SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For Quarter Ended Commission File Number
September 30, 1998 1-13906
BALLANTYNE OF OMAHA, INC.
--------------------------
(Exact name of Registrant as specified in its charter)
Delaware 47-0587703
- ------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4350 McKinley Street, Omaha, Nebraska 68112
----------------------------------------------------------
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code:
(402) 453-4444
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of the latest practicable date:
Class Outstanding as of October 15, 1998
- --------------
Common Stock, $.01
par value 13,592,368 shares
1
BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Consolidated Financial Statements PAGE
Consolidated Balance Sheets-September 30, 1998 and
December 31, 1997 ....................................... 3
Consolidated Statements of Income- Three and Nine months ended
September 30, 1998 and 1997.............................. 4
Consolidated Statements of Stockholders' Equity-
Nine months ended September 30, 1998..................... 5
Consolidated Statements of Cash Flows- Nine months ended
September 30, 1998 and 1997.............................. 6
Notes to Consolidated Financial Statements-
Nine months ended September 30, 1998..................... 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition....................... 11
Part II. Other Information
Item 6. Exhibits and reports on form 8-K............................. 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Ballantyne of Omaha, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, December 31,
1998 1997
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 714,278 $ 7,701,507
Accounts receivable, net 14,807,344 11,728,231
Inventories 21,517,739 17,445,632
Recoverable income taxes - 490,766
Deferred income taxes 850,452 626,133
Other current assets 105,120 118,028
------------ -------------
Total current assets 37,994,933 38,110,297
Plant and equipment, net 11,271,313 7,399,990
Other assets, net 3,735,265 1,242,211
------------ -------------
Total assets $ 53,001,511 $ 46,752,498
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations $ - $ 70,000
Accounts payable 4,987,655 8,351,392
Accrued expenses 3,147,532 2,286,001
Income taxes payable 968,630 -
------------ -------------
Total current liabilities 9,103,817 10,707,393
Deferred income taxes 338,697 250,315
Long-term obligations, excluding current installments 40,175 171,761
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
13,832,368 shares at September 30, 1998
and 13,548,594 shares at
December 31, 1997 138,324 135,486
Additional paid-in capital 25,624,773 22,741,511
Retained earnings 18,491,223 12,746,032
------------ -------------
44,254,320 35,623,029
Less treasury stock, at cost
100,000 shares at September 30, 1998 (735,498) -
------------ -------------
Total stockholders' equity 43,518,822 35,623,029
------------ -------------
Total liabilities and
stockholders' equity $ 53,001,511 $ 46,752,498
------------ -------------
------------ -------------
See accompanying notes to consolidated financial statements
3
Ballantyne of Omaha, Inc. and Subsidiaries
Consolidated Statements of Income
Three and Nine Months Ended September 30, 1998 and 1997
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Net revenues $20,852,022 $17,378,858 $53,536,705 $48,452,667
Cost of revenues 14,281,629 12,231,360 36,889,186 34,016,616
----------- ----------- ----------- -----------
Gross profit 6,570,393 5,147,498 16,647,519 14,436,051
Operating expenses:
Selling 991,503 812,144 2,818,532 2,219,731
General and administrative 1,822,095 1,294,081 4,976,157 3,967,786
----------- ----------- ----------- -----------
Total operating expenses 2,813,598 2,106,225 7,794,689 6,187,517
----------- ----------- ----------- -----------
Income from operations 3,756,795 3,041,273 8,852,830 8,248,534
Interest income 7,382 75,289 93,951 210,939
Interest expense (8,529) (5,591) (21,183) (36,468)
----------- ----------- ----------- -----------
Net interest income(expense) (1,147) 69,698 72,768 174,471
----------- ----------- ----------- -----------
Income before income taxes 3,755,648 3,110,971 8,925,598 8,423,005
Income taxes 1,337,607 1,058,140 3,180,407 2,946,722
----------- ----------- ----------- -----------
Net income $ 2,418,041 $ 2,052,831 $ 5,745,191 $ 5,476,283
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share:
Basic $ 0.18 $ 0.15 $ 0.42 $ 0.42
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted $ 0.17 $ 0.14 $ 0.40 $ 0.39
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding:
Basic 13,789,783 13,482,047 13,724,622 13,079,505
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted 14,376,378 14,225,960 14,380,649 14,114,439
