UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2004
OR

 

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                  to
	Commission File Number: 1-13906

 

BALLANTYNE OF OMAHA, INC.

(Exact name of Registrant as specified in its charter)

 

 

4350 McKinley Street, Omaha, Nebraska 68112

(Address of principal executive offices including zip code)

 

Registrant’s telephone number, including area code:

(402) 453-4444

 

(Former name, former address and former fiscal year, if changed since last report.)

 

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

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   o       No   ý

 

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

 

 

 

TABLE OF CONTENTS

 

PART I. Financial Information
Item 1.		Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition And Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
PART II. Other Information
Item 1.		Legal Proceedings
Item 6.		Exhibits
		Signatures

 

 

Part I. Financial Information

 

Item 1.  Financial Statements

 

Ballantyne of Omaha, Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

September 30, 2004 and December 31, 2003

 

		September 30, 2004			December 31, 2003
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	11,791,160		$	8,761,568
Accounts receivable (less allowance for doubtful accounts of $419,099 in 2004 and $512,962 in 2003)		7,619,460			6,698,725
Inventories, net		14,793,289			12,459,852
Deferred income taxes		1,524,215			—
Other current assets		528,911			963,613
Total current assets		36,257,035			28,883,758
Property, plant and equipment, net		5,682,008			5,794,935
Goodwill, net		2,467,219			2,467,219
Intangible assets, net		33,554			64,073
Other assets		23,757			24,782
Total assets		$	44,463,573		$	37,234,767
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt		$	25,502		$	24,253
Accounts payable		4,123,557			3,766,773
Warranty reserves		756,404			732,033
Accrued group health insurance claims		260,996			386,911
Customer deposits		2,673,077			566,434
Other accrued expenses		2,907,834			2,345,133
Income tax payable		360,670			255,835
Total current liabilities		11,108,040			8,077,372
Deferred income taxes		280,539			—
Long-term debt, excluding current installments		49,019			68,306
Stockholders’ equity:
Preferred stock, par value $.01 per share; Authorized 1,000,000 shares, none outstanding		—			—
Common stock, par value $.01 per share; Authorized 25,000,000 shares; issued 14,931,016 shares in 2004 and 14,814,604 shares in 2003		149,310			148,146
Additional paid-in capital		31,982,903			31,891,630
Retained earnings		16,209,216			12,364,767
		48,341,429			44,404,543
Less 2,097,805 common shares in treasury, at cost		(15,315,454		)	(15,315,454		)
Total stockholders’ equity		33,025,975			29,089,089
Total liabilities and stockholders’ equity		$	44,463,573		$	37,234,767

 

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, 2004 and 2003

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net revenues		$	11,675,514		$	9,411,274		$	34,630,893		$	26,381,245
Cost of revenues		8,371,203			7,227,858			24,931,685			20,434,461
Gross profit		3,304,311			2,183,416			9,699,208			5,946,784
Selling and administrative expenses:
Selling		759,395			971,329			2,130,827			2,535,393
Administrative		1,204,823			898,497			3,549,557			3,009,553
Total selling and administrative expenses		1,964,218			1,869,826			5,680,384			5,544,946
Income from operations		1,340,093			313,590			4,018,824			401,838
Interest income		38,284			32,454			76,248			75,934
Interest expense		(8,174		)	(10,475		)	(27,531		)	(28,906		)
Gain on disposal of assets, net		109,230			—			110,030			136,056
Other income (expense)		(28,888		)	30,654			(49,170		)	20,518
Income before income taxes		1,450,545			366,223			4,128,401			605,440
Income tax benefit (expense)		693,594			(182,982		)	(283,952		)	(248,834		)
Net income		$	2,144,139		$	183,241		$	3,844,449		$	356,606
Basic net income per share		$	0.17		$	0.01		$	0.30		$	0.03
Diluted net income per share		$	0.16		$	0.01		$	0.28		$	0.03
Weighted average shares outstanding:
Basic		12,833,211			12,643,601			12,789,408			12,626,196
Diluted		13,626,594			13,216,296			13,572,924			13,070,305

 

See accompanying notes to consolidated financial statements.

