-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hj1Qxv6LpPlLBcgq0mK4A+yufcGMFtG7jmrGrNpO/2coHetoqZUv21NPZSA8unhD RrGgzWjqn8kiA5ihdEvNDw== 0001047469-99-012997.txt : 19990402 0001047469-99-012997.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012997 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BALLANTYNE OF OMAHA INC CENTRAL INDEX KEY: 0000946454 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 470587703 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13906 FILM NUMBER: 99583067 BUSINESS ADDRESS: STREET 1: 4350 MCKINLEY ST CITY: OMAHA STATE: NE ZIP: 68112 BUSINESS PHONE: 4024534444 MAIL ADDRESS: STREET 1: 4350 MCKINLEY ST CITY: OMAHA STATE: NE ZIP: 68112 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File No. 1-13906 BALLANTYNE OF OMAHA, INC. ------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 47-0587703 -------- ---------- (State of incorporation) (I.R.S. Employer Identification No.) 4350 MCKINLEY STREET, OMAHA, NEBRASKA 68112 ------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (402) 453-4444 Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, $0.01 PAR VALUE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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 ---- ---- As of March 23, 1999, 12,664,371 shares of Common Stock of Ballantyne of Omaha, Inc., were outstanding and the aggregate market value of such Common Stock held by nonaffiliates (based upon the closing price of the stock on the NYSE) was approximately $68,335,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1998 (the "Annual Report") are incorporated by reference in Parts I and II, and portions of the Company's Proxy Statement for it's Annual Meeting of Shareholders to be held on May 18, 1999 (the "Proxy Statement") are incorporated by reference in Part III. 1 PART I ITEM 1. BUSINESS GENERAL Ballantyne of Omaha, Inc. and its subsidiaries (the "Company") is a developer, manufacturer and distributor of commercial motion picture equipment and long-range follow spotlights in the U.S. and abroad. The Company also manufactures, rents and leases specialty entertainment lighting products used at arenas, television and motion picture production studios, theme parks and architectural sites. The Company primarily operates within three business segments; 1) theatre, 2) entertainment lighting and 3) restaurant equipment. The Company's business was founded in 1932. Since that time, the Company has manufactured and supplied equipment and services to the commercial motion picture projection industry and to sports and concert arenas and theme parks. In 1983, the Company acquired the assets of the Simplex Projector Division of the National Screen Services Corporation, thereby expanding its commercial motion picture projection equipment business. The Company further expanded its commercial motion picture projection equipment business with the 1993 acquisition of the business of the Cinema Products Division of Optical Radiation Corporation. That division manufactured the Century(R) projector and distributed ISCO-Optic lenses to the theatre and audio visual industries in North America. ISCO-Optic is a trademark of ISCO-Optic GmbH. In December 1994, the Company increased its presence in the international marketplace with the acquisition of Westrex Company, Asia ("Westrex"), which provides the Company with a strategic Far Eastern location and greater access to the expanding economies of the Pacific Rim. In April 1998, the Company vertically integrated their motion picture projection business with the acquisition of Design & Manufacturing, Ltd. ("Design"). Design is a leading supplier of film platter systems to the motion picture exhibition industry. The Company also manufactures customized motion picture projection equipment for use in special venues, such as large screen format presentations and other forms of motion picture-based entertainment requiring visual and multimedia special effects. These customers include Imax Corporation, The Walt Disney Company and Universal Studios. The Company helped pioneer the special venue market more than 20 years ago by working with its customers to design and build customized projection systems featuring special effects. During 1998, the Company and MegaSystems, Inc., a full service provider of products and services for the large-format film industry, collaborated on a large format projection system that will be exclusively manufactured by the Company and distributed by MegaSystems, Inc. The Company's long-range follow spotlights are used for both permanent installations and touring applications. During 1997, the Company complemented its long-range follow spotlights product line with the acquisition of substantially all of the net assets of Xenotech, Inc. ("Xenotech") and Sky-Tracker of America, Inc. ("Sky-Tracker"). Xenotech is a leading manufacturer and supplier of high intensity searchlights and computer-based lighting systems for the motion picture production, television, live entertainment, theme park and architectural industries. Sky-Tracker sells and rents computer and manually operated high intensity searchlights. Sky-Tracker and Xenotech were merged together and operate a sales and rental office out of a facility in North Hollywood, California. During January 1998, the Company further complemented its lighting segment with the acquisition of Sky-Tracker of Florida, Inc., a rental agent and distributor of high intensity promotional searchlights. The Company also manufactures commercial food service equipment, which is sold to convenience store and fast food restaurant operators and to equipment suppliers for resale on a private label basis. During 1998, the Company established an audio visual division in Orlando, Florida called Strong Communications. The scope of services that Strong Communications provides are design consulting, 2 rental services and equipment sales in the audio visual industry. By year-end, additional offices were established in Fort Lauderdale