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements
4
Ballantyne of Omaha, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 1998
(Unaudited)
Additional
Preferred Common paid-in- Retained Treasury
Stock stock capital earnings Stock Total
-----------------------------------------------------------------------------------------
Balance at December 31, 1997 - $ 135,486 $22,741,511 $12,746,032 $ - $35,623,029
Net income - - - 5,745,191 - 5,745,191
Issuance of 259,058 shares
of common stock upon
acquisition of business - 2,590 2,797,410 - - 2,800,000
Issuance of 24,750 shares of
common stock upon exercise
of stock options - 248 85,852 - - 86,100
Purchase of common
stock for treasury - - - - (735,498) (735,498)
-----------------------------------------------------------------------------------------
Balance at September 30, 1998 - $ 138,324 $25,624,773 $18,491,223 $(735,498) $43,518,822
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
5
Ballantyne of Omaha, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998
(Unaudited)
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 5,745,191 $ 5,476,283
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,313,536 685,275
Changes in assets and liabilities, net
of assets acquired:
Accounts receivable (2,795,524) (939,986)
Inventories (3,148,920) (3,451,340)
Other current assets 16,267 (24,918)
Accounts payable (3,510,297) 225,288
Accrued expenses 801,279 535,898
Income taxes 1,323,459 382,879
Other assets (226,215) (47,978)
----------- -----------
Net cash (used in) provided by
operating activities (481,224) 2,841,401
----------- -----------
Cash flows from investing activities:
Acquisitions, net of cash acquired (3,811,922) (1,150,000)
Capital expenditures (1,824,685) (2,198,046)
----------- -----------
Net cash used in investing
activities (5,636,607) (3,348,046)
Cash flows from financing activities:
Repayments of long-term obligation (220,000) (832,853)
Purchase of common stock for treasury (735,498) -
Proceeds from exercise of stock options 86,100 1,933,046
----------- -----------
Net cash (used in) provided by financing activities (869,398) 1,100,193
----------- -----------
Net (decrease) increase in cash and cash equivalents (6,987,229) 593,548
Cash and cash equivalents at beginning of period 7,701,507 6,042,593
----------- -----------
Cash and cash equivalents at end of period $ 714,278 $ 6,636,141
----------- -----------
See accompanying notes to consolidated financial statements
6
Ballantyne of Omaha, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 1998
(Unaudited)
1. Company
Ballantyne of Omaha, Inc., a Delaware corporation ("Ballantyne" or the
"Company"), and its wholly-owned subsidiaries, Strong Westrex, Inc., Xenotech
Strong, Inc., Xenotech Rental Corp. and Design and Manufacturing, Inc., design,
develop, manufacture and distribute commercial motion picture projection
equipment, lighting systems and restaurant equipment. The Company's products
are distributed worldwide through a domestic and international dealer network
and are sold to major movie exhibition companies, sports arenas, auditoriums,
amusement parks, special venues, restaurants, supermarkets and convenience food
stores. Approximately 23.0% of the Company's common stock is owned by Canrad of
Delaware, Inc. ("Canrad") which is an indirect wholly-owned subsidiary of ARC
International Corporation.
2. Summary of Significant Accounting Policies
The principal accounting policies upon which the accompanying consolidated
financial statements are based are summarized as follows:
a. Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries and have been prepared by the Company without audit. All
significant intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for the periods presented. All such adjustments
are, in the opinion of management, of a normal, recurring nature. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
latest annual report on Form 10-K. The results of operations for the period
ended September 30, 1998 are not necessarily indicative of the operating results
for the full year.
b. Stock Splits
The Company's Board of Directors declared a 3-for-2 stock split of the Company's
common stock on April 21, 1998. The stock split was in the form of a 50% common
stock dividend payable June 12, 1998 to shareholders of record on May 29, 1998.
As a result of the stock split, the Company's outstanding shares of common stock
increased 4,610,767 shares. Share information and per share prices in the
accompanying financial statements reflect this stock split as of the earliest
period presented.
c. 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.
d. Revenue Recognition
The Company recognizes revenue from product sales upon shipment to the customer.
