UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended |
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to |
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| 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) |
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4350 McKinley Street, Omaha, Nebraska |
| 68112 |
(Address of Principal Executive Offices) |
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(402) 453-4444
(Registrant’s telephone number, including area code)
(former name, former address and former fiscal year, if changed since last report)
code:
Indicate by check mark whether the registrantregistrant: (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 12twelve 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 ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). YesAct (check one):
Large accelerated filer o NoAccelerated filer o Non-accelerated filer ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:
Class |
| Outstanding as of |
Common Stock, $.01, par value |
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TABLE OF CONTENTS
Ballantyne of Omaha, Inc. and Subsidiaries
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| September 30, |
| December 31, |
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| March 31, |
| December 31, |
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| (Unaudited) |
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| (Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 17,411,830 |
| $ | 14,031,984 |
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| $ | 22,049,763 |
| $ | 19,628,348 |
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Accounts receivable (less allowance for doubtful accounts of $436,818 in 2005 and $485,829 in 2004) |
| 9,543,681 |
| 6,159,764 |
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Accounts receivable (less allowance for doubtful accounts of $440,943 in 2006 and $420,223 in 2005) |
| 6,587,272 |
| 7,821,085 |
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Inventories, net |
| 11,628,649 |
| 12,173,966 |
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| 11,209,687 |
| 9,942,065 |
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Deferred income taxes |
| 1,432,261 |
| 1,320,591 |
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| 1,354,818 |
| 1,247,609 |
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Other current assets |
| 360,171 |
| 293,676 |
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| 349,434 |
| 430,411 |
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Total current assets |
| 40,376,592 |
| 33,979,981 |
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| 41,550,974 |
| 39,069,518 |
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Property, plant and equipment, net |
| 5,561,461 |
| 5,676,595 |
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| 5,218,775 |
| 5,379,933 |
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Goodwill, net |
| 2,467,219 |
| 2,467,219 |
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| 2,467,219 |
| 2,467,219 |
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Intangible assets, net |
| — |
| 23,488 |
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Other assets |
| 19,257 |
| 23,757 |
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| 19,257 |
| 19,257 |
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Total assets |
| $ | 48,424,529 |
| $ | 42,171,040 |
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| $ | 49,256,225 |
| $ | 46,935,927 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Current portion of long-term debt |
| $ | 27,292 |
| $ | 25,935 |
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| $ | 28,239 |
| $ | 27,761 |
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Accounts payable |
| 3,382,651 |
| 2,600,477 |
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| 3,494,727 |
| 2,212,056 |
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Warranty reserves |
| 693,825 |
| 668,268 |
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| 690,162 |
| 680,017 |
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Accrued group health insurance claims |
| 179,019 |
| 234,598 |
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| 190,836 |
| 275,468 |
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Accrued bonuses |
| 42,621 |
| 983,235 |
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Other accrued expenses |
| 2,155,215 |
| 1,663,708 |
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Customer deposits |
| 980,276 |
| 913,267 |
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| 374,681 |
| 536,724 |
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Accrued bonus |
| 1,186,311 |
| 911,520 |
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Other accrued expenses |
| 1,667,792 |
| 1,480,237 |
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Income tax payable |
| 750,868 |
| 245,986 |
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| 515,022 |
| 63,217 |
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Total current liabilities |
| 8,868,034 |
| 7,080,288 |
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| 7,491,503 |
| 6,442,186 |
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Long-term debt, excluding current installments |
| 21,727 |
| 42,370 |
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Long-term debt, net of current portion |
| 7,367 |
| 14,609 |
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Deferred income taxes |
| 340,432 |
| 256,008 |
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| 118,574 |
| 156,912 |
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Other accrued expenses, net of current portion |
| 314,333 |
| 268,936 |
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| 328,800 |
| 324,715 |
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Total liabilities |
| 9,544,526 |
| 7,647,602 |
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| 7,946,244 |
| 6,938,422 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, par value $.01 per share; Authorized 1,000,000 shares, none outstanding |
| — |
| — |
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| — |
| — |
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Common stock, par value $.01 per share; Authorized 25,000,000 shares; issued 15,477,013 shares in 2005 and 15,090,863 shares in 2004 |
| 154,770 |
| 150,908 |
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Common stock, par value $.01 per share; Authorized 25,000,000 shares; issued 15,627,836 shares in 2006 and 15,495,336 shares in 2005 |
| 156,278 |
| 154,953 |
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Additional paid-in capital |
| 33,370,371 |
| 32,249,888 |
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| 33,807,416 |
| 33,411,013 |
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Retained earnings |
| 20,670,316 |
| 17,438,096 |
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| 22,661,741 |
| 21,746,993 |
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| 54,195,457 |
| 49,838,892 |
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| 56,625,435 |
| 55,312,959 |
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Less 2,097,805 common shares in treasury, at cost |
| (15,315,454 | ) | (15,315,454 | ) |
| (15,315,454 | ) | (15,315,454 | ) | ||||
Total stockholders’ equity |
| 38,880,003 |
| 34,523,438 |
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| 41,309,981 |
| 39,997,505 |
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Total liabilities and stockholders’ equity |
| $ | 48,424,529 |
| $ | 42,171,040 |
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| $ | 49,256,225 |
| $ | 46,935,927 |
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See accompanying notes to consolidated financial statements.
1
Ballantyne of Omaha, Inc. and Subsidiaries
Consolidated Statements of Operations
Three and Nine Months Ended September 30,March 31, 2006 and 2005 and 2004
(Unaudited)
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| Three Months Ended September 30, |
| Nine Months Ended September 30, |
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| 2006 |
| 2005 |
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| 2005 |
| 2004 |
| 2005 |
| 2004 |
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Net revenues |
| $ | 14,260,237 |
| $ | 11,675,514 |
| $ | 39,813,700 |
| $ | 34,630,893 |
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| $ | 12,433,338 |
| $ | 12,511,869 |
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Cost of revenues |
| 10,203,994 |
| 8,371,203 |
| 28,675,874 |
| 24,931,685 |
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| 9,102,371 |
| 9,117,278 |
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Gross profit |
| 4,056,243 |
| 3,304,311 |
| 11,137,826 |
| 9,699,208 |
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| 3,330,967 |
| 3,394,591 |
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Selling and administrative expenses: |
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Selling |
| 699,485 |
| 759,395 |
| 2,055,394 |
| 2,130,827 |
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| 734,523 |
| 739,412 |
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Administrative |
| 1,481,269 |
| 1,095,593 |
| 4,098,805 |
| 3,439,527 |
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| 1,369,684 |
| 1,194,412 |
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Total selling and administrative expenses |
| 2,180,754 |
| 1,854,988 |
| 6,154,199 |
| 5,570,354 |
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| 2,104,207 |
| 1,933,824 |
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Income from operations |
| 1,875,489 |
| 1,449,323 |
| 4,983,627 |
| 4,128,854 |
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| 1,226,760 |
| 1,460,767 |
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Interest income |
| 105,440 |
| 38,284 |
| 272,974 |
| 76,248 |
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| 166,185 |
| 72,152 |
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Interest expense |
| (8,433 | ) | (8,174 | ) | (25,913 | ) | (27,531 | ) |
| (8,022 | ) | (8,656 | ) | ||||||
Other income (expense) |
| 18,847 |
| (28,888 | ) | (20,059 | ) | (49,170 | ) | |||||||||||
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Other income (expense), net |
| 18,880 |
| (29,519 | ) | |||||||||||||||
Income before income taxes |
| 1,991,343 |
| 1,450,545 |
| 5,210,629 |
| 4,128,401 |
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| 1,403,803 |
| 1,494,744 |
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Income tax benefit (expense) |
| (762,298 | ) | 693,594 |
| (1,978,409 | ) | (283,952 | ) | |||||||||||
Income tax expense |
| (489,055 | ) | (552,830 | ) | |||||||||||||||
Net income |
| $ | 1,229,045 |
| $ | 2,144,139 |
| $ | 3,232,220 |
| $ | 3,844,449 |
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| $ | 914,748 |
| $ | 941,914 |
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Basic net income per share |
| $ | 0.09 |
| $ | 0.17 |
| $ | 0.24 |
| $ | 0.30 |
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Diluted net income per share |
| $ | 0.09 |
| $ | 0.16 |
| $ | 0.23 |
| $ | 0.28 |
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Basic earnings per share |
| $ | 0.07 |
| $ | 0.07 |
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Diluted earnings per share |
| $ | 0.07 |
| $ | 0.07 |
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Weighted average shares outstanding: |
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Basic |
| 13,355,955 |
| 12,833,211 |
| 13,209,580 |
| 12,789,408 |
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| 13,440,500 |
| 13,050,733 |
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Diluted |
| 13,955,817 |
| 13,626,594 |
| 13,903,081 |
| 13,572,924 |
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| 13,947,291 |
| 13,840,719 |
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See accompanying notes to consolidated financial statements.
2
Ballantyne of Omaha, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
NineThree Months Ended September 30,March 31, 2006 and 2005 and 2004
(Unaudited)
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| 2005 |
| 2004 |
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| 2006 |
| 2005 |
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Cash flows from operating activities: |
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Net income |
| $ | 3,232,220 |
| $ | 3,844,449 |
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| $ | 914,748 |
| $ | 941,914 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Adjustments to reconcile net income to net cash provided by operating activities. |
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Provision for doubtful accounts |
| (9,301 | ) | 19,095 |
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| 18,750 |
| (69,301 | ) | ||||
Depreciation of plant and equipment |
| 834,850 |
| 795,230 |
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Depreciation of property, plant and equipment |
| 279,934 |
| 281,405 |
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Other amortization |
| 23,488 |
| 30,519 |
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| — |
| 10,066 |
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Gain on disposal of fixed assets |
| (8,704 | ) | (110,030 | ) | |||||||||
Deferred income taxes |
| (27,246 | ) | (1,243,676 | ) |
| (145,547 | ) | 14,360 |
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Share-based compensation |
| 31,723 |
| — |
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Excess tax benefits from stock options exercised |
| (180,397 | ) | — |
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Changes in assets and liabilities: |
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Accounts receivable |
| (3,374,616 | ) | (939,830 | ) |
| 1,215,063 |
| 493,592 |
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Inventories |
| 545,317 |
| (2,333,437 | ) |
| (1,267,622 | ) | (257,400 | ) | ||||
Income taxes |
| 796,320 |
| 128,542 |
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Other current assets |
| (66,495 | ) | 434,702 |
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| 80,977 |
| 125,296 |
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Other assets |
| 4,500 |
| 1,025 |
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Accounts payable |
| 782,174 |
| 19,915 |
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| 1,282,671 |
| 546,334 |
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Warranty reserves |
| 25,557 |
| 24,371 |
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| 10,145 |
| 8,212 |
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Accrued group health insurance claims |
| (55,579 | ) | (125,915 | ) |
| (84,632 | ) | (28,088 | ) | ||||
Accrued bonuses |
| (940,614 | ) | (628,878 | ) | |||||||||
Other accrued expenses |
| 487,650 |
| 159,279 |
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Customer deposits |
| 67,009 |
| 2,443,512 |
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| (162,043 | ) | (122,207 | ) | ||||
Accrued bonus |
| 274,791 |
| 728,156 |
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Other accrued expenses |
| 232,952 |
| (165,455 | ) | |||||||||
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Current income taxes |
| 632,202 |
| 476,069 |
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Other assets |
| — |
| 1,500 |
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Net cash provided by operating activities |
| 3,277,237 |
| 3,551,173 |
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| 2,173,008 |
| 1,952,153 |
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Cash flows from investing activities: |
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Capital expenditures |
| (730,346 | ) | (841,352 | ) |
| (118,776 | ) | (83,020 | ) | ||||
Proceeds from sale of assets |
| 19,334 |
| 269,079 |
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Net cash used in investing activities |
| (711,012 | ) | (572,273 | ) |
| (118,776 | ) | (83,020 | ) | ||||
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Cash flows from financing activities: |
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Payments on long-term debt |
| (19,286 | ) | (18,038 | ) |
| (6,764 | ) | (6,321 | ) | ||||
Proceeds from exercise of stock options |
| 832,907 |
| 68,730 |
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| 193,550 |
| 224,625 |
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Excess tax benefits from stock options exercised |
| 180,397 |
| — |
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Net cash provided by financing activities |
| 813,621 |
| 50,692 |
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| 367,183 |
| 218,304 |
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Net increase in cash and cash equivalents |
| 3,379,846 |
| 3,029,592 |
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| 2,421,415 |
| 2,087,437 |
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Cash and cash equivalents at beginning of period |
| 14,031,984 |
| 8,761,568 |
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| 19,628,348 |
| 14,031,984 |
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Cash and cash equivalents at end of period |
| $ | 17,411,830 |
| $ | 11,791,160 |
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| $ | 22,049,763 |
| $ | 16,119,421 |
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See accompanying notes to consolidated financial statements.
