Table
of Contents
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 September 30, 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,
or a non-accelerated filer. See
definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act (check one):
Large accelerated filer
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 November 6, 2008
|
Common Stock,
$.01, par value
|
|
14,051,065
shares
|
Table of Contents
Part I. FINANCIAL
INFORMATION
Item 1. Condensed Consolidated Financial Statement
Ballantyne
of Omaha, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
September 30,
2008 and December 31, 2007
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
6,440,726
|
|
$
|
4,220,355
|
|
Restricted cash
|
|
1,195,240
|
|
1,191,747
|
|
Short-term
investments
|
|
|
|
13,000,000
|
|
Accounts
receivable (less allowance for doubtful accounts of $528,212 in 2008 and
$534,526 in 2007)
|
|
6,975,669
|
|
7,841,348
|
|
Inventories, net
|
|
11,646,888
|
|
9,883,555
|
|
Recoverable
income taxes
|
|
1,466,502
|
|
1,365,530
|
|
Deferred income
taxes
|
|
2,169,013
|
|
1,695,926
|
|
Consignment
inventory
|
|
432,316
|
|
2,767,899
|
|
Other current
assets
|
|
682,253
|
|
322,102
|
|
Total current
assets
|
|
31,008,607
|
|
42,288,462
|
|
|
|
|
|
|
|
Investment in
securities
|
|
10,919,895
|
|
|
|
Investment in
Digital Link II joint venture
|
|
3,327,966
|
|
3,727,485
|
|
Property, plant
and equipment, net
|
|
3,574,905
|
|
3,633,124
|
|
Deferred income
taxes
|
|
356,556
|
|
|
|
Goodwill
|
|
2,317,171
|
|
2,420,993
|
|
Intangible
assets, net
|
|
1,619,951
|
|
2,047,185
|
|
Other assets
|
|
18,757
|
|
23,099
|
|
Total assets
|
|
$
|
53,143,808
|
|
$
|
54,140,348
|
|
|
|
|
|
|
|
Liabilities
and Stockholders Equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,984,597
|
|
$
|
6,134,703
|
|
Warranty
reserves
|
|
469,585
|
|
381,710
|
|
Accrued group
health insurance claims
|
|
254,807
|
|
201,687
|
|
Accrued bonuses
|
|
189,545
|
|
54,178
|
|
Other accrued
expenses
|
|
2,473,901
|
|
2,151,413
|
|
Customer
deposits
|
|
1,083,327
|
|
974,910
|
|
Total current
liabilities
|
|
10,455,762
|
|
9,898,601
|
|
|
|
|
|
|
|
Deferred income
taxes
|
|
|
|
98,532
|
|
Other accrued
expenses, net of current portion
|
|
1,192,517
|
|
1,101,517
|
|
Total
liabilities
|
|
11,648,279
|
|
11,098,650
|
|
|
|
|
|
|
|
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 16,148,868
shares in 2008 and 15,956,243 in 2007
|
|
161,488
|
|
159,562
|
|
Additional
paid-in capital
|
|
34,953,588
|
|
34,637,868
|
|
Accumulated
other comprehensive income (loss):
|
|
|
|
|
|
Foreign currency
translation adjustment
|
|
(377,972
|
)
|
(59,427
|
)
|
Pension
liability adjustment
|
|
75,833
|
|
75,833
|
|
Unrealized loss
on investments in securities
|
|
(830,105
|
)
|
|
|
Retained earnings
|
|
22,828,151
|
|
23,543,316
|
|
|
|
56,810,983
|
|
58,357,152
|
|
Less 2,097,805
common shares in treasury, at cost
|
|
(15,315,454
|
)
|
(15,315,454
|
)
|
Total
stockholders equity
|
|
41,495,529
|
|
43,041,698
|
|
Total
liabilities and stockholders equity
|
|
$
|
53,143,808
|
|
$
|
54,140,348
|
|
See accompanying notes
to the condensed consolidated financial statements.
1
Table
of Contents
Ballantyne
of Omaha, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations
Three
and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net revenues
|
|
$
|
12,309,109
|
|
$
|
12,615,705
|
|
$
|
40,149,385
|
|
$
|
38,206,449
|
|
Cost of revenues
|
|
10,162,989
|
|
10,526,839
|
|
33,643,529
|
|
30,913,586
|
|
Gross profit
|
|
2,146,120
|
|
2,088,866
|
|
6,505,856
|
|
7,292,863
|
|
|
|
|
|
|
|
|
|
|
|
Selling and
administrative expenses:
|
|
|
|
|
|
|
|
|
|
Selling
|
|
835,294
|
|
787,270
|
|
2,365,814
|
|
2,279,622
|
|
Administrative
|
|
1,989,584
|
|
1,312,779
|
|
5,649,852
|
|
4,339,829
|
|
Goodwill
impairment
|
|
|
|
|
|
|
|
639,466
|
|
Total selling
and administrative expenses
|
|
2,824,878
|
|
2,100,049
|
|
8,015,666
|
|
7,258,917
|
|
|
|
|
|
|
|
|
|
|
|
Gain on the
transfer of assets
|
|
|
|
|
|
|
|
234,557
|
|
Gain on the sale
of assets
|
|
|
|
|
|
258,170
|
|
|
|
Gain (loss) on
disposal of fixed assets
|
|
24,783
|
|
|
|
23,498
|
|
(11,004
|
)
|
Income (loss)
from operations
|
|
(653,975
|
)
|
(11,183
|
)
|
(1,228,142
|
)
|
257,499
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
127,855
|
|
211,305
|
|
403,391
|
|
636,548
|
|
Interest expense
|
|
(8,805
|
)
|
(11,531
|
)
|
(26,503
|
)
|
(30,685
|
)
|
Equity in loss
of joint venture
|
|
(164,329
|
)
|
(79,754
|
)
|
(462,229
|
)
|
(153,134
|
)
|
Other income
(expense), net
|
|
74,474
|
|
(39,075
|
)
|
121,148
|
|
(111,827
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before income taxes
|
|
(624,780
|
)
|
69,762
|
|
(1,192,335
|
)
|
598,401
|
|
Income tax
benefit (expense)
|
|
284,132
|
|
58,876
|
|
477,170
|
|
(94,190
|
)
|
Net income
(loss)
|
|
$
|
(340,648
|
)
|
$
|
128,638
|
|
$
|
(715,165
|
)
|
$
|
504,211
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
0.04
|
|
Diluted earnings
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
13,933,152
|
|
13,836,537
|
|
13,894,300
|
|
13,805,506
|
|
Diluted
|
|
13,933,152
|
|
14,110,477
|
|
13,894,300
|
|
14,096,263
|
|
See accompanying notes to the condensed
consolidated financial statements.
2
Table
of Contents
Ballantyne
of Omaha, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
Nine
Months Ended September 30, 2008 and 2007
(Unaudited)
|
|
2008
|
|
2007
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(715,165
|
)
|
$
|
504,211
|
|
Adjustments to
reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
Provision for
doubtful accounts
|
|
19,887
|
|
31,583
|
|
Provision for
obsolete inventory
|
|
549,847
|
|
520,773
|
|
Depreciation of
consignment inventory
|
|
857,160
|
|
707,833
|
|
Depreciation of
property, plant, and equipment
|
|
694,933
|
|
807,068
|
|
Amortization of
intangibles
|
|
327,151
|
|
70,834
|
|
Equity in loss
of joint venture
|
|
462,229
|
|
153,134
|
|
Goodwill
impairment
|
|
|
|
639,466
|
|
Gain (loss) on
disposal of fixed assets
|
|
(23,498
|
)
|
11,004
|
|
Gain on sale of
assets
|
|
(258,170
|
)
|
|
|
Deferred income
taxes
|
|
(894,225
|
)
|
(833,449
|
)
|
Share-based
compensation expense
|
|
171,396
|
|
69,562
|
|
Excess tax
benefits from stock options exercised
|
|
(92,362
|
)
|
(173,888
|
)
|
Changes in
assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
968,348
|
|
302,434
|
|
Inventories
|
|
(2,389,310
|
)
|
(6,016,116
|
)
|
Consignment
inventory
|
|
1,478,423
|
|
(2,902,527
|
)
|
Other current
assets
|
|
(270,734
|
)
|
962,609
|
|
Accounts payable
|
|
(321,506
|
)
|
991,970
|
|
Warranty
reserves
|
|
95,048
|
|
(136,915
|
)
|
Accrued group
health insurance claims
|
|
53,120
|
|
(48,099
|
)
|
Accrued bonus
|
|
135,367
|
|
146,184
|
|
Other accrued
expenses
|
|
320,184
|
|
50,399
|
|
Customer
deposits
|
|
119,440
|
|
476,788
|
|
Current income
taxes
|
|
(5,502
|
)
|
(13,730
|
)
|
Other assets
|
|
(8,328
|
)
|
7,300
|
|
Net cash
provided by (used in) operating activities
|
|
1,273,733
|
|
(3,671,572
|
)
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
Increase in
acquisition costs
|
|
(46,969
|
)
|
(183,364
|
)
|
Investment in
joint venture
|
|
(62,711
|
)
|
(276,755
|
)
|
Proceeds from
sale of assets
|
|
271,360
|
|
|
|
Decrease
(increase) in restricted cash
|
|
(3,493
|
)
|
360,658
|
|
Capital
expenditures
|
|
(632,772
|
)
|
(421,407
|
)
|
Proceeds from
sales of investment securities
|
|
1,250,000
|
|
4,500,000
|
|
Net cash
provided by investing activities
|
|
775,415
|
|
3,979,132
|
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
Payments on
long-term debt
|
|
|
|
(14,608
|
)
|
Proceeds from
exercise of stock options
|
|
90,113
|
|
65,415
|
|
Excess tax benefits
from stock options exercised
|
|
92,362
|
|
173,888
|
|
Net cash
provided by financing activities
|
|
182,475
|
|
224,695
|
|
|
|
|
|
|
|
Effect of
exchange rate changes on cash and cash equivalents
|
|
(11,252
|
)
|
|
|
Net increase in
cash and cash equivalents
|
|
2,220,371
|
|
532,255
|
|
Cash and cash
equivalents at beginning of year
|
|
4,220,355
|
|
2,622,654
|
|
Cash and cash
equivalents at end of year
|
|
$
|
6,440,726
|
|
$
|
3,154,909
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated financial
statements.