Revenues related to equipment rental and services are recognized as earned over
the terms of the contracts.
7
e. Goodwill and Other Intangibles
The Company capitalizes and includes in other assets the excess of cost over the
fair value of assets of business acquired ("goodwill"), the present value of
non-compete agreements and the costs of acquiring patents on its products.
These assets are stated at cost less accumulated amortization and are being
amortized on a straight-line basis over the expected periods to be benefited, 3
to 25 years. The Company assesses and would recognize any deficiency of the
recoverability of goodwill by determining whether the amortization of the asset
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operations.
f. Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
g. Earnings Per Common Share
Earnings per share of common stock have been computed on the basis of the
weighted average number of shares of common stock outstanding after giving
effect to equivalent common shares from dilutive stock options. In February
1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128
"Earnings Per Share" which revised the calculation and presentation provisions
of Accounting Principles Board ("APB") Opinion 15 and related interpretations.
SFAS No. 128, which was effective for periods ending after December 15, 1997,
requires companies to present both currently and retroactively, basic earnings
per share and diluted earnings per share instead of primary and fully-diluted
earnings per share which was previously required under APB Opinion 15.
Accordingly, earnings per share for all periods presented have been restated to
apply the provisions of SFAS No. 128.
h. Reclassifications
Certain of the 1997 amounts have been reclassified to conform to the 1998
presentation.
3. Equity Offerings
On June 30, 1997, the Company completed a public offering pursuant to a
Registration Statement on Form S-3 (the "Offering"). Pursuant to the Offering,
Canrad sold 1,932,860 shares of Ballantyne common stock to the public at the
price of $16.875 per share. In addition, Canrad granted the Underwriters an
option to purchase an aggregate of up to 333,729 additional shares of common
stock at $16.875 per share less underwriting discounts and commissions to cover
over-allotments, if any. The Underwriters purchased all 333,729 shares. While
the Company did not offer any shares or pay any expenses incurred in the
Offering, the Company did receive approximately $1,146,000 from the exercise of
a warrant and certain stock options, which in aggregate totaled 280,750 shares
and were sold in connection with the Offering. Share information and per share
prices have not been adjusted for the stock split declared on April 21, 1998 for
the above Offering.
8
4. Inventories
Inventories consist of the following:
September 30, December 31,
1998 1997
---- ----
Raw materials and supplies $15,141,867 $13,857,783
Work in process 3,839,458 2,451,078
Finished goods 2,536,414 1,136,771
----------- -----------
$21,517,739 $17,445,632
----------- -----------
----------- -----------
5. Supplemental Cash Flow Information
Supplemental disclosures to the consolidated statements of cash flows are as
follows:
Nine Months Ended September 30,
1998 1997
---- ----
Interest paid $ 21,183 $ 36,468
---------- ----------
Income taxes paid (net of refunds received) $1,856,948 $2,578,035
---------- ----------
---------- ----------
Non-cash activities in 1998 include the issuance of $2.8 million of common stock
as partial consideration for the purchase of the net assets of Design and
Manufacturing, Ltd. Non-cash activities in 1997 include recording the present
value of non-compete contracts for approximately $248,000.
6. Acquisitions
Effective April 1, 1998, the Company purchased substantially all of the net
assets of Design and Manufacturing, Ltd. ("Design") for cash and stock of
approximately $5.5 million. The Company also assumed liabilities of
approximately $207,000. The common stock issued in this acquisition is subject
to a one-year lock-up agreement. The cash portion of the purchase price was
financed through operating cash flows. The purchase price was assigned to the
assets acquired and liabilities assumed based upon the fair market value of such
assets and liabilities. In connection with the acquisition, goodwill of
approximately $2.5 million was recorded and will be amortized over 15 years.
Design is a leading supplier of film platter systems to the motion picture
exhibition industry and was a vendor of the Company. In a related transaction
in May 1998, the Company purchased land and a building for $500,000 from the
former owner of Design.
During January of 1998, the Company purchased substantially all of the net
assets of Sky-Tracker of Florida, Inc. ("Sky-Tracker of Florida") for cash of
$575,000. Sky-Tracker of Florida is a rental agent and distributor of high
intensity promotional searchlights.
