 2007, investing outflows consisted of the $0.2 million
purchase of a product line within the lighting segment and capital expenditures
of $0.1 million. We did generate $2.5 million in proceeds from the
sale of investment securities during the first quarter of 2007.
Net
cash provided by financing activities amounted to $0.1 million in 2007
resulting primarily from activity related to our stock plans. We did not
experience any financing activities in 2008.
Transactions with Related and Certain Other Parties
There
were no significant transactions with related and certain other parties during
the first quarter of fiscal year 2008.
Financial Instruments and Credit Risk Concentrations
Our
top ten customers accounted for approximately 55% of 2008 consolidated net
revenues and were primarily from the theatre segment. Trade accounts receivable
from these customers represented approximately 54% of net consolidated
receivables at March 31, 2008. Sales to Regal Cinemas, Inc. and
Cinemark USA each represented over 10% of consolidated sales. Additionally,
receivables from Vari International and Cinemark USA each represented over 10%
of net consolidated receivables at March 31, 2008. While we believe our
relationships with these 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 investments in auction-rate securities and accounts
receivable. See Note 6 to the Notes to Consolidated Financial Statements
for further discussions of the risks related to holding auction-rate
securities. 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.
27
Hedging and Trading Activities
We do
not engage in any hedging activities, including currency-hedging activities, in
connection with our foreign operations and sales. Historically, the majority of
our international sales have been denominated in U.S. 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
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Non-competition
agreement
|
|
100,000
|
|
25,000
|
|
25,000
|
|
|
|
50,000
|
|
|
|
|
|
Postretirement
benefits
|
|
212,415
|
|
19,363
|
|
22,320
|
|
17,829
|
|
18,895
|
|
19,878
|
|
114,130
|
|
Operating leases
|
|
1,309,690
|
|
245,654
|
|
283,852
|
|
280,414
|
|
280,414
|
|
219,356
|
|
|
|
Contractual cash
obligations
|
|
$
|
1,622,105
|
|
290,017
|
|
331,172
|
|
298,243
|
|
349,309
|
|
239,234
|
|
114,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Technobeam® business. There were no other contractual
obligations other than inventory and property, plant and equipment purchases in
the ordinary course of business. In addition, we have accrued approximately
$0.2 million for the estimated underpayment of income taxes we may be obligated
to pay.
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 21 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. Historically, we have been able to offset any inflationary
effects by either increasing prices or improving cost efficiencies.
2008 Outlook
We have begun to see evidence of the theatre
exhibition industry expected transition to digital cinema during 2008. 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 our 2008 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 Corporation of America, to launch this next generation technology within
the exhibition industry.
28
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. As a majority of our 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 purchase the majority of our lenses from a German
manufacturer. Based on forecasted purchases during 2008, an average 10%
devaluation of the dollar compared to the Euro would cost us approximately $0.1
million.
We
are also exposed to foreign exchange risk through subsidiaries located in
Canada and Asia. Based on historical data
a 10% devaluation of the U.S. dollar would have less than a 1% impact to the Company.
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 Original
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 not deemed significant.
We
have also evaluated our exposure to changes in the market price of our
auction-rate securities as a result of the current liquidity in the
auction-rate market. A one percent decrease in the average market price of our
auction-rate securities would have an effect on comprehensive income of
approximately $0.1 million.
We
have not historically and are not currently using derivative instruments to
manage the interest rate and foreign currency risks.
Item
4. Controls and Procedures
The
Company carried out an evaluation under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Companys 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, the Companys disclosure controls
and procedures are effective at ensuring that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 (as amended) is (1) accumulated and communicated to
management, including the Companys Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosures and (2) recorded,
processed, summarized and reported within the time periods specified in the SECs
rules and forms. There have been no changes in the Companys internal
control over financial reporting during the fiscal quarter for the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, such internal control over financial reporting.
29
PART II. Other
Information
Item 1. Legal Proceedings
A review of the Companys current litigation is disclosed
in note 21 to the Consolidated Financial Statements.
Item 1A. Risk Factors
Item 1A, Risk Factors of the Companys 2007 Annual
Report on Form 10-K includes a detailed discussion of the Companys risk
factors.There have been no material changes to the risk factors as previously
disclosed in Item 1A of the Form 10-K.
Item 6. Exhibits
See the Exhibit Index on page 32.
30
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALLANTYNE OF OMAHA, INC.
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By:
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/s/ JOHN WILMERS
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By:
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/s/ KEVIN HERRMANN
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John
Wilmers, President,
Chief Executive Officer, and Director
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Kevin
Herrmann, Secretary/Treasurer and
Chief Financial Officer
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Date:
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May 12, 2008
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Date:
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May 12, 2008
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31
EXHIBIT INDEX
4.2.8
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Seventh
Amendment to the Revolving Credit Agreement dated March 31, 2008 between
the Company and First National Bank of Omaha, Inc. (incorporated by
reference to Exhibit 4.1 to the Form 8-K as filed on April 4,
2008).
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4.2.9
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Secured Business
Promissory Note dated March 31, 2008 between the Company and First
National Bank of Omaha, Inc. (incorporated by reference to
Exhibit 4.2 to the form 8-K as filed on April 4, 2008).
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31.1
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Rule 13a-14(a) Certification of Chief Executive Officer.
·
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31.2
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Rule 13a-14(a) Certification of Chief Financial Officer.
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32.1
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18 U.S.C. Section 1350 Certification of Chief Executive Officer.
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32.2
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18 U.S.C. Section 1350 Certification of Chief Financial Officer.
·
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·
-
Filed herewith
32
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