SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934

BALLANTYNE OF OMAHA, INC.

(Exact name of Registrant as specified in its charter)

Registrant's telephone number, including area code:
(402) 453-4444

        Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ý    No / /o

        Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of the latest practicable date:

BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES

Index

Part I. FINANCIAL INFORMATION

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PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

Ballantyne of Omaha, Inc. and Subsidiaries
Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

2

Ballantyne of Omaha, Inc. and Subsidiaries
Consolidated Statements of Operations
Three and Nine Months Ended September 30,March 31, 2002 and 2001 and 2000
(Unaudited)

See accompanying notes to consolidated financial statements.

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Ballantyne of Omaha, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
NineThree Months Ended September 30,March 31, 2002 and 2001 and 2000
(Unaudited)

See accompanying notes to consolidated financial statements.

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Ballantyne of Omaha, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NineThree Months Ended September 30, 2001March 31, 2002
(Unaudited)

1.

Company

        Ballantyne of Omaha, Inc., a Delaware corporation ("Ballantyne" or the "Company"), and its wholly-owned subsidiaries, Strong Westrex, Inc., Design & Manufacturing, Inc., Xenotech Rental Corp. and Xenotech Strong, Inc., design, develop, manufacture and distribute commercial motion picture equipment, lighting systems, audiovisual equipment and restaurant equipment.products. The Company's products are distributed worldwide through a domestic and international dealer network and are sold or rented to major movie exhibition companies, sports arenas, auditoriums, amusement parks, special venues, restaurants, supermarkets, convenience stores, hotels and convenience food stores.convention centers.

2.

Summary of Significant Accounting Policies

        The principal accounting policies upon which the accompanying consolidated financial statements are based are summarized as follows:

a.

Basis of Presentation

        The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include all normal and recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and related notes included in the Company's latest annual report on Form 10-K. The results of operations for the three and nine month periodsthree-month period ended September 30, 2001March 31, 2002 are not necessarily indicative of the operating results for the full year.

b.

Inventories

        Inventories are stated at the lower of cost (first-in, first-out) or market and include appropriate elements of material, labor and manufacturing overhead.

c.

Plant and Equipment

        Significant expenditures for the replacement or expansion of plant and equipment are capitalized. Depreciation of plant and equipment is provided over the estimated useful lives of the respective assets using the straight-line method. EstimatedFor financial reporting purposes estimated useful lives range from 3 to 20 years. The Company generally uses accelerated methods of depreciation for income tax purposes.

d.

Income Taxes

        Income taxes are accounted for under the asset and liability method. 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 carryforwards. 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 ultimate realization of deferred tax

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assets is entirely dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, availability of loss carrybacks, projected future taxable income and tax planning strategies in making this assessment.

e.

Revenue Recognition

        The Company recognizes revenue from product sales upon shipment to the customer. Revenues related to equipment rental and services are recognized as earned over the terms of the contracts.contracts or delivery of the service to the customer.

e.f.

Fair Value of Financial Instruments

        The fair value of a financial instrument is the amount at which the instruments could be exchanged into a current transaction between willing parties. Cash and cash equivalents, accounts and notes receivable, debt, notes payable to bank and accounts payable reported in the consolidated balance sheets equal or approximate fair values.

g.

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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f.

Net Loss Per Common Share

    Net loss per share—basic has been computed on the basis of the weighted average number of shares of common stock outstanding. Net loss per share—diluted 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. Because the Company reported net losses for the three and nine months ended September 30, 2001 and 2000, respectively, the calculation of net loss per share—diluted excludes potential common shares from stock options, as they are anti-dilutive and would result in a reduction of loss per share. If the Company had reported net income for the three and nine months ended September 30, 2001, there would have been 75,711 and 73,990 additional shares in the calculation of net income per share—diluted. If the Company had reported net income for the three and nine months ended September 30, 2000, there would have been 13,233 and 113,205 additional shares in the calculation of net income per share—diluted.

g.h.

Cash and Cash Equivalents

        All highly liquid financial instruments with maturities of three months or less from date of purchase are classified as cash equivalents in the consolidated balance sheets and statements of cash flows.

h.i.

Loss Per Common Share

        Net loss per share—basic has been computed on the basis of the weighted average number of shares of Common Stock outstanding. Net loss per share—diluted 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. Because the Company reported net losses for the periods ended March 31, 2002 and 2001, respectively, the calculation of net loss per share—diluted excludes potential common shares from stock options as they are anti-dilutive and would result in a reduction in loss per share. If the Company had reported net income for these periods, there would have been 80,315 and 66,840 additional shares, respectively in the calculation of net loss per share—diluted.

j.

Stock Based Compensation

        As permitted under SFAS No. 123, "AccountingAccounting for Stock-Based Compensation"Compensation, the Company elected to account for its stock based compensation plans under the provisions of Accounting Principles Board ("APB") Opinion No. 25, "AccountingAccounting for Stock Issued to Employees"Employees, and related interpretations.

i.k.

Income TaxesLong-Lived Assets

        Income taxes are accounted for under the asset and liability method. Deferred taxThe Company reviews long-lived assets and liabilities are recognizedgoodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used, excluding goodwill, is measured by a comparison of the carrying amount of an asset to 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 arenet cash flows expected to be recoveredgenerated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of are reported at the lower of the carrying amount or settled.fair value less costs to sell. Effective January 1, 2002, the Company measures

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impairment losses for goodwill using the fair value methodology of SFAS No. 142,Goodwill and Other Intangible Assets.

        On January 1, 2002, the Company adopted SFAS 144,Accounting for the Impairment or Disposal of Long-Lived assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supercedes FASB Statement No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of, it retains many of the fundamental provisions of that statement. The effect on deferred tax assets and liabilitiesadoption of a change in tax rates is recognized in income in the period that includes the enactment date. BasedSFAS 144 did not have an impact on the scheduled reversalCompany's financial position and results of deferred tax liabilities, projected future taxable income and tax planning strategies, management believes it is more likely than not that the Company will realize the benefits of deferred tax assets as of September 30, 2001.operations.

j.l.

Comprehensive Income

        The Company's comprehensive income consists solely of its net operating loss. The Company had no other comprehensive income for the three and nine months ended September 30,March 31, 2002 and 2001, respectively.

m.

Reclassification

        Certain amounts of a minor nature in the accompanying consolidated financial statements and notes thereto have been reclassified to conform to the 2002 presentation.

n.

Recently Issued Accounting Pronouncements

        During June 2001, the FASB issued Statement No. 143 (SFAS 143),Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company is currently evaluating the impact of the adoption of this standard and has not yet determined the effect of adoption on its financial position and results of operations.

o.

Environmental

        The Company is subject to various federal, state and local laws and regulations pertaining to environmental protection and the discharge of material into the environment. During 2001, Ballantyne was informed by a neighboring company of likely contaminated soil on certain parcels of land adjacent to Ballantyne's main manufacturing facility in Omaha, Nebraska. The Environmental Protection Agency and the Nebraska Health and Human Services System subsequently determined that certain parcels of Ballantyne property had various levels of contaminated soil relating to a pesticide company which previously owned the property and that burned down in 1965. Based on discussions with the above agencies, it is likely that some degree of environmental remediation will be required, however, the investigation is not yet at a stage where Ballantyne is able to determine whether it is liable or, if liability is probable, to reasonably estimate the loss or range of loss. Estimates of Ballantyne's liability are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, the extent of collective actions and the financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation. Through March 31, 2002, the Company had not accrued any liability for this environmental loss contingency.

p.