3
Table
of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended September 30,
2008 and 2007
(Unaudited)
1.
Nature of Operations
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.
2.
Summary of
Significant Accounting Policies
Basis
of Presentation
The condensed
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 condensed 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 condensed 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. All significant intercompany balances and
transactions have been eliminated in consolidation.
The preparation of
condensed 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 condensed
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. Certain amounts in the accompanying
condensed consolidated financial statements and notes thereto have been
reclassified to conform to the 2008 presentation.
Revenue Recognition
Ballantyne
manufactures and sells motion picture projectors which are highly complex and
have many components that make up a complete system, which is referred to as an
integrated system. Each customer selects options for certain components in
determining the integrated system they chose to purchase. To recognize revenue,
the Company follows the requirements of Staff Accounting Bulletin 104,
Revenue Recognition
, which consists of determining that:
·
Persuasive
evidence of an arrangement exists
·
Delivery has
occurred or services have been rendered
·
The sellers
price to the buyer is fixed or determinable
·
Collectibility
is reasonably assured
Once
the customer has determined the features for their integrated system, the
Company manufactures the system to their preference and then ships the system
when it is complete. Revenue is generally recognized upon shipment of the
product to the third party. In those limited situations where the shipping terms
are FOB destination point, the Company recognizes revenue when the product is
delivered.
4
Table
of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
Consignment Inventory
Digital
and film projection equipment is provided to potential customers for consignment
and demonstration purposes under customer use agreements. Additionally, during
2007, the Company entered into operating lease agreements with third party
customers for the use of certain projection equipment of which a majority of
the projection equipment was sold during the first quarter of 2008. The Company
recognized revenue in accordance with Staff Accounting Bulletin 104,
Revenue Recognition
, upon delivery of title to customer. No
other income was generated under these operating lease agreements. The Company
considered the guidance contained within ARB 43, EITF 01-08 and SFAS No. 13
to determine the proper accounting treatment for the agreements referenced
above.
Consignment
inventory is reviewed for impairment by comparing the inventory to estimated
future usage and sales. Digital and film projection equipment on consignment
amounted to approximately $0.4 million and $2.8 million at September 30,
2008 and December 31, 2007, respectively.
Recently Adopted 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.
Although the Company adopted the provisions of SFAS No. 159
effective with the beginning of the Companys 2008 fiscal year, it did not
elect the fair value option for any financial instruments or other items held
by the Company. Therefore, the adoption
of SFAS No. 159 did not have an impact on the Companys consolidated
financial position or results of operations.
In September 2006,
the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. In February 2008, FASB issued FASB Staff Position
(FSP) No. 157-2,
Effective Date of FASB
Statement No. 15
which delayed the effective date of
FASB 157 for certain non-financial assets and non-financial liabilities to
fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years.
In October 2008, the FASB issued FASB Staff
Position No. FAS 157-3, Determining Fair Value of a Financial Asset in a
Market that is not Active. FSP No. FAS 157-3 clarifies the application of
FASB Statement No. 157,
Fair Value
Measurements,
in a market that is not active and provides an example
to illustrate key considerations in determining the fair value of a financial
asset when the market for that financial asset is not active. FSB No. FAS
157-3 is effective for the Company beginning in the third quarter of 2008. The partial adoption of
SFAS No. 157 did not have a material
impact on the Companys consolidated financial position or results of
operations. See further discussion in Note 9.
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) will
be effective for the Companys business combinations occurring on or after January 1,
2009. Management is currently assessing the effect of this pronouncement on the
Companys consolidated financial statements.
In May 2008, the
FASB issued SFAS No. 162,
The Hierarchy
of Generally Accepted Accounting Principles
(SFAS No. 162).
SFAS No. 162 identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles in the United States (GAAP). SFAS No. 162
will be effective 60 days following the SECs approval of the Public
Company Accounting Oversight Boards related amendments to remove the GAAP
hierarchy from auditing standards. The Company does not believe the adoption
will have a material impact on its consolidated financial statements.
5
Table
of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
In September 2008,
the FASB issued FASB Staff Position FAS 133-1 and FIN 45-4, Disclosures about
Credit Derivatives and Certain Guarantees which amends FASB Statement No. 133
and FASB Interpretation FIN 45. FSP No. FAS 133-1 and FIN 45-4 requires
sellers of credit derivatives, including credit derivatives embedded in hybrid
instruments, to disclose additional information about exposure to potential
loss from credit-risk-related events. The new disclosures require both sellers
of credit derivatives and guarantors to disclose the current status of
payment/performance risk. The disclosures are effective for annual and interim
reporting periods ending after November 15, 2008. The Company does not believe the adoption
will have a material impact on its consolidated financial statements.
3.
Investment
in Digital Link II Joint Venture
On March 6, 2007,
the Company entered into an agreement with RealD to form an operating entity,
Digital Link II, LLC (the LLC). Under the agreement, the LLC was formed with
the Company and RealD as the only two members with membership interests of
44.4% and 55.6%, respectively. The LLC was formed for purposes of
commercializing certain 3D technology and to fund the deployment of digital
projector systems and servers to exhibitors. As of September 30, 2008, total
current and non-current assets of the joint venture amounted to approximately
$1.1 million and $10.0 million, respectively. Total liabilities and
equity at September 30, 2008 amounted to $3.3 million and
$7.8 million, respectively. The joint venture, which operates on a fiscal
year end of March 31, 2008, reported a net loss for the six months ended September 30,
2008 of approximately $0.6 million which primarily resulted from
depreciation expense related to projection equipment on consignment to third party
customers.
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 $0.5 million for the nine months
ended September 30, 2008.
4.
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 September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Basic earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
Income (loss)
applicable to common stock
|
|
$
|
(340,648
|
)
|
$
|
128,638
|
|
$
|
(715,165
|
)
|
$
|
504,211
|
|
Weighted average
common shares outstanding
|
|
13,933,152
|
|
13,836,537
|
|
13,894,300
|
|
13,805,506
|
|
Basic earnings
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
Income (loss)
applicable to common stock
|
|
$
|
(340,648
|
)
|
$
|
128,638
|
|
$
|
(715,165
|
)
|
$
|
504,211
|
|
Weighted average
common shares outstanding
|
|
13,933,152
|
|
13,836,537
|
|
13,894,300
|
|
13,805,506
|
|
Assuming
conversion of options outstanding
|
|
|
|
273,940
|
|
|
|
290,757
|
|
Weighted average
common shares outstanding, as adjusted
|
|
13,933,152
|
|
14,110,477
|
|
13,894,300
|
|
14,096,263
|
|
Diluted earnings
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
0.04
|
|
6
Table
of Contents
Ballantyne of Omaha, Inc. and
Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
For the three and nine
months ended September 30, 2008, options and restricted stock outstanding
were not included in the computation of diluted earnings (loss) per share as
the Company reported a loss from continuing operations available to common
stockholders. For the three and nine months ended September 30,
2007, options to purchase 101,063 shares of common stock at a weighted average
price of $9.71 per share were outstanding, but were not included in the
computation of diluted earnings per share as the options exercise price was
greater than the average market price of the common shares. Options
outstanding as of September 30, 2008 expire December 2008 and May 2012.