9
The allocation of the purchase prices for Design and Sky-Tracker of Florida are
as follows, net of cash acquired:
Accounts receivable $ 283,589
Inventories 923,187
Other current assets 3,359
Plant and equipment 3,088,599
Other assets 2,520,000
Accounts payable (146,560)
Accrued expenses (60,252)
Purchase price paid in stock (2,800,000)
-----------
Purchase price paid in cash $ 3,811,922
-----------
-----------
During September of 1997, the Company acquired certain assets of Sky-Tracker of
America, Inc. ("Sky-Tracker") for cash of approximately $400,000. In
connection with the purchase, the Company recorded approximately $167,000 of
goodwill which will be amortized over 5 years. In addition, the Company entered
into a 3-year non-compete agreement with the owner of Sky-Tracker. The
agreement is for a total of $60,000 and is included in other assets and
long-term debt in the accompanying consolidated balance sheets.
Effective April 1, 1997, the Company purchased certain net assets, primarily
accounts receivable, inventories and fixed assets of Xenotech, Inc. ("Xenotech")
for cash of $750,000. The Company also assumed liabilities of $1,175,897. The
purchase price has been assigned to the assets acquired and liabilities assumed
based upon the fair market value of such assets and liabilities. No goodwill
was recorded in connection with the acquisition. Xenotech produces, sells and
rents a complete line of stationary searchlights and computer operated lighting
systems for the motion picture production, television, live entertainment, theme
parks and architectural industries. In addition, the Company entered into a
5-year non-compete agreement with Xenotech's founder and sole proprietor. The
agreement is for a total of $250,000. The present value of the non-compete
payments has been included in other assets and long-term debt in the
accompanying consolidated balance sheets.
These acquisitions have been accounted for as purchases and, accordingly, the
Company's consolidated financial statements reflect the operations of the
acquired companies subsequent to the effective date of the acquisitions. If
the above business combinations had occurred on January 1, 1997, the proforma
operations of the Company would not have been materially different than that
reported in the accompanying statements of income.
7. Stock Repurchases
On June 26, 1998, the Company's Board of Directors authorized the repurchase of
up to 10% of the Company's outstanding common stock. The timing of the
purchases and the actual number of shares to be purchased will depend on market
conditions. The Company, through September 30, 1998, has subsequently
repurchased 100,000 shares of common stock to be held in treasury for a total
cost of $735,498. Subsequent to September 30, 1998, the Company repurchased
1,254,500 shares of common stock for a total cost of approximately $8,578,000.
On October 30, 1998, the Company's Board of Directors authorized the repurchase
of an additional 10% of the Company's outstanding shares. As of October 30,
1998, the Company had 12,477,868 shares of common stock outstanding.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This 10-Q report includes forward-looking statements that involve risks and
uncertainties, including but not limited to, quarterly fluctuations in results;
customer demand for the Company's products; the development of new technology
for alternate means of motion picture presentation; failure of the company's
computer systems or that of any of its suppliers, and/or products manufactured
and sold by the Company, resulting from the year 2000 problem; domestic and
international economic conditions; the management of growth; and, other risks
detailed from time to time in the Company's other Securities and Exchange
Commission filings. Actual results may differ materially from management
expectations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenues for the three months ended September 30, 1998 (the "1998
Period") increased $3.5 million or 20.0% to $20.9 million from $17.4 million for
the three months ended September 30, 1997 (the "1997 Period"). The following
table shows comparative net revenues of theatre and lighting and restaurant
products for the respective periods:
Three Months Ended September 30,
1998 1997
---- ----
Theatre and lighting $ 20,208,204 $ 16,736,897
Restaurant 643,818 641,961
------------ ------------
Total net revenues $ 20,852,022 $ 17,378,858
------------ ------------
------------ ------------
The increase for the 1998 Period reflects higher revenues from the sale of
theatre products. The increase in theatre products reflects increased sales of
commercial motion picture projection equipment ("projection equipment"), which
rose $3.2 million or 24.0% from $13.3 million in the 1997 Period to $16.5
million in the 1998 Period. This increase was mainly attributed to sales to
domestic customers. Included in domestic theatre sales were revenues from Design
and Manufacturing, Ltd. which was purchased during the second quarter of 1998
and contributed approximately $689,000. Sales of ISCO-Optic lenses, which are
included as part of domestic and foreign projection equipment sales, rose
approximately $.3 million or 18.4%. The increase in sales of ISCO-Optic lenses
is tied to the increase in sales of projection equipment as many times the
lenses are sold with the projector as a unit. ISCO-Optic is a trademark of
ISCO-Optic GmbH. Lighting revenues also contributed to the increase in total net
revenues, contributing $2.0 million in sales and rentals, an increase of $.5
million over the $1.5 million contributed in the 1997 Period. This increase was
due entirely to acquisitions made by the Company. Replacement part revenues were
flat at approximately $1.9 million for the 1998 and 1997 periods. Sales of
replacement parts fluctuates from quarter to quarter and are not directly
related to the volume of projection equipment sold, but are more of a function
of the needs of current customers which have projection systems previously
purchased from the Company. Restaurant sales, excluding restaurant part sales,
also remained flat at $.5 million for the 1998 and 1997 periods.
Overall, the increase in net revenues was attributed to sales to
domestic customers, which rose $2.0 million or 15.2% from $12.8 million in
the 1997 Period to $14.8 million in the 1998 Period. Sales to foreign
customers rose $1.5 million from $4.5 million in the 1997 Period to $6.0
million in the 1998 Period. This increase was mainly due to sales to Europe
and Canada but was offset by the continued softening of sales in Asia and
Mexico.
11
Gross profit as a percentage of net revenues increased from 29.6% in the
1997 Period to 31.5% in the 1998 Period. The increase can be attributed to
synergies obtained through the purchase of Design in April 1998 and certain
manufacturing efficiencies due to an increase in production volume during the
1998 Period. The purchase of Design has enabled the Company to generate cost
savings by vertically integrating the supply of certain components sold with
the Company's projection equipment.
Operating expenses in the 1998 Period increased approximately $.7 million
or 33.6% from the 1997 Period. As a percentage of net revenues, such expenses
increased to 13.5% for the 1998 Period from 12.1% for the 1997 Period. The
increase can be attributed to the acquisition of Design and to the costs related
to the growth strategy of the lighting division. The reason why operating
expenses as a percentage of revenue is relatively high for Design is that
operating expenses are primarily incurred to generate intercompany revenues
which are eliminated in consolidation. This impact is offset by Design's
ability to produce a low-cost product for the Company and thus increase gross
margins. The reason for the increased operating expenses in the lighting
division is due to the Company making a concerted effort to grow the division
but has not yet seen the sales growth that was expected.
Net interest expense was $1,147 for the 1998 Period compared to net
interest income of $69,698 for the 1997 Period. The decrease in net interest
income from the 1997 Period reflects lower cash on hand and higher interest
expense due to borrowings on the Company's line of credit with Norwest Bank.
Borrowings on the line of credit were necessitated due to lower cash flows from
operations related to the increase of inventory and the repurchase of 100,000
shares of common stock to be held in treasury.
The Company's effective tax rate for the 1998 Period was 35.6% compared
to 34.0% for the 1997 Period. The increase from the 1997 Period reflects
increased sales in the state of California and Illinois related to sales of
Xenotech and Design products. The difference between the Company's effective
tax rate and the Federal statutory rate of 34% reflects the non-deductibility
of certain intangible assets, principally goodwill and the impact of state
income taxes.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenues for the nine months ended September 30, 1998 (the "1998
Period") increased $5.1 million or 10.5% to $53.5 million from $48.4 million for
the nine months ended September 30, 1997 (the "1997 Period"). The following
table shows comparative net revenues of theatre and lighting and restaurant
products for the respective periods:
Nine Months Ended September 30,
1998 1997
Theatre and lighting $51,783,724 $46,505,519
Restaurant 1,752,981 1,947,148
----------- -----------
Total net revenues $53,536,705 $48,452,667
----------- -----------
----------- -----------
The increase for the 1998 Period reflects higher revenues from the sale and
rental of theatre and lighting products and to the acquisition of Design, which
contributed approximately $1.5 million of revenue in the 1998 Period. The
increase in theatre products primarily reflects increased sales of projection
equipment, which increased approximately $3.6 million or 9.7% from $38.0 million
in the
12
1997 Period to $41.6 million in the 1998 Period. This increase was mainly
attributable to increased sales of such equipment to domestic customers.
Sales of ISCO-Optic lenses, which are sold both domestically and
internationally, and are included in projection equipment sales rose
approximately 9.9% to $4.7 million from $4.3 million in the 1997 Period. This
increase is related to projection equipment sales as many times, the lenses are
sold with the projector as a unit. ISCO-Optic is a trademark of ISCO-Optic
GmbH. Sales of replacement parts and sales and rentals of lighting equipment
also contributed to the overall revenue increase for the 1998 period. Sales of
replacement parts rose 3.8% to $5.6 million in the 1998 Period from $5.4 million
in the 1997 period due to a higher installed base of projection equipment. Net
revenues from lighting products increased $1.5 million from $3.4 million in the
1997 Period to $4.9 million in the 1998 Period. This increase primarily reflects
the acquisition of Xenotech, Inc. in the second quarter of 1997, the acquisition
of Sky-Tracker of America, Inc. in the third quarter of 1997 and the acquisition
of Sky-Tracker of Florida, Inc. in the first quarter of 1998. Net revenues from
lighting products, however, were lower than expected mainly due to lower than
expected sales and rentals of Xenotech computer-based lighting systems.
Gross profit as a percentage of net revenues increased from 29.8% in the
1997 Period to 31.1% in the 1998 Period. The increase was attributed to
synergies obtained through the purchase of Design and to certain manufacturing
efficiencies due to an increase in production volume during the 1998 Period.
The purchase of Design has enabled the Company to generate cost savings by
vertically integrating the supply of certain components sold with the Company's
projection equipment.
Operating expenses in the 1998 Period increased $1.6 million or 26.0% from
the 1997 Period. As a percentage of net revenues, such expenses increased to
14.6% for the 1998 Period from 12.8% for the 1997 Period. The increase can be
attributed to the acquisition of Design in April 1998 and to the growth strategy
of the lighting division. The reason why operating expenses as a percentage of
revenue is high for Design is that operating expenses are primarily incurred to
generate intercompany revenues which are eliminated in consolidation. This
impact is offset by Design's ability to produce a low cost product for the
Company and thus increase gross margins. The reason for the increased operating
expenses in the lighting division is that the Company has made a concerted
effort to grow the division but has not yet seen the sales growth that was
expected.
Net interest income decreased to $72,768 from $174,471 in the 1997 Period
reflecting lower cash on hand and more interest expense due to borrowings on the
Company's line of credit with Norwest Bank. Borrowings on the line of credit
were necessitated due to lower cash flows from operations relating to the
increase of inventory and the repurchase of 100,000 shares of common stock for
treasury.
The Company's effective tax rate for the 1998 Period was 35.6% compared to
35.0% for the 1997 Period. The difference between the Company's effective tax
rate and the Federal statutory rate of 34% reflects the non-deductibility of
certain intangible assets, principally goodwill and the impact of state income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had $40,175 of long-term obligations.
The obligations relate entirely to non-compete agreements set up to be paid
in installments.
As of September 30, 1998, the Company has a $10 million line of credit with
Norwest Bank, N.A. (the "Norwest Facility"). At September 30, 1998, there were
no borrowings outstanding on the line of credit. Borrowings outstanding under
the Norwest Facility bear interest, payable monthly, at a rate equal to Norwest
Bank's National Money Market Rate as announced from time to time (8.25% at
September 30, 1998). All of
13
the Company's assets secure the Norwest Facility. The Norwest Facility
agreement contains certain restrictive covenants which include, among other
things, a prohibition on the payment of cash dividends and requirements
relating to current debt, current debt service coverage and total debt to
tangible net worth ratios and tangible net worth. The Company was in
compliance with such covenants at September 30, 1998 and December 31, 1997.
Historically the Company has funded its working capital requirements
through cash flow generated by its operations, however, net cash used in
operating activities for the nine month period ended September 30, 1998 was
$481,224 compared to net cash provided by operating activities for the same
period in 1997 of $2,841,401. The decrease in net cash provided by operating
activities was due primarily to a $3.5 million decrease in accounts payable,
a $2.8 million increase in accounts receivable and a $3.1 million inventory
buildup for sales in the fourth quarter of 1998. The Company anticipates
that internally generated funds and borrowings under the Norwest Facility
will be sufficient to meet its working capital needs. The Company expects
that it will have capital expenditures of approximately $2.0 million in 1998.