3
Ballantyne of Omaha, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30,March 31, 2006 and 2005 and 2004
(Unaudited)
1.Company
Ballantyne of Omaha, Inc., a Delaware corporation (“Ballantyne” or the “Company”), and its wholly-owned subsidiaries Strong Westrex, Inc., and Design & Manufacturing, Inc., design, develop, manufacture and distribute commercial motion picture equipment and lighting systems and distribute restaurant products. The Company’s products are solddistributed to movie exhibition companies, sports arenas, auditoriums, amusement parks, special venues, and the food service industry. Refer to the Business Segment Section (Note(note 11) for further information.
2. Summary of Significant Accounting Policies
The principal accounting policies upon which the accompanying consolidated financial statements are based are summarized as follows:
a. Basis of Presentation and Principles of Consolidation
The consolidated financial statements included herein are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America for annual reporting purposes or those made in the Company’s annual Form 10-K filing. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for fiscal 2004.2005.
In the opinion of management, the unaudited consolidated financial statements of the Company reflect all adjustments of a normal recurring nature necessary to present a fair statement of the financial position and the results of operations and cash flows for the respective interim periods. The results for interim periods are not necessarily indicative of trends or results expected for a full year.
b. Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.and changes in facts and circumstances may alter such estimates and affect results of operations and financial position in future periods.
c. Allowance for Doubtful Accounts
Accounts receivable are presented net of an allowance for doubtful accounts of $436,818$440,943 and $485,829$420,223 at September 30, 2005March 31, 2006 and December 31, 2004,2005, respectively. This allowance is developed based on several factors including overall customer credit quality, historical write-off experience and a specific analysis that projects the ultimate collectibility of the account. As such, these factors may change over time causing the reserve level to adjust accordingly.
4
d. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and include appropriate elements of material, labor and manufacturing overhead. Inventory balances are net of reserves of slow moving or obsolete inventory estimated based on management’s review of inventories on hand compared to estimated future usage and sales.
e. Goodwill and Intangible Assets
The Company capitalizes and includes in intangible assets the excess of cost over the fair value of net identifiable assets of operations acquired through purchase transactions (“goodwill”) in accordance with the provisions of Statement of Financial Accounting Standards (SFAS)(“SFAS”) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires goodwill no longer be amortized to earnings, but instead be reviewed at least annually for impairment. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s estimated fair value. All recorded goodwill is attributed to the Company’s theatre segment.
4
Other intangible assets were stated at cost and amortized on a straight-line basis over the expected periods to be benefited (25 to 36 months).
f. Property, Plant and Equipment
Significant expenditures for the replacement or expansion of property, plant and equipment are capitalized. Depreciation of property, plant and equipment is provided over the estimated useful lives of the respective assets using the straight-line method. For financial reporting purposes, assets are depreciated over the estimated useful lives of 20 years for buildings and improvements, 3 to 10 years for machinery and equipment, 7 years for furniture and fixtures and 3 years for computers and accessories. The Company generally uses accelerated methods of depreciation for income tax purposes.
g. Income Taxes
Income taxes are accounted for under the asset and liability method. The Company uses an estimate of its annual effective rate at each interim period based on the facts and circumstances at the time while the actual effective rate is calculated at year-end. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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.
h. Revenue Recognition
The Company recognizes revenue from product sales upon shipment to the customer when collectibility is reasonably assured. Revenues related to services are recognized as earned over the terms of the contracts or delivery of the service to the customer.
The Company enters into transactions that represent multiple element arrangements, which may include a combination of services and asset sales. Under EITF 00-21, Revenue Arrangements with Multiple Deliverables, multiple element arrangements are assessed to determine whether they can be separated into more than one unit of accounting. A multiple element arrangement is separated into more than one unit of accounting if all of the following criteria are met:met.
• The delivered item(s) has value on a standalone basis;
5
• There is objective and reliable evidence of the fair value of the undelivered item(s);
• If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.
If these criteria are not met, then revenue is deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value. There may be cases, however, in which there is objective and reliable evidence of fair value of the undelivered item(s) but no such evidence for the delivered item(s). In those cases, the residual method is used to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered item(s) equals the total arrangement consideration less the aggregate fair value of the undelivered item.
i. Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrumentinstruments could be exchanged in a current transaction between willing parties. Cash and cash equivalents, accounts receivable, debt, accounts payable and accrued expensesAll financial instruments reported in the consolidated balance sheets equal or approximate their fair values.
5
j. 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.
k. Income Earnings Per Common Share
The Company computes and presents net incomeearnings per share in accordance with SFAS No. 128, Earnings Per Share. Net incomeBasic earnings per share—basicshare has been computed on the basis of the weighted average number of shares of common stock outstanding. Net incomeDiluted earnings per share—dilutedshare 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 incomeearnings per share:
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
Basic income per share: |
|
|
|
|
|
|
|
|
| ||||
Income applicable to common stock |
| $ | 1,229,045 |
| $ | 2,144,139 |
| $ | 3,232,220 |
| $ | 3,844,449 |
|
Weighted average common shares outstanding |
| 13,355,955 |
| 12,833,211 |
| 13,209,580 |
| 12,789,408 |
| ||||
Basic income per share |
| $ | 0.09 |
| $ | 0.17 |
| $ | 0.24 |
| $ | 0.30 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted income per share: |
|
|
|
|
|
|
|
|
| ||||
Income applicable to common stock |
| $ | 1,229,045 |
| $ | 2,144,139 |
| $ | 3,232,220 |
| $ | 3,844,449 |
|
Weighted average common shares outstanding |
| 13,355,955 |
| 12,833,211 |
| 13,209,580 |
| 12,789,408 |
| ||||
Assuming conversion of options outstanding |
| 599,862 |
| 793,383 |
| 693,501 |
| 783,516 |
| ||||
Weighted average common shares outstanding, as adjusted |
| 13,955,817 |
| 13,626,594 |
| 13,903,081 |
| 13,572,924 |
| ||||
Diluted income per share |
| $ | 0.09 |
| $ | 0.16 |
| $ | 0.23 |
| $ | 0.28 |
|
|
| Three Months Ended March 31, |
| ||||
|
| 2006 |
| 2005 |
| ||
Basic earnings per share: |
| $ | 914,748 |
| $ | 941,914 |
|
Weighted average common shares outstanding |
| 13,440,500 |
| 13,050,733 |
| ||
|
|
|
|
|
| ||
Basic earnings per share |
| $ | 0.07 |
| $ | 0.07 |
|
|
|
|
|
|
| ||
Diluted earnings per share: |
| $ | 914,748 |
| $ | 941,914 |
|
Weighted average common shares outstanding |
| 13,440,500 |
| 13,050,733 |
| ||
Assuming conversion of options outstanding |
| 506,791 |
| 789,986 |
| ||
Weighted average common shares outstanding, as adjusted |
| 13,947,291 |
| 13,840,719 |
| ||
|
|
|
|
|
| ||
Diluted earnings per share |
| $ | 0.07 |
| $ | 0.07 |
|
6
At September 30, 2005,March 31, 2006, options to purchase 268,800286,733 shares of common stock at a weighted average price of $8.43$8.15 per share were outstanding, but were not included in the computation of net incomediluted earnings per share—dilutedshare for the three and nine months ended September 30, 2005March 31, 2006 as the options’ exercise price was greater than the average market price of the common shares. These options expire between January 2007 and May 2010. At September 30, 2004,March 31, 2005, options to purchase 237,925197,925 shares of common stock at a weighted average price of $8.61$9.74 per share were outstanding, but were not included in the computation of net incomediluted earnings per share—dilutedshare for the three and nine months ended September 30, 2004 as the options’ exercise price was greater than the average market price of the common shares.March 31, 2005.
6
l. Stock-Based Compensation Share-Based Payments
As permitted under SFAS No. 123, Accounting for Stock-Based Compensation, and amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure,Effective January 1, 2006, the Company elected to account for its stock-based compensation plans underadopted the provisions of Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), “Share-Based Payments,” which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. SFAS 123R supersedes the Company’s previous accounting methodology using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25 Accounting(“APB 25”), “Accounting for Stock Issued to Employees, andEmployees.” Under the intrinsic value method, no share-based compensation expense related interpretations. Consequently, when bothto stock option awards granted to employees had been recognized in the numberCompany’s consolidated statements of shares andoperations, as all stock option awards granted under the plans had an exercise price is known atequal to the market value of the common stock on the date of the grant.
The Company adopted SFAS 123R using the modified prospective transition method. Under this transition method, compensation expense recognized during the three months ended March 31, 2006 included: (a) compensation expense for all share-based awards granted prior to, but not yet vested, as of December 31, 2005, based on the grant date nofair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense is recognized for all share-based awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The Company did not grant options during the three months ended March 31, 2006. In accordance with the modified prospective transition method, the Company’s consolidated financial statements for prior periods have not been restated to reflect the impact of SFAS 123R.
On November 10, 2005 the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 123R-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of share-based compensation pursuant to SFAS 123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC Pool”) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC Pool and consolidated statements of cash flows of the tax effects of employee and director share-based awards that are outstanding upon adoption of SFAS 123R.
Options
The Company currently has a 2001 Non-Employee Directors Stock Option Plan (“2001 Directors Plan”) and a 2005 Outside Directors Stock Option Plan (“2005 Outside Directors Plan”) which have been approved by the Company’s stockholders. The Company also had a 1995 Employee Stock Option Plan and a 1995 Directors Stock Plan which expired in 2005, however, there are outstanding stock options issued to employeesunder these two expired plans.
All past and directors unlessfuture grants under the exercise price ofCompany’s stock option plans are granted at prices based on the option is less than the quotedfair market value of the Company’s common stock aton the date of grant. HadThe outstanding options generally vest over periods ranging from zero to three years from the grant date and expire between 5 and 10 years.
7
No options have been granted under the 2005 Outside Directors Plan and all options granted under the 2001 Directors Plan and the 1995 Employee Stock Option Plan were fully vested, based on their original terms, prior to January 1, 2006. As such, no compensation costexpense related to those options has been recognized under SFAS 123R. The 1995 Outside Directors Stock Plan had 47,250 shares outstanding not yet vested at January 1, 2006 and were subject to the recognition of compensation expense.
A total of 1,152,940 shares of common stock have been reserved for issuance pursuant to the Company’s stock compensationoption plans been determined consistent with SFAS No. 123 as amended by SFAS No. 148, the Company’s net income and basic and diluted income per share would have changed to the pro forma amounts indicated below:at March 31, 2006.
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
Net income: |
|
|
|
|
|
|
|
|
| ||||
As reported |
| $ | 1,229,045 |
| $ | 2,144,139 |
| $ | 3,232,220 |
| $ | 3,844,449 |
|
Stock-based compensation income (expense), determined under fair value based method, net of tax |
| (10,236 | ) | 3,741 |
| (47,237 | ) | (34,952 | ) | ||||
Proforma net income |
| $ | 1,218,809 |
| $ | 2,147,880 |
| $ | 3,184,983 |
| $ | 3,809,497 |
|
|
|
|
|
|
|
|
|
|
| ||||
Income per share—basic |
|
|
|
|
|
|
|
|
| ||||
As reported |
| $ | 0.09 |
| $ | 0.17 |
| $ | 0.24 |
| $ | 0.30 |
|
|
|
|
|
|
|
|
|
|
| ||||
Proforma net income per share |
| $ | 0.09 |
| $ | 0.17 |
| $ | 0.24 |
| $ | 0.30 |
|
|
|
|
|
|
|
|
|
|
| ||||
Income per share—diluted |
|
|
|
|
|
|
|
|
| ||||
As reported |
| $ | 0.09 |
| $ | 0.16 |
| $ | 0.23 |
| $ | 0.28 |
|
|
|
|
|
|
|
|
|
|
| ||||
Proforma net income per share |
| $ | 0.09 |
| $ | 0.16 |
| $ | 0.23 |
| $ | 0.28 |
|
The averageCompany records compensation expense for stock options based on the estimated fair value of each option granted in 2005 and 2004 was $1.86 and $1.69, respectively. The fair value of each option grant is estimatedthe options on the date of grant using the Black-Scholes Option-Pricingoption-pricing model. The Company uses historical data among other factors to estimate the expected price volatility, the expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for the estimated life of the option. The Company has not and is not expected to pay cash dividends in the future. The Company did not grant stock options during the three months ended March 31, 2006 and 2005.