Goodwill

        The Company capitalizes and includes in other assets the excess of cost over the fair value of net identifiable assets of operations acquired through purchase transactions ("goodwill"). The balance of goodwill included in other assets was $2,467,219 at March 31, 2002 and December 31, 2001, respectively. The Company has adopted the provisions of SFAS No. 142,Goodwill and other Intangible Assets, effective January 1, 2002. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed periodically for impairment. The Company performed such

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impairment test at December 31, 2001 and 2000.updated such test at March 31, 2002, concluding that no impairment of goodwill was deemed necessary at either date. In accordance with the adoption of SFAS No. 142, the effect of this accounting change is reflected prospectively.

6        Supplemental comparative disclosure as if the change had been retroactively applied to the prior year period is as follows:

				Three Months Ended March 31,
				2002			2001
Net loss:
	Reported net loss			$	(234,293	)	$	(464,073	)
	Goodwill amortization				—			81,957
	Tax benefit of goodwill amortization				—			(31,144	)
		Adjusted net loss		$	(234,293	)	$	(413,260	)
Basic and diluted loss per share:
	Reported loss per share			$	(0.02	)	$	(0.04	)
	Goodwill amortization				—			0.01
		Adjusted basic and diluted loss per share		$	(0.02	)	$	(0.03	)

3.

Inventories

        Inventories consist of the following:

4.

Stockholder Rights Plan

        On May 26, 2000The inventory balances are net of reserves for slow moving or obsolete inventory of approximately $2,200,000 and $2,400,000 as of March 31, 2002 and December 31, 2001, respectively.

4. Plant and Equipment

        Plant and equipment include the Board of Directors of the Company adopted a Stockholder Rights Plan (the "Plan"). Under terms of the Plan, which expires June 9, 2010, the Company declared a distribution of one right for each outstanding share of common stock. The rights become exercisable only if a person or group (other than certain exempt persons, as defined) acquires 15 percent or more of Ballantyne common stock or announces a tender offer for 15 percent or more of Ballantyne's common stock. Under certain circumstances, the Plan allows stockholders, other than the acquiring person or group, to purchase the Company's common stock at an exercise price of half the market price. See Note 7 for a further discussion of the Plan.following:

			March 31, 2002			December 31, 2001
			(Unaudited)
Land			$	343,500		$	343,500
Buildings and improvements				4,636,782			4,636,782
Machinery and equipment				12,675,262			12,705,342
Office furniture and fixtures				1,846,356			1,840,171
Construction in process				50,738			12,231
				19,552,638			19,538,026
Less accumulated depreciation				10,258,778			9,709,677
	Net plant and equipment		$	9,293,860		$	9,828,349

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---

5.

Related Party Transaction

    On June 24, 2000 the former Chairman of the Board of the Company (the "Former Chairman") defaulted on a term loan from the Company. The Company is vigorously pursuing collection of the defaulted loan and expects to receive a favorable court judgment in the state of Nebraska. However, since the Former Chairman is a resident of Canada there may be some uncertainty as to whether a Canadian court would enforce such a judgment. Additionally, no assurances can be given that the Former Chairman has sufficient assets to comply with such a judgment. Due to the uncertainty regarding the ultimate recovery of the note, the Company recorded a charge in the amount of $511,744 during the quarter ended June 30, 2000, which included unpaid principal and interest at that time.

6.

Notes Payable to Bank

        On August 30, 2001,March 26, 2002, the Company entered into a revolvingamended it's credit facility and term loan arrangementfacilities with General Electric Capital Corporation ("GE Capital"). The new credit facility replaces a previous lending arrangement with Wells Fargo Bank Nebraska, N.A. The revolving credit facility (the "Revolver") now provides for borrowings up to the lesser of $8.0$6.0 million or amounts determined by an asset-based lending formula, as defined (approximately $1.5$0.4 million was available for borrowingsborrowing under the Revolver as of September 30, 2001)March 31, 2002). The asset-based lending formula was also altered to reduce available borrowings through additional reserves of approximately $0.7 million. The Company now pays interest on the Revolver at a rate equal to the latest rate for 30-day dealer placed commercial paper determined on the last business day of each month (the "Index Rate") plus 3.375% (6.85%4.375% (6.125% at September 30, 2001)March 31, 2002). The Company also pays a fee of .25%.50% on the unused portion of the Revolver. The Revolver matures on August 30, 2003 with the Company having two one-year renewal options.

        The $1,875,000Company's term loan portion of the credit facility with GE Capital was not substantially altered and provides for equal monthly principal payments of $31,250, with a balloon payment due on August 30, 2003 and provides for interest at the Index Rate plus 3.625% (7.10%(5.375% at September 30, 2001)March 31, 2002).

        As of March 31, 2002, the Company had outstanding borrowings on the Revolver and the term loan of $0 and $1.7 million, respectively. The credit facilities contain restrictive covenants relating to restrictions on capital

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expenditures, intercompany loans and also requirerequires that a "Fixed Charge Coverage Ratio"fixed charge coverage ratio be above a certain percentage, as defined. The Company is currentlywas in compliance with these covenants. The majority ofcovenants at March 31, 2002. All the Company's assets secure the credit facilities. As

6. Supplemental Cash Flow Information

        Supplemental disclosures to the consolidated statements of September 30, 2001,cash flows are as follows:

7. Stockholder Rights Plan

        On May 26, 2000 the Board of Directors of the Company hadadopted a Stockholder Rights Plan (the "Rights Plan"). Under terms of the Rights Plan, which expires June 9, 2010, the Company declared a distribution of one right for each outstanding borrowings onshare of Common Stock. The rights become exercisable only if a person or group (other than certain exempt persons, as defined) acquires 15 percent or more of Ballantyne Common Stock or announces a tender offer for 15 percent or more of Ballantyne's Common Stock. Under certain circumstances, the Revolver andRights Plan allows stockholders, other than the Term Loanacquiring person or group, to purchase the Company's Common Stock at an exercise price of $664,630 and $1,843,750, respectively.half the market price.

7.

Significant Stockholder

        During May 2001, BalCo Holdings L.L.C., ("BalCo Holdings") an affiliate of the McCarthy Group, Inc., an Omaha-based merchant banking firm, purchased 3,238,845 shares, or a 26% stake in Ballantyne from GMAC Financial Services, which obtained the block of shares from Ballantyne's former parent company, Canrad of Delaware, Inc. ("Canrad"), a subsidiary of ARC International Corporation. Ballantyne amended its Stockholderthe Rights Plan (the "Plan") to exclude the purchase from operation of the Plan.this purchase. On October 3, 2001, Ballantyne announced that certain affiliates of the McCarthy Group Inc. purchased an additional 678,181 shares in Ballantyne bringing their total holdingcollective holdings to 3,917,026 shares or a 31% stake in Ballantyne. The Rights Plan was further amended to exclude the October 3, 2001 purchasepurchase.