 

2

 

Ballantyne of Omaha, Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows

 

Nine Months Ended September 30, 2004 and 2003

(Unaudited)

 

		2004			2003
Cash flows from operating activities:
Net income		$	3,844,449		$	356,606
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		19,095			(58,543		)
Depreciation of plant and equipment		795,230			885,230
Other amortization		30,519			30,556
Gain on disposal of fixed assets		(110,030		)	(136,056		)
Deferred income taxes		(1,243,676		)	(168,000		)
Changes in assets and liabilities:
Accounts and notes receivable		(939,830		)	(446,306		)
Inventories		(2,333,437		)	89,187
Income taxes		128,542			1,473,713
Other current assets		434,702			(326,845		)
Other assets		1,025			(12,499		)
Accounts payable		356,784			113,486
Warranty reserves		24,371			(542,479		)
Accrued group health insurance claims		(125,915		)	(95,384		)
Customer deposits		2,106,643			—
Other accrued expenses		562,701			366,225
Net cash provided by operating activities		3,551,173			1,528,891
Cash flows from investing activities:
Capital expenditures		(841,352		)	(356,228		)
Proceeds from sale of assets		269,079			290,000
Net cash used in investing activities		(572,273		)	(66,228		)
Cash flows from financing activities:
Payments on long-term debt		(18,038		)	(12,926		)
Proceeds from exercise of stock options		68,730			20,914
Net cash provided by financing activities		50,692			7,988
Net cash contributed to continuing operations  from discontinued operations		—			473,231
Net increase in cash and cash equivalents		3,029,592			1,943,882
Cash and cash equivalents at beginning of period		8,761,568			6,276,011
Cash and cash equivalents at end of period		$	11,791,160		$	8,219,893

 

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, 2004 and 2003

(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, lighting systems and restaurant products. The Company’s products are distributed to movie exhibition companies, sports arenas, auditoriums, amusement parks and special venues, restaurants, supermarkets and convenience stores. Refer to the Business Segment Section (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 2003.

 

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.

 

c.                                       Allowance for Doubtful Accounts

 

Accounts receivable are presented net of an allowance for doubtful accounts of $419,099 and $512,962 at September 30, 2004 and December 31, 2003, 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.

 

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.

 

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) 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 are 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. 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.

 

For the nine months ended September 30, 2004, the Company recognized income tax expense of $284,000, as compared to income tax expense of $249,000 for the nine months ended September 30, 2003.  During the third quarter of 2004, the Company reversed all valuation allowances against its deferred tax assets as management believes that it is more likely than not that all deferred tax assets will be realized taking into consideration all available evidence including historical pre-tax and taxable income, projected future pre-tax and taxable income and the expected timing of the reversals of existing temporary differences.  The reversal was recorded as an offset against income tax expense in the amount of $1.2 million.

 

h.                                      Revenue Recognition

 

The Company recognizes revenue from product sales upon shipment or delivery of the service to the customer when collectibility is reasonably assured, unless the criteria of EITF 00-21, Revenue Arrangements with Multiple Deliverables, require deferral of revenue until receipt of goods by the customer or installation and customer acceptance based on the terms of the sales agreement.

 

The Company enters into transactions that represent multiple element arrangements, which may include a combination of services and asset sales. Multiple element arrangements are assessed to determine whether they can be separated into more than one unit of accounting. A multiple element arrangement is separated into more than one unit of accounting if all of the following criteria are met.

 

•                  The delivered item(s) has value on a stand-alone 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.

 

5

 

i.                                          Fair Value of Financial Instruments

 

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

 

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 Per Common Share

 

The Company computes and presents net income per share in accordance with SFAS No. 128, Earnings Per Share. Net income per share—basic has been computed on the basis of the weighted average number of shares of common stock outstanding. Net income per share—diluted has been computed on the basis of the weighted average number of shares of common stock outstanding after giving effect to potential common shares from dilutive stock options.