5.
Business Acquisitions
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 is forming 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.
Goodwill recorded in
connection with this acquisition 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.
6.
Comprehensive Income
(Loss)
The accumulated other
comprehensive income (loss), net, shown in the Companys consolidated balance
sheets includes the unrealized loss on investments in securities, pension
liability adjustments and the accumulated foreign currency translation
adjustment. The following table shows the difference between the Companys
reported net earnings (loss) and its comprehensive income (loss):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
$ in thousands
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(340,648
|
)
|
$
|
128,638
|
|
$
|
(715,165
|
)
|
$
|
504,211
|
|
Other comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
Unrealized gain
(loss) on investment in securities
|
|
116,240
|
|
|
|
(830,105
|
)
|
|
|
Foreign currency
translation adjustment
|
|
(189,855
|
)
|
|
|
(318,545
|
)
|
|
|
Total
comprehensive income (loss)
|
|
$
|
(414,263
|
)
|
$
|
128,638
|
|
$
|
(1,863,815
|
)
|
$
|
504,211
|
|
7.
Sale of
Product Line
During
2008, the Company sold its Coater and Marinade product line in exchange for
$275,000 in cash. In connection with the sale, the Company recorded a pre-tax
net gain of approximately $258,000 (estimated $159,000 after-tax) which is net
of related costs to sell. The product line was sold to a former Chief Financial
Officer of the Company.
The Company recorded the
sale of the Coater and Marinade product line in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Based on the
guidance, the Coater and Marinade product line is not considered a separate
accounting component of the Company as the cash flows of the product line could
not be clearly distinguished from the rest of the Company. Therefore, the
Company has not presented the operations of the Coater and Marinade product
line as discontinued operations.
7
Table
of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
8.
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 Company
accounts for its investments in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
During
2008, the market for the Companys investments in auction-rate securities began
experiencing a liquidity issue when the securities came up for auction 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 have been
reclassified to noncurrent assets within the Condensed Consolidated Balance
Sheet as of September 30, 2008. As of September 30, 2008, the Company
has liquidated, at par, $1,250,000 of its auction rate securities of which
$50,000 were sold through the normal auction process and $1,200,000 were
redeemed by the fund itself.
Due
to the inability to trade all of the Companys investments in auction-rate
securities in the current market, the Company continues to earn interest on its
investments at the maximum contractual default rate. The weighted average
maximum contractual default rate being earned as of September 30, 2008 was
8.48%.
Based
on the valuations performed (Note 9), the Company determined there was an
impairment in the fair value of its investments of approximately $0.8 million.
When events or circumstances exist that require the Company to record an
impairment on its investments, the Company determines 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. Based on this assessment as of September 30,
2008, the Company determined the impairment in the fair value of its
investments is temporary.
9.
Fair Value
of Financial Instruments
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. Under SFAS 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. Pursuant
to the provisions of FSP No. 157-2, the Company has decided to defer
adoption of SFAS No. 157 for one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis.
8
Table of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
SFAS 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.
Because
of the inability to trade the Companys auction-rate securities, a readily
determinable fair value using market observables (Level 1 input) does not
exist. Therefore, in accordance with SFAS No. 157, Fair Value
Measurement, the Company obtained Gifford Fong Associates, a third party
valuation expert, to assist with the determination of the estimated fair value
of its auction-rate securities (Level 3 input). The valuation expert used a
cash flow model to determine the fair value of these securities. The
significant inputs and assumptions used in preparing this model are summarized
as follows:
·
Interest rate indices LIBOR curve and commercial
paper rates obtained.
·
Rating transition matrix the rating transition
matrix gives transition probabilities for the underlying collateral migrating
from one rating level to another in one year, particularly the transition
probability to default status. The rating transition matrix is constructed from
rating migration and default data published by various rating agencies.
·
Default and recovery rates the default rate is
estimated using a credit spread (discount margin) over the risk free rate curve
obtained.
·
Illiquidity risk in a distressed market, investors
may not be able to find willing buyers, hence reduced liquidity.
·
Estimate for the timing of full redemption of the securities
the full redemption is estimated to take place in two years on the historical
observation that economic cycles usually turn around in two years.
·
Estimated weighted average coupon the yield,
considered to be the weighted average cost of capital (WACC), is related to the
financial strength and outlook of each fund.
Financial assets and
liabilities measured at fair value on a recurring basis as of September 30,
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
|
|
9/30/08
|
|
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
|
|
$
|
10,919,895
|
|
$
|
|
|
$
|
|
|
$
|
10,919,895
|
|
Total
|
|
$
|
10,919,895
|
|
$
|
|
|
$
|
|
|
$
|
10,919,895
|
|
9
Table
of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
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 September 30,
2008 follows:
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
|
|
Investments in
Auction-Rate
Securities
|
|
Total
|
|
Beginning
balance
|
|
$
|
13,000,000
|
|
$
|
13,000,000
|
|
Total gains or
losses (realized/unrealized)
|
|
|
|
|
|
Included in
other comprehensive income (loss)
|
|
(830,105
|
)
|
(830,105
|
)
|
Purchases,
issuances and settlements
|
|
(1,250,000
|
)
|
(1,250,000
|
)
|
Transfers in
and/or out of Level 3
|
|
|
|
|
|
Ending balance
|
|
$
|
10,919,895
|
|
$
|
10,919,895
|
|
|
|
|
|
|
|
The amount of
total gains or losses for the period included in earnings (loss) (or changes
in net assets) attributable to the change in unrealized gains or losses
relating to assets still held at the reporting date
|
|
|
|
|
|
10.
Inventories
Inventories consist of
the following:
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Raw materials
and components
|
|
$
|
5,965,124
|
|
$
|
4,911,345
|
|
Work in process
|
|
1,245,504
|
|
772,055
|
|
Finished goods
|
|
4,436,260
|
|
4,200,155
|
|
|
|
$
|
11,646,888
|
|
$
|
9,883,555
|
|
The inventory balances
are net of reserves of approximately $2,500,000 and $1,901,000 as of September 30,
2008 and December 31, 2007, respectively.
11.
Property, Plant and Equipment
Property, plant and
equipment include the following:
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Land
|
|
$
|
313,500
|
|
$
|
313,500
|
|
Buildings and
improvements
|
|
3,962,989
|
|
3,962,989
|
|
Machinery and
equipment
|
|
7,270,444
|
|
7,199,257
|
|
Office furniture
and fixtures
|
|
1,928,320
|
|
1,662,578
|
|
|
|
13,475,253
|
|
13,138,324
|
|
Less accumulated
depreciation
|
|
(9,900,348
|
)
|
(9,505,200
|
)
|
Net property,
plant and equipment
|
|
$
|
3,574,905
|
|
$
|
3,633,124
|
|
Depreciation expense
amounted to approximately $243,000 and $695,000 for the three and nine months
ended September 30, 2008, respectively, as compared to approximately
$270,000 and $807,000 for the three and nine months ended September 30,
2007.
10
Table
of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
12.
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. The
Company has recorded a receivable for the amount of the income tax refund due
to the Company primarily as a result of estimated payments made by the Company
during 2007 in excess of the amounts actually owed. In addition, the Company
has recorded a receivable for the carry back of certain net operating losses to
previous years taxable income resulting in additional tax refunds due.
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.
The
Company has adopted the provisions of 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
adoption of this interpretation did not have a material impact on the Companys
consolidated financial position.
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 2005
through 2007. 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.
An estimate for the
underpayment of income taxes, including interest and penalties are classified
as a component of tax expense in the Condensed Consolidated Statements of
Operations. During 2008, the Company
made interest and penalty payments to various states related to back taxes paid
in 2007. Additionally, during the third quarter the overall estimate was
reduced for underpayments, including penalty and interest, the Company is no
longer obligated to pay due to the expirations of the statute of limitations,
which had an impact to the quarterly effective tax rate of 11.9%. The effective
tax rates for the three and nine months ended September 30, 2008 was approximately
45.5% and 40.0%, respectively. The estimate relating largely to state tax
matters approximated $0.1 million as of September 30, 2008 and $0.2
million as of December 31, 2007.
11
Table
of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
13.