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8. Notes Receivable

        During 2001, the Company determined that certain notes and credits for returned lenses due from triggering operationIsco-Optic GmbH ("Isco-Optic") were impaired. Isco-Optic is the Company's sole supplier of lenses. The Company was subsequently notified in January 2002 that certain assets of ISCO-Optic had been transferred to Optische Systems Gottingen ISCO-Optic AG ("Optische Systems"). Optische Systems has agreed to pay the Company a total of $375,000 due in fifteen equal installments of $25,000 beginning in July 2002 as payment for its debt to Ballantyne. The notes receivable from Optische Systems on the accompanying consolidated balance sheet of approximately $342,000 was based on calculating the present value of the Plan.expected payments over the fifteen-month term. The present value of payments that extended beyond twelve months were included as a non-current receivable and amounted to $201,000. The difference between the original amount due (approximately $1,007,000) and the present value of the expected payment was charged to operations in the amount of approximately $665,000 during the year ended December 31, 2001.

8.

9. Subsequent Event

        On May 9, 2002, the Company announced that its Board of Directors has engaged McCarthy & Co. ("McCarthy") to help the Company develop and explore ways to enhance shareholder value, including, but not limited to, a possible sale of the Company, a merger with another company or another transaction. McCarthy is an affiliate of McCarthy Group, Inc., who through affiliates, own 3,917,026 shares, or approximately 31% of Ballantyne Common Stock. See Note 7 for a further discussion of McCarthy Group, Inc.

10. Business Segment Information

        The presentation of segment information reflects the manner in which management organizes segments for making operating decisions and assessing performance.

        The Company's operations are conducted principally through threefour business segments: Theatre, Lighting, Audiovisual and Restaurant. During the fourth quarter of 2001 the Company began breaking out audiovisual as a separate segment. As such, amounts for the first quarter of 2001 have been reclassified to conform with the 2002 presentation. Theatre operations include the design, manufacture, assembly and sale of motion picture projectors, xenon lamphouses and power supplies, sound systems and the sale of film handling equipment, xenon bulbslamps and lenses for the theatre exhibition industry. The lighting segment operations include the sale and rental of follow spotlights, stationary searchlights and computer operated lighting systems for the motion picture production, television, live entertainment, theme parks and architectural industries, as well asindustries. The audiovisual segment includes the sale and rental of audiovisual products.presentation equipment to the hotel and convention industries. The restaurant segment includes the design, manufacture, assembly and sale of pressure and open fryers and smoke ovens and the sale of seasonings, marinades and barbeque sauces, mesquite and hickory woods and point of purchase displays. The Company allocates resources to business segments and evaluates the performance of these segments based upon reported segment gross profit. However, certain key operations of a particular segment are tracked on the basis of operating profit. There are no significant intersegment sales. All intersegment transfers are recorded at historical cost.

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Summary by Business Segments

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Summary by Business Segments (continued):(Continued)

Summary by Geographical Area:Area

        Net revenues by business segment are to unaffiliated customers. Net sales by geographical area are based on destination of sales. Identifiable assets by geographical area are based on location of facilities.

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Item 2. Management's 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 document. Management's discussion and analysis contains forward-looking statements that involve risks and uncertainties, including but not limited to, quarterly fluctuations in results; customer demand for the Company's products; the development of new technology for alternate means of motion picture presentation; domestic and international economic conditions in the theatre exhibition industry; the achievement of lower costs and expenses; the continued availability of financing in the amounts and on the terms required to support the Company's future business; credit concerns in the theatre exhibition industry; and, other risks detailed from time to time in the Company's other Securities and Exchange Commission filings. Actual results may differ materially from management expectations.

        During the fourth quarter of 2001, the Company began breaking out audiovisual as a separate segment. As such, amounts for the first quarter of 2001 have been reclassified to conform with the 2002 presentation.

Critical Accounting Policies:

        The U.S. Securities and Exchange Commission (the "SEC") has defined a Company's most critical accounting policies as the ones that are most important to the portrayal of the Company's financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company has identified the critical accounting policies below. The Company also has other key accounting policies, which involve the use of estimates, judgments and assumptions. For additional information, see Note 2, "Summary of Significant Accounting Policies" in Item 1 of Part I, "Financial Statements" of this Form 10-Q and Note 1, "Summary of Significant Accounting Policies" in Item 8 of Part II, "Financial Statements and Supplementary Data" in the Company's annual report on From 10-K for the year ended December 31, 2001.

Inventories

        Inventories are stated at the lower of cost (first-in, first-out) or market and include appropriate elements of material, labor and manufacturing overhead. The Company's policy is to evaluate all inventory quantities for amounts on-hand that are potentially in excess of estimated usage requirements, and to write down any excess quantities to estimated net realizable value. Inherent in the estimates of net realizable values are management estimates related to the Company's future manufacturing schedules, customer demand and the development of digital technology that could make the Company's theatre products obsolete, among other items.

Long-Lived Assets and Goodwill

        The Company reviews long-lived assets and goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used, exclusive of goodwill, is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. Impairment losses of goodwill are measured using the fair value method of SFAS No. 142,Goodwill and Other Intangible Assets, following the Company's adoption of SFAS No. 142 on January 1, 2002. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

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Revenue Recognition

        The Company recognizes revenue from product sales upon shipment to the customer. Revenues related to equipment rental and services are recognized as earned over the terms of the contracts or delivery of the service to the customer. In accordance with accounting principles generally accepted in the United States of America, the recognition of these revenues is partly based on the Company's assessment of the probability of collection of the resulting accounts receivable balance. Additionally, costs of warranty service and product replacement are estimated and accrued at the time of sale or rental. As a result of these estimates, the timing or amount of revenue recognition may have been different if different assessments had been made at the time the transactions were recorded in revenue.

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and 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. Actual results may differ from these estimates under different assumptions or conditions.

Results of Operations

Three Months Ended September 30, 2001March 31, 2002 Compared to the Three Months Ended September 30, 2000March 31, 2001

Revenues

        Net revenues for the three months ended September 30, 2001 increased $0.6March 31, 2002 decreased $1.5 million or 5.9%13.0% to $11.0$10.2 million from $10.4$11.7 million for the three months ended September 30, 2000.March 31, 2001. As discussed in further detail below, the majority of the increasedecrease relates to higherlower sales of theatre and audiovisual products. The following table shows comparative net revenues offor theatre, lighting, audiovisual and restaurant products for the respective periods:

Theatre Segment

        As stated above, the increasedecrease in consolidated net revenues primarily related to higherlower sales of theatre products, which increased $0.5decreased $0.7 million or 7.3%7.9% from $8.4 million in 2001 to $7.7 million in 2000 to $8.2 million in 2001.2002. In particular, sales of projection equipment increased $0.6decreased $0.8 million from $5.7 million in 2000 to $6.3$6.4 million in 2001 asto $5.6 million in 2002. This decrease resulted from a continued downturn in the construction of new theatre screens in North America by the theatre segment downturn temporarily leveled off duringexhibition industry. The Company's ability to increase sales depends upon new screen growth by the quarter.exhibitors.