 

The following table provides reconciliation between basic and diluted income per share:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Basic income per share:
Income applicable to common stock		$	2,144,139		$	183,241		$	3,844,449		$	356,606
Weighted average common shares outstanding		12,833,211			12,643,601			12,789,408			12,626,196
Basic income per share		$	0.17		$	0.01		$	0.30		$	0.03
Diluted income per share:
Income applicable to common stock		$	2,144,139		$	183,241		$	3,844,449		$	356,606
Weighted average common shares outstanding		12,833,211			12,643,601			12,789,408			12,626,196
Assuming conversion of options outstanding		793,383			572,695			783,516			444,109
Weighted average common shares outstanding, as adjusted		13,626,594			13,216,296			13,572,924			13,070,305
Diluted income per share		$	0.16		$	0.01		$	0.28		$	0.03

 

At September 30, 2004, options to purchase 237,925 shares of common stock at a weighted average price of $8.61 per share were outstanding, but were not included in the computation of net income per share—diluted 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. These options expire between January 2007 and January 2014.  At September 30, 2003, options to purchase 596,631 shares of common stock at a weighted average price of $5.90 per share were outstanding, but were not included in the computation of net income per share—diluted for the three and nine months ended September 30, 2003 as the options’ exercise price was greater than the average market price of the common shares.

 

6

 

l.                                          Stock Based Compensation

 

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, the Company elected to account for its stock based compensation plans under the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Consequently, when both the number of shares and the exercise price is known at the grant date, no compensation expense is recognized for stock options issued to employees and directors unless the exercise price of the option is less than the quoted value of the Company’s common stock at the date of grant. Had compensation cost for the Company’s stock compensation 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 been reduced to the pro forma amounts indicated below:

 

`		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net income:
As reported		$	2,144,139		$	183,241		$	3,844,449		$	356,606
Stock-based compensation (expense) benefit, determined under fair value based method, net of tax		3,741			(45,202		)	(34,952		)	(142,582		)
Proforma net income		$	2,147,880		$	138,039		$	3,809,497		$	214,024
Income per share—basic
As reported		$	0.17		$	0.01		$	0.30		$	0.03
Proforma net income per share		$	0.17		$	0.01		$	0.30		$	0.02
Income per share—diluted
As reported		$	0.16		$	0.01		$	0.28		$	0.03
Proforma net income per share		$	0.16		$	0.01		$	0.28		$	0.02

 

The average fair value of each option granted in 2004 and 2003 was $1.69 and $0.83, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model made with the following weighted average assumptions:

 

 

7

 

m.                                    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 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 $5.7 million at September 30, 2004 and $5.8 million at December 31, 2003. 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.

 

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.

 

The following table summarizes warranty activity for the periods indicated below:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Balance at beginning of period		$	697,338		$	878,188		$	732,033		$	1,332,173
Charged to expense		268,654			40,515			414,824			185,679
Amounts written off, net		(209,588		)	(129,009		)	(390,453		)	(728,158		)
Balance at end of period		$	756,404		$	789,694		$	756,404		$	789,694

 

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

 

Ballantyne is a party to various legal actions that have arisen in the normal course of business.  These actions involve normal business issues such as products liability.

 

During February 2004, Ballantyne settled an asbestos-related lawsuit in a case in the Supreme Court of the State of New York entitled Prager v. A.W. Chesterton Company, et al, including Ballantyne.

 

Ballantyne is also a defendant in two other asbestos cases.  One entitled Bercu v. BICC Cables Corporation, et. al., in the Supreme Court of the State of New York and one entitled Julia Crow, Individually and as Special Administrator of the Estate of Thomas Smith, deceased v. Ballantyne of Omaha, Inc. in Madison County, Illinois.  In both cases, there are numerous defendants including Ballantyne.  At this time, neither case has 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 these matters could have a material effect on the financial position of Ballantyne.

 

During October 2004, the Company’s insurance carrier settled a lawsuit entitled Scott Henry, et al., v. Ballantyne of Omaha, Inc. d/b/a Skytracker of Florida, et al.  Since the lawsuit was covered by insurance, Ballantyne will only pay an immaterial deductible pertaining to the settlement.

 

8

 

Ballantyne currently has a claim for approximately $0.4 million pending against it arising out of the bankruptcy of a customer filed in 2002.  The claim alleges that Ballantyne received preferential payments from the customer during the ninety days before the customer filed for bankruptcy protection.  The claim was brought against Ballantyne in the fourth quarter of 2003.  Ballantyne has recorded an accrual with respect to this contingency in an amount less than the full amount of the claim that represents the best estimate within the range of likely exposure and intends to vigorously defend against the claim.  Given the nature of this claim, it is possible that the ultimate outcome could differ from the recorded amount.