Warranty Reserves
The Company generally
grants a warranty to its customers for a one-year period following the sale of
all new equipment and on selected repaired equipment for a one-year period
following the repair. The warranty period is extended under certain
circumstances and for certain products. The Company accrues for these costs at
the time of sale or repair or when events dictate that additional accruals are
necessary. The following table summarizes warranty activity for the periods indicated
below:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Warranty accrual
at beginning of period
|
|
$
|
347,571
|
|
$
|
516,201
|
|
$
|
381,710
|
|
$
|
617,052
|
|
Charged to
expense
|
|
196,990
|
|
44,115
|
|
298,542
|
|
137,058
|
|
Amounts written
off, net of recoveries
|
|
(74,976
|
)
|
(80,179
|
)
|
(210,667
|
)
|
(273,973
|
)
|
Warranty accrual
at end of period
|
|
$
|
469,585
|
|
$
|
480,137
|
|
$
|
469,585
|
|
$
|
480,137
|
|
14.
Debt
The Company is party to
a revolving credit facility (the Original Credit Facility) with First
National Bank of Omaha expiring August 30, 2009. The credit facility
provides for borrowings up to the lesser of $4.0 million or amounts
determined by an asset-based lending formula, as defined. Borrowings available
under the credit facility amounted to $4.0 million at September 30,
2008. The Company pays interest on outstanding amounts equal to the Prime Rate
plus 0.25% (5.25% at September 30, 2008) and pay a fee of 0.125% on the
unused portion.
Effective
September 26, 2008, the Company entered into a Ninth Amendment to its
Original Credit Facility to extend the maturity date of its interim extension
of credit (the Interim Credit Facility) to August 30, 2009 and to reduce
the available borrowings to $9.4 million. 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. The
credit facilities contain certain restrictions primarily related to
restrictions on acquisitions and dividends. All of the Companys personal
property and certain stock in our subsidiaries secure the credit
facilities. No amounts are currently outstanding under either of the
credit facilities.
15.
Note Receivable
During July 2006,
the Company entered into a note receivable arrangement with Digital Link LLC
(Digital Link) pertaining to the sale and installation of digital projectors.
The sale amounted to $780,000 of which 25% was due upon installation and was
collected. The remaining amounts are due over a 5-year period at an 8% interest
rate. At September 30, 2008, $358,820 is due from Digital Link. Only the
payments received since inception in 2006 on the note receivable totaling
$421,180 have been 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
the 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.
12
Table
of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
16.
Supplemental Cash
Flow Information
Supplemental disclosures
to the consolidated statements of cash flows are as follows:
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Cash paid during
the period for:
|
|
|
|
|
|
Interest
|
|
$
|
5,471
|
|
$
|
21,154
|
|
Income taxes
|
|
$
|
652,175
|
|
$
|
941,370
|
|
|
|
|
|
|
|
Non-cash
investing activities:
|
|
|
|
|
|
Non-cash
investment in joint venture
|
|
$
|
|
|
$
|
2,543,771
|
|
|
|
|
|
|
|
|
|
|
|
17.
Stock
Compensation
The Company accounts for
awards of share-based compensation in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based
Payment
, (SFAS No. 123(R)) which requires the measurement and
recognition of compensation expense for all share-based payment awards made to
employees and directors based on estimated fair values. Share-based
compensation expense was $96,374 and $15,495 for the three months ended September 30,
2008 and 2007 and $171,396 and $69,562 for the nine months ended September 30,
2008 and 2007, respectively.
Stock Options
The
Company currently maintains a 2005 Outside Directors Stock Option Plan (2005
Outside Directors Plan) which has been approved by the Companys stockholders.
During the current period, the Board of Directors made the decision to
discontinue granting further stock options under this Plan. The Company also maintains 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. No stock options were granted during the nine months ended September 30,
2008 and 2007, respectively.
The
following table summarizes the Companys activities with respect to its stock
options for the nine months ended September 30, 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
|
|
(123,625
|
)
|
$
|
0.73
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2008
|
|
320,125
|
|
$
|
2.95
|
|
2.59
|
|
$
|
215,650
|
|
Exercisable at
September 30, 2008
|
|
320,125
|
|
$
|
2.95
|
|
2.59
|
|
$
|
215,650
|
|
13
Table
of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
The aggregate intrinsic
value in the table above represents the total that would have been received by
the option holders if all in-the-money options had been exercised on September 30,
2008.
The following table
summarizes information about stock options outstanding and exercisable at September 30,
2008:
|
|
Options Outstanding at
September 30, 2008
|
|
Options Exercisable at
September 30, 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 0.63
|
|
160,000
|
|
3.58
|
|
$
|
0.62
|
|
160,000
|
|
3.58
|
|
$
|
0.62
|
|
$4.25 to 4.75
|
|
118,125
|
|
2.07
|
|
4.55
|
|
118,125
|
|
2.07
|
|
4.55
|
|
$7.30
|
|
42,000
|
|
0.26
|
|
7.30
|
|
42,000
|
|
0.26
|
|
7.30
|
|
$0.62 to 7.30
|
|
320,125
|
|
2.59
|
|
$
|
2.95
|
|
320,125
|
|
2.59
|
|
$
|
2.95
|
|
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. The plan expires in September 2010.
During May 2008, the Company granted 54,000 shares to certain employees. A
portion of the shares vest at January 2009 with the remaining shares being
earned if the Company achieves certain earning thresholds, as defined within
the restricted stock agreements. Once the shares are earned, vesting would
occur on January 1, 2010. At September 30, 2008, 196,000 shares
remain available for issuance under the Plan.
On
May 21, 2008, the Company adopted and the stockholders approved the
Ballantyne of Omaha, Inc. Non-Employee Director Restricted Stock Plan
(Non-Employee Plan) to replace the 2005 Non-Employee Director Stock Option
Plan. The total number of shares reserved for issuance under the plan is
120,000 shares. During May 2008, the Company granted 15,000 restricted
shares under the Non-Employee Plan. The shares vest the day after the Companys
2009 Annual Meeting. At September 30, 2008, 105,000 shares remain
available for issuance under the Plan.
In
connection with restricted stock granted to certain employees and non-employee
directors, the Company is accruing compensation expense based on the estimated
number of shares expected to be issued utilizing the most current information
available to the Company at the date of the financial statements.
Employee
Stock Purchase Plan
The Companys Employee Stock
Purchase Plan, approved by the stockholders, provides for the purchase of
shares of Ballantyne common stock by eligible employees at a per share purchase
price equal to 85% of the fair market value of a share of Ballantyne common
stock at either the beginning or end of the offering period, as defined,
whichever is lower. Purchases are made through payroll deductions of up to 10%
of each participating employees salary. The maximum number of shares that can
be purchased by participants in any offering period is 2,000 shares.
Additionally, the Plan has set certain limits, as defined, in regard to the
number of shares that may be purchased by all eligible employees during an
offering period. At September 30, 2008, 123,746 shares of common stock
remained available for issuance under the Plan. The Plan expires in October 2010.
14
Table
of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
18.
Postretirement Health
Care
Components of the net
period benefit cost for the Companys post retirement health care plan
includes:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net periodic
benefit cost:
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
$
|
2,979
|
|
$
|
|
|
$
|
8,937
|
|
Interest cost
|
|
4,974
|
|
5,416
|
|
14,922
|
|
16,254
|
|
Amortization of
prior-service cost
|
|
|
|
5,598
|
|
|
|
16,793
|
|
Total net
periodic benefit cost
|
|
$
|
4,974
|
|
$
|
13,993
|
|
$
|
14,922
|
|
$
|
41,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to
pay $20,874 of benefits under its postretirement benefit plan in 2008. As of September 30, 2008, benefits of
$5,445 have been paid.
19.
Guarantee
On July 28, 2008,
the Company provided a guarantee to a note entered into by its joint venture,
Digital Link II, LLC to finance digital projection equipment deployed in the
normal course of business. The loan provides for borrowings of approximately
$1.3 million and bears interest equal to 7% per annum. The Companys guarantee
of the note is limited to its 44.4% ownership percentage, which amounts to
approximately $0.6 million. RealD, who holds a membership interest of 55.6% in
the joint venture, has provided a guarantee for the remainder of the note
outstanding, which amounts to approximately $0.7 million. The Company has
recorded a liability for the fair value of the obligation undertaken by issuing
the guarantee of approximately $0.04 million. The guarantees will expire by the
end of 2011. Under the terms of the guarantees, the Company and RealD would be
required to fulfill the guarantees should the joint venture be in default of
its loan or contract terms.
20.
Concentrations
The Companys top ten
customers accounted for approximately 46% of 2008 consolidated net revenues and
were primarily from the theatre segment. Trade accounts receivable from these
customers represented approximately 38% of net consolidated receivables at September 30,
2008. Sales to Regal Cinemas, Inc. represented over 10% of consolidated
sales. Additionally, receivables from Regal Cinemas, Inc. represented over 10%
of net consolidated receivables at September 30, 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.