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        The North American theatre exhibition industry is currently experiencing poor operating results dueslowly recovering from a severe downturn that resulted in several exhibition companies filing for bankruptcy. Higher theatre attendance and exhibitors having more access to numerous factors including, but not limited to, over construction incash are fueling the recovery. In fact, certain areas of the country coupled with the difficulty in closing obsolete theatres, deteriorating credit ratingsexhibitors are already emerging from bankruptcy. However, there are still liquidity problems in the industry and lower theatre attendance. In particular, some theatre exhibition companies have either filed for or are considering protection under federal bankruptcy laws. During 2001, the Company wrote off approximately $500,000 of receivables from two theatre companies that had previously filed for bankruptcy causing the "allowance for doubtful accounts" balance to decrease to $0.7 million at September 31, 2001 compared to $1.0 million at December 31, 2000. The bankruptcy of one or more of the Company's major customers could have a material adverse effect on the Company's business, financial condition and results of operations. The liquidity problems of the theatre exhibition industrywhich result in continued exposure to the Company. This exposure is in the form of receivables from those exhibitors along with receivables from the Company's independent dealers who resell the Company's products to certain exhibitors and continued depressed revenue levels if the industry cannot or decides not to build new theatres. In many instances, the Company sells theatre products to the industry through independent dealers who resell to the exhibitor. These dealers have in many cases been impacted in the same manner as the exhibitors and while the exhibitors are beginning to recover, it has not benefited the dealer network as quickly since the exhibitors are still not recovered sufficiently to begin constructing as many new complexes. Until the construction of new theatre complexes return to normal, sales of theatre projectors to the exhibitors or to the dealer network for resale will continue to be soft. While the Company feels the sharp decreases in theatre projector sales during 2001 and 2000 will subside, it is likely that sales for the remaining nine months of 2002 will be below those of 2001.

        Sales of theatre replacement parts were also$1.4 million for both 2002 and 2001, respectively. Replacement part sales were positively impacted by the downturn in theincreased theatre exhibition industry decreasing from $1.6 million in 2000 to $1.2 million in 2001. In particular, theatre exhibition

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companiesattendance, which generally means projectors are closing older theatres, which creates two problems from the Company's perspective. First, the theatre companies are scrapping older projectors that normally requirebeing used more repair than the newer ones in service and second, there are fewer projectors in service due to these closings. The Company is also experiencingtherefore need more maintenance. These sales were negatively impacted by more competition than ever beforefor replacement part sales as other manufacturing companies tiedfirms, with ties to the theatre exhibition industry, tryattempt to find alternative revenue sources. Sales of lenses decreased $0.04have been impacted in much the same manner as replacement part sales and were flat at $0.3 million for both 2002 and 2001, respectively. Sales of xenon bulbs increased from $0.36$0.3 million in 20002001 to $0.32$0.4 million in 2001. Lens2002 due to a combination of more market share for the product line and the increase in theatre attendance discussed earlier.

        Sales outside the United States (mainly theatre sales) were $3.6 million in 2002 compared to $3.2 million in 2001 as sales do not always fluctuate withto South America were strong during the volume of projection equipment sold as the lens can be sold individually.quarter increasing from $0.3 million in 2001 to $0.6 million in 2002. The Company also began selling xenon bulbs in late 2000 when an agreement was entered intosold projection equipment to be the exclusive distributor for Lighting Technologies International, a lighting company that manufactures specialty light sources and related lighting systems. ForUnited Arab Emirates during the three months ended September 30, 2001, the Company sold $0.4 million of this product.

    Foreign sales (mainly theatre products) were lower in 2001 decreasing $1.0 million from $3.8 million in 2000 to $2.8 million in 2001. A portion of this decrease related to lower shipments to Canada as the problemsquarter in the theatre exhibition industry discussed earlier are being felt throughout North America. Additionally,amount of $0.3 million. However, sales into Europe and Asia were lower thanMexico offset a large part of the same period one year ago.increases due to a combination of less demand and the strength of the dollar in certain European countries making it more expensive to buy U.S. goods. This in turn created more competition from local manufacturers in those countries.

Lighting Segment

        Sales and rentals in the lighting segment decreased slightly$0.3 million from $2.3$1.4 million in 20002001 to $2.2$1.1 million in 2001.2002. Sales and rentals generated from the Company's audiovisualentertainment lighting facility in North Hollywood, California were flat at approximately $0.4 million for 2002 and 2001, respectively. This location is being adversely affected by a weakened motion picture production economy in the Hollywood and Los Angeles area. In December 2001, the Company's Board of Directors approved a plan to reorganize certain activities relating to this division. In connection with the plan of reorganization, the Company incurred charges in fiscal 2001 of approximately $0.7 million relating to the impairment and write-off of goodwill, rental equipment and other assets. The Company is still in the process of reorganizing the location during the quarter and is also considering other alternatives such as selling the remaining assets.

        The Company's entertainment lighting division in Florida ("Strong Communications") were lower thanand Georgia generated revenues of $0.4 million in both 2002 and 2001, respectively. This division is being affected by a weakened tourist economy in Florida. The Company was also notified during 2002 that an anticipated sale of certain high intensity searchlights to be used at the Kennedy Space Center in Cape Canaveral, Florida would not materialize due to governmental budget constraints. The Company generated $1.1 million from a similar sale of these searchlights during the third quarter of 2001.

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        Sales of follow spotlights decreased approximately $0.2 million from $0.6 million in 2001 to $0.4 million in 2002 due to a combination of fewer arenas being constructed and cameincreased competition.

        Due to a combination of the expected continued weakness in at $0.5 millionthe Florida tourist economy, the downsizing of the North Hollywood location and the loss of the Cape Canaveral searchlights, lighting segment revenues for the quarter comparedremaining nine months of 2002 are expected to $0.8 million during the same period in 2000. The majority of the decrease can be attributed to softer salesfall well below 2001 levels.

Audiovisual Segment

        Sales and rentals of audiovisual equipmentproducts decreased 35.8% to $1.1 million in 2002 from $1.6 million in 2001, as the slowinga sluggish tourist economy and the events of September 11, 2001 affected the convention and hotel industryindustries in Ft. Lauderdale and Orlando, Florida. Hotel chains and convention centers are the primary customers who rent audiovisual equipment from Strong Communications. Salesfor this segment. The Company feels it will take sometime for the industry to return to normal activity and rentals of entertainment, promotionalmost likely even longer for substantial growth to occur. Management continues to monitor this situation carefully and architectural lighting products increased $0.9 millionintends to $1.8 million in 2001 from $0.9 million in 2000 dueconsider options with respect to a $1.2 million sale of specialty lights to be deployed at the Kennedy Space Center in Cape Canaveral, Florida. Without this large transaction, sales and rentals of these products would have been lower by $0.3 million as sales and rentals continued to be soft in the Hollywood and Los Angeles areas. This particular product line is being adversely affected by the motion picture production downturn in these areas and the after affects of the September 11, 2001 attacks.segment.

Restaurant Segment

        Restaurant sales increased $0.07 million to $0.5were flat at $0.3 million in both 2002 and 2001, comparedrespectively as sales to $0.43 million in 2000 dueSouth America and to improved sales of pressure fryers.the segment's largest customer have been softer than anticipated.

Gross Profit

        Overall,Despite lower revenues, consolidated gross profit decreased $0.6increased to $2.0 million in 2002 compared to $1.0$1.6 million in 2001. As discussed below, the increase was due to the theatre and lighting segments.

        Theatre segment gross profit increased to $1.4 million in 2002 compared to $0.8 million in 2001, from $1.6despite theatre revenues decreasing to $7.7 million in 20002002 from $8.4 million in 2001. The improved profit was accomplished almost entirely by reducing the Company's cost structure at its manufacturing plant in Omaha, Nebraska. The Company reduced manufacturing overhead costs in Omaha by $0.5 million compared to the first quarter of 2001 accomplished mainly through personnel reductions which has not only saved money but has increased manufacturing efficiencies, which has improved manufacturing profitability. The other reason for the improved margin at the Omaha plant was substantially less inventory, which has benefited the Company in the form of lower holding costs, more production throughput and less inventory shrinkage.