The following table summarizes the Company’s activities with respect to its stock options for the first three months of 2006 as follows:
|
|
|
|
|
| Weighted- |
|
|
| ||
|
|
|
| Weighted |
| Average |
|
|
| ||
|
|
|
| Average |
| Remaining |
|
|
| ||
|
| Number of |
| Exercise Price |
| Contractual |
| Aggregate |
| ||
|
| Shares |
| Per Share |
| Term |
| Intrinsic Value |
| ||
Outstanding at January 1, 2006 |
| 987,078 |
| $ | 2.86 |
|
|
|
|
| |
Exercised |
| (132,500 | ) | $ | 1.46 |
|
|
|
|
| |
Forfeited |
| — |
| $ | — |
|
|
|
|
| |
Outstanding at March 31, 2006 |
| 854,578 |
| $ | 3.08 |
| 3.73 |
| $ | 2,208,023 |
|
|
|
|
|
|
|
|
|
|
| ||
Exercisable at March 31, 2006 |
| 807,328 |
| $ | 2.98 |
| 3.71 |
| $ | 2,208,023 |
|
The total intrinsic value for options exercised during the three months ended March 31, 2006 and 2005 was $563,145 and $550,373, respectively. As of March 31, 2006, the total unrecognized compensation cost related to non-vested stock option awards was approximately $53,011 and is expected to be recognized over a weighted average period of 14 months.
Cash received from option exercises under all plans for the three months ended March 31, 2006 and 2005 was approximately $193,550 and $224,625, respectively. The actual tax benefit realized for the tax deductions from option exercises under all plans totaled approximately $180,397 and $189,186, respectively, for three months ended March 31, 2006 and 2005.
Restricted Stock Plan
During 2005, the Company adopted and the stockholders approved, the 2005 Restricted Plan. Under terms of the plan, the compensation committee of the Board of Directors selects which employees of the Company are to receive restricted stock awards and the terms of such awards. The total number of shares reserved for issuance under the plan is 250,000 shares. There have been no shares issued under the plan through March 31, 2006. The plan expires in September 2010.
8
Employee Stock Purchase Plan
The Company’s 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 employee’s salary. The number of shares that can be purchased by participants in any offering period is 2,000 shares. Additionally, the Plan has set certain limits, as defined, in regard to the number of shares that may be purchased by all eligible employees during an offering period. At March 31, 2006, 150,000 shares of common stock remained available for issuance under the Plan. The Plan expires in September 2010. The total estimated grant date fair value of purchase rights outstanding under the Employee Stock Purchase Plan was $2.07 using the Black-Scholes option-pricing model made with the following weighted average assumptions: risk-free interest rate – 4.31%; dividend yield – 0%; expected volatility – 43.4% and expected life in years – 1. At March 31, 2006, total unrecognized estimated compensation cost was $29,159 which is expected to be recognized over a period of 7 months.
|
| 2005 |
| 2004 |
|
Risk-free interest rate |
| 3.82 | % | 4.01 | % |
Dividend yield |
| 0 | % | 0 | % |
Expected volatility |
| 37.6 | % | 37.5 | % |
Expected life in years |
| 5 |
| 10 |
|
Share-Based Compensation Expense
The table below shows the amounts recognized in the financial statements for the three months ended March 31, 2006 for share-based compensation related to employees and directors.
|
| Three Months |
| |
|
| Ended March 31, |
| |
|
| 2006 |
| |
|
|
|
| |
Total cost of share-based compensation included in selling and administrative expenses, before income tax |
| $ | 31,723 |
|
Amount of income tax benefit recognized |
| (9,240 | ) | |
Amount charged against net income |
| $ | 22,483 |
|
|
|
|
| |
Impact on earnings share: |
|
|
| |
|
|
|
| |
Basic |
| $ | (0.00 | ) |
Diluted |
| $ | (0.00 | ) |
There were no amounts relating to share-based compensation capitalized in inventory during the three months ended March 31, 2006.
9
Pro Forma Share-Based Compensation Expense
Prior to December 31, 2005, the Company accounted for share-based compensation arrangements in accordance with the provisions and related interpretations of APB 25. Had compensation cost for share-based awards been determined consistent with SFAS No. 123R, the net income and earnings per share would have been adjusted to the following pro forma amounts:
|
| Three Months |
| |
|
| Ended March 31, |
| |
|
| 2005 |
| |
|
|
|
| |
Net income, as reported |
| $ | 941,914 |
|
Deduct: Total share-based compensation expense determined under fair value based method for all awards, net of related tax effects |
| (37,595 | ) | |
|
|
|
| |
Pro forma net income |
| $ | 904,319 |
|
|
|
|
| |
Earnings per share: |
|
|
| |
Basic-as reported |
| $ | 0.07 |
|
Basic-pro forma |
| $ | 0.07 |
|
Diluted-as reported |
| $ | 0.07 |
|
Diluted-pro forma |
| $ | 0.07 |
|
m. Impairment of Long-Lived Assets
The Company reviews long-lived assets, exclusive of goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
The Company’s most significant long-lived assets subject to these periodic assessments of recoverability are property, plant and equipment, which have a net book value of $5.6$5.2 million at September 30, 2005.March 31, 2006. Because the recoverability of property, plant and equipment is based on estimates of future undiscounted cash flows, these estimates may vary due to a number of factors, some of which may be outside of management’s control. To the extent that the Company is unable to achieve management’s forecasts of future income, it may become necessary to record impairment losses for any excess of the net book value of property, plant and equipment over its fair value.
7
n. Warranty Reserves
The Company generally grants a warranty to its customers for a one-year period following the sale of all new equipment, and on selected repaired equipment for a one-year period following the repair. The warranty period is extended under certain circumstances and for certain products. The Company accrues for these costs at the time of sale or repair, when events dictate that additional accruals are necessary.
10
The following table summarizes warranty activity for the periods indicated below:
|
| Three Months Ended March 31, |
| |||||||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
|
| 2006 |
| 2005 |
| ||||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
|
|
|
|
|
| ||||||
Balance at beginning of period |
| $ | 596,043 |
| $ | 697,338 |
| $ | 668,268 |
| $ | 732,033 |
|
| $ | 680,017 |
| $ | 668,268 |
|
Charged to expense |
| 121,694 |
| 268,654 |
| 207,421 |
| 414,824 |
|
| 57,750 |
| 69,245 |
| ||||||
Amounts written off, net of recoveries |
| (23,912 | ) | (209,588 | ) | (181,864 | ) | (390,453 | ) |
| (47,605 | ) | (61,033 | ) | ||||||
Balance at end of period |
| $ | 693,825 |
| $ | 756,404 |
| $ | 693,825 |
| $ | 756,404 |
|
| $ | 690,162 |
| $ | 676,480 |
|
o. Comprehensive Income
The Company’s comprehensive income consists solely of net income. All other items were not material to the consolidated financial statements.
p. Litigation
During March 2006, Ballantyne is a defendant insettled an asbestos liability case seeking monetary damages, entitled Bercu v. BICC Cables Corporation, et al.,originallyfiled June 27, 2003 in the Supreme Court of the State of New York. ThereThe settlement amount was not material to the Company’s results of operations, financial position or cash flows.
Ballantyne is a party to various other legal actions which are numerous defendants including Ballantyne. At this time,ordinary routine litigation matters incidental to the case hasCompany’s business, such as products liability. Based on currently available information, management believes that the ultimate outcome of these matters individually and in the aggregate, will not progressed to a stage where either the likely outcome or the amount of damages, if any, for which Ballantyne may be liable can be determined. An adverse resolution of this matter could have a material adverse effect on the Company’s results of operations, financial position of Ballantyne.or cash flows.
q. 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 former pesticide company which previously owned the property and that burned down in the 1960’s. During October 2004, Ballantyne agreed to enter into an Administrative Order on Consent (“AOC”) to resolve the matter. The AOC holds Ballantyne and two other parties jointly and severally responsible for the cleanup. In this regard, the three parties have also entered into a Site Allocation Agreement by which they will divide past, current and future costs of the EPA, the costs of remediation and the cost of long term maintenance. In connection with the AOC, the Company has paid its share of the costs. At September 30, 2005,March 31, 2006, the Company has provided for management’s estimate of any future exposurepayments relating to this matter which is not material to the consolidated financial statements.
811
r. Concentrations
The Company’s top ten customers accounted for approximately 51%55% of 2006 consolidated net revenues for the nine months ended September 30, 2005. These customers were primarily from the theatre segment.revenues. Trade accounts receivable from these customers represented approximately 67%62% of net consolidated accounts receivables at September 30, 2005.March 31, 2006. Sales to AMC Theatres, Inc. and Regal Cinema, Inc. each represented over 10% of consolidated revenues. In addition, receivables from Vari Internacional, AMC Theatres, Regal Entertainment Group and National Cinema Supply eachInternational represented over 10%approximately 27% of net consolidated accounts receivables at September 30, 2005.March 31, 2006. While the Company believes its relationships with such customers are stable, most arrangements are made by purchase order and are terminable at will by either party. A significant decrease or interruption in business from the Company’s significant customers could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company 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 the Company sells its products.
s. Recently Issued Accounting Pronouncements
In May 2004,The Financial Accounting Standards Board (FASB) has adopted SFAS No. 151, “Inventory Costs – an Amendment of ARB No. 43, Chapter 4.” The provisions of SFAS 151 are intended to eliminate narrow differences between the existing accounting standards of the FASB and the International Accounting Standards Board (IASB) related to inventory costs, in particular, the treatment of abnormal idle facility expense, freight, handling costs and spoilage. SFAS 151 requires that these costs be recognized as current period charges regardless of the extent to which they are considered abnormal. The provisions of SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS 151 did not have a significant impact on the Company’s results of operations, financial position or cash flows.
During 2005, the FASB issued Staff PositionSFAS No. 106-2 (“FSP No. 106-2”), Accounting and Disclosure Requirements Related153, “Exchanges of Nonmonetary Assets” which eliminates the exception to the Medicare Prescription Drug Improvementfair-value principle for exchanges of “similar productive assets,” which had been accounted for based on the book value of the asset surrendered with no gain recognition. Nonmonetary exchanges have to be accounted for at fair-value, recognizing any gain or loss, if the transactions meet the commercial-substance criterion and Modernization Act of 2003 (“fair-value determinable. The Statement reduces the Act”). FSP No. 106-2 provides guidance ondifferences between U.S. and international accounting for the effects of a subsidy available under the Act to companies that sponsor retiree medical programs with drug benefits that are actuarially equivalent to those available under Medicare. In addition to the direct benefit to a company from qualifying for and receiving the subsidy, the effects would include expected changes in retiree participation rates and changes in estimated health care costs that result from the Act. FSP No. 106-2 wasstandards. This Statement is effective for Ballantyne duringnonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company adopted this Statement in the interim period ending September 30, 2004first quarter of fiscal 2006 and the pronouncement did not have a material impact on the Company’s consolidated financial statementsposition, results of the Company.operations or cash flows.
During 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (SFAS 154). SFAS 154 is a replacement of Accounting Principles Board No. 20, “Accounting Changes” and FASB Statement No. 3 “Reporting Accounting Changes in Interim Financial Statement.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS 154. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 31, 2005. The Company adopted this pronouncement in the first quarter of 2006.