 

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 (“EPA”) 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.  At September 30, 2004, the Company has provided for management’s estimate of the Company’s exposure relating to this matter which is not material to the financial statements.

 

r.                                         Contingencies

 

In October 2003, management identified that an administrative-level employee misappropriated funds from the Company. The actions took place from 1998 through October 2003, when the employee was terminated. As a result of the investigation by the Company’s management and audit committee, the total loss was determined to be approximately $768,000 over the five-year-period. The additional expenses incurred due to the misappropriation of funds were primarily recorded and expensed by the Company as selling expenses in the years when the fraudulent expense claims were submitted by the former employee.  The Company has subsequently recovered $460,000 of the misappropriated funds from insurance and other sources of which $160,000 was received and recorded in 2004.  No other recovery or restitution possibilities exist.

 

s.                       Recently Issued or Adopted Accounting Pronouncements

 

In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21).  EITF 00-21 addresses certain aspects of revenue recognition on contracts with multiple deliverable elements.  EITF 00-21 was effective prospectively for new or modified contracts beginning July 1, 2003.  The adoption of EITF 00-21 required the deferral of all revenue on a $2.2 million project in progress at September 30, 2004 and December 31, 2003.

 

In December 2003, the Financial Accounting Standards Board (“FASB”) revised SFAS No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits — an amendment of FASB Statements No. 87, 88, and 106.  The Statement revises employers’ disclosures about pension plans and other postretirement benefit plans requiring additional disclosures relating to assets, obligations, cash flows and net periodic benefit costs of defined benefit pension plans and other defined benefit postretirement plans.  The revision did not change the measurement or recognition of those plans required by SFAS No. 87, Employers’ Accounting for Pensions, SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions.  The revised Statement is effective for financial statements with fiscal years ended after December 15, 2003.  The interim-period disclosures required by this Statement are effective for interim periods beginning after December 15, 2003.  The Company does not expect the adoption of SFAS No. 132 to have a material impact on its consolidated financial position, results of operations or cash flows.

 

9

 

In December 2003, the FASB revised FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities.  FIN No. 46 addresses consolidation by business enterprises of certain variable interest entities.  For public entities that are not small business issuers, the provisions of FIN No. 46 are effective no later than the end of the first reporting period that ends after March 15, 2004.  If the variable interest entity is considered to be a special-purpose entity, FIN No. 46 shall be applied no later than the first reporting period that ends after December 15, 2003.  The adoption of FIN No. 46 did not impact Ballantyne’s consolidated financial statements.

 

In December 2003, the FASB issued Interpretation No. 46R (“FIN 46R”), a revision to FIN 46.  FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements.  FIN 46R is effective at the end of the first interim period ending after December 15, 2003.  The Company provided certain disclosures related to its lease obligations in this Quarterly Report on Form 10-Q.

 

In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (“SAB 104”), Revenue Recognition, which supersedes Staff Accounting Bulletin No. 101 (“SAB101”), Revenue Recognition in Financial Statements.  The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superseded as a result of the issuance of EITF 00-21.  SAB 104 also incorporated certain sections of the SEC’s Revenue Recognition in Financial Statements — Frequently Asked Questions and Answers document.  While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104.  The adoption of SAB 104 did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

On March 31, 2004, the FASB issued its Exposure Draft No. 1102-100 Share-Based Payment, which is a proposed amendment to FASB Statement No. 123, Accounting for Stock-Based Compensation.  Generally, the approach in the Exposure Draft is similar to the approach described in Statement 123.  However, the Exposure Draft would require all share-based payments to employees, including grants of employee stock option, to be recognized in the income statement based on their fair values.  The FASB expects to issue a final standard late in 2004 that would be effective for public companies for fiscal years beginning after December 15, 2004.  The Company is presently studying the Exposure Draft in anticipation of its adoption next year, the impact of which is not known or possible to estimate at this time.