        The gross margin in the lighting segment was also higher than 2001 increasing from $0.2 million in 2001 to approximately $0.3 million in 2002 despite revenues decreasing from $1.4 million in 2001 to 1.1 million in 2002. The Company reduced personnel and other costs at the sales and rental facility in North Hollywood, California to accomplish this.

        The gross profit in the audiovisual segment decreased from $0.6 million in 2001 to $0.3 million in 2002 due to a drop in rental revenues. As such, the segment did not cover fixed costs in a profitable manner. The audiovisual segment is similar to the lighting segment in that a substantial amount of costs are fixed in the short-term. The Company is currently evaluating projected revenue levels to determine what level of cost reductions, if any, need to be made in the remaining nine months of 2002 to assure margins in sufficient amounts to make the segment profitable.

        Restaurant margins were flat at less than $0.1 million for both periods. As discussed previously, the Company had disappointing sales results during the quarter for this segment.

Operating Expenses

        Operating expenses increased approximately $0.2 million compared to 2001 and as a percentage of net revenues, ("gross margin") decreasedincreased to 8.7% compared22.6% in 2002 from 18.1% in 2001. The increase was mainly due to 15.7% during the third quarter of 2000. The decrease relates to the theatre segment where gross profit decreased $0.5 million compared to 2000. Additionally, the gross margin in the theatre segment decreased from 16.8% to 9.2% during 2001, due in part to a change in product mix as theatre revenues for the quarter ended September 30, 2001 consisted of fewer replacement part sales that generally carry a higher margin than projector sales. Additionally, the Company is now selling xenon bulbs that carry a low margin. The Company did not sell any of these bulbs until the fourth quarter of 2000. Contributing to both the lower gross profit and gross margin were negative manufacturing variances created by less volume through the Company's manufacturing facilities. Additionally, the amount of sales

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professional fees coupled with current inventory levels has caused plant labor utilizationseverance charges of $0.05 million included in general and administrative expenses. Additionally, selling expenses were higher than 2001 by $0.1 million due to drop considerably leadinghigher salary expense and increased costs relating to manufacturing inefficiencies. To correct these problems, the Company is in the process of reducing its cost structure,

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lowering inventory and bringing custom manufacturing work into its plants to increase labor utilization and absorb more manufacturing overhead.

    Gross profit in the lighting segment decreased to $0.09 million compared to $0.2 million for the same period one year ago. The decrease can be attributed to the same manufacturing inefficiencies discussed previously and to the lack of sufficient rental revenues to cover fixed rental expenses in the Company's rental operations in California and Florida. Restaurant margins remained flat during the quarter.

Operating Expenses

    Operating expenses for the three months ended September 30, 2001 decreased approximately $0.7 million compared to the three months ended September 30, 2000, and as a percentage of net revenues decreased to 19.9% in 2001 from 27.6% in 2000. This decrease has come from cost reductions, including personnel reductions and lower selling costs. The Company is continually aligning operating costs with projected future revenue and will continue this process until the appropriate levels have been achieved.attending industry tradeshows.

Other Financial Items

        During 2002, the Company sold used lighting equipment generating a gain of $0.04 million compared to a gain of $0.07 million in 2001 as the Company continues to sell assets held for rental that are not being used efficiently.

        The Company also recorded approximately $0.02 million of miscellaneous expense (net of miscellaneous income) in 2002 compared to net miscellaneous expense of $0.08 million a year ago. The difference was due to the Company incurring more foreign currency translation expense a year ago.

        Net interest expense was approximately $0.05$0.03 million in 2002 compared to $0.1 million in 2001 compared to $0.2 million in 2000 due entirely to lower outstanding borrowings on the Company's line of credit.credit facilities.

        The Company's effective tax rate for 2001the income tax benefit for 2002 was 33.7%27.9% compared to 28.0%32.2% in 2000.2001. The change in the tax rate resulted from the differing impact of permanent differences comparedand to a year ago.certain states that do not allow carrybacks of net operating losses. Net deferred tax assets were $1.5$1.3 million as of September 30, 2001.March 31, 2002. Based upon the scheduled reversal of deferred tax liabilities, availability of loss carrybacks, projected future taxable income and tax planning strategies, management believes it is more likely than not that the Company will realize the benefits of deferred tax assets as of September 30,March 31, 2002.

        Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142,Goodwill and Other Intangible Assets and ceased amortizing goodwill. Excluding the effects of goodwill amortization, the Company's net loss and net loss per share would have been $0.4 million and $0.03 per share, respectively for the three months ended March 31, 2001.

        For the reasons outlined above, the Company experienced a net loss for the three months ended September 30, 2001in 2002 of approximately $0.9$0.2 million compared to a net loss of $1.1$0.5 million for the three months ended September 30, 2000.in 2001. This translated into a net loss per share—basic and diluted of $0.07$0.02 per share in 20012002 compared to a net loss per share—basic and diluted of $0.09$0.04 per share in 2000.

Nine Months Ended September 30, 2001 Compared to the Nine Months Ended September 30, 2000

Revenues

    Net revenues for the nine months ended September 30, 2001 decreased $4.5 million or 12.2% to $33.0 million from $37.5 million for the nine months ended September 30, 2000. As discussed in further detail below, the majority of the decrease relates to lower sales of theatre products. The following table shows comparative net revenues of theatre, lighting and restaurant products for the respective periods:

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Theatre Segment

    As stated above, the decrease in consolidated net revenues primarily related to lower sales of theatre products, which decreased $4.8 million or 16.7% from $29.0 million in 2000 to $24.2 million in 2001. In particular, sales of projection equipment decreased $4.0 million from $21.9 million in 2000 to $17.9 million in 2001. This decrease resulted from a continued downturn in the construction of new theatres in North America. The North American theatre exhibition industry is currently experiencing poor operating results due to numerous factors including, but not limited to, over construction in certain areas of the country coupled with the difficulty in closing obsolete theatres, deteriorating credit ratings in the industry and lower theatre attendance. In particular, some theatre exhibition companies have either filed for or are considering protection under federal bankruptcy laws. During 2001, the Company wrote off approximately $500,000 of receivables from two theatre companies that had previously filed for bankruptcy causing the "allowance for doubtful accounts" balance to decrease to $0.7 million at September 31, 2001 compared to $1.0 million at December 31, 2000. The bankruptcy of one or more of the Company's major customers could have a material adverse effect on the Company's business, financial condition and results of operations. The liquidity problems of the theatre exhibition industry result in continued exposure to the Company. This exposure is in the form of receivables from those exhibitors and continued depressed revenue levels if the industry cannot build new theatres. The Company anticipates the depressed theatre sales to continue into the fourth quarter.

    Sales of theatre replacement parts were also impacted by the downturn in the theatre exhibition industry decreasing from $5.7 million in 2000 to $4.2 million in 2001. In particular, customers are closing older theatres, which creates two problems from the Company's perspective. First, the theatre companies are scrapping older projectors which normally require more repair than the newer ones in service and second, there are fewer projectors in service due to the theatre closings. The Company is also experiencing more competition as manufacturing companies tied to the theatre exhibition industry try to find alternative revenue sources. Sales of lenses were also impacted by the theatre industry downturn decreasing approximately $0.3 million from $1.4 million in 2000 to $1.1 million in 2001. As stated during the discussion of the results for the three months ended September 30, 2001, the Company began selling xenon bulbs in late 2000. During the nine months ended September 30, 2001 $1.0 million of these were sold.