and Tampa, Florida. The Company's product lines are distributed on a worldwide basis through a network of over 200 domestic and international dealers to major movie exhibitors, ride simulation operators and sports arena and amusement park operators. The Company's broad range of both standard and custom-made equipment can completely outfit and automate a motion picture projection booth and is currently being used by major motion picture exhibitors such as AMC Entertainment, Inc., Regal Cinemas, Inc. and Loews Cineplex. As a major supplier of motion picture equipment to the theatre exhibitors, the Company has benefited directly from both the domestic and international growth in motion picture screens. The Company believes that its position as a fully-integrated equipment manufacturer enables it to be more responsive to its customers' specific design requirements, thereby giving it a competitive advantage over other manufacturers who rely more on outsourcing components. In addition, the Company believes its expertise in engineering, manufacturing, prompt order fulfillment, delivery, after-sale technical support and emergency service have allowed the Company to build and maintain strong customer relationships. The Company's principal objective is to increase its U.S. market share and its established international presence in its three business segments. In order to achieve this objective, the Company is pursuing a number of strategies including (i) expanding its presence outside the U.S. by leveraging its relationships with domestic customers who are aggressively expanding internationally and building relationships with international theatre exhibitors, (ii) developing and maintaining strong customer relationships through fully understanding customer needs and furnishing value-added services, (iii) leveraging its manufacturing expertise, (iv) making strategic acquisitions of complementary or related niche market products, (v) expanding the special venue business and (vi) expanding the entertainment lighting segment. MOTION PICTURE EXHIBITION INDUSTRY OVERVIEW The motion picture theatre industry has experienced competition from in-home sources of entertainment in recent years, forcing theatre exhibitors to build higher quality theatres with more screens per location in order to lure consumers to theatres. As a result, U.S. theatre exhibitors have begun developing multiple screen theatres to provide a more consumer friendly destination and a wider range of film choices than traditional single screen theatres. More recently, domestic theatre exhibitors have accelerated the addition of new screens and in many cases, have begun developing "multiplex" or "megaplex" theatres which have an even larger number of screens per location (sometimes as many as 30 screens). Coupled with wide body seats and stadium seating, these new generation theatres offer patrons a new and invigorating moviegoing experience. The Company believes the outlook for such multiplexing and megaplexing remains promising as many domestic markets still lack modern, high quality theatre complexes and commercial real estate developers increasingly view such facilities as attractive anchor tenants that enhance consumer traffic. Domestically, the theatre exhibitors' strategy is to focus on growth and increased market share by building new, multiplex theatres in their key markets, while expanding and refurbishing their existing high traffic locations. Management believes that the trend toward multiplexing or megaplexing is also accelerating internationally as the international marketplace is one, which has historically been underserved. U.S.-based theatre exhibitors are entering the international markets with plans to build modern multiplexes and megaplexes in response to increased movie theatre attendance. International exhibitors, faced with this increased competition, are expected to respond by becoming more aggressive in building these new multiplexes. According to GLOBAL FILM EXHIBITION AND DISTRIBUTION (C) 1998), published by Baskerville, a media and communications market research firm, there will be an estimated 3 108,800 screens in the world at the end of 1998 and this number is expected to increase by approximately 24,000 net new screens through the year 2007. BUSINESS STRATEGY The Company's principal objective is to increase its U.S. market share and its established international presence. The Company's strategy combines the following key elements: EXPAND INTERNATIONAL PRESENCE. As rapid construction of new multiple screen motion picture theatres has extended to the international market, sales of the Company's products to international end users are becoming increasingly important to the Company. Net sales to foreign customers, primarily of theatre products, increased from $11.3 million or 29.4% of consolidated net revenues in 1995 to $22.0 million or 29.3% of consolidated net revenues in 1998 including sales by Westrex. The Company believes that its smaller international market share represents an attractive growth opportunity, as the Company intends to seek a greater market share for its products internationally by working with its domestic dealers and U.S.