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.
15
Table
of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
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 September 30,
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, motion
picture screens, xenon lamphouses and power supplies, sound systems, film
handling equipment and the sale and service of xenon lamps, lenses and digital
projection equipment and accessories. 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 intersegment sales are eliminated in consolidation.
16
Table
of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
Summary
by Business Segments
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
10,263,557
|
|
$
|
10,521,596
|
|
$
|
34,086,965
|
|
$
|
31,885,555
|
|
Services
|
|
833,215
|
|
854,223
|
|
2,353,829
|
|
2,711,926
|
|
Total theatre
|
|
11,096,772
|
|
11,375,819
|
|
36,440,794
|
|
34,597,481
|
|
Lighting
|
|
1,199,479
|
|
1,064,562
|
|
3,510,431
|
|
3,082,435
|
|
Other
|
|
12,858
|
|
175,324
|
|
198,160
|
|
526,533
|
|
Total revenue
|
|
$
|
12,309,109
|
|
$
|
12,615,705
|
|
$
|
40,149,385
|
|
$
|
38,206,449
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,630,499
|
|
$
|
1,564,677
|
|
$
|
6,172,034
|
|
$
|
5,969,057
|
|
Services
|
|
214,596
|
|
79,303
|
|
(650,195
|
)
|
301,230
|
|
Total theatre
|
|
1,845,095
|
|
1,643,980
|
|
5,521,839
|
|
6,270,287
|
|
Lighting
|
|
294,265
|
|
367,878
|
|
896,437
|
|
791,602
|
|
Other
|
|
6,760
|
|
77,008
|
|
87,580
|
|
230,974
|
|
Total gross
profit
|
|
2,146,120
|
|
2,088,866
|
|
6,505,856
|
|
7,292,863
|
|
Selling and administrative
expenses:
|
|
|
|
|
|
|
|
|
|
Selling
|
|
(835,294
|
)
|
(787,270
|
)
|
(2,365,814
|
)
|
(2,279,622
|
)
|
Administrative
|
|
(1,989,584
|
)
|
(1,312,779
|
)
|
(5,649,852
|
)
|
(4,339,829
|
)
|
Goodwill
impairment
|
|
|
|
|
|
|
|
(639,466
|
)
|
Gain on transfer
of assets
|
|
|
|
|
|
|
|
234,557
|
|
Gain on sale of
assets
|
|
|
|
|
|
258,170
|
|
|
|
Gain (loss) on
disposal of fixed assets
|
|
24,783
|
|
|
|
23,498
|
|
(11,004
|
)
|
Operating income
(loss)
|
|
(653,975
|
)
|
(11,183
|
)
|
(1,228,142
|
)
|
257,499
|
|
Net interest
income
|
|
119,050
|
|
199,774
|
|
376,888
|
|
605,863
|
|
Equity in loss
of joint venture
|
|
(164,329
|
)
|
(79,754
|
)
|
(462,229
|
)
|
(153,134
|
)
|
Other income
(expense), net
|
|
74,474
|
|
(39,075
|
)
|
121,148
|
|
(111,827
|
)
|
Income (loss)
before income taxes
|
|
$
|
(624,780
|
)
|
$
|
69,762
|
|
$
|
(1,192,335
|
)
|
$
|
598,401
|
|
Expenditures on
capital equipment
|
|
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
67,585
|
|
$
|
116,640
|
|
$
|
384,221
|
|
$
|
240,978
|
|
Services
|
|
66,373
|
|
87,826
|
|
227,470
|
|
160,931
|
|
Total theatre
|
|
133,958
|
|
204,466
|
|
611,691
|
|
401,909
|
|
Lighting
|
|
6,699
|
|
10,163
|
|
21,081
|
|
19,498
|
|
Total
|
|
$
|
140,657
|
|
$
|
214,629
|
|
$
|
632,772
|
|
$
|
421,407
|
|
Depreciation and
amortization
|
|
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
517,430
|
|
$
|
385,262
|
|
$
|
1,628,268
|
|
$
|
1,379,736
|
|
Services
|
|
73,979
|
|
52,977
|
|
194,457
|
|
148,078
|
|
Total theatre
|
|
591,409
|
|
438,239
|
|
1,822,725
|
|
1,527,814
|
|
Lighting
|
|
22,234
|
|
22,081
|
|
56,519
|
|
57,921
|
|
Total
|
|
$
|
613,643
|
|
$
|
460,320
|
|
$
|
1,879,244
|
|
$
|
1,585,735
|
|
17
Table of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
Summary
by Business Segments (continued)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Gain (loss) on disposal of fixed assets
|
|
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
24,783
|
|
$
|
|
|
$
|
23,498
|
|
$
|
(11,004
|
)
|
Services
|
|
|
|
|
|
|
|
|
|
Total theatre
|
|
24,783
|
|
|
|
23,498
|
|
(11,004
|
)
|
Lighting
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,783
|
|
$
|
|
|
$
|
23,498
|
|
$
|
(11,004
|
)
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Gain on transfer
of assets
|
|
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
234,557
|
|
Services
|
|
|
|
|
|
|
|
|
|
Total theatre
|
|
|
|
|
|
|
|
234,557
|
|
Lighting
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
234,557
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Identifiable
assets
|
|
|
|
|
|
|
|
|
|
Theatre
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
47,118,897
|
|
$
|
47,442,283
|
|
|
|
|
|
Services
|
|
2,006,054
|
|
2,195,660
|
|
|
|
|
|
Total theatre
|
|
49,124,951
|
|
49,637,943
|
|
|
|
|
|
Lighting
|
|
3,737,528
|
|
3,970,457
|
|
|
|
|
|
Other
|
|
281,329
|
|
531,948
|
|
|
|
|
|
Total identifiable
assets
|
|
$
|
53,143,808
|
|
$
|
54,140,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Table
of Contents
Ballantyne of Omaha, Inc.
and Subsidiaries
Notes to the Condensed
Consolidated Financial Statements
Three and Nine Months Ended
September 30, 2008 and 2007
(Unaudited)
Summary
by Business Segments (continued)
Summary by Geographical
Area
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,054,223
|
|
$
|
8,604,208
|
|
$
|
27,939,782
|
|
$
|
28,852,669
|
|
Canada
|
|
621,574
|
|
328,402
|
|
1,406,244
|
|
574,706
|
|
Asia
|
|
1,587,142
|
|
1,964,677
|
|
5,500,556
|
|
4,856,952
|
|
Latin America
|
|
229,306
|
|
1,317,107
|
|
3,051,039
|
|
2,634,584
|
|
Europe
|
|
379,366
|
|
401,311
|
|
1,397,186
|
|
1,085,261
|
|
Other
|
|
437,498
|
|
|
|
854,578
|
|
202,277
|
|
Total
|
|
$
|
12,309,109
|
|
$
|
12,615,705
|
|
$
|
40,149,385
|
|
$
|
38,206,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Identifiable
assets
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
44,452,866
|
|
$
|
45,359,184
|
|
|
|
|
|
Canada
|
|
5,748,806
|
|
5,762,761
|
|
|
|
|
|
Asia
|
|
2,942,136
|
|
3,018,403
|
|
|
|
|
|
Total
|
|
$
|
53,143,808
|
|
$
|
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.
19
Table of Contents
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 are a Delaware Corporation and maintain our
corporate office and primary manufacturing facilities in Omaha, Nebraska. We
were founded in 1932 and went public in 1995. Our shares are traded on the
American Stock Exchange under the symbol BTN.
We have two primary reportable core operating
segments: theatre and lighting. Approximately 91% of our revenues for the nine
months ended September 30, 2008 were from theatre products and 9% were
lighting products.
20
Table
of Contents
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 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 nine months ended September 30,
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 the assets acquired,
liabilities assumed, and any noncontrolling interest in the acquiree. 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. Management is currently assessing the effect of this pronouncement on the
Companys consolidated financial statements.
In
May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles
(SFAS
No. 162). SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States (GAAP). SFAS No. 162 will be effective 60 days
following the SECs approval of the Public Company Accounting Oversight Boards
related amendments to remove the GAAP hierarchy from auditing standards. We do
not believe the adoption will have a material impact on our consolidated
financial statements.