    Foreign sales (mainly theatre sales) were also lower in 2001 decreasing $2.0 million from $11.6 million in 2000 to $9.6 million in 2001. This decrease related to lower shipments to Canada as the problems in the theatre exhibition industry discussed earlier were felt throughout North America. Sales to European companies were also lower in the second and third quarters of 2001, which contributed to year-to-date European sales being lower by approximately $0.5 million compared to 2000. Sales to Asia have also been lower than expected. Some of the lost sales can be attributed to less demand however; most are due to the strength of the dollar versus the particular foreign currency making it more expensive to buy U.S. goods in certain areas of Europe and Asia. This in turn creates more competition from local manufacturers in these countries.

Lighting Segment

    Sales and rentals in the lighting segment increased $0.4 million from $7.1 million in 2000 to $7.5 million in 2001. Sales and rentals of audiovisual products decreased $0.2 million from the same period a year ago as the slowing economy and the events of September 11, 2001 affected the convention and hotel industry in Ft. Lauderdale and Orlando, Florida. Hotel chains and convention centers are the primary customers who rent audiovisual equipment. Sales and rentals of entertainment, promotional and architectural lighting products increased $0.7 million compared to 2000 helped by a $1.2 million sale of architectural lights to be used at the Kennedy Space Center in Cape Canaveral, Florida. Without this large sale, revenues for this product line would have decreased $0.5 million compared to 2000 as sales and rentals from the Company's unit in North Hollywood, California

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continued to be disappointing. This particular product line is being adversely affected by the motion picture production downturn in the Hollywood and Los Angeles areas and with the after affects of the September 11, 2001 attacks. Sales of spotlights were flat compared to the prior year.

Restaurant Segment

    Restaurant sales decreased $0.1 million to $1.3 million in 2001 compared to $1.4 million in 2000 due to softer sales of replacement parts.

Gross Profit

    Overall, consolidated gross profit decreased $2.8 million to $3.6 million in 2001 from $6.4 million in 2000 and as a percentage of net revenues ("gross margin") decreased to 11.0% compared to 17.0% in 2000. The decrease relates to the theatre segment where gross profit decreased $2.4 million compared to 2000. Additionally, the gross margin in the theatre segment decreased from 16.3% to 9.6% during 2001 due in part to a change in product mix as theatre revenues for 2001 consisted of fewer replacement part sales that generally carry a higher margin than projector sales. Contributing to the lower gross profit were lower theatre revenues that resulted in lost gross profit of approximately $1.4 million. Contributing to both the lower gross profit and gross margin were negative manufacturing variances created by less volume through the Company's manufacturing facilities. This has resulted in the level of sales not being sufficient to fully absorb the Company's manufacturing overhead. Additionally, the amount of sales coupled with current inventory levels has caused plant labor utilization to drop considerably leading to manufacturing inefficiencies. To correct these problems, the Company is in the process of reducing its cost structure, lowering inventory and bringing custom manufacturing work into its plants to increase labor utilization and absorb more manufacturing overhead.

    Gross profit in the lighting segment was lower by approximately $0.2 million compared to 2000 due to lower margins from rental activities related to a lack of sufficient rental revenues to cover certain fixed rental expenses, mainly salaries and depreciation.

    Restaurant margins also decreased in 2001 from $0.3 million in 2000 to $0.15 million in 2001 due to the same manufacturing inefficiencies discussed previously.

Operating Expenses

    Operating expenses for the nine months ended September 30, 2001 decreased approximately $2.7 million compared to the nine months ended September 30, 2000 and as a percentage of net revenues, decreased to 20.4% in 2001 from 25.0% in 2000. Included in the 2000 expenses were restructuring charges of approximately $0.5 million relating to the Company reducing its workforce during the first quarter of 2000 and $0.5 million relating to a reserve set up for the default of a term loan made by the Company to a former Chairman of the Board during the second quarter of 2000. The remaining decrease in operating expenses has come from cost reductions across the board, including personnel reductions and lower selling costs. The Company is continually aligning operating costs with projected future revenue and will continue this process until the appropriate levels have been achieved.

Other Financial Items

    Net interest expense was approximately $0.3 million in 2001 compared to $0.8 million in 2000 due to lower outstanding borrowings on the Company's credit facilities.

    The Company's effective tax rate for 2001 was 33.7% compared to 33.3% in 2000. The change in the tax rate resulted from the differing impact of permanent differences compared to a year ago. Net deferred tax assets were $1.5 million as of September 30, 2001. Based upon the scheduled reversal of

15

deferred tax liabilities, projected future taxable income and tax planning strategies, management believes it is more likely than not that the Company will realize the benefits of deferred tax assets as of September 30, 2001.

    For the reasons outlined above, the Company experienced a net loss for the nine months ended September 30, 2001 of approximately $2.3 million compared to a net loss of $2.6 million for the three months ended September 30, 2000. This translated into a net loss per share—basic and diluted of $0.18 per share in 2001 compared to a net loss per share—basic and diluted of $0.20 per share in 2000.

Liquidity and Capital Resources

        On August 30, 2001,March 26, 2002, the Company entered into a revolvingamended it's credit facility and term loan arrangementfacilities with General Electric Capital Corporation ("GE Capital"). The new credit facility replaces a previous lending arrangement with Wells Fargo Bank Nebraska, N.A. The revolving credit facility (the "Revolver") now provides for borrowings up to the lesser of $8.0$6.0 million or amounts determined by an asset-based lending formula, as defined (approximately $1.5$0.4 million was available for borrowingsborrowing under the Revolverrevolver as of September 30, 2001)March 31, 2002). The asset-based lending formula was also altered to reduce available borrowings through additional reserves of approximately $0.7 million. The Company now pays interest on the Revolver at a rate equal to the latest rate for 30-day dealer placed commercial paper determined on the last business day of each month (the "Index Rate") plus 3.375% (6.85%4.375% (6.125% at September 30, 2001)March 31, 2002). The Company also pays a fee of .25%.50% on the unused portion of the Revolver. The Revolver matures on August 30, 2003 with the Company having two one-year renewal options.

        The $1,875,000Company's term loan portion of the credit facility with GE Capital was not substantially altered and provides for equal monthly principal payments of $31,250, with a balloon payment due on August 30, 2003 and provides for interest at the Index Rate plus 3.625% (7.10%(5.375% at September 30, 2001)March 31, 2002). The credit facilities contain restrictive covenants relating to restrictions on capital expenditures and also require that a "Fixed Charge Coverage Ratio" be above a certain percentage as defined. The Company is currently in compliance with these covenants. The majority of the Company's assets secure the credit facilities.

        As of September 30, 2001,March 31, 2002, the Company had outstanding borrowings on the Revolver and the term loan of $664,630$0 and $1,843,750,$1.7 million, respectively. The credit facilities contain restrictive covenants relating to restrictions on capital expenditures, intercompany loans and also requires that a fixed charge coverage

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ratio be above a certain percentage, as defined. The Company was in compliance with these covenants at March 31, 2002. All the Company's assets secure the credit facilities.