-based motion picture exhibitor customers as they expand abroad. In addition, the Company is seeking to continue to strengthen and develop its international presence through its international dealer network and the Company's sales force will continue to travel extensively worldwide to market the Company's products. The Company believes that as a result of these efforts, it is well-positioned to expand its brand name recognition and international market share. EMPHASIZE CUSTOMER SERVICE. The Company seeks to develop and maintain strong customer relationships by offering a wide variety of standardized commercial theatre and restaurant equipment, working closely with its customers to fully understand their needs and furnishing value-added services such as (i) expertise in engineering and manufacturing high-quality, reliable and innovative products (often designed to customer specifications), (ii) prompt order fulfillment and delivery and (iii) after-sale technical support and emergency service. The Company further supports its products through its replacement parts business, which represents an additional source of recurring income that is less dependent on new screen construction. The Company believes that one of its competitive advantages is its superior customer service, which has resulted in strong, long-lasting customer relationships. LEVERAGE MANUFACTURING EXPERTISE. The Company's position as a fully integrated manufacturer enables it to develop, design and customize its products to meet customer specifications and to respond quickly to customers' requests for replacement parts and repair. The Company believes that its integrated manufacturing capabilities allow it to rapidly increase its manufacturing capacity, thereby providing it with a competitive advantage in meeting its customers' accelerating delivery schedules. In addition, its manufacturing capabilities, combined with its emphasis on customer service, have contributed to retaining strong customer relationships and developing new business opportunities and products in both the traditional theatre equipment market and the special venue market. EXPLORE STRATEGIC ACQUISITIONS. The Company has historically been successful in identifying and acquiring complementary businesses, which have been profitable for its core operations. The Company plans to continue to explore opportunities to acquire companies which complement its sales and marketing and manufacturing expertise, as well as companies which provide opportunities for geographical expansion of its dealer network and product line expansion. EXPAND SPECIAL VENUE BUSINESS. The Company believes that there is increasing consumer demand for large screen format presentations and other forms of motion picture-based entertainment which use visual and multimedia special effects. Although sales of special venue products currently represent only a small percentage of the Company's net sales, the Company believes that increasing public demand for such products and the increased publicity generally associated with special venue products create an attractive opportunity for future growth. 4 EXPAND ENTERTAINMENT LIGHTING SEGMENT. The Company intends to consolidate the fragmented specialty entertainment lighting industry through complementary acquisitions. In addition, the Company expects to leverage its existing customer and distribution network to grow this division internally. PRODUCTS MOTION PICTURE PROJECTION EQUIPMENT The Company is a leading developer, manufacturer and distributor of commercial motion picture projection equipment in the U.S. and abroad. The Company's commercial motion picture projection equipment consists of 35mm and 70mm motion picture projectors, combination 35/70mm projectors, xenon lamphouses and power supplies, a console system combining a lamphouse and power supply into a single cabinet, soundhead reproducers and related products such as film handling equipment and sound systems. The Company's commercial motion picture projection equipment is marketed under the industrywide recognized trademarks of Strong(TM), Simplex(TM), Century(R), Optimax(R), and Ballantyne(TM). The Company's commercial motion picture projection equipment may be sold individually or as an integrated system with other components manufactured by the Company. The Company's commercial motion picture projection equipment can fully outfit and automate a motion picture projection booth. The Company's lamphouse consoles are unique to the industry in that they incorporate a solid state power supply, which allows for a broader range of wattages, thereby reducing operating costs, as compared to inefficient copper and iron power transformers. The Company's lamphouse consoles incorporate all elements required for quality film presentations while requiring minimum booth floor space. The Company's film handling equipment consists of either a three-deck or five-deck platter and a make-up table which allows the reels of a full length motion picture to be spliced together, thereby eliminating the need for an operator to change reels during the showing of the motion picture. Pursuant to a distribution agreement with ISCO-Optic GmbH of Germany, the Company has the exclusive right to distribute ISCO-Optic lenses in North America. Under the distribution agreement, the Company's exclusive right continues through April 30, 2006, subject to the attainment of minimum sales quotas (which the Company has historically exceeded), and thereafter is automatically renewed for successive two-year periods until terminated by either party upon 12 months' prior notice. ISCO-Optic lenses have developed a reputation for delivering high-image quality and resolution over the entire motion picture screen. In addition to incorporating the ISCO-Optic lenses into its own equipment, the Company distributes ISCO-Optic lenses to customers with operations in the theatre and audio visual industries. ISCO-Optic lenses have a leading market share in the U.S. commercial motion picture projector lens market and have won two Academy Awards for technical achievement. The Company does not have any similar right outside of North America. The Company does not manufacture sound processors, but rather integrates sound processors manufactured by others, such as Dolby and Ultrastereo, into its projection consoles. In addition, the Company distributes the DSS Cinema Sound Processor (the "DSS System"), which is designed to be a low-cost full-featured backup system for digital sound processors. The DSS System operates with all digital sound processors, thereby providing an analog default backup. The Company believes that the DSS System provides more features at a lower cost than competitive models. 