In September 2008,
the FASB issued FASB Staff Position FAS 133-1 and FIN 45-4, Disclosures about
Credit Derivatives and Certain Guarantees which amends FASB Statement No. 133
and FASB Interpretation FIN 45. FSP No. FAS 133-1 and FIN 45-4 requires
sellers of credit derivatives, including credit derivatives embedded in hybrid
instruments, to disclose additional information about exposure to potential
loss from credit-risk-related events. The new disclosures require both sellers
of credit derivatives and guarantors to disclose the current status of
payment/performance risk. The disclosures are effective for annual and interim
reporting periods ending after November 15, 2008. We do not believe the
adoption will have a material impact on our consolidated financial statements.
21
Table
of Contents
Results of Operations
Three months ended September 30, 2008 compared to the
three months ended September 30, 2007
Revenues
Net revenues during the three months ended September 30,
2008 decreased to $12.3 million from $12.6 million in 2007.
|
|
Three Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Theatre
|
|
|
|
|
|
Products
|
|
$
|
10,263,557
|
|
$
|
10,521,596
|
|
Services
|
|
833,215
|
|
854,223
|
|
|
|
|
|
|
|
Total theatre
revenues
|
|
11,096,772
|
|
11,375,819
|
|
Lighting
|
|
1,199,479
|
|
1,064,562
|
|
Other
|
|
12,858
|
|
175,324
|
|
|
|
|
|
|
|
Total net
revenues
|
|
$
|
12,309,109
|
|
$
|
12,615,705
|
|
Theatre Segment
Sales of theatre products and services decreased to
$11.1 million in 2008 from $11.4 million in 2007 due to sales of film
projection equipment declining to $3.8 million in 2008 from
$5.6 million a year-ago. The decline pertains to the industry transition
to digital cinema projection equipment coupled with a slowdown in new theatre
construction in the United States. Included in film equipment revenues were
sales of used equipment which amounted to $0.8 million in 2008 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. The decline in film projection
equipment was offset somewhat by sales of digital projection equipment
increasing to $1.6 million from $1.1 million in 2007 as the theatre
exhibition industry begins to transition from traditional film projectors to
digital-based systems. The results also reflect sales of cinema projector
screens of $1.5 million during the quarter from our subsidiary in Canada,
Marcel Desrochers, Inc. (MDI), which was not purchased until the fourth
quarter of 2007.
Service
revenues remained steady at $0.8 million in 2008 compared to a year-ago despite
a decline in business from traditional film business where service revenue
declined to $0.5 million from $0.8 million a year-ago. Digital service revenues
rose to $0.3 million during the quarter from less than $0.1 million a year-ago.
Sales
of replacement parts were also impacted by the industry transition falling to
$1.7 million from $1.9 million during 2007. We expect these sales to decrease
over time but the decline is expected to be slower than the sale of projectors
themselves as the equipment will require maintenance up to the point they are
replaced by a digital unit.
Sales of film lenses decreased to $0.1 million from
$0.3 million a year-ago. More than any other film product, used lenses have
overtaken the market. Sales of film xenon lamps remained consistent in 2008 and
2007 at $1.6 million and are relatively unaffected by the used equipment
market.
22
Table
of Contents
Lighting Segment
Sales of lighting products increased to
$1.2 million in 2008 from $1.1 million a year-ago due to increased
demand for follow spotlights which rose to $0.7 million from
$0.5 million during 2007. We have allocated additional resources to grow
the core spotlight business which is now comprised of items we manufacture and
also products that we distribute. Replacement parts remained steady in 2008 at
$0.2 million as compared to 2007. Sky-Tracker sales decreased to $0.04 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 increased to $0.3 million from $0.2 million in 2007.
Export Revenues
Sales outside the United States (mainly theatre sales)
decreased to $3.3 million in 2008 from $4.0 million in 2007 resulting
from decreased demand in Latin America and Asia. However, the Canadian
subsidiary we purchased in late 2007 led to increased sales in Canada and other
countries. Export sales are sensitive to worldwide economic and political
conditions that can lead to volatility. Additionally, certain areas of the
world are more cost conscious than the U.S. market and there are instances
where our products are priced higher than local manufacturers making it more
difficult to generate sufficient profit to justify selling into these regions.
Additionally, foreign exchange rates and excise taxes sometimes make it
difficult to market our products overseas at reasonable selling prices.
Gross Profit
Consolidated gross profit remained steady at
$2.1 million in 2008 as compared to a year-ago but as a percent of total
revenue increased to 17.4% from 16.6% in 2007 due to the reasons discussed
below.
Gross profit in the theatre segment increased to
$1.8 million in 2008 from $1.6 million in 2007 and as a percentage of
theatre sales increased to 16.6% from 14.5% a year-ago. The favorable margin
was a result of profits generated by our screen business obtained through the
purchase of MDI in the fourth quarter of 2007. The screen business is currently
at or near full capacity which is leading to favorable margins. The favorable
screen margins were offset by the declining margins in our film businesses due
to less manufacturing throughput and higher material costs which are a result
of the transition in the industry to digital cinema.
The gross profit in the lighting segment declined to
$0.3 million in 2008 from $0.4 million a year-ago and as a percent of lighting
revenues declined to 24.5% from 34.6% a year-ago. The results reflect the
impact of less manufacturing throughput in the plant in Omaha, Nebraska and
selling more lower-margin distribution products.
Selling and Administrative Expenses
Selling and administrative expenses increased to $2.8
million compared to $2.1 million in 2007 and as a percent of total revenue
increased to 22.9% in 2008 from 16.6% in 2007.
Administrative costs increased to $2.0 million in
2008 as compared to $1.3 million a year-ago and as a percent of total revenue
increased to 16.2% in 2008 from 10.4% in 2007. The results reflect higher
professional fees, compliance costs and health insurance benefits.
Selling expenses were comparable to 2007 at $0.8
million but as a percent of total revenue increased to 6.8% from 6.2% a
year-ago.
23
Table
of Contents
Other Financial Items
We recorded net interest income of $0.1 million during
2008 compared to $0.2 million a year-ago as our average cash and investment
balances were lower during 2008.
The results also reflect a loss of $0.2 million
pertaining to our 44.4% share of equity in the loss from our joint venture with
RealD (Digital Link II, LLC). This loss compares to a loss of $0.1 million a
year-ago. This loss was higher primarily due to more depreciation expense
resulting from additional deployments.
We recorded an income tax benefit of approximately
$0.3 million in 2008 compared to an income tax benefit of
$0.1 million in 2007. The effective tax rate (calculated as a ratio of
income tax benefit (expense) to pretax income (loss), inclusive of equity
method investment earnings (losses)) was approximately 45.5% for 2008, which
reflects the impact of a reduction in income tax contingency reserves and an
increase in the benefit from the impact of tax-free interest income. The
effective tax for 2007 was approximately 84.4% which reflected the benefit from
the impact of tax-free interest income.
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 $0.1 million and basic and
diluted earnings per share of $0.01 a year-ago, respectively.
Nine months ended September 30, 2008 compared to the
nine months ended September 30, 2007
Revenues
Net revenues during the nine months ended September 30,
2008 increased to $40.1 million from $38.2 million in 2007.
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Theatre
|
|
|
|
|
|
Products
|
|
$
|
34,086,965
|
|
$
|
31,885,555
|
|
Services
|
|
2,353,829
|
|
2,711,926
|
|
|
|
|
|
|
|
Total theatre
revenues
|
|
36,440,794
|
|
34,597,481
|
|
Lighting
|
|
3,510,431
|
|
3,082,435
|
|
Other
|
|
198,160
|
|
526,533
|
|
|
|
|
|
|
|
Total net
revenues
|
|
$
|
40,149,385
|
|
$
|
38,206,449
|
|
Theatre Segment
Sales of theatre products and services increased to
$36.4 million in 2008 from $34.6 million in 2007 reflecting higher
sales of digital projection equipment which increased to $8.7 million from
$2.5 million in 2007 as the theatre exhibition industry begins to transition
from traditional film projectors to digital-based systems. The results also
reflect sales of cinema screens of $4.0 million during 2008, resulting from our
new screen subsidiary in Canada, which was purchased in the fourth quarter of
2007.
Sales of film projection equipment declined to
$11.4 million in 2008 from $17.7 million a year-ago due to the
industry transition coupled with a slowdown in new theatre construction in the
United States. Included in film equipment revenues
24
Table
of Contents
were
sales of used equipment which amounted to $1.6 million compared to $1.8 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 $2.4 million from $2.7 million a year-ago as
the business is feeling the effects of the decline in the traditional film
business without a substantial increase in digital service due to the delay in
the full-scale digital rollout.
Sales
of replacement parts were also impacted by the industry transition falling to
$5.0 million from $5.7 million during 2007. We expect these sales to decrease
over time but the decline will be much slower than the sale of projectors
themselves as the equipment will require maintenance up to the point they are
replaced by a digital unit.