 

In May 2004, the FASB issued Staff Position No. 106-2 (“FSP No. 106-2”), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003 (“the Act”).  FSP No. 106-2 provides guidance on 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 is effective for Ballantyne during the interim period ending September 30, 2004.  The Company believes that its postretirement benefit plan currently provides prescription drug coverage that is at least actuarially equivalent to the new benefit available under Medicare, and it will therefore qualify for the subsidy for an initial period of time after the Act is implemented until actuarial equivalency changes due to existing limits on the Company’s cost of providing the benefit.  The adoption of FSP No. 106-2 is not expected to have a material effect on the Company’s consolidated financial statements.

 

In June 2004, the FASB issued Emerging Issues Task Force Issue No. 02-14 (“EITF 02-14”), Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock.  EITF 02-14 addresses whether the equity method of accounting applies when an investor does not have an investment in voting common stock of an investee but exercises significant influence through other means.  EITF 02-14 states that an investor should only apply the equity method of accounting when it has investments in either common stock or in-substance common stock of a corporation, provided that the investor has the ability to exercise significant influence over the operating and financial policies of the investee.  The accounting provisions of EITF 02-14 are effective for reporting periods beginning after September 15, 2004.  The Company does not expect the adoption of EITF 02-14 to have a material impact on its consolidated financial position, results of operations or cash flows.

 

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3.             Intangible Assets

 

Intangible assets consist of the following:

 

 

 

Amortization expense relating to amortizable intangible assets for the three and nine months ended September 30, 2004 amounted to $10,146 and $30,519, respectively.  Amortization expense for the three and nine months ended September 30, 2003 amounted to $10,189 and $30,556, respectively.  Amortization expense is expected to be $10,066 for the remainder of fiscal 2004 and $23,488 in fiscal 2005.

 

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4.             Inventories

 

Inventories consist of the following:

 

 

The inventory balances are net of reserves for slow moving or obsolete inventory of approximately $1,436,000 and $1,157,000 as of September 30, 2004 and December 31, 2003, respectively.

 

5.             Property, Plant and Equipment

 

Property, plant and equipment include the following:

 

 

6.             Debt

 

The Company is a party to a revolving credit facility (“credit facility”) with First National Bank of Omaha (“First National Bank”) expiring on August 29, 2005.  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 amount to $4.0 million at September 30, 2004. No amounts are currently outstanding. The Company pays interest on outstanding amounts equal to the Prime Rate plus 0.25% (4.26% at September 30, 2004) and pays a fee of 0.125% on the unused portion. The credit facility also contains certain restrictive covenants mainly relating to restrictions on acquisitions and dividends with which the Company was compliant at September 30, 2004.  All of the Company’s personal property and stock in its subsidiaries secure this credit facility.

 

Long-term debt at September 30, 2004 consists of installment payments relating to the purchase of certain intangible assets. Future maturities of long-term debt for the remainder of fiscal 2004 and for each of the remaining years are as follows:   2004 - $6,215; 2005 - $25,935; 2006 - $27,762; and 2007 - $14,609.

 

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7.             Supplemental Cash Flow Information

 

Supplemental disclosures to the consolidated statements of cash flows are as follows:

 

 

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’s 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.

 

9.                                      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, 2004 and December 31, 2003 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’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, 2004 and 2003:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Service cost		$	2,485		$	2,146		$	7,455		$	6,438
Interest cost		5,559			4,908			16,677			14,724
Prior year service cost		—			—			—			193,485
Amortization of prior-service cost		6,718			6,718			20,154			20,154
Net periodic benefit cost		$	14,762		$	13,772		$	44,286		$	234,801

 

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The Company previously disclosed in its financial statements for the year ended December 31, 2003 that it expected to pay $18,000 under the plan in 2004. As of September 30, 2004, benefits of $19,094 have been paid.  The Company presently anticipates paying $25,000 under the plan in 2004.

 

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.

 

In May 2004, the FASB issued Staff Position No. 106-2 (“FSP No. 106-2”), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003 (“the Act”).  FSP No. 106-2 provides guidance on 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 is effective for Ballantyne during the interim period ending September 30, 2004.  The Company believes that its postretirement benefit plan currently provides prescription drug coverage that is at least actuarially equivalent to the new benefit available under Medicare, and it will therefore qualify for the subsidy for an initial period of time after the Act is implemented until actuarial equivalency changes due to existing limits on the Company’s cost of providing the benefit.  The adoption of FSP No. 106-2 is not expected to have a material effect on the Company’s consolidated financial statements.