5 REPLACEMENT PARTS The Company has a significant installed base of motion picture projectors. Although these projectors have an average useful life in excess of 20 years, periodic replacement of components is required as a matter of routine maintenance, in most cases with parts manufactured by the Company. The Company believes that growth in the installed base of commercial motion picture projectors should result in increased net sales of replacement parts for the Company's commercial motion picture projection equipment. Replacement part sales represent a recurring revenue source for the Company, which is less dependent on new screen construction. Net sales of the Company's replacement parts were $7.3 million, $7.3 million and $6.1 million for 1998, 1997 and 1996, respectively. Sales of replacement parts fluctuate from quarter to quarter and are not directly related to the volume of projection equipment sold but are more a function of the needs of current customers which have projection systems previously purchased from the Company. SPECIAL VENUE PRODUCTS The Company has sold customized commercial motion picture equipment directly to special venue customers such as Imax Corporation, The Walt Disney Company and Electrosonic Systems, Inc. for use at special venue sites such as the Magic Kingdom, EPCOT Center, IMAX Ridefilms Simulators, Universal Studios and Busch Gardens. The Company works closely with its customers to develop, design and engineer customized projection equipment to accommodate various formats required for the special venue industry. The Company manufacturers 4, 5, 8 and 10 perforation 35mm and 70mm projection systems for large-screen, simulation ride and planetarium applications and for other venues that require special effects. The Company's ability as a fully integrated manufacturer enables it to work closely with its customers from initial concept and design through manufacturing to the customers' specifications. The Company believes that its reputation for quality and responsiveness and its collaboration with MegaSystems, Inc. provides a competitive advantage in these markets. SPOTLIGHT AND OTHER ILLUMINATION PRODUCTS The Company is a leading developer, manufacturer and distributor of long-range follow spotlights in the U.S. and abroad. These spotlights are high-intensity general use illumination products designed for both permanent installations and touring applications. The Company's long-range follow spotlights consist of eight basic models ranging in output from 400 watts to 3,000 watts. The Company's 400 watt spotlight model, which has a range of 20 to 150 feet, is compact, portable and appropriate for small venues and truss mounting. The Company's 3,000 watt spotlight model, which has a range of 300 to 600 feet, is a high-intensity xenon light spotlight appropriate for large theatres, arenas and stadiums. All of the Company's long-range follow spotlights employ a variable focal length lens system which increases the intensity of the light beam as it is narrowed from flood to spot. The Company's long-range follow spotlights are marketed under the Strong(TM) trademark under recognized brand names such as Super Trouper(R), Gladiator(TM) and Roadie(TM). The Company sells its long-range follow spotlights through dealers to equipment rental companies, arenas, stadiums, theme parks, theatres and auditoriums. The Company's spotlight products are used in, among other venues, the Toronto SkyDome, the United Center in Chicago, the RCA Dome in Indianapolis, the Continental Airlines Arena in the New Jersey Meadowlands and Sheffield Arena in the United Kingdom, as well as at special venue sites such as the 1996 Summer Olympics and in world tours by, among others, the Rolling Stones, R.E.M. and Pink Floyd. The Company, through its wholly-owned subsidiary, Xenotech Strong, Inc. ("Xenotech") is a manufacturer and supplier (through both rental and outright sale) of high intensity searchlights and computer-based lighting systems for the motion picture production, television, live entertainment, theme park and architectural industries. The Company's computer-based lighting systems are marketed under the Xenotech(TM) and Britelights(R) trademarks, while the high intensity searchlights are marketed under the Sky-Tracker(TM) trademark. 6 Xenotech's and Britelight's specialty illumination products have been used in numerous feature films including BATMAN, TERMINATOR I, TERMINATOR II and INDEPENDENCE DAY and have also been used at live performances such as the Super Bowl half-time shows and are currently illuminating such venues as the Luxor Hotel Casino and the Stratosphere Hotel and Casino in Las Vegas, Nevada. These products are marketed directly to customers in North America, Europe, South America and the Pacific Rim. Sky-Tracker's products have been used at Walt Disney World, Universal Studios, various Olympic Games, grand openings and also have been used by touring musical acts such as The Rolling Stones, and Van Halen. The Company believes that it can expand Xenotech's and Sky-Tracker's sales without incurring significant additional expense by utilizing the Company's existing domestic and international dealer network to sell these products and reducing manufacturing costs for previously outsourced products. To achieve this goal, the Company began manufacturing substantially all of the components for these specialty lights during the fourth quarter of 1998. RESTAURANT PRODUCTS The Company's restaurant product line consists of commercial food service equipment, principally pressure fryers and barbecue/slow roast ovens. The Company's pressure fryers account for the majority of its commercial food service equipment net sales. The Company's restaurant product line is marketed under the Flavor-Crisp(R) and Flavor-Pit(R) trademarks. The Company's commercial food service equipment is supplemented by seasonings, marinades and barbecue sauces manufactured to the Company's specifications by various food product contractors, and by mesquite and hickory woods, paper serving products and point of