Sales of lenses decreased to $0.3 million from $1.3
million a year-ago. More than any other film product, used lenses have
overtaken the market. Sales of xenon lamps declined slightly to $4.6 million
compared to $4.7 million a year-ago and are not yet experiencing the effects of
the industry transition to digital cinema.
Lighting Segment
Sales of lighting products increased to
$3.5 million in 2008 from $3.1 million a year-ago due to increased
demand for follow spotlights which rose to $2.1 million from
$1.6 million during 2007. We have allocated additional resources to grow
the core spotlight business which is now comprised of items we manufacture and
also products that we distribute. Replacement parts were flat at $0.6 million
for both 2008 and 2007 periods. Sky-Tracker sales fell to $0.3 million during
2008 from $0.5 million a year-ago due to lower demand for these large
expensive lights in the first half of the year. Sales of all other lighting
products, including but not limited to, xenon lamps, britelights and nocturns
amounted to $0.5 million in 2008 compared to $0.4 million a year-ago.
Export Revenues
Sales outside the United States (mainly theatre sales)
rose to $12.2 million in 2008 from $9.4 million in 2007 resulting
from increased demand in Latin America, Europe and Asia. In addition, the
Canadian subsidiary we purchased in late 2007 led to increased sales in Canada
and other countries. Export sales are sensitive to worldwide economic and
political conditions that can lead to volatility. Additionally, certain areas
of the world are more cost conscious than the U.S. market and there are
instances where our products are priced higher than local manufacturers making
it more difficult to generate sufficient profit to justify selling into these regions.
Additionally, foreign exchange rates and excise taxes sometimes make it
difficult to market our products overseas at reasonable selling prices.
Gross Profit
Consolidated gross profit decreased to
$6.5 million in 2008
from
$7.3 million a year-ago and as a percent of
total revenue declined to 16.2% from 19.1% in 2007 due to the reasons discussed
below.
Gross profit in the theatre segment fell to
$5.5 million in 2008 from $6.3 million in 2007 and as a percentage of
theatre sales declined to 15.2% from 18.1% a year-ago. The margin primarily
reflects the transition that is taking place in the theatre industry and a
slowdown in new theatre construction in the United States. During 2008, we sold
$8.7 million of digital equipment which we distribute through a
distribution agreement with NEC Corporation of America. These sales compare to
$2.5 million a year-ago. 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 offsets gross margin dollars to a degree. Our margin was also
impacted by our service subsidiary. 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
25
Table
of Contents
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 overhead costs.
However, as discussed during the quarter, margins were positively impacted by
profits from our new screen manufacturing subsidiary we purchased during the
fourth quarter of 2007.
The gross profit in the lighting segment rose to $0.9
million in 2008 from $0.8 million a year-ago but as a percent of lighting
revenues declined to 25.5% from 25.7% a year-ago. The results reflect the
impact
of less manufacturing throughput in our
plant in Omaha Nebraska and selling more lower-margin distribution items.
Selling and Administrative Expenses
Selling and administrative expenses increased to $8.0
million compared to $6.6 million (excluding a $0.6 million goodwill impairment
charge) in 2007 and as a percent of total revenue increased to 20.0% in 2008
from 17.3% in 2007.
Administrative costs rose to $5.6 million in 2008 from
$4.3 million in 2007 and as a percent of total revenue increased to 14.1% in
2008 from 11.4% in 2007. During 2008, we experienced higher costs pertaining to
audit and Sarbanes/Oxley compliance services compared to a year-ago. In
addition, we experienced an increase in professional fees pertaining to due
diligence work performed on a terminated acquisition and for an audit of
Digital Link II, LLC, our 44.4% owned joint venture. Other items increasing
administrative costs included additional professional fees pertaining to legal
and other compliance costs. Administrative expenses also rose $0.7 million due
to the addition of MDI, the Canadian subsidiary we did not purchase until the
fourth quarter of 2007.
Selling expenses increased to $2.4 million in 2008
compared to $2.3 million in 2007, but as a percent of total revenue declined
slightly to 5.9% from 6.0% a year-ago.
Other Financial Items
During 2008, we sold our
Coater and Marinade product line for approximately $275,000 resulting in a net
gain of approximately $258,000. The product line was sold to a former Chief
Financial Officer of the Company.
During 2007, the Company
recorded a $0.2 million gain on the initial transfer of equipment into our
44.4% owned Joint Venture with RealD, Digital Link II, LLC. No such transaction
took place in 2008.
Year-to-date results also
reflect a loss of $0.5 million pertaining to our 44.4% share of equity in the
loss from Digital Link II, LLC. This loss compares to $0.2 million a year-ago
and was higher due to more depreciation and interest costs resulting from
additional deployments.
We recorded net interest income of $0.4 million during
2008 compared to $0.6 million a year-ago as our average cash and investment
balances were lower during the current year.
We recorded an income tax benefit of approximately
$0.5 million in 2008 compared to income tax expense of $0.1 million
in 2007. The effective tax rate (calculated as a ratio of income tax benefit
(expense) to pre-tax income (loss), inclusive of equity method investment
earnings (losses)) was approximately 40.0% for 2008 as compared to
approximately 15.7% in 2007. The increase in 2008 is a result of the impact of a reduction in income tax
contingency reserves and an increase in the benefit from the impact of tax-free
interest income.
For the reasons outlined herein, we experienced a net
loss of $0.7 million and basic and diluted loss per share of $0.05 in
2008, respectively, compared to net income of $0.5 million during 2007and basic
and diluted earnings per share of $0.04 a year-ago, respectively.
26
Table of Contents
Liquidity
and Capital Resources
During
the past several years, we have met our working capital and capital resource
needs from our operating and investing cash flows. We ended the third quarter
with total cash and cash equivalents of $6.4 million. Additionally, we have
approximately $10.9 million of investments in auction-rate securities (net of
an $0.8 million unrealized loss) 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. 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 2008, the market
for our investments in auction-rate securities began experiencing a liquidity
issue when the securities came up for auction 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 have been reclassified to noncurrent assets within the
Consolidated Balance Sheet as of September 30, 2008. As of September 30,
2008, the Company has liquidated, at par, $1,250,000 of its auction rate
securities of which $50,000 were sold through the normal auction process and
$1,200,000 were redeemed by the fund itself.
Effective January 1,
2008, we 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 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 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 inability to
trade all of our investments in auction-rate securities in the current market,
we continue to earn interest on our investments at the maximum contractual
default rate. The weighted average maximum contractual default rate being
earned as of September 30, 2008 was 8.48%. Because of the inability to
trade these investments, a readily determinable fair value using market
observables (Level 1) does not exist. Therefore, in accordance with SFAS 157, Fair
Value Measurement, the Company, via the retention of the valuation firm
Gifford Fong Associates, used a cash flow model to determine the estimated fair
value of our 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 and are summarized below:
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Interest rate indices
LIBOR curve and commercial paper rates obtained.
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Rating transition
matrix the rating transition matrix gives transition probabilities for the
underlying collateral migrating from one rating level to another in one year,
particularly the transition probability to
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default status. The
rating transition matrix is constructed from rating migration and default
data published by the rating agencies.
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Default and recovery
rates the default rate is estimated using a credit spread (discount margin)
over the risk free rate curve obtained.
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Illiquidity risk in a
distressed market, investors may not be able to find willing buyers, hence
reduced liquidity.
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Estimate for the timing
of full redemption of the securities the full redemption is estimated to
take place in two years on the historical observation that economic cycles
usually turn around in two years.
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Estimated weighted
average coupon the yield, considered to be the weighted average cost of
capital (WACC), is related to the financial strength and outlook of each
fund.
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Based
on the valuations obtained, an impairment of approximately $0.8 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 the 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 and the guidance in SEC Staff Accounting
Bulletin Topic 5M 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 for the following reasons:
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As noted previously,
the ARS began experiencing failed auctions in mid-February. Therefore, the
length of time the failed auctions had been occurring was short.
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The investments are in
closed-end funds that are AAA rated and fully collateralized. Further, we are
a preferred shareholder in all the funds. The ratings and collateralization
is confirmed every seven days at each auction regardless of whether the
auction fails or succeeds. Therefore, the financial condition of the issuer
is strong and management believes the impairment is more a result of the
illiquidity in the market and not the creditworthiness of the issuers.
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The amount of the
temporary impairment recorded to accumulated other comprehensive income
(loss) was only 7.1% of the carrying value. We view this evidence as
corroborative that the underlying credit worthiness of the securities was not
impaired.
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We believe that as of
September 30, 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. 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 securities 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. Therefore, it is managements intent to hold these
securities for a sufficient amount of time to allow for recovery in the
market value to occur.