 

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, 2004, the Company’s operations are 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 and the sale of film handling equipment, xenon lamps and lenses for the theatre exhibition industry. 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 park and architectural industries. During January 2003, the Company disposed of its remaining lighting rental operations. The restaurant segment primarily includes the manufacture of replacement parts and the sale of seasonings and marinades.  During the fourth quarter of 2003, the Company made the decision to phase out its restaurant equipment product line, which accounted for $0.8 million in sales or 47% of total segment sales in 2003. Going forward, the Company will continue to supply parts and service to its installed equipment customer base and will also distribute its “Flavor-Crisp” marinade and breading products as well as support its “Chicken-On-The-Run” and “BBQ-On-The-Run” programs. The Company allocates resources to business segments and evaluates the performance of these segments based upon reported segment gross profit. However, certain key operations of a particular segment are tracked on the basis of operating profit. There are no significant intersegment sales. All intersegment transfers are recorded at historical cost.

 

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Summary by Business Segments

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net revenue
Theatre		$	10,414,218		$	8,033,552		$	31,503,673		$	22,735,025
Lighting		988,845			944,891			2,174,434			2,380,948
Restaurant		272,451			432,831			952,786			1,265,272
Total revenue		$	11,675,514		$	9,411,274		$	34,630,893		$	26,381,245
Gross profit
Theatre		$	2,942,410		$	1,875,554		$	8,875,006		$	5,166,385
Lighting		275,731			198,335			583,344			535,214
Restaurant		86,170			109,527			240,858			245,185
Total gross profit		3,304,311			2,183,416			9,699,208			5,946,784
Selling and administrative expenses		(1,964,218		)	(1,869,826		)	(5,680,384		)	(5,544,946		)
Operating income		1,340,093			313,590			4,018,824			401,838
Other income (expense)		(28,888		)	30,654			(49,170		)	20,518
Net interest income		30,110			21,979			48,717			47,028
Gain on disposal of assets		109,230			—			110,030			136,056
Income before income taxes		$	1,450,545		$	366,223		$	4,128,401		$	605,440
Expenditures on capital equipment
Theatre		$	311,158		$	18,126		$	781,827		$	301,477
Lighting		11,106			3,365			59,525			45,163
Restaurant		—			2,015			—			9,588
Total		$	322,264		$	23,506		$	841,352		$	356,228
Depreciation and amortization
Theatre		$	249,680		$	262,884		$	773,752		$	822,051
Lighting		12,157			17,857			51,997			58,630
Restaurant		—			10,692			—			35,105
Total		$	261,837		$	291,433		$	825,749		$	915,786
Gain on disposal of long-lived assets and goodwill
Theatre		$	102,628		$	—		$	103,428		$	—
Lighting		6,602			—			6,602			136,056
Restaurant		—			—			—			—
Total		$	109,230		$	—		$	110,030		$	136,056

 

						At September 30, 2004			At December 31, 2003
Identifiable assets
Theatre						$	40,787,884		$	32,924,370
Lighting						3,311,391			2,943,804
Restaurant						364,298			1,366,593
Total						$	44,463,573		$	37,234,767

 

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Summary by Geographical Area

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net revenue
United States		$	8,817,229		$	4,882,363		$	25,040,921		$	16,030,646
Canada		160,711			147,925			529,354			691,459
Asia		947,377			1,742,480			3,993,511			4,116,780
Mexico and South America		1,414,445			1,887,025			3,234,129			4,014,163
Europe		329,207			751,406			1,687,579			1,386,489
Other		6,545			75			145,399			141,708
Total		$	11,675,514		$	9,411,274		$	34,630,893		$	26,381,245

 

				At September 30, 2004			At December 31, 2003
Identifiable assets
United States				$	42,763,097		$	35,690,521
Asia				1,700,476			1,544,246
Total				$	44,463,573		$	37,234,767

 

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

 

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