purchase displays. The Company sells its restaurant product line through dealers, who sell primarily to independent convenience store/fast food restaurant operators. The Company also sells its pressure fryers to equipment suppliers directly, on a private label basis, for resale to major chains such as Pathmark and Wal-Mart for use in their delicatessens and sit-down eateries. SALES, MARKETING AND CUSTOMER SERVICE The Company markets and sells its product primarily through a network of over 200 domestic and international dealers to major movie exhibitors, sports arenas and amusement park operators. The Company also sells directly to end users. The Company services its customers in large part through this dealer network, however, the Company does have technical support personnel to provide necessary assistance to the end user or to assist the dealer network. Sales and marketing professionals principally develop business by maintaining regular personal customer contact, including conducting site visits, while customer service and technical support functions are primarily centralized and dispatched when needed. During 1998, the Company relocated one sales professional to Asia and added another in Germany as the Company executes its international sales plan. In addition, the Company markets its products in trade publications such as Film Journal and Box Office and by participating in annual major industry trade shows such as ShowWest in Las Vegas, ShowEast in Atlantic City, CineAsia in Asia and Cinema Expo in Europe. The Company's sales and marketing professionals in all three business segments have extensive experience with the Company's product lines and have long-term relationships with many current and potential customers. By virtue of these relationships, the Company can anticipate marketplace demand, and alter its production schedule accordingly. The Company believes that its continuing sales and marketing focus on anticipating and addressing customer needs and providing consistent, high-level service has enabled it to become the industry market leader in the theatre segment. 7 For the years ended December 31, 1998, 1997 and 1996, sales to a customer represented approximately 15%, 20% and 16% of consolidated net revenues, respectively. For the year ended December 31, 1998, sales to another customer represented approximately 14% of consolidated net revenues. BACKLOG At December 31, 1998 and 1997, the Company had backlogs of $16.6 million and $12.7 million, respectively. Such backlogs mainly consisted of orders received with a definite shipping date within twelve months. These backlogs typically increase during the year to reflect increases in the construction of new motion picture screens in anticipation of the holiday movie season. Backlog figures are not necessarily indicative of sales or income for any full twelve-month period. MANUFACTURING The Company's manufacturing operations are primarily conducted at its Omaha, Nebraska manufacturing facility and the manufacturing facility in Fisher, Illinois acquired with the purchase of Design & Manufacturing, Ltd. during 1998. The Company's manufacturing operations at both locations consist primarily of engineering, quality control, testing, material planning, machining, fabricating, assembly and packaging and shipping. The Company believes that Omaha's and Fisher's central location has and will serve to reduce the Company's transportation costs and delivery times of products to the East and West Coasts of the U.S. The Company's manufacturing strategy is to (i) minimize costs through manufacturing efficiencies, (ii) employ flexible assembly processes that allow the Company to customize certain of its products and adjust the relative mix of products to meet demand, (iii) reduce labor costs through the increased use of computerized numerical control machines for the machining of products and (iv) use outside contractors as necessary to meet increased customer demand. The Company currently manufactures the majority of the components used in its products. The Company believes that its integrated manufacturing operations help maintain the high quality of its products and its ability to customize products to customer specifications. The principal raw materials and components used in the Company's manufacturing processes include aluminum, solid state electronic sub-assemblies and sheet metal. The Company utilizes a single contract manufacturer for each of intermittent movement components and lenses for its commercial motion picture projection equipment lenses and aluminum kettles for its pressure fryers. 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. QUALITY CONTROL The Company believes that its design standards, quality control procedures, and the quality standards for the materials and components used in its products have contributed significantly to the reputation of its products for high performance and reliability. The Company has implemented a quality control program for its theatre, lighting and restaurant product lines which is designed to ensure compliance with the Company's manufacturing and assembly specifications and the requirements of its customers. Essential elements of this program are the inspection of materials and components received from suppliers and the monitoring and testing of all of the Company's products during various stages of production and assembly. 