12
In December 2004, the FASB issued SFASFASB Staff Position No. 123(R)FAS 109-1 (“FSP FAS 109-1”), Share-Based Payment. This“Application of FASB Statement is a revision of SFAS No. 123, 109, Accounting for Stock-Based Compensation,Income Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004.” FSP FAS 109-1 clarifies that the deduction will be treated as a “special deduction” as described in SFAS 109, “Accounting for Income Taxes.” As such, the special deduction has no effect on deferred tax assets and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) requires companies to recognize inliabilities existing at the income statement the grant date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation model.enactment. The Statement was effective for interim periods beginning after June 15, 2005. On April 14, 2005, the SEC announced the adoption of a new rule amending the compliance dates for this Statement. The Statement will now be effective for the Company’s first quarter beginning January 1, 2006. The Company is currently determining the impact of the Statement on its financial position, resultsdeduction will be reported in the period in which the deduction is claimed. The incentive for U.S. qualified production activities included in the Act is effective as of operations and cash flows.December 21, 2004.
9
3. Intangible Assets
IntangibleThe Company’s intangible assets consistat March 31, 2006 consisted entirely of goodwill which is not amortizable in accordance with SFAS No. 142. In applying SFAS No. 142, the following:Company performed the annual reassessment and impairment test in the fourth quarter of 2005 and determined that goodwill was not impaired. The goodwill is recorded at a cost of $3,720,743 reduced by accumulated amortization of $1,253,524 at March 31, 2006 and December 31, 2005, respectively.
|
| At September 30, 2005 |
| |||||||
|
| Cost |
| Accumulated |
| Net Book |
| |||
Nonamortizable intangible assets: |
|
|
|
|
|
|
| |||
Goodwill |
| $ | 3,720,743 |
| $ | (1,253,524 | ) | $ | 2,467,219 |
|
Amortizable intangible assets: |
|
|
|
|
|
|
| |||
Customer relationships |
| 113,913 |
| (113,913 | ) | — |
| |||
Trademarks |
| 1,000 |
| (1,000 | ) | — |
| |||
Non-competition agreement |
| 6,882 |
| (6,882 | ) | — |
| |||
|
| $ | 3,842,538 |
| $ | (1,375,319 | ) | $ | 2,467,219 |
|
|
|
|
|
|
|
|
| |||
|
| At December 31, 2004 |
| |||||||
|
| Cost |
| Accumulated |
| Net Book Value |
| |||
Nonamortizable intangible assets: |
|
|
|
|
|
|
| |||
Goodwill |
| $ | 3,720,743 |
| $ | (1,253,524 | ) | $ | 2,467,219 |
|
Amortizable intangible assets: |
|
|
|
|
|
|
| |||
Customer relationships |
| 113,913 |
| (91,763 | ) | 22,150 |
| |||
Trademarks |
| 1,000 |
| (1,000 | ) | — |
| |||
Non-competition agreement |
| 6,882 |
| (5,544 | ) | 1,338 |
| |||
|
| $ | 3,842,538 |
| $ | (1,351,831 | ) | $ | 2,490,707 |
|
AmortizationThe Company’s amortizable intangible assets became fully amortized during 2005. The Company recorded amortization expense relating to amortizableidentifiable intangible assets of $0 and $10,066 for the three months ending March 31, 2006 and nine months ended September 30, 2005, amounted to $3,354 and $23,488, respectively, as compared to $10,146 and $30,519 for the three and nine months ended September 30, 2004, respectively. No further amortization will be recorded as the assets were fully amortized at September 30, 2005.
4. Inventories Inventories
Inventories consist of the following:
|
| March 31, |
| December 31, |
| |||||||||
|
| September 30, |
| December 31, |
|
| 2006 |
| 2005 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Raw materials and components |
| $ | 7,906,417 |
| $ | 8,995,922 |
|
| $ | 7,892,863 |
| $ | 7,008,791 |
|
Work in process |
| 1,671,532 |
| 1,276,297 |
|
| 1,489,628 |
| 1,339,323 |
| ||||
Finished goods |
| 2,050,700 |
| 1,901,747 |
|
| 1,827,196 |
| 1,593,951 |
| ||||
|
| $ | 11,628,649 |
| $ | 12,173,966 |
|
| $ | 11,209,687 |
| $ | 9,942,065 |
|
The inventory balances are net of reserves for slow moving or obsolete inventory of approximately $1,416,000$1,270,000 and $1,086,000$1,138,000 as of September 30, 2005March 31, 2006 and December 31, 2004,2005, respectively.
1013
5. Property, Plant and Equipment
Property, plant and equipment include the following:
|
| September 30, |
| December 31, |
|
| March 31, |
| December 31 |
| ||||
|
| 2005 |
| 2004 |
|
| 2006 |
| 2005 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Land |
| $ | 343,500 |
| $ | 343,500 |
|
| $ | 343,500 |
| $ | 343,500 |
|
Buildings and improvements |
| 4,694,226 |
| 4,687,859 |
|
| 4,699,981 |
| 4,699,981 |
| ||||
Machinery and equipment |
| 9,431,721 |
| 9,125,868 |
|
| 9,562,615 |
| 9,511,671 |
| ||||
Office furniture and fixtures |
| 2,176,378 |
| 1,932,367 |
|
| 2,276,370 |
| 2,212,273 |
| ||||
Construction in process |
| 63,798 |
| 28,922 |
|
| 33,184 |
| 39,155 |
| ||||
|
| 16,709,623 |
| 16,118,516 |
|
| 16,915,650 |
| 16,806,580 |
| ||||
Less accumulated depreciation |
| (11,148,162 | ) | (10,441,921 | ) |
| 11,696,875 |
| 11,426,647 |
| ||||
Net property, plant and equipment |
| $ | 5,561,461 |
| $ | 5,676,595 |
|
| $ | 5,218,775 |
| $ | 5,379,933 |
|
Depreciation expense amounted to $271,379$279,934 and $834,850$281,405 for the three months ending March 31, 2006 and nine months ended September 30, 2005, respectively, as compared to $251,691 and $795,230 for the three and nine months ended September 30, 2004, respectively.
6. Debt Debt
The Company is a party to a revolving credit facility with First National Bank of Omaha expiring on August 28, 2006. The Company expects to renew the credit facility in the ordinary course of business. The credit facility provides for borrowings up to the lesser of $4.0 million or amounts determined by an asset based lending formula, as defined. Borrowings available under the credit facility amountamounted to $4.0 million at September 30, 2005.March 31, 2006. No amounts are currently outstanding. The Company payswould pay interest on outstanding amounts equal to the Prime Rate plus 0.25% (7.0%(8.0% at September 30, 2005)March 31, 2006) and pays a fee of 0.125% on the unused portion. The credit facility contains certain restrictive covenants primarily related to maintaining certain earnings, as defined, and restrictions on acquisitions and dividends. All of the Company’s personal property and stock in its subsidiaries secure this credit facility.
Long-term debt at September 30, 2005 consistsMarch 31, 2006 consisted entirely of installment payments relating to the purchase of certain intangible assets. Future maturities of long-term debt for the remainder of fiscal 20052006 and for each of the remaining yearsyear in 2007 are as follows: 2005 - $6,648; 2006 - $27,762;$20,998 and 2007 - $14,609.$14,608, respectively.
7. Supplemental Cash Flow Information
Supplemental disclosures to the consolidated statements of cash flows are as follows:
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| ||||||||
|
| 2005 |
| 2004 |
|
| 2006 |
| 2005 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Interest paid |
| $ | 7,325 |
| $ | 26,253 |
|
| $ | 1,938 |
| $ | 2,488 |
|
|
|
|
|
|
| |||||||||
Income taxes paid |
| $ | 1,209,335 |
| $ | 1,400,101 |
|
| $ | 2,400 |
| $ | 62,401 |
|
|
|
|
|
|
| |||||||||
Income tax benefit related to stock option plans |
| $ | 291,438 |
| $ | 23,707 |
|
| $ | 180,397 |
| $ | — |
|
Share-based compensation expense related to liability classified awards |
| $ | 7,942 |
| $ | — |
|
14
8. Stockholder Rights Plan
On May 26, 2000, the Board of Directors of the Company adopted a Stockholder Rights Plan (the “Rights Plan”). Under terms of the Rights Plan, which expires June 9, 2010, the Company declared a distribution of one right for each outstanding share of common stock. The rights become exercisable only if a person or group (other than certain exempt persons, as defined) acquires 15 percent or more of Ballantyne’sBallantyne common stock or announces a tender offer for 15 percent or more of Ballantyne’s common stock. Under certain circumstances, the Rights 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.
11
9. Postretirement Health Care Self-Insurance
The Company is self-insured up to certain stop loss limits for group health insurance. Accruals for claims incurred but not paid as of September 30, 2005 and December 31, 2004 are included in accrued group health insurance claims in the accompanying consolidated balance sheets. The Company’s policy is to accrue the employee health benefit accruals based on historical information along with certain assumptions about future events.
10. Postretirement Health Care
Ballantyne sponsors a postretirement health care plan (the “Plan”) for certain current and former executives and their spouses. Ballantyne’sThe Company’s policy is to fund the cost of the Plan as expenses are incurred. The costs of the postretirement benefits are accrued over the employees’ service lives.
In accordance with SFAS No. 132, Disclosures About Pensions and Other Postretirement Benefits, the following table sets forth the components of the net period benefit cost for the three and nine months ended September 30, 2005March 31, 2006 and 2004:2005:
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
|
| 2006 |
| 2005 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Service cost |
| $ | 3,051 |
| $ | 2,485 |
| $ | 9,153 |
| $ | 7,455 |
|
| $ | 3,116 |
| $ | 3,051 |
|
Interest cost |
| 6,196 |
| 5,559 |
| 18,588 |
| 16,677 |
|
| 6,083 |
| 6,196 |
| ||||||
Amortization of prior-service cost |
| 6,718 |
| — |
| 20,154 |
| — |
|
| 6,718 |
| 6,718 |
| ||||||
Amortization of loss |
| 934 |
| 6,718 |
| 2,802 |
| 20,154 |
|
| — |
| 934 |
| ||||||
Net periodic benefit cost |
| $ | 16,899 |
| $ | 14,762 |
| $ | 50,697 |
| $ | 44,286 |
|
| $ | 15,917 |
| $ | 16,899 |
|
The Company expects to pay $5,962$6,045 under the plan in 2005.2006. As of September 30, 2005,March 31, 2006, benefits of $2,415$348 have been paid.
In December 2003, the United States enacted into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act established a prescription drug benefit under Medicare, known as “Medicare Part D” and a federal subsidy to sponsors of retired healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. On May 19, 2004, the FASB issued Staff Position No. FAS-106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP-106-2), which requires measures of the accumulated postretirement benefit obligation and net periodic postretirement benefit costs to reflect the effects of the Act in the first interim or annual period beginning after June 15, 2004. On January 21, 2005, final regulations under the Act were issued. The effects of the Act did not have a material impact on the consolidated financial statements of the Company.
11.10. Self-Insurance
The Company is self-insured up to certain stop loss limits for group health insurance. Accruals for claims incurred but not paid as of March 31, 2006 and December 31, 2005 are included in accrued group health insurance claims in the accompanying consolidated balance sheets. The Company’s policy is to accrue the employee health benefit accruals based on historical information along with certain assumptions about future events.
15
11. 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, 2005,March 31, 2006, the Company’s operations arewere conducted principally through three business segments: Theatre, Lighting and Restaurant. Theatre operations include the design, manufacture, assembly and sale of motion picture projectors, xenon lamphouses and power supplies, sound systems, film handling equipment and the sale of xenon lamps and lenses. 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 restaurant segment primarily includes the manufacture and sale of replacement parts and the sale of seasonings, marinades and marinades. The Company has phased out its restaurant equipment product line.barbeque sauces. 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.