Net cash used in investing activities was $5,636,607 for the nine months
ended September 30, 1998 compared to $3,348,046 in the same period a year
ago. Investing activities for 1998 reflect the acquisition of Sky-Tracker of
Florida, Inc. during January of 1998 and the purchase of Design in the second
quarter of 1998. Capital expenditures were approximately $1.8 million for the
nine months ended September 30, 1998 and primarily relate to the purchase of
rental and plant equipment.
Net cash used in financing activities was $869,398 for the nine months
ended September 30, 1998 compared to net cash provided by financing
activities of $1,100,193 for the same period last year. The reasons for the
change from the 1997 Period relate to the repurchase of common stock for
$735,498 and the repayment of obligations relating to non-compete contracts.
Subsequent to September 30, 1998, the Company purchased 1.25 million
additional shares of common stock for approximately $8,578,000. The Company
funded this repurchase by borrowing under the Norwest Facility.
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.
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.
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. Historically, the Company has been able to offset any
inflationary effects by either increasing prices or improving cost efficiencies.
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YEAR 2000
The Company has developed a plan to deal with the year 2000 problem in
connection with its systems and has begun converting its systems to be year 2000
compliant. The plan provides for the conversions to be completed and tested
well before the 1999 year-end. The year 2000 problem, frequently referred to as
the "millennium bug", results from the fact that computer programs in the past
have been written using only two digits to identify a year, rather than four
digits. Because of this, the computer would not recognize years commencing with
the digits "20", instead of "19", and could produce erroneous calculations
resulting in interruptions and crashes in business operating systems. The
Company's information technology systems contain inventory and accounting
systems, electronic data interchange, and mechanical systems affecting machinery
and equipment. There are four phases involved in assessing the year 2000
problem described by the Company as follows:
AWARENESS. Identify all data-impacted systems and products; contact
product vendors concerning compliance status and plans.
ASSESSMENT. Identify compliance status of all data-impacted systems and
equipment; prioritize systems and equipment based on
business risk; estimate cost and feasibility of repairing
and replacing each non-compliant system and product and
finally, establish a testing approach.
IMPLEMENTATION. Repair or replace each non-compliant system and product;
build contingency plans.
TESTING. Test the Company's systems and products to gain assurance
that the year 2000 problem is fixed.
The information technology systems are currently in the implementation
phase with approximately two months to complete. Year 2000 issues relating to
third parties relate to the automated equipment which the company sells to its
customers. While the Company is currently assessing the impact to these
products, it believes that the equipment already complies with the year 2000
requirements. The Company has currently incurred an inconsequential amount of
costs relating to the year 2000 problem and believes that the overall costs will
be inconsequential. The Company's risks of its most reasonable likely worst
case year 2000 scenarios are not yet known, but the Company is making efforts to
analyze the uncertainty and intends to address this uncertainty by the first
quarter of 1999.
If the Company's conversion efforts or the conversion efforts of any of
its suppliers do not adequately solve all potential problems, or if the
automation products which the Company sells do not operate satisfactorily
because of the "Millennium bug", the Company could incur substantial
liabilities and potential losses.
RECENT ACCOUNTING PRONOUNCEMENTS
In June of 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires these enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement is effective for financial statements for fiscal periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. The Company will be required
to disclose additional information with regard to segments relating to this
statement.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
11 Computation of net earnings per share for the three and nine months
ended September 30, 1998 and 1997
27 Financial Data Schedule (for SEC information only)
(b) Reports on Form 8-K filed for the three months ended September 30, 1998
No reports on Form 8-K were filed during the three months ended
September 30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BALLANTYNE OF OMAHA, INC.
By: /s/ John Wilmers By: /s/ Brad French
-------------------------------------- ----------------------------------
John Wilmers, President, Brad French, Secretary, Treasurer,
Chief Executive Officer, and Director and Chief Financial Officer
Date: October 30, 1998 Date: October 30, 1998
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