8 WARRANTY POLICY The Company provides a warranty to end users of substantially all of its products, which generally covers a period of 12 months, but may be extended under certain circumstances and for certain products. Under the Company's warranty policy, the Company will repair or replace defective products or components at its election. Costs of warranty service and product replacements have not been material to the Company's consolidated financial position and consolidated results of operations. RESEARCH AND DEVELOPMENT The Company's ability to compete successfully depends, in part, upon its continued close work with its existing and new customers. The Company focuses its research and development efforts on the development of new products based on its customers' requirements, including the development of products used for special venues. The Company believes that the introduction of more special venue products will provide opportunity for further growth, both domestically and internationally. Research and development costs charged to operations amounted to approximately $746,000, $647,000 and $485,000 for the years ended December 31, 1998, 1997 and 1996, respectively. COMPETITION Although the Company has a leading position in the domestic motion picture projection equipment market, the domestic and international markets for commercial motion picture projection equipment are highly competitive. Major competitors for the Company's motion picture projection equipment include Christie Electric Corporation, Cinemeccanica SpA and Kinoton GmbH. In addition to existing motion picture equipment manufacturers, the Company may also encounter competition from new competitors, as well as from the development of new technology for alternative means of motion picture presentation. No assurance can be given that the equipment manufactured by the Company will not become obsolete as technology advances. Certain of the Company's competitors for its motion picture projection equipment have significantly greater resources than the Company. The Company competes in the commercial motion picture projection equipment industry primarily on the basis of quality, fulfillment and delivery, price, after-sale technical support and product customization capabilities. The markets for the Company's long-range follow spotlight, other illumination and restaurant products are also highly competitive. The Company competes in the illumination industry primarily on the basis of quality, price and product line variety. The Company competes in the restaurant products industry primarily on the basis of price and equipment design. Certain of the Company's competitors for its long-range follow spotlights, other illumination and restaurant products have significantly greater resources than the Company. PATENTS AND TRADEMARKS The Company owns or otherwise has rights to numerous trademarks used in conjunction with the sale of its products. The Company believes that its success will not be dependent upon patent protection, but rather upon its scientific and engineering "know-how" and research and production techniques. EMPLOYEES As of March 1, 1999 the Company had a total of 386 employees. The Company is not a party to any collective bargaining agreement and believes that its relationship with its employees is good. 9 ENVIRONMENTAL MATTERS The Company's operations involve the handling and use of substances that are subject to Federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the soil, air and water and establish standards for their storage and disposal. A risk of environmental liabilities is inherent in manufacturing activities. The Company believes that it is in material compliance with environmental laws, but there can be no assurance that future additional environmental compliance or remediation obligations will not arise or that such operations could not have a material adverse effect on the Company. The Company does not anticipate any material capital expenditures for environmental matters during 1999. ITEM 2. PROPERTIES The Company's headquarters and main manufacturing facility is located at 4350 McKinley Street, Omaha, Nebraska, where it owns a building consisting of approximately 160,000 square feet on approximately 12.0 acres. The premises are used for offices and for the manufacture, assembly and distribution of its products, other than those for one of its wholly-owned subsidiaries, Design and Manufacturing, Inc. ("Design"). The Design subsidiary is located in Fisher, Illinois on 2 acres and has one building, with 31,600 square feet under roof. The Company also leases a sales and rental facility for its new audio visual division in Orlando and Ft. Lauderdale, Florida. The Company also leases a sales and service facility in Hong Kong. Through its wholly-owned subsidiary, Xenotech Strong, Inc., the Company leases a 24,500 square foot sales and rental facility in North Hollywood, California for the sale and rental of its specialty lighting products. Xenotech Strong, Inc. also leases a sales and rental facility in Orlando, Florida and one in Atlanta, Georgia. ITEM 3. LEGAL PROCEEDINGS The Company is involved from time to time in litigation arising out of its operations in the normal course of business. Management believes that the ultimate resolution of all pending litigation will not have a material adverse effect on the Company's financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of fiscal 1998, no issues were submitted to a vote of stockholders. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER'S MATTERS The Common Stock is listed and traded on the NYSE under the symbol "BTN". Prior to December 5, 1997, the Company was listed on the American Stock Exchange (the "AMEX"). The following table sets forth the high and low per share sale price for the Common Stock as reported by the NYSE and the AMEX for the periods indicated (rounded to the nearest 1/8)
HIGH LOW ---- --- 1998 First Quarter 11 1/8 9 1/8 Second Quarter 13 1/8 6 1/4 Third Quarter 8 5/8 6 3/8 Fourth Quarter 8 3/8 5 1/2 1997 First Quarter 10 3/8 7 3/4 Second Quarter 11 5/8 8 7/8 Third Quarter 14 1/4 10 7/8 Fourth Quarter 12 1/2 9 1/2 1996 First Quarter 3 7/8 3 Second Quarter 7 1/2 3 5/8 Third Quarter 6 7/8 4 5/8 Fourth Quarter 8 3/8 5 7/8