1216
Summary by Business Segments
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| ||||||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
|
| 2006 |
| 2005 |
| ||||||
Net revenue |
|
|
|
|
|
|
|
|
| |||||||||||
Net revenues |
|
|
|
|
| |||||||||||||||
Theatre |
| $ | 13,228,282 |
| $ | 10,414,218 |
| $ | 36,806,106 |
| $ | 31,503,673 |
|
| $ | 11,132,206 |
| $ | 11,471,203 |
|
Lighting |
| 822,404 |
| 988,845 |
| 2,359,449 |
| 2,174,434 |
|
| 1,120,424 |
| 829,364 |
| ||||||
Restaurant |
| 209,551 |
| 272,451 |
| 648,145 |
| 952,786 |
|
| 180,708 |
| 211,302 |
| ||||||
Total net revenue |
| $ | 14,260,237 |
| $ | 11,675,514 |
| $ | 39,813,700 |
| $ | 34,630,893 |
| |||||||
Total net revenues |
| $ | 12,433,338 |
| $ | 12,511,869 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Theatre |
| $ | 3,695,022 |
| $ | 2,942,410 |
| $ | 10,082,395 |
| $ | 8,875,006 |
|
| $ | 2,932,970 |
| $ | 3,060,270 |
|
Lighting |
| 270,161 |
| 275,731 |
| 760,531 |
| 583,344 |
|
| 318,643 |
| 254,994 |
| ||||||
Restaurant |
| 91,060 |
| 86,170 |
| 294,900 |
| 240,858 |
|
| 79,354 |
| 79,327 |
| ||||||
Total gross profit |
| 4,056,243 |
| 3,304,311 |
| 11,137,826 |
| 9,699,208 |
|
| 3,330,967 |
| 3,394,591 |
| ||||||
Selling and administrative expenses |
| (2,180,754 | ) | (1,854,988 | ) | (6,154,199 | ) | (5,570,354 | ) |
| (2,104,207 | ) | (1,933,824 | ) | ||||||
Operating income |
| 1,875,489 |
| 1,449,323 |
| 4,983,627 |
| 4,128,854 |
|
| 1,226,760 |
| 1,460,767 |
| ||||||
Other income (expense) |
| 18,847 |
| (28,888 | ) | (20,059 | ) | (49,170 | ) | |||||||||||
Net interest income |
| 97,007 |
| 30,110 |
| 247,061 |
| 48,717 |
|
| 158,163 |
| 63,496 |
| ||||||
Other income (expense), net |
| 18,880 |
| (29,519 | ) | |||||||||||||||
Income before income taxes |
| $ | 1,991,343 |
| $ | 1,450,545 |
| $ | 5,210,629 |
| $ | 4,128,401 |
|
| $ | 1,403,803 |
| $ | 1,494,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Expenditures on capital equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Theatre |
| $ | 184,614 |
| $ | 311,158 |
| $ | 695,744 |
| $ | 781,827 |
|
| $ | 112,082 |
| $ | 78,297 |
|
Lighting |
| 7,615 |
| 11,106 |
| 34,602 |
| 59,525 |
|
| 6,694 |
| 4,723 |
| ||||||
Restaurant |
| — |
| — |
| — |
| — |
| |||||||||||
Total |
| $ | 192,229 |
| $ | 322,264 |
| $ | 730,346 |
| $ | 841,352 |
|
| $ | 118,776 |
| $ | 83,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Theatre |
| $ | 270,088 |
| $ | 249,680 |
| $ | 821,750 |
| $ | 773,752 |
|
| $ | 258,353 |
| $ | 275,759 |
|
Lighting |
| 4,645 |
| 12,157 |
| 36,588 |
| 51,997 |
|
| 21,581 |
| 15,712 |
| ||||||
Restaurant |
| — |
| — |
| — |
| — |
| |||||||||||
Total |
| $ | 274,733 |
| $ | 261,837 |
| $ | 858,338 |
| $ | 825,749 |
|
| $ | 279,934 |
| $ | 291,471 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Gain (loss) on disposal of long-lived assets |
|
|
|
|
|
|
|
|
| |||||||||||
Theatre |
| $ | (1,992 | ) | $ | 102,628 |
| $ | 8,008 |
| $ | 103,428 |
| |||||||
Lighting |
| 696 |
| 6,602 |
| 696 |
| 6,602 |
| |||||||||||
Restaurant |
| — |
| — |
| — |
| — |
| |||||||||||
Total |
| $ | (1,296 | ) | $ | 109,230 |
| $ | 8,704 |
| $ | 110,030 |
|
|
|
|
|
|
| At September 30, |
| At December 31, |
| |||||||||
|
|
|
|
|
| 2005 |
| 2004 |
|
| March 31, |
| December 31, |
| ||||
Identifiable assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Theatre |
|
|
|
|
| $ | 44,655,208 |
| $ | 39,129,877 |
|
| $ | 44,139,302 |
| $ | 42,866,118 |
|
Lighting |
|
|
|
|
| 3,137,454 |
| 2,764,847 |
|
| 4,362,660 |
| 3,382,738 |
| ||||
Restaurant |
|
|
|
|
| 631,867 |
| 276,316 |
|
| 754,263 |
| 687,071 |
| ||||
Total |
|
|
|
|
| $ | 48,424,529 |
| $ | 42,171,040 |
|
| $ | 49,256,225 |
| $ | 46,935,927 |
|
1317
Summary by Geographical Area
|
| Three Months Ended March 31, |
| ||||
Summary by Geographical Area |
| 2006 |
| 2005 |
| ||
Net revenue |
|
|
|
|
| ||
United States |
| $ | 9,297,051 |
| $ | 8,600,561 |
|
Canada |
| 70,622 |
| 264,346 |
| ||
Asia |
| 1,641,048 |
| 1,965,814 |
| ||
Mexico and South America |
| 1,098,280 |
| 1,427,934 |
| ||
Europe |
| 310,077 |
| 223,150 |
| ||
Other |
| 16,260 |
| 30,064 |
| ||
Total |
| $ | 12,433,338 |
| $ | 12,511,869 |
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| |||||||||||
Net revenue |
|
|
|
|
|
|
|
|
| |||||||||||
United States |
| $ | 11,185,760 |
| $ | 8,817,229 |
| $ | 29,416,083 |
| $ | 25,040,921 |
| |||||||
Canada |
| 171,584 |
| 160,711 |
| 531,913 |
| 529,354 |
| |||||||||||
Asia |
| 1,465,628 |
| 947,377 |
| 4,734,112 |
| 3,993,511 |
| |||||||||||
Mexico and South America |
| 1,206,656 |
| 1,414,445 |
| 3,954,120 |
| 3,234,129 |
| |||||||||||
Europe |
| 226,812 |
| 329,207 |
| 1,124,699 |
| 1,687,579 |
| |||||||||||
Other |
| 3,797 |
| 6,545 |
| 52,773 |
| 145,399 |
| |||||||||||
Total |
| $ | 14,260,237 |
| $ | 11,675,514 |
| $ | 39,813,700 |
| $ | 34,630,893 |
| |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
| At September 30, |
| At December 31, |
|
| March 31, |
| December 31, |
| ||||||
|
|
|
|
|
| 2005 |
| 2004 |
|
| 2006 |
| 2005 |
| ||||||
Identifiable assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
United States |
|
|
|
|
| $ | 47,058,710 |
| $ | 40,513,053 |
|
| $ | 47,747,423 |
| $ | 44,910,526 |
| ||
Asia |
|
|
|
|
| 1,365,819 |
| 1,657,987 |
|
| 1,508,802 |
| 2,025,401 |
| ||||||
Total |
|
|
|
|
| $ | 48,424,529 |
| $ | 42,171,040 |
|
| $ | 49,256,225 |
| $ | 46,935,927 |
|
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.
1418
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 report. Management’s 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 the Company’s 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 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’s expectations. The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect the Company’s business and financial performance. Moreover, the Company operates 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 the Company’s 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 the Company does communicate with securities analysts from time to time, it has ais against its policy against issuingto disclose to them any material non-public information or confirming financial forecast or projections issued by others.other confidential information. Accordingly, investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has 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 the Company.
Overview
The Company designs, develops, manufactures and distributes commercial motion picture equipment and lighting systems and also distributes restaurant products. The Company business was founded in 1932.
The Company has three reportable core operating segments: theatre, lighting and restaurant. Approximately 92%90% of fiscal year 2005 sales have resulted so far fromfirst quarter 2006 revenues were theatre products, 6% from9% were lighting products and 2% from1% were restaurant products.
Critical Accounting Policies and Estimates
General
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of the Board of Directors. Actual results may differ from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on
19
assumptions about matters that are uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.
The Company’s accounting policies are discussed in note 2 to the consolidated financial statements in this report. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the consolidated financial statements.
15
Revenue Recognition
The Company normally recognizes revenue from product sales upon shipment to the customer when collectibility is reasonably assured. Revenue related to services is recognized as earned over the terms of the contractsgoods or delivery of the service to customers when collectibility is reasonably assured. In certain circumstances revenue is not recognized until the customer. Thegoods are received by the customer or upon installation and customer acceptance based on the terms of the sale agreement. During 2003, the Company enters into transactions that represent multiple element arrangements, which may include a combinationadopted the provisions of services and asset sales. Under EITF 00-21,Revenue Arrangements withWith Multiple Deliverables, multiple element arrangements are assessed to determine whether they can be separated into more than one unit(EITF 00-21). EITF 00-21 addresses certain aspects of accounting. A multiple element arrangement is separated into more than one unit of accounting if all of the following criteria are met:
• The delivered item(s) has value on a standalone basis;
• There is objective and reliable evidence of the fair value of the undelivered item(s);
• If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.
If these criteria are not met, then revenue is deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value. There may be cases, however, in which there is objective and reliable evidence of fair value of the undelivered item(s) but no such evidence for the delivered item(s). In those cases, the residual method is used to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered item(s) equals the total arrangement consideration less the aggregate fair value of the undelivered item. During 2003 and through the third quarter of 2004, the Company deferred all revenue on a $2.2 million project. During the fourth quarter of 2004, approximately $2.1 million was recognized on this project, with the remaining revenue to be recognized during 2005.
The Company permits product returns from customers under certain circumstances and also allows returns under the Company’s warranty policy. Allowances for product returns are estimated and recorded at the time revenue is recognized. The return allowance is recorded as a reduction to revenues for the estimated sales value of the projected returns and as a reduction in cost of products for the corresponding cost amount. See note 2 to the consolidated financial statements for a full description of the Company’s revenue recognition policy.on contracts with multiple deliverable elements.
Allowance for Doubtful Accounts
The Company makes judgments about the credit worthiness of both current and prospective customers based on ongoing credit evaluations performed by the Company’s credit department. These evaluations include, but are not limited to, reviewing customers’ prior payment history, analyzing credit applications, monitoring the aging of receivables from current customers and reviewing financial statements, if applicable. The allowance for doubtful accounts is developed based on several factors including overall customer credit quality, historical write-off experience and a specific account analysis that project the ultimate collectibility of the accounts. As such, these factors may change over time causing the reserve level to adjust accordingly. When it is determined that a customer is unlikely to pay, a charge is recorded to bad debt expense in the consolidated statements of operations and the allowance for doubtful accounts is increased. When it becomes certain the customer cannot pay, the receivable is written off by removing the accounts receivable amount and reducing the allowance for doubtful accounts accordingly.
At September 30,March 31, 2006, there were approximately $7.0 million in gross outstanding accounts receivable and $0.4 million recorded in the allowance for doubtful accounts. At December 31, 2005, there were approximately $9.9$8.2 million in gross outstanding accounts receivable and $0.4 million recorded in the allowance for doubtful accounts to cover potential future customer non-payments. At December 31, 2004, there were approximately $6.7 million in gross outstanding accounts receivable and $0.5 million recorded in the allowance for doubtful accounts. If economic conditions deteriorate significantly or if one of the Company’s large customers were to declare bankruptcy, a larger allowance for doubtful accounts might be necessary.
Inventory Valuation
Inventories are stated at the lower of cost (first-in, first-out) or market and include appropriate elements of material, labor and overhead. 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’s estimates related to the Company’s future manufacturing schedules, customer demand and the development of digital technology, which could make the Company’s theatre products obsolete, among other items. Management has managed these risks in the past and believes that it can manage them in the future, however, operating margins may suffer if they are
16
unable to effectively manage these risks. At September 30, 2005,March 31, 2006 the Company had recorded gross inventory of approximately $13.0$12.5 million and $1.4$1.3 million of inventory reserves. This compared to $13.3$11.0 million and $1.1 million, respectively, at December 31, 2004.2005.
Warranty
The Company’s products must meet certain product quality and performance criteria. In addition to known claims or warranty issues, the Company estimates future claims on recent sales. The Company
20
relies on historical product claims data to estimate the cost of product warranties at the time revenue is recognized. In determining the accrual for the estimated cost of warranty claims, the Company considers experience with: 1) costs for replacement parts; 2) costs of scrapping defective products; 3) the number of product units subject to warranty claims and 4) other direct costs associated with warranty claims. If the cost to repair a product or the number of products subject to warranty claims is greater than originally estimated, the Company’s accrued cost for warranty claims would increase.
At March 31, 2006, the warranty accrual amounted to $0.7 million and the amount charged to expense for the three months ending March 31, 2006 was approximately $58,000. At March 31, 2005, the warranty accrual amounted to $0.7 million and the amount charged to expense for the three months ending March 31, 2005 was approximately $69,000.
Long-lived Assets
The Company reviews long-lived assets, exclusive of goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
The Company’s most significant long-lived assets subject to these periodic assessments of recoverability are property, plant and equipment, which have a net book value of $5.6$5.2 million at September 30, 2005.March 31, 2006. Because the recoverability of property, plant and equipment is based on estimates of future undiscounted cash flows, these estimates may vary due to a number of factors, some of which may be outside of management’s control. To the extent that the Company is unable to achieve management’s forecasts of future income, it may become necessary to record impairment losses for any excess of the net book value of property, plant and equipment over its fair value.
Goodwill
In accordance with SFAS No. 142, the Company evaluates its goodwill for impairment on an annual basis based on values at the end of the fourth quarter or whenever indicators of impairment exist. The Company has evaluated its goodwill for impairment in the fourth quarter of fiscal 2005 and has determined that the fair value of the reporting units exceeded their carrying value, so no impairment of goodwill was recognized. Goodwill of approximately $2.5 million is included in the consolidated balance sheets at September 30, 2005March 31, 2006 and December 31, 2004.2005. Management’s assumptions about future cash flows for the reporting units require significant judgment and actual cash flows in the future may differ significantly from those forecasted today.
Deferred Income Taxes
Income taxes are accounted for under the asset and liability method. The Company uses an estimate of its annual effective rate at each interim period based on the facts and circumstances known at the time, while the actual effective rate is calculated at year-end. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
For the nine months ended September 30, 2005, the Company recognized income tax expense of $2.0 million, as compared to $0.3 million for the nine months ended September 30, 2004. During the third quarter of 2004, the Company reversed all valuation allowances against its deferred tax assets as management believed that it was more likely than not that all deferred tax assets would be realized. The reversal was recorded as an offset against income tax expense in the amount of $1.2 million.21
Self-insurance Reserves
The Company is partially self-insured for certain employee health benefits. The related liabilities are included in the accompanying consolidated financial statements. The Company’s policy is to accrue the liabilities based on historical information along with certain assumptions about future events.
17
Stock-BasedShare-based Compensation
TheEffective January 1, 2006, the Company accountsadopted the provisions of Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), “Share-Based Payments,” which requires the measurement and recognition of compensation expense for its stock option plansall share-based payment awards to employees and directors based on estimated fair values. SFAS 123R supersedes the Company’s previous accounting methodology using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25 Accounting(“APB 25”), “Accounting for Stock Issued to Employees,which results in no charge to earnings when options are issued at fair market value. SFAS No. 123, Accounting for Stock-Based Compensation, issued subsequent toAPB Opinion No. 25and amended bySFAS No. 148, Accounting for Stock-Based Compensation – Transition andDisclosure, defines a fair value based method of accounting for employee stock options but allows companies to continue to measure compensation cost for employee stock options usingEmployees.” Under the intrinsic value based method, describedno share-based compensation expense related to stock option awards granted to employees had been recognized in APB Opinion No. 25.the Company’s consolidated statements of operations, as all stock option awards granted under the plans had an exercise price equal to the market value of the common stock on the date of the grant.
In accordance withThe Company adopted SFAS No. 148,123R using the Company has been disclosing inmodified prospective transition method. Under this transition method, compensation expense recognized during the notes to the consolidated financial statements the impact on net income and net income per share had the fair value based method been adopted. If the fair value method had been adopted, net income for the ninethree months ended September 30,March 31, 2006 included: (a) compensation expense for all share-based awards granted prior to, but not yet vested, as of December 31, 2005, and 2004 would have been $47,237 and $34,952 lower than reported, respectively.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. This Statement is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires companies to recognize in the income statementbased on the grant date fair value estimated in accordance with the original provisions of stock optionsSFAS 123, and other equity-based(b) compensation issuedexpense for all share-based awards granted subsequent to employees, but expresses no preference for a typeDecember 31, 2005, based on the grant date fair value estimated in accordance with the provisions of valuation model. SFAS No. 123(R) was effective for interim periods beginning after June 15, 2005. On April 14, 2005,123R. In accordance with the SEC announced the adoption of a new rule amending the compliance date. SFAS No. 123(R) will now be effective formodified prospective transition method, the Company’s first quarter beginning January 1, 2006. The Company is currently determiningconsolidated financial statements for prior periods have not been restated to reflect the impact of SFAS 123R. The Company recorded $31,723 of share-based compensation expense during the three months ended March 31, 2006 upon adoption of SFAS 123R.
On November 10, 2005 the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 123(R)123R-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of share-based compensation pursuant to SFAS 123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC Pool”) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on its financial position, resultsthe APIC Pool and consolidated statements of operationscash flows of the tax effects of employee and cash flows.director share-based awards that are outstanding upon adoption of SFAS 123R.
Recent Accounting Pronouncements
See Notenote 2 to the consolidated financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.
22
Three Months Ended September 30,March 31, 2006 Compared to the Three Months Ended March 31, 2005
Revenues
Net revenues in 2006 decreased to $12.4 million from $12.5 million in 2005. As discussed in further detail below, the decrease resulted primarily from lower theatre revenues.
|
| Three Months Ended March 31, |
| ||||
|
| 2006 |
| 2005 |
| ||
|
|
|
|
|
| ||
Theatre |
| $ | 11,132,206 |
| $ | 11,471,203 |
|
Lighting |
| 1,120,424 |
| 829,364 |
| ||
Restaurant |
| 180,708 |
| 211,302 |
| ||
Total net revenues |
| $ | 12,433,338 |
| $ | 12,511,869 |
|
Theatre Segment
Sales of theatre products decreased 3.0% from $11.5 million in 2005 to $11.1 million in 2006 due to lower demand for projection equipment which decreased to $7.3 million in 2006 from $8.1 million in 2005. The Company has begun to see the theatre exhibition industry’s transition to digital cinema. Theatre owners appear to be evaluating their options as they plan capital expenditures relative to new or used film projectors or digital equipment. In large part, the decrease in theatre revenues pertain to this uncertainty as certain customers have either delayed or cancelled previous film projector orders with the Company. While digital cinema remains a critical component of the Company’s long-term growth strategy, management is unsure how the transition will affect revenues during the rest of fiscal 2006.
Sales of xenon lamps rose 33.5% in 2006 to $1.4 million from $1.1 million a year ago primarily a result of the Company gaining market share and a general improvement of the theatre exhibition industry.
Sales of lenses rose 7.8% in 2006 to $0.6 million from $0.5 million a year ago.
Sales of theatre replacement parts amounted to $1.8 million in 2006 compared to $1.7 million in 2005.
The Company’s top ten theatre customers accounted for approximately 53% of total theatre revenues compared to 52% in 2005.
Lighting Segment
Sales of lighting products rose 35.1% to $1.1 million in 2006 from $0.8 million a year ago. The increase primarily pertains to higher revenues from britelights, sky-trackers and replacement parts. Spotlight sales were flat at $0.4 million for both 2006 and 2005 periods. The increase in britelight sales was due to a $0.2 million sale of 10K lights to be used by NASA. Sky-tracker revenues rose to approximately $0.2 million in 2006 from $0.1 million in 2005 due to higher demand for these large lights. Replacement parts also rose to $0.2 million from $0.1 million a year-ago due primarily to improved industry conditions.
Sales of all other lighting products, including but not limited to, xenon lamps and nocturns fell to $0.1 million from $0.2 million a year-ago, as the Company experienced weaker demand for xenon lamps in the lighting segment.
23
Restaurant Segment
Sales of restaurant products amounted to $0.2 million in both 2006 and 2005 as sales of both replacement parts and marinades were comparable to last year.
Export Revenues
Sales outside the United States (mainly theatre sales) declined to $3.1 million in 2006 from $3.9 million in 2005, due to lower demand in Mexico, South America, Asia and Canada. 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 Ballantyne’s products are priced higher than local manufacturers making it more difficult to generate sufficient profit to justify selling into these regions. Additionally, foreign exchange rates and excise taxes sometimes make it difficult to market the Company’s products overseas at reasonable selling prices.
Gross Profit
Consolidated gross profit decreased to $3.3 million in 2006 from $3.4 million in 2005 and as a percent of revenue declined to 26.8% from 27.1% in 2005.
Gross profit in the theatre segment fell to $2.9 million in 2006 from $3.1 million in 2005 and as a percentage of sales declined to 26.3% from 26.7% a year ago. The results reflect lower production demand in the manufacturing plant in Omaha which resulted in the Company not covering fixed overhead costs in a productive manner and certain manufacturing inefficiencies. The Company has reduced production personnel and is working towards bringing in other products to manufacture to offset expected lower demand for analog projectors in the future.
Gross profit in the lighting segment was approximately $0.3 million in both 2006 and 2005 but as a percent of revenues fell to 28.4% from 30.7%. The results reflect a less favorable product mix consisting of higher revenues of lighting equipment as opposed to higher-margin replacement part sales. The Company also experienced manufacturing inefficiencies as the decline in theatre projection equipment sales had a ripple effect throughout the manufacturing plant in Omaha.
Restaurant margins were at approximately $0.1 million for both the 2006 and 2005 periods. The results were expected as the Company is now only selling coater, marinades and replacement parts.
Selling and Administrative Expenses
Selling and administrative expenses amounted to $2.1 million in 2006 compared to $1.9 million in 2005 and as a percent of revenue rose to 16.9% in 2006 from 15.5% in 2005.
Administrative costs rose to $1.4 million or 11.0% of revenue compared to $1.2 million or 9.5% a year ago. The increase was primarily due to employee severance costs incurred as a result of planned workforce reductions as well as for legal expenses to settle the Company’s remaining asbestos lawsuit. Compliance and compensation costs were also higher during 2006 but were offset to a degree by lower bonus expenses.
Selling expenses amounted to $0.7 million in both 2006 and 2005 periods and as a percent of revenues remained at 5.9%.
24
Other Financial Items
Net other income amounted to $18,900 in 2006 compared to net other expense of $29,500 in 2005 as the Company received an insurance settlement during 2006 and gave fewer cash discounts to customers in 2006.
During 2006, the Company recorded interest income of $166,000 compared to $72,000 in 2005 as the Company earned interest from higher cash levels. Interest expense declined to $8,000 in 2006 from $8,700 in 2005.
The Company recorded income tax expense of $0.5 million in 2006 compared to $0.6 million in 2005. The effective tax rate declined to 34.8% in 2006 compared to 37.0% a year-ago due primarily to the Company investing in more tax-free municipal bonds during 2006.
For the reasons outlined herein, the Company earned net income of $0.9 million and basic and diluted earnings per share of $0.07 in both 2006 and 2005, respectively.
Three Months Ended March 31, 2005 Compared to the Three Months Ended September 30,March 31, 2004
Revenues
Net revenues in 2005 increased 22.1%10.7% to $14.3$12.5 million from $11.7$11.3 million in 2004. As discussed in further detail below, the increase resulted entirelyprimarily from higher revenues from theatre products.
|
| Three Months Ended September 30, |
|
| Three Months Ended March 31, |
| ||||||||
|
| 2005 |
| 2004 |
|
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Theatre |
| $ | 13,228,282 |
| $ | 10,414,218 |
|
| $ | 11,471,203 |
| $ | 10,384,132 |
|
Lighting |
| 822,404 |
| 988,845 |
|
| 829,364 |
| 605,202 |
| ||||
Restaurant |
| 209,551 |
| 272,451 |
|
| 211,302 |
| 308,078 |
| ||||
Total net revenue |
| $ | 14,260,237 |
| $ | 11,675,514 |
|
| $ | 12,511,869 |
| $ | 11,297,412 |
|
Theatre Segment
Sales of theatre products increased 27.0%10.5% from $10.4 million in 2004 to $13.2$11.5 million in 2005. In particular, sales of projection equipment increased to $9.6$8.1 million in 2005 from $7.1$7.2 million in 2004, primarily due to a combination of improved demand domestically coupled with higher demand from domestic exhibitors as they continue to add new screenssales in accordance with their business plans. A larger percent of the business is coming from theAsia and Mexico and South America. The Company’s largesttop ten theatre customers asaccounted for approximately 68%52% of total theatre sales in the third quarter resulted from the Company’s top 10 customers asrevenues compared to 52% a year ago.59% in 2004.
Sales of theatre replacement parts declined 16.2%2.7% from $1.9approximately $1.8 million in 2004 to $1.6approximately $1.7 million in 2005. Demand for replacement parts rose substantially during 20042005 but this growth has not been sustainable during 2005 due in partare expected to a non-recurring sale of replacement parts to a large exhibitor a year-ago.increase as the year progresses.
Sales of xenon lamps to the theatre industry rose 20.4%28.3% to $1.1 million from $0.9$0.8 million a year agoyear-ago primarily as a result of the continuing improvement of the theatre industry in general, increased marketing of the product line and obtainingincreased sales to the business from certain largelarger theatre exhibitors who previously purchased the product from competitors.exhibitors. The Company has also increased exposure by selling these lamps via an internet website.
18
Sales of lenses to theatre customers rose 87.5% to $0.9 million in 2005 fromwere flat at $0.5 million infor both 2005 and 2004 due in large part to obtaining the business of a large exhibitor who previously purchased product from a competitor. In addition, the Company’s supplier of lenses struggled in the past couple of years in providing timely shipments due to a bankruptcy reorganization. This supplier is now more financially solid and is able to deliver product when needed.periods.
Lighting Segment
Sales of lighting products decreased 16.8%increased 37.0% to $0.8 million in 2005 from $1.0$0.6 million a year agoyear-ago primarily a resultdue to sales of selling twelve MK5 Britelights® during 2004 for $0.2 million as part of a planfollow spotlights which rose to divest this product. There have been no further sales since that time. Spotlight sales were flat at $0.4 million for both 2005 and 2004 periods as the increased demand experienced in the first quarter has not been sustainable.from $0.1 million a year-ago. The Company is developing or marketing new spotlight products that are less expensive, smaller and more user-friendly to respond to the changing nature of the spotlight industry. The Company is also modifying how its core
25
spotlight products, the Super Trouper® and Gladiator®, are marketed and distributed as it believes these industry leading products still have a long market life ahead.
Sales of Skytrackers rose to $0.2 million comparedSkytracker® products declined to $0.1 million in 2004. Sales2005 from $0.3 million in 2004 primarily as a result of these largea special sale of lights have historically fluctuated from period to period as selling a few more or less offor the product can make a significant differenceStaples Center in sales. The Company expects sales to even out as the year progresses.Los Angeles during 2004 which did not reoccur in 2005.
Sales of all other lighting products, including but not limited to, replacement parts, xenon lamps, Nocturns® and Nocturns® declined to $0.2 million in 2005 comparedBritelights®, increased to $0.3 million in 2005 from $0.2 million in 2004. The decreased sales pertain to lower replacement part sales during the quarter.
Restaurant Segment
Restaurant sales fell to $0.2 million in 2005 from $0.3 million in 2004, a result of the Company’s decision to phase out its unprofitable equipment product line comprised of smokers, ventilation hoods and pressure fryers during 2004.fryers. The only sales during 2005 pertaining to the discontinued equipment product line consistedconsist of divesting the remaining inventory on hand. The Company continues to supply parts to its installed customer base and also continues to distribute its “Flavor Crisp®” marinade and breading products as well as support its “Chicken-On-The-Run” and “BBQ-On-The-Run” programs.
Export Revenues
Sales outside the United States (mainly theatre sales) rose to $3.1$3.9 million in 2005 from $2.9$3.4 million in 2004, as sales to Asia continued to strengthen as the year has progressed. The results reflectCompany experienced stronger demand for theatre products in this region.Asia, Mexico and South America. However, sales into Europe were lower than expected. 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 the Company’s products are priced higher than local manufacturers making it more difficult to generate sufficient profit to justify selling into these regions. Additionally, foreign exchange rates and excise taxes sometimes make it difficult to market the Company’s products overseas at reasonable selling prices.
Gross Profit
Consolidated gross profit increased to $4.1$3.4 million in 2005 from $3.3$3.2 million in 2004 andbut as a percent of revenue increased slightlydecreased to 28.4%27.1% in 2005 from 28.3%28.0% in 2004 due to the reasons discussed below:2004.
Gross profit in the theatre segment increased to $3.7$3.1 million in 2005 from $2.9$3.0 million in 2004 but as a percent of sales decreased to 27.9%26.7% from 28.3%28.5% a year ago. The results reflect projection equipment and lamp sales representing a higher percentage of sales in 2005 and which carry a lower margin than certain other products within the segment, namely replacement parts. In addition, the Company is experiencing the effects of rising raw material and component parts prices for certain of its products and is also experiencing some customer pricing issues to stay competitive. The Company is currently working on strategies to cover these cost increases and regain pricing competitiveness.
Gross profit in the lighting segment amounted to $0.3 million for both 2005 and 2004 but as a percent of revenue rose to 32.9% compared to 27.9% a year ago. The results primarily reflect production efficiency gains.
Restaurant margins were also flat at approximately $0.1 million for both the 2005 and 2004 periods but as a percent of revenue rose to 43.5% from 31.6% a year ago. Restaurant margins have been volatile due to the sell off of the discontinued equipment product line. Now that the majority of this equipment is sold, margins should stabilize in the 35-40% range.
19
Selling and Administrative Expenses
Selling and administrative expenses amounted to approximately $2.2 million in 2005 compared to $1.9 million in 2004 but as a percent of revenue declined to 15.3% from 15.9% in 2004. The expenses rose due to additional consulting costs pertaining to compliance with the Sarbanes/Oxley Act of 2002 and other consulting projects, as well as higher employee bonus expenses. The favorable change as a percentage of revenue pertains to covering certain fixed costs with higher revenues during 2005 and managing selling expenses in an effective manner.
Other Financial Items
During 2005, the Company recorded interest income of approximately $105,000 compared to $38,000 in 2004 as the Company earned interest from higher cash levels and invested in higher yield commercial paper. Interest expense was flat at approximately $8,000 in 2005 compared to a year-ago.
The Company recorded income tax expense in 2005 of $0.8 million compared to an income tax benefit of $0.7 million in 2004. The results reflect the reversals of certain valuation reserves pertaining to net deferred tax assets in the amount of $1.2 million during 2004. The effective tax rate for 2004, excluding the valuation reserve reversals, amounted to 37.9% compared to 38.3% in 2005. The higher effective rate pertains to the Company paying taxes in more states than a year ago.
For the reasons outlined herein, the Company earned net income in 2005 of $1.2 million compared to $2.1 million in 2004. This translated into net income per share basic and diluted of $0.09 in 2005 compared to $0.17 and $0.16, respectively, in 2004. The results reflect the income tax benefit of $1.2 million in 2004 relating to the reversal of the deferred tax valuation allowance discussed earlier.
Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September 30, 2004
Revenues
Net revenues in 2005 increased 15.0% to $39.8 million from $34.6 million in 2004. As discussed in further detail below, the increase resulted primarily from higher revenues from theatre products.
|
| Nine Months Ended September 30, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Theatre |
| $ | 36,806,106 |
| $ | 31,503,673 |
|
Lighting |
| 2,359,449 |
| 2,174,434 |
| ||
Restaurant |
| 648,145 |
| 952,786 |
| ||
Total net revenues |
| $ | 39,813,700 |
| $ | 34,630,893 |
|
Theatre Segment
Sales of theatre products increased 16.8% from $31.5 million in 2004 to $36.8 million in 2005. In particular, sales of projection equipment increased to $25.9 million in 2005 from $21.6 million in 2004, due primarily to higher demand from domestic exhibitors as they continue to add new screens in accordance with their business plans. A larger percentage of the business is coming from the Company’s largest customers as 55% of total theatre sales have resulted from the Company’s top 10 customers compared to 50% a year ago.
Sales of theatre replacement parts declined 9.9% from approximately $5.6 million in 2004 to approximately $5.1 million in 2005. Demand for replacement parts rose substantially during 2004 but has not been sustainable during 2005 due in part to a special sale of replacement parts to a large exhibitor a year-ago.
Sales of xenon lamps to the theatre industry rose 25.1% to $3.5 million from $2.8 million a year ago primarily as a result of the continuing improvement of the theatre industry in general, increased marketing of the product line and obtaining the business of a large exhibitor who previously purchased the product from a competitor.
20
Sales of lenses to theatre customers rose 53.9% to $2.4 million in 2005 from $1.5 million in 2004, due in part to obtaining the business of a large exhibitor who previously purchased product from a competitor. In addition, the Company’s supplier of lenses struggled in the past couple of years in providing timely shipments due to a bankruptcy reorganization which affected sales. This supplier is now more financially solid and is able to deliver product when needed.
Lighting Segment
Sales of lighting products increased 8.5% to $2.4 million from $2.2 million a year ago primarily a result of sales of follow spotlights which rose to $1.1 million from $0.8 million a year ago due in part to a turnaround in industry demand during the first and second quarters. The Company is developing or marketing new spotlight products that are less expensive, smaller and more user-friendly to respond to the changing nature of the spotlight industry. The Company is also modifying how its core spotlight products, the Super Trouper® and Gladiator®, are marketed and distributed as it believes these industry leading products still have a long market life ahead.
Sales of Skytracker® products declined to $0.4 million in 2005 from $0.5 million in 2004 primarily as a result of a special sale of lights for the Staples Center in Los Angeles during the first quarter of 2004 which did not reoccur in 2005.
Sales of all other lighting products, including but not limited to, replacement parts, xenon lamps, Nocturns® and Britelights®, decreased to $0.8 million in 2005 from $0.9 million in 2004. The decrease primarily resulted from the Company selling twelve MK5 Britelights® for approximately $0.2 million during 2004 as part of a plan to divest this product. There have been no further sales since that time. Sales of xenon lamps partially offset this lost revenue source during 2005.
Restaurant Segment
Restaurant sales fell to $0.6 million in 2005 from $1.0 million in 2004, a result of the Company’s decision to phase out its unprofitable equipment product line comprised of smokers, ventilation hoods and pressure fryers during 2004. The only sales pertaining to the equipment product line consist of divesting the remaining inventory on hand. The Company continues to supply parts to its installed customer base and also continues to distribute its “Flavor Crisp®” marinade and breading products as well as support its “Chicken-On-The-Run” and “BBQ-On-The-Run” programs.
Export Revenues
Sales outside the United States (mainly theatre sales) rose to $10.4 million in 2005 from $9.6 million in 2004, as the Company experienced stronger demand in Asia, Mexico and Latin America. The Company is becoming more of a presence in these regions at a time when demand for theatre products are increasing. Sales into Europe were below year-ago levels but did show improvements during the second and third quarters. 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 the Company’s products are priced higher than local manufacturers making it more difficult to generate sufficient profit to justify selling into these regions. Additionally, foreign exchange rates and excise taxes sometimes make it difficult to market the Company’s products overseas at reasonable selling prices.
Gross Profit
Consolidated gross profit increased to $11.1 million in 2005 from $9.7 million in 2004 but as a percent of revenue remained steady at 28.0% for both periods.
Gross profit in the theatre segment increased to $10.1 million in 2005 from $8.9 million in 2004 but as a percent of revenue decreased to 27.4% from 28.2% a year ago. The results reflect projection equipment and lamp sales representing a higher percentage of sales in 2005 and which generally carry a lower margin than the other products within the segment, namely replacement parts. Theparts and lenses. In addition, the Company is also experiencing the effects of rising raw material and component parts prices for certain of its products.
Gross profit in the lighting segment rose to $0.8$0.3 million in 2005 from $0.6$0.1 million in 2004 due to lower manufacturing costs and asalso higher margin replacement parts accounting for a larger percent of revenue rose to 32.2% from 26.8% in 2004 due primarily to a more favorable product mix sold and production efficiency gains.revenues.
Restaurant margins rose to $0.3were flat at approximately $0.1 million infor both the 2005 compared to $0.2 million inand 2004 and as a percent of revenue rose to 45.5% compared to 25.3% in 2004. Restaurant margins have been volatile due to the sell off of the discontinued equipment product line. Now that the majority of this equipment is sold, margins should stabilize in the 35-40% range.periods.