        Historically, the Company has funded its working capital requirements through cash flow generated by its operations and use of its line of credit.revolving credit facilities. The Company anticipates that internally generated funds and borrowings available under the Company'srevolving credit facility with GE Capital will be sufficient to meet its working capital needs and planned 2001 and 2002 capital expenditures.expenditures of approximately $0.3 million. However, a future default of the Company's debt covenants could result in acceleration of the Company's obligations relating to the GE credit facility and subsequent foreclosure on the collateral securing these obligations. To counter this risk, the Company may need to secure alternative sources of financing which could result in a higher cost of capital and additional dilution to its stockholders. In the event that digital projection becomes a commercially viable product, the Company may also need to raise additional funds other than those available under the Company'sa revolving credit facility in order to fully develop or market such a product. If adequate funds are not available on acceptable terms, the Company may be unable to take advantage of future digital projection opportunities or respond to competitive pressures any of which could have a material adverse effect on the Company's business, financial condition and operating results. On June 6,See the "Business Strategy" section under the caption "Explore Digital Projection" in the Company's Annual Report on Form 10-K for the year ending December 31, 2001 the Company announced that it had suspended funding for a research and development project with Lumavision Display, Inc. ("Lumavision"). Lumavision was to develop a proprietaryfurther discussion of digital projector for exclusive use by the Company for the Digital Cinema market. The project was suspended due to unresolved differences between the parties concerning the original agreement. The Company felt it was not prudent to continue funding unless a new agreement could be negotiated. If a new agreement were entered into, the Company would consider continuing the financing. In accordance with the agreement, the funding since September 26, 2000 was in the form of notes receivable due from Lumavision. Through the date of suspension of the project, $400,000 of notes receivable is due from Lumavision. Due to the nature of Lumavision's business, the individual notes were reserved into expense for financial purposes, as there was uncertainty as to their ultimate collectibility. The expense was included as research and development expenses when the funds were transferred on each note. Since the inception of the project, a total of $0.9 million was expensed as research and development costs including the reserve for the notes discussed earlier. The Company

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continues to pursue other opportunities to have a commercially viable digital projection system available for the Digital Cinema market when it becomes acceptable to the motion picture industry.projectors.

        Net cash provided by operating activities was $6.2$0.07 million for the nine months ended September 30, 2001in 2002 compared to $0.3$1.0 million for the nine months ended September 30, 2000.in 2001. The increasedecrease in operating cash flow was mainly due to cutbacks in inventory purchases and turning previously highthe Company reducing inventory levels by almost $3.0 million during 2001 compared to only $1.4 million in 2002. During 2001, the Company was turning very high levels of inventory into cashcash. While the Company has continued that process in 2002, inventory levels are much lower and the Company is purchasing more inventory components. However, the Company still has inventory levels higher than optimal and will continue to work the inventory down in 2002 just not at the same pace as shown by a $7.5 million reductionwas accomplished in inventory since December 31, 2000.2001.

        Net cash provided by investing activities in 2002 was $0.01 million compared to net cash used in investing activities was $0.6of $0.2 million for the nine months ended September 30, 2001 compared to $1.4 million a year ago. Investing activities in both periods mainly reflect capital expenditures, which have decreased2001. The difference was due to fewer purchases of lighting equipment and a general reduction ofsubstantial cutback in capital expenditures as part of the Company's cost cutting program.campaign. The Company also continued it's policy of selling used assets held for rental and to that end generated proceeds of $0.07 million compared to $0.1 million a year ago.

        Net cash used in financing activities was $6.4$0.1 million for the nine months ended September 30, 2001in 2002 compared to cash provided by financing activities of $0.9$2.9 million a year ago. The change from yearlarge decrease was entirely due to year representspayments on the fact thatCompany's revolving credit facility during 2001. During 2002, no such payments were made as the facility was completely paid down.

Transactions with Related and Certain Other Parties

        The Company has disclosed the effects of transactions with related parties in 2000Notes 7 and 9 in Item 1 of Part I, "Financial Statements" of this Form 10-Q. There were no other significant transactions with related and certain other parties.

Concentrations

        The Company's top ten customers accounted for approximately 39% of net revenues for the three months ended March 31, 2002. While the Company was borrowing fundsbelieves its relationships with such customers are stable, most arrangements are made by purchase order and are terminable at will by either party. Additionally, receivables from two theatre segment customers accounted for approximately 29% of consolidated accounts receivable at March 31, 2002. A significant decrease or interruption in business from the Company's significant customers could have a material adverse effect on the lineCompany's business, financial condition and results of credit, but during 2001,operations. Additionally sales of equipment outside the United States represented approximately 35.5% of consolidated revenues for the three months ended

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March 31, 2002 and are expected to be higher in future years. As a result, the Company reducedcould 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 the Company sells its products.

        The liquidity problems of the theatre exhibition industry also result in continued exposure to the Company. If conditions would substantially worsen, the Company may be unable to lower its cost structure quickly enough to counter the lost revenue. The Company has been able to pay down debt during the current downturn in large part by reducing inventory. While inventory levels are still higher than necessary, reductions similar to 2001 are not likely to be possible in future periods. To counter these risks, the Company has initiated a cost reduction program and is paying down debt.streamlining its manufacturing processes. The Company also has a strategy to find alternative product lines to become less dependent on the theatre exhibition industry. No assurances can be given that this strategy will succeed or that the Company will be able to obtain adequate financing to take advantage of potential opportunities.

Hedging and Trading Activities

        The Company does not engage in any hedging activities, including currency-hedging activities, in connection with its foreign operations and sales. To date, all of the Company's international sales have been denominated in U.S. dollars, exclusive of Strong Westrex, Inc. sales, which are denominated in Hong Kong dollars. In addition, the Company does not have any trading activities that include non-exchange traded contracts at fair value.

Off Balance Sheet Arrangements and Contractual Obligations

        The Company's off balance arrangements consist principally of leasing various assets under operating leases. The future estimated payments under these arrangements are summarized below along with the Company's other contractual obligations:

        There are no other contractual obligations other than inventory and property and equipment purchases in the ordinary course of business.

Seasonality

        Generally, the Company's business exhibits a moderate level of seasonality as sales of theatre products typically increase during the third and fourth quarters. The Company believes that such increased sales reflect seasonal increases in the construction of new motion picture screens in anticipation of the holiday movie season. However,Because of the current state ofdifficulties encountered in the theatre exhibition industry in 2001 and 2000, historical seasonality trends did not occur to the same degree as previous years.

Critical Suppliers

        The principal raw materials and components used in the Company's manufacturing processes include aluminum, electronic sub-assemblies and sheet metal. The Company utilizes a single contract manufacturer for each of its intermittent movement components, lenses and xenon lamps for its commercial motion picture projection equipment and aluminum kettles for its pressure fryers. Although

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the Company has not to-date experienced a significant difficulty in obtaining these components, no assurance can be given that shortages will not arise in the future. The loss of any one or more of such contract manufacturers could have a short-term adverse effect on the Company until alternative manufacturing arrangements were secured. The Company is not dependent upon any one contract manufacturer or supplier for the balance of its raw materials and components. The Company believes that there are adequate alternative sources of such raw materials and components of sufficient quantity and quality.

Environmental

        Health, safety and environmental considerations are a priority in the Company's planning for all new and existing products. The Company's policy is to operate its plants and facilities in a manner that protects the environment and the health and safety of its employees and the public. The Company's operations involve the handling and use of substances that are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the soil, air and water and establish standards for their storage and disposal. A risk of environmental liabilities is inherent in manufacturing activities. During 2001, Ballantyne was informed by a neighboring company of likely contaminated soil on certain parcels of land adjacent to Ballantyne's main manufacturing facility in Omaha, Nebraska. The Environmental Protection Agency and the Nebraska Health and Human Services System subsequently determined that certain parcels of Ballantyne property had various levels of contaminated soil relating to a pesticide company that formerly owned the property and that burned down in 1965. Based on discussions with the above agencies, it is likely that some degree of environmental remediation will be required, however, the investigation is not yet at a stage where Ballantyne has been able to determine whether it is liable or, if liability is probable, to reasonably estimate the loss or range of loss. Estimates of Ballantyne's liability are further moderatedsubject to uncertainties regarding the levelnature and extent of seasonality.site contamination, the range of remediation alternatives available, the extent of collective actions and the financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation. Through March 31, 2002, the Company had not accrued any liability for this environmental loss contingency.

Inflation and Changing Prices

        The Company believes that the relatively moderate rates of inflation in recent years have not had a significant impact on its net revenues or profitability. Historically, the Company has been able to offset any inflationary effects by either increasing prices or improving cost efficiencies.efficiencies, however, there can be no assurance that increases in raw material or component costs will not have a material adverse effect on the Company's business, financial condition and results of operations.

Recent Accounting Pronouncements

    In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 138,Accounting for Certain Derivative Investments and Certain Hedging Activities. The standard amends certain provisions of SFAS No. 133,Accounting for Derivative Investments and Hedging Activities, which was issued in June 1998 to establish accounting standards for derivative instruments and for hedging activities. The Company adopted these accounting pronouncements effective January 1, 2001. The adoption of these standards did not significantly impact the Company's consolidated financial statements.

        In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,Business Combinations and No. 142Goodwill and Other Intangible AssetsAssets.. SFAS No. 141 will requirerequires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the use of the pooling-of-interest method is no longer allowed. SFAS No. 142 requires that upon adoption, amortization of goodwill and other intangible assets with indefinite lives will cease and instead, the carrying value of goodwill will be evaluated for impairment on an annuala regular basis. Other identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121Accounting for the Impairment of Long-LivedLong-lived Assets to be

17

Disposed OfOf.. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company is evaluating the impacthas adopted SFAS 141 and 142. For additional information, see Note 2p, in Item 1 of the adoptionPart I, "Financial Statements" of these standards and has not yet determined the effect of adoption on its financial position and results of operations.this Form 10-Q.

        During June 2001, the FASB issued Statement No. 143 (SFAS 143),Accounting for Asset Retirement ObligationsObligations.. This Statement addresses financial accounting and reporting for obligations associated with

20

the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company is currently evaluating the impact of the adoption of this standard and has not yet determined the effect of adoption on its financial position and results of operations.

        On October 3, 2001, the FASB issued Statement No. 144 (SFAS 144),Accounting for the Impairment or Disposal of Long-Lived AssetsLong-lived assets,, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement No. 121,Accounting for the Impairment of Long-LivedLong-lived Assets and for Long-LivedLong-lived Assets to Be Disposed Of,, it retains many of the fundamental provisions of that Statement. SFAS 144 is effective for the fiscal years beginning after December 15, 2001. The Company is currently evaluating the impact of the adoption of this standard and hasin 2002 did not yet determinedhave an impact on the effect of adoption on itsCompany's financial position and results of operations.

Securities and Exchange Releases

        During December 2001, the Securities and Exchange Commission ("SEC") issued FR-60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies." FR-60 is an intermediate step to alert companies to the need for greater investor awareness of the sensitivity of financial statements to the methods, assumptions, and estimates underlying their preparation including the judgments and uncertainties affecting the application of those policies, and the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

        During January 2002, the SEC issued FR-61, "Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations." While the SEC intends to consider future rulemaking regarding the topics addressed in this statement and other topics covered by MD&A, the purpose of this statement was to suggest steps that issuers should consider in meeting their current disclosure obligations.

        The Company believes it has addressed all of the SEC's concerns through the disclosures in this document.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

        The Company markets its products throughout the United States and the world. As a result, the Company could be adversely affected by such factors as changes in foreign currency exchange rates and weak economic conditions. In particular, the Company can be and was impacted by the recent downturn in the North American theatre exhibition industry in the form of lost revenues. Additionally, as a majority of sales are currently denominated in U.S. dollars, a strengthening of the dollar can and sometimes is makinghas made the Company's products less competitive in foreign markets. As stated above, the majority of the Company's foreign sales are denominated in U.S. dollars except for its subsidiary in Hong Kong.

        In January 1999, certain member countries of the European Union established irrevocable, fixed conversion rates between their existing currencies and the European Union's common currency (the "Euro"). Effective January 1, 2002, the Euro became the sole currency of the participating countries. The Company's sole supplier of lenses is a German company and all purchases are denominated in Euro's. The Company has implemented necessary changes to accounting, operational and payment systems to accommodate the introduction of the Euro.

The Company has also evaluated its exposure to fluctuations in interest rates and the corresponding effect on the rate of interest on the Company's floating rate debt facilities.debt. Assuming amounts remain outstanding on the Company's debt instruments,facilities, increases in interest rates would increase interest expense. At current amounts outstanding on these instruments,debt facilities, a one percent increase in the interest rate would increase yearly interest expense by approximately $25,000.$16,000. The Company has not historically and is not currently using derivative instruments to manage the above risks.

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PART II.    Other InformationOTHER INFORMATION

Item 6.    Exhibits and Reports on Form 8-K

(a)

EXHIBITS

11

Computation of net loss per share*

*

Filed herewith

3.3.1		First Amendment dated April 30, 2001 to Rights Agreement dated as of May 25, 2000 between the Company and Mellon Investor Services L.L.C. (formerly ChaseMellon Shareholder Services L.L.C.), as Rights Agent. (Incorporated by reference to the Form 8-K as filed on May 7, 2001).
3.3.2		Second Amendment dated July 25, 2001 to Rights Agreement dated as of May 25, 2000 between the Company and Mellon Investor Services, L.L.C., as Rights Agent. *
3.3.3		Third Amendment dated October 2, 2001 to Rights Agreement dated as of May 25, 2001 between the Company and Mellon Investor Services, L.L.C., as Rights Agent. *
4.1		Loan Agreement dated August 30, 2001 between the Company and General Electric Capital Corporation.*
10.5.1		Option to purchase Common Stock of Ballantyne of Omaha, Inc. between the Company and William F. Welsh II in consideration of Mr. Welsh serving as Chairman of the Board. *
10.8.2		Stock Option Agreement dated July 3, 2001 between the Company and Ronald H. Echtenkamp permitting Mr. Echtenkamp to receive stock options in lieu of all or part of the cash retainer otherwise paid for service on the Board. *
10.8.3		Stock Option Agreement dated July 3, 2001 between the Company and Marshall S. Geller permitting Mr. Geller to receive stock options in lieu of all or part of the cash retainer otherwise paid for service on the board. *
10.8.4		Stock Option Agreement dated July 3, 2001 between the Company and Lee J. Seidler permitting Mr. Seidler to receive stock options in lieu of all or part of the cash retainer otherwise paid for service on the board. *
11		Computation of net loss per share*
*		Filed herewith

(b)

Reports on Form 8-K filed for the three months ended September 30, 2001March 31, 2002

No reports on Form 8-K were filed during the three months ended September 30, 2001.March 31, 2002.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BALLANTYNE OF OMAHA, INC.

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Ballantyne of Omaha, Inc. and Subsidiaries Item 1. Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 6. Exhibits and Reports on Form 8-K