On March 23, 1999 the last reported per share sale price for the Common Stock was $7.25. At March 23, 1999, there were 205 holders of record of the Common Stock and the Company had 12,664,371 shares of Common Stock outstanding. DIVIDEND POLICY The Company intends to retain its earnings to assist in financing its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The declaration and payment of dividends by the Company are also subject to the discretion of the Board. The Company's line of credit contains certain prohibitions on the payment of cash dividends. Any determination by the Board as to the payment of dividends in the future will depend upon, among other things, business conditions and the Company's financial condition and capital requirements, as well as any other factors deemed relevant by the Board. ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference to the Company's Annual Report as set forth on page 15. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference to the Company's Annual Report as set forth on pages 10 through 15. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has evaluated its exposure to fluctuation in the interest rate and foreign currency environment and has concluded that its exposure to these fluctuations would not be material to the consolidated financial statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements called for by this item are hereby incorporated by reference to the Company's Annual Report as set forth on pages 17 through 35, together with the independent auditor's report on page 16. The supplemental quarterly financial information is incorporated herein by reference to page 35 of the Company's Annual Report. INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE Board of Directors and Shareholders Ballantyne of Omaha, Inc. We have audited the consolidated financial statements of Ballantyne of Omaha, Inc. and Subsidiaries (the Company) as of December 31, 1998 and 1997 and for the three-year period ended December 31, 1998, and have issued our report thereon dated January 18, 1999; such consolidated financial statements and report are included in the 1998 Annual Report to Shareholders of the Company and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of the Company for the three-year period ended December 31, 1998 listed in Item 14 of this Form 10-K. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. KPMG PEAT MARWICK LLP Omaha, Nebraska January 18, 1999 12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from the Ballantyne of Omaha, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held May 18, 1999, under the captions ELECTION OF DIRECTORS, LIST OF CURRENT EXECUTIVE OFFICERS OF THE COMPANY, and ADDITIONAL INFORMATION - Compliance with Section 16(a) of the Securities Exchange Act of 1934. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the Ballantyne of Omaha, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held May 18, 1999, under the caption REPORT ON EXECUTIVE COMPENSATION. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the Ballantyne of Omaha, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held May 18, 1999, under the captions GENERAL and ELECTION OF DIRECTORS. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the Ballantyne of Omaha, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held May 18, 1999, under the caption CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. The following documents are filed as part of this report: Page No. -------- 1. Financial Statements: The following consolidated financial statements of Ballantyne of Omaha, Inc. and subsidiaries have been incorporated by reference to pages 16 through 35 of the Company's Annual Report to Shareholders for the year ended December 31, 1998: Independent Auditor's Report - Three-Year Period Ended December 31, 1998. Consolidated Balance Sheets - December 31, 1998 and 1997. Consolidated Statements of Income - Three-Year Period Ended December 31, 1998. Consolidated Statements of Stockholders' Equity - Three-Year Period Ended December 31, 1998. Consolidated Statements of Cash Flows - Three-Year Period Ended December 31, 1998. Notes to Consolidated Financial Statements - Three-Year Period Ended December 31, 1998. Consolidated Financial Statement Schedule - Three-Year Period Ended December 31, 1998. SCHEDULE II - Valuation and Qualifying Accounts All other schedules have been omitted as the required information is inapplicable or the information is included in the consolidated financial statements or related notes. Separate financial statements of the Registrant have been omitted because the Registrant meets the requirement which permit omission. b. Reports on Form 8-K filed for the three months ended December 31, 1998: 1. None
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Page No. -------- c. Exhibits (Numbered in accordance with Item 601 of Regulation S-K): 2.5 Asset Purchase Agreement dated April 1, 1997 between the Company and Xenotech, Inc. (incorporated by reference to Exhibit 2.5 to the Form 10-Q for the quarter ended June 30, 1997) 2.6 Asset Purchase Agreement dated September 8, 1997 between the Company and Sky-Tracker of America, Inc. (incorporated by reference to Exhibit 2.6 to the Form 10-Q for the quarter ended September 30, 1997) 2.7 Asset Purchase Agreement dated January 29, 1998 between the Company and Sky-Tracker of Florida, Inc. (incorporated by reference to Exhibit 2.7 to the Form 10-K for the year ended December 31, 1997) (the "1997 10-K") 2.8 Asset Purchase Agreement between the Company and Design and Manufacturing, Ltd. (incorporated by reference to Exhibit 2.8 to the Form 10-Q for the quarter ended March 31, 1998) 2.9 Asset Purchase Agreement between the Company and ARC, EFX, Inc...................................................................21 3.1 Certificate of Incorporation as amended through July 20, 1995 (incorporated by reference to Exhibits 3.1 and 3.3 to the Registration Statement on Form S-1, File No. 33-93244) (the "Form S-1") 3.1.1 Amendment to the Certificate of Incorporation (incorporated by reference to Exhibit 3.1.1 to Form 10-Q for the quarter ended June 30, 1997) 3.2 Bylaws of the Company as amended through August 24, 1995 (incorporated by reference to Exhibit 3.2 to the Form S-1) 4.2 Loan Agreement dated August 30, 1995, as amended November 24, 1995 between the Company and Norwest Bank, N.A. (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K filed for the year ended December 31, 1995) (the "1995 Form 10-K") 4.3 Second Amendment to Loan Agreement dated August 30, 1995 between the Company and Norwest Bank Nebraska, N.A. dated August 29, 1997 (incorporated by reference to Exhibit 4.3 to the Form 10-Q for the quarter ended September 30, 1997) 4.4 Third Amendment to Loan Agreement dated August 30, 1995 between the Company and Norwest Bank, N.A. dated December 1, 1998.............31