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Selling and Administrative Expenses
Selling and administrative expenses amounted to $6.2$1.9 million in 2005 compared to $5.6$1.8 million in 2004 but as a percent of revenue declined to 15.5% from 16.1%15.7% in 2004. These expenses rose due to additional consulting costs pertaining to compliance with the Sarbanes/Oxley Act of 2002 and other consulting projects, as well as higher employee bonus expenses. The favorable change as a percentage of revenue pertains toto; 1) covering certain fixed costs with higher revenues during 2005, despite incurring additional costs pertaining to compliance with the Sarbanes-Oxley Act of 2002 and those pertaining to the Company’s bonus plan, 2) lower bad debt expenses and 3) managing selling expenses in an effective manner.
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Other Financial Items
During 2005, the Company recorded interest income of approximately $273,000$72,200 compared to $76,000$12,400 in 2004 as the Company earned interest from higher cash levels and invested in higher yield commercial paper. Interest expense declined to approximately $26,000$8,700 in 2005 from approximately $28,000$11,100 in 2004 primarily resulting from the fee on the Company’s unused portion of its credit facility being renegotiated to 0.125% from 0.375% during 2004.
The Company recorded income tax expense in 2005 of $2.0$0.6 million compared to $0.3$0.5 million in 2004.2004 reflecting higher taxable income. The 2004 amount reflects reversals of certain deferred tax asset valuation reserves resulting in a credit to income tax expense in the amount of $1.2 million. TheCompany’s effective tax excluding the valuation reversals, amountedrate remained comparable to 37.0% in 2004 compared to 38.0% in 2005. The increase in the effective rate pertains primarily to the Company paying taxes in more states than a year ago.2004.
For the reasons outlined herein, the Company earned net income in 2005 of $3.2 million$942,000 compared to $3.8 million$855,000 in 2004. This translated into net income per share basic and diluted of $0.24 and $0.23$0.07 in 2005 respectively, compared to $0.30$0.07 and $0.28,$0.06, respectively, in 2004. The results reflect the income tax benefit of $1.2 million in 2004 relating to the reversal of the deferred tax valuation allowance discussed earlier.
Liquidity and Capital Resources
The Company is a party to a revolving credit facility with First National Bank of Omaha expiring August 28, 2006. The Company plans on renewing the credit facility in the ordinary course of business. The credit facility provides for borrowings up to the lesser of $4.0 million or amounts determined by an asset basedasset-based lending formula, as defined. Borrowings available under the credit facility amounted to $4.0 million at September 30, 2005.March 31, 2006. No amounts are currently outstanding. The Company pays interest on outstanding amounts equal to the Prime Rate plus 0.25% (7.0%(8.0% at September 30, 2005)March 31, 2006) and pays a fee of 0.125% on the unused portion. The credit facility contains certain restrictive covenants mainly related to maintaining certain earnings, as defined, and restrictions on acquisitions and dividends. All of the Company’s personal property and stock in its subsidiaries secure this credit facility.
Net cash provided by operating activities amountedrose to $3.3$2.2 million in 2005 compared2006 from $2.0 million a year-ago, despite operating income decreasing $0.2 million. The Company was able to $3.6 million in 2004. The decrease inincrease cash flow primarily relates to higherflows by decreasing accounts receivable balances inby $1.2 million from the end of fiscal 2005. In addition, despitethe timing of income tax payments increased cash flow by an additional $0.2 million compared to the first quarter of 2005. Certain items reduced cash flows including inventory levels decreasing $0.5purchases and bonus payments. Inventories rose $1.3 million during 2005, it could not match the quarter due to a slowdown in demand, cancellation of an order and purchasing more digital projectors for consignment and sales purposes. Offsetting the impact of the higher inventory liquidations experienced during 2004 of $2.3 million. The Company is now returning to more normalized inventory turnover levels as the theatre exhibition industry stabilizes. Items contributing to operating cash flow primarily consisted of higher operating income, accounts payable and income tax accruals. The increasesbalances was an increase in accounts payable and income taxes essentially relatebalances of $1.3 million due to the timing of paying for certain of the aforementioned inventory purchases. Finally, the Company paid out $0.9 million in bonus payments and are expected to even out as the year progresses.accrued for at December 31, 2005.
Net cash used in investing activities amounted to $0.7 million$118,000 in 2006 compared to $83,000 in 2005 comparedand related entirely to $0.6 millioncapital expenditures in 2004, as both periods included purchasing large machining centers to meet current and future demands.periods.
Net cash provided by financing activities amounted to $814,000$0.4 million compared to $51,000$0.2 million in 2004.2005. The Company received proceeds of $833,000$0.2 million from its employee stock option plans in 20052006, recorded a $0.2 million income tax benefit pertaining to these exercises and made $19,000debt payments of debt payments. In large part, the proceeds received from the stock plans resulted from plans set up under SEC Rule 10b5-1 for certain executives to exercise and sell certain stock options prior to the options expiring in September of 2005.$6,800. During 2004,2005, the Company received proceeds of $69,000$0.2 million from its stock plans and made debt payments of $18,000.$6,300.
Transactions with Related and Certain Other Parties
There were no significant transactions with related and certain other parties during 2005.2006.
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Internal Controls Over Financial Reporting
Current SEC rules implementing Section 404 of the Sarbanes-Oxley Act of 2002 will require the Company’s annual reportAnnual Report on Form 10-K for fiscal 2007 to include a report on management’s assessment of the effectiveness of the Company’s internal controls
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over financial reporting and a statement that the Company’s independent registered public accounting firm has issued an attestation report on management’s assessment of the Company’s internal controls over financial reporting and a report on the effectiveness of the Company’s internal controls over financial reporting. However, it is possible that the Company will become an accelerated filer“accelerated filer” as defined in Rule 12b-2 of the Exchange Act and if so this report and statement will need to be included in its Form 10-K for fiscal 2006. The Company will not know whether it will become an accelerated filer until June 30, 2006, which is the next date at which this status is determined. While the Company has not yet identified any material weaknesses in internal controls over financial reporting, there are no assurances that the Company will not discover deficiencies in its internal controls as it implements new documentation and testing procedures to comply with the new Section 404 reporting requirement. If the Company discovers deficiencies or is unable to complete the work necessary to properly evaluate its internal controls over financial reporting, there is a risk that management and/or the Company’s independent registered public accounting firm may not be able to conclude that the Company’s internal controls over financial reporting are effective.
Concentrations
The Company’s top ten customers accounted for approximately 51%55% of 2006 consolidated net revenues for the nine months ended September 30, 2005. These customers were primarily from the theatre segment.revenues. Trade accounts receivable from these customers represented approximately 67%52% of net consolidated receivables at September 30, 2005. In addition, receivables from Vari Internacional,March 31, 2006. Sales to AMC Theatres, Inc. and Regal Entertainment Group and National Cinema SupplyCinemas, Inc., each represented over 10% of consolidated revenues. Additionally, receivables from Vari International represented 27% of net consolidated receivables at September 30, 2005.March 31, 2006. While the Company believes its relationships with such customers are stable, most arrangements are made by purchase order and are terminable at will by either party. A significant decrease or interruption in business from the Company’s significant customers could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company 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 the Company sells its products. In addition, advancing technologies, such as digital cinema, could disrupt historical customer relationships.
Financial instruments that potentially expose the Company to a concentration of credit risk principally consist of accounts receivable. 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 or uses letters of credit.
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Increased competition also results in continued exposure to the Company. If the Company loses market share or encounters more competition relating to the development of new technology for alternate means of motion picture presentation such as digital technology, the Company may be unable to lower its cost structure quickly enough to offset the lost revenue. To counter these risks, the Company has initiated a cost reduction program, continues to streamline its manufacturing processes and is formulating a strategy to respond to the digital marketplace. The Company also is focusing on a growth and diversification strategy to find alternative product lines to become less dependent on the theatre exhibition industry. However, no assurances can be given that this strategy will succeed or that the Company will be able to obtain adequate financing to take advantage of potential opportunities.
The principal raw materials and components used in the Company’s manufacturing processes include aluminum, reflectors, electronic subassemblies and sheet metal. The Company utilizes a single contract manufacturer for each of its intermittent movement components, reflectors, certain aluminum castings, lenses and xenon lamps. Although 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.
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.
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Off Balance Sheet Arrangements and Contractual Obligations
The Company’s 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 the Company’s other contractual obligations:
|
| Payments Due by Period |
|
| Payments Due by Period |
| ||||||||||
Contractual Obligations |
| Total |
| Remaining in |
| Thereafter |
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| Total |
| Remaining in 2006 |
| Thereafter |
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Long-term debt, including interest |
| $ | 52,150 |
| 7,450 |
| 44,700 |
| ||||||||
Long-term debt |
| $ | 37,250 |
| 22,350 |
| 14,900 |
| ||||||||
Postretirement benefits |
| 254,941 |
| 5,647 |
| 249,294 |
| |||||||||
Operating leases |
| 202,915 |
| 39,199 |
| 163,716 |
|
| 151,882 |
| 66,300 |
| 85,582 |
| ||
Less sublease receipts |
| (58,203 | ) | (21,826 | ) | (36,377 | ) |
| (14,551 | ) | (14,551 | ) | — |
| ||
Net contractual cash obligations |
| $ | 196,862 |
| 24,823 |
| 172,039 |
|
| $ | 429,522 |
| 79,746 |
| 349,776 |
|
There arewere no other contractual obligations other than inventory and property, plant and equipment purchases in the ordinary course of business.
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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.
Environmental and Legal
See Notenote 2 to the consolidated financial statements and Item 3 of this report, for a full description of all environmental and legal matters.
Inflation
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. The Company did experience higher than normal prices on certain metals and aluminum productsraw materials during the yearfiscal 2005 coupled with higher freight costs as freight companies passed on a portion of higher gas and oil costs. Historically, the Company has been able to offset any inflationary effects by either increasing prices or improving cost efficiencies.
2006 Outlook
The Company has begun to see evidence of the theatre exhibition industry’s expected transition to digital cinema during 2006. Theatre owners are now evaluating their options as they plan capital expenditures relative to new or used film projectors or digital equipment. However, the extent and timing of the impact to Ballantyne’s 2006 revenues and operations is currently unclear. Digital cinema remains an important component of the Company’s long-term growth strategy, and it continues to work closely with its partner, NEC Solutions (America), Inc., to launch this next generation technology within the exhibition industry.
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 rates and weak economic conditions. In particular, the Company was impacted by the downturn in the North American theatre exhibition industry in fiscal years 2000 to 2002 in the form of lost revenues and bad debts. Additionally, as a majority of sales are currently denominated in U.S. dollars, a strengthening of the dollar can and sometimes has 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. The Company purchases the majority of its lenses from a German manufacturer. The strengthening of the Euro compared to the U.S. dollar made these purchases more expensive during 2004. Based on forecasted purchases during 2005,2006, an average 10% devaluation of the dollar compared to the Euro would cost the Company approximately $98,000$0.2 million per annum.
The Company has also evaluated its exposure to fluctuations in interest rates. If the Company would borrow up to the maximum amount available under its variable interest rate credit facility, a one percent increase in the interest rate would increase interest expense by $40,000 per annum. No amounts are currently outstanding under the credit facility. Interest rate risks from the Company’s other interest-related accounts such as its postretirement obligations are deemed to not be significant.
The Company has not historically and is not currently using derivative instruments to manage the above risks.
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Item 4. Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s 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 Company’s 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 recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There have been no changes in the Company’s internal control over financial reporting during the fourth 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.
A review of the Company’s current litigation is disclosed in Notenote 2 to the consolidated financial statements. Except as discussed in Note 2, the other legal proceedings to which the Company is a party are ordinary routine litigation matters incidental to the business.
Item 1A, “Risk Factors” of the Company’s 2005 Annual Report on Form 10-K includes a detailed discussion of the Company’s risk factors. There have been no material changes to the risk factors as previously disclosed in Item 1A of the Form 10-K.
See the Exhibit Index on page 27.33.
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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: | /s/ |
| By: | /s/ | BRAD FRENCH |
| John Wilmers, President, |
| Brad French, Secretary/Treasurer and | ||
Date: |
| Date: |
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31.1
| Rule 13a-14(a) Certification of Chief Executive Officer.* |
31.2 | Rule 13a-14(a) Certification of Chief Financial Officer.* |
32.1 | 18 U.S.C. Section 1350 Certification of Chief Executive Officer.* |
32.2 | 18 U.S.C. Section 1350 Certification of Chief Financial Officer. * |
•* - Filed herewith
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