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Additionally, all of the Companys ARS investments
were purchased, via an intermediary brokerage firm, with a brokerage firm that
has reached settlement with the Securities and Exchange Commission. Therefore,
management anticipates a large portion of the ARS investments to be redeemed,
at par, by the brokerage firm by way of the settlement agreement.
However,
if market conditions would deteriorate further and the anticipated recovery in
market values does not occur or the settlement agreement with the SEC is
modified 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.
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We are
a party to a revolving credit facility (the Original Credit Facility) with
First National Bank of Omaha expiring August 30, 2009. The credit facility provides for borrowings
up to the lesser of $4.0 million or amounts determined by an asset-based
lending formula, as defined. Borrowings available under the credit facility
amounted to $4.0 million at September 30, 2008. We pay interest on
outstanding amounts equal to the Prime Rate plus 0.25% (5.25% at September 30,
2008) and pay a fee of 0.125% on the unused portion. Effective September 26,
2008, the Company entered into a Ninth Amendment to its Original Credit
Facility to extend the maturity date of its interim extension of credit (the Interim
Credit Facility) to August 30, 2009 and to reduce the available
borrowings to $9.4 million. 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. 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 $1.3 million in 2008
compared to net cash used in operating activities of $3.7 million in 2007. The improvement from a year-ago primarily
came from turning $1.5 million of our consignment inventory into cash as
compared to a year-ago where we purchased $2.9 million of such inventory. In addition, cash flow a year-ago was used to
expand our digital equipment inventory resulting in cash used of $4.4 million compared
to cash used to increase inventory of $2.4 million in 2008.
Net
cash provided by investing activities amounted to $0.8 million in 2008 compared
to $4.0 million provided in 2007. During 2008 we incurred $0.6 million of
capital expenditures and liquidated at par, $1.3 million of our auction-rate
securities. In addition, we received $0.3 million of proceeds from the sale of
our Coater and Marinade product line during the second quarter. During 2007,
investing outflows consisted primarily of $0.2 million for purchase of a
product line within the lighting segment, capital expenditures of
$0.4 million and additional investments of $0.3 million in our joint
venture with RealD (Digital Link II). We also liquidated $4.5 million of
auction-rate securities during 2007.
Net
cash provided by financing activities amounted to $0.2 million in both
2008 and 2007 periods resulting primarily from transactions in our stock plans.
Transactions
with Related and Certain Other Parties
During
2008, the Company sold its Coater and Marinade product line in exchange for
$275,000 in cash. In connection with the sale, the Company recorded a pre-tax
net gain of approximately $258,000 (estimated $159,000 after-tax) which is net
of related costs to sell. The product line was sold to a former Chief Financial
Officer of the Company.
Financial
Instruments and Credit Risk Concentrations
Our
top ten customers accounted for approximately 46% of 2008 consolidated net
revenues and were primarily from the theatre segment. Trade accounts receivable
from these customers represented approximately 38% of net consolidated
receivables at September 30, 2008. Sales to Regal Cinemas, Inc.
represented over 10% of consolidated sales. Additionally, receivables from
Regal Cinemas, Inc. represented over 10% of net consolidated receivables
at September 30, 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. 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.
29
Table
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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:
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Payments Due by Period
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Contractual Obligations
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Total
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Remaining
in 2008
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2009
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2010
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2011
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2012
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Thereafter
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Non-competition
agreement
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$
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100,000
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25,000
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25,000
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50,000
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Postretirement
benefits
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208,481
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15,429
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22,320
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17,829
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18,895
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19,878
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114,130
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Operating leases
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1,224,722
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79,215
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309,797
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309,797
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302,233
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223,680
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Contractual cash
obligations
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$
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1,533,203
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119,644
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357,117
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327,626
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371,128
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243,558
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114,130
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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. In addition, we have accrued
approximately $0.1 million for the estimated underpayment of income taxes
including, interest and penalties, we may be obligated to pay.
On July 28, 2008,
the Company provided a guarantee to a note entered into by its joint venture,
Digital Link II, LLC to finance digital projection equipment deployed in the
normal course of business. The loan provides for borrowings of approximately
$1.3 million and bears interest equal to 7% per annum. The Companys guarantee
of the note is limited to its 44.4% ownership percentage, which amounts to
approximately $0.6 million. RealD, who holds a membership interest of 55.6% in
the joint venture, has provided a guarantee for the remainder of the note
outstanding, which amounts to approximately $0.7 million. The Company has
recorded a liability for the fair value of the obligation undertaken by issuing
the guarantee of approximately $0.04 million. The guarantees will expire by the
end of 2011. Under the terms of the guarantees, the Company and RealD would be
required to fulfill the guarantees should the joint venture be in default of
its loan or contract terms. There were no other contractual obligations other
than inventory and property, plant and equipment purchases in the ordinary
course of business.
Seasonality
Generally,
our business exhibits a moderate level of seasonality as sales of theatre
products typically increase during the third and fourth quarters. We believe
that such increased sales reflect seasonal increases in the construction of new
motion picture screens in anticipation of the holiday movie season.
Legal
See
Note 21 to the Condensed Consolidated Financial Statements for a full
description of all 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.
30
Table
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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 subsidiaries in
Hong Kong and Canada.
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 an approximate
$0.2 million 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 credit facilities, a
one percent increase in the interest rate would increase interest expense by a
maximum of $134,000 per annum. No amounts are currently outstanding under the
credit facilities. 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 (loss) 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.
31
Table
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PART II. OTHER INFORMATION
Item
1. Legal Proceedings
A review of the Companys
current litigation is disclosed in Note 21 to the Condensed Consolidated
Financial Statements.
Item 1A. Risk Factors
The risks described below update the risk factors in Part
I, Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2007.
Current
levels of market volatility are unprecedented
There has been substantial uncertainty and disruption in
the capital and credit markets over the past twelve months and in recent weeks
have reached unprecedented levels. This uncertainty has caused fluctuation in
our stock price and could negatively impact our access to financing if needed.
Additionally, these conditions could have an adverse effect on our industry and
our business, including our future operating results and the ability to recover
our assets at their stated values. Our customers may curtail their growth
plans, which could result in a decrease in demand for our products and
services. In addition, certain of our customers could experience an inability
to pay suppliers, including our Company, in the event they are unable to access
the capital markets to fund their business operations. Likewise, our suppliers
may be unable to sustain their current level of operations, fulfill their
commitments and/or fund future operations and obligations, each of which could
adversely affect our operations.
We
may be unsuccessful in capturing sufficient market share of digital cinema
equipment sales
We previously disclosed that based on recent discussions
with certain exhibitors who are members of the Digital Cinema Implementation
Partners (DCIP), our projection of our expected market share for digital cinema
equipment sales with this partnership are below original expectations. Our assessment of the market share was based
on information gleaned from planning dialogues with these organizations. The
market share assessment was not based on executed purchase orders, and as a
result, actual order activity could differ from current expectations. We are
currently working to improve our market share with the members of DCIP, and
continue to market our products to the remaining exhibitors in North America
and certain other areas of the world where we serve as NECs master reseller.
If we are unable to respond to new competitive pressures and gain sufficient
market share of the digital cinema equipment sales and continue to take
advantage of other digital cinema opportunities, the result could have a
material adverse impact on our business, financial condition and operating
results.
Investments
in our auction-rate securities are experiencing liquidity issues
Based on the continued unsuccessful auctions of our
auction-rate securities which began experiencing liquidity issues subsequent to
year-end, these investments have been reclassified to noncurrent assets within
the Condensed Consolidated Balance Sheet as of September 30, 2008. Additionally, we have determined the fair
value of these investments is below the carrying value and have therefore
recorded a temporary impairment on these investment securities which is
classified within accumulated other comprehensive income within the Condensed
Consolidated Balance Sheet at September 30, 2008. If market conditions would
deteriorate further and 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.
See Part I, Item 1A, Risk Factors in our 2007 Annual
Report on Form 10-K for the year ended December 31, 2007 for further discussion
of the Companys risk factors.
Item 6. Exhibits
See the Exhibit Index on
page 34.
32
Table
of Contents
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: November 10,
2008
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Date:
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November 10, 2008
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33
Table
of Contents
EXHIBIT
INDEX
4.2.9
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Eighth Amendment to the
Revolving Credit Agreement dated August 29, 2008 between the Company and
First National Bank of Omaha, Inc.
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4.2.10
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Ninth Amendment to the
Revolving Credit dated September 26, 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 October 2, 2008).
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4.2.11
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Secured Business
Promissory Note dated September 26, 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 October 2, 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.
34
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