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Page No. -------- 10.17 Amendment to the Company's 1995 Stock Option Plan (incorporated by reference to Exhibit 10.17 to the Form 10-Q for the quarter ended June 30, 1998) 10.18 Amendment to the Company's 1995 Outside Directors Stock Option Plan (incorporated by reference to Exhibit 10.18 to the Form 10-Q for the quarter ended June 30, 1998) 10.3 Employment Agreement between the Company and John Wilmers dated October 15, 1991 (incorporated by reference to Exhibit 10.3 to the Form S-1) * 10.3.1 Extension to Employment Agreement between the Company and John Wilmers dated July 8, 1996 (incorporated by reference to Exhibit 10.16 to the Form 10-Q for the quarter ended June 30, 1996) * 10.3.2 Employment Agreement between the Company and John Wilmers dated January 1, 1997 (incorporated by reference to the 1996 Form 10-K) * 10.3.3 Employment Agreement between the Company and Ray F. Boegner dated November 20, 1996 (incorporated by reference to Exhibit 10.3.3 to the Form 10-Q for the quarter ended March 31, 1997) * 10.3.4 Employment Agreement between the Company and Richard Hart dated April 1, 1997 (incorporated by reference to Exhibit 10.3.4 to the Form 10-Q for the quarter ended June 30, 1997) * 10.3.5 Non-competition Agreement between the Company and Richard Hart (incorporated by reference to Exhibit 10.3.5 to the Form 10-Q for the quarter ended June 30, 1997) * 10.3.6 Consulting Agreement between the Company and Marlowe A. Pichel (incorporated by reference to Exhibit 10.3.6 to Form 10-Q for the quarter ended September 30, 1997) * 10.3.7 Non-competition Agreement between the Company and Marlowe A. Pichel (incorporated by reference to Exhibit 10.3.7 to Form 10-Q for the quarter ended September 30, 1997) * 10.3.8 Employment Agreement dated May 1, 1998 between the Company and Brad French (incorporated by reference to Exhibit 10.36 to the Form 10-Q for the quarter ended June 30, 1998) * 10.3.9 Consulting Agreement between the Company and Arnold S. Tenney dated January 1, 1999.................................................37 10.6 Distributorship Agreement dated as of March 1, 1992 between ISCO-Optic GmbH and the Company (incorporated by reference to Exhibit 10.6 to the Form S-1)
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Page No. -------- 10.6.1 First Amendment dated December 4, 1998, to Distributorship Agreement dated as of March 1, 1992, between ISCO-Optic GmbH and the Company...........................................................39 10.7 Form of 1995 Stock Option Plan (incorporated by reference to Exhibit 10.7 to the Form S-1) 10.7.1 Amendment to Stock Option Agreement (incorporated by reference to Exhibit 10.16 to the Form 10-Q for the quarter ended June 30, 1997) 10.8 Form of 1995 Outside Directors Stock Option Plan as amended as of June 11, 1996 (incorporated by reference to Exhibit 10.8 to the Form S-1) 10.8.1 Amendment to 1995 Outside Directors Stock Option Plan, as amended through July 8, 1996 (incorporated by reference to exhibit 10.8 to the Form 10-Q for the quarter ended June 30, 1996) 10.9 Form of 1995 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.9 to the Form S-1) 10.9.1 Amendment to the 1995 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.9.1 to the 1996 Form 10-K) 10.10 Form of Management Services Agreement by and between the Company and Canrad, Inc. (incorporated by reference to Exhibit 10.10 to the Form S-1) * 10.10.1 Amendment to Management Services Agreement by and between the Company and Canrad, Inc. dated July 1, 1997 (incorporated by reference to the 1997 Form 10-K)* 10.10.2 Second Amendment to Management Services Agreement by and between the Company and Canrad, Inc. dated January 1, 1999....................41 10.11 Profit Sharing Plan (incorporated by reference to Exhibit 10.11 to the Form S-1) 10.11.1 Amendment to the Profit Sharing Plan (incorporated by reference to Exhibit 10.11.1 to the 1996 Form 10-K) 10.14 Stock Option Agreement dated as of September 19, 1995 between the Company and Jaffoni & Collins Incorporated (incorporated by reference to Exhibit 10.14 to the Form 10-Q for the quarter ended June 30, 1996)
17 13 Annual Report to Shareholders.......................................................... 11 Computation of net earnings per share.................................42 21 Registrant owns 100% of the outstanding capital stock of the following subsidiaries:
Jurisdiction of Name Incorporation ---- ------------- a. Strong Westrex, Inc. Nebraska b. Xenotech Rental Corp. Nebraska c. Design & Manufacturing, Inc. Nebraska d. Xenotech Strong, Inc. Nebraska
23 Consent of KPMG Peat Marwick LLP...................................... 43 27 Financial Data Schedule (for SEC information only)
* Management contract or compensatory plan. 18 SCHEDULE II Ballantyne Of Omaha, Inc. and Subsidiaries Valuation and Qualifying Accounts
Balance at Charged to Amounts Balance beginning costs and written at end of year expenses off (1) of year --------- ------- ------- ------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended December 31, 1998 - Allowance for doubtful accounts $ 215,823 273,122 92,160 396,785 --------- ------- ------- ------- --------- ------- ------- ------- Year ended December 31, 1997 - Allowance for doubtful accounts $ 143,000 187,110 114,287 215,823 --------- ------- ------- ------- --------- ------- ------- ------- Year ended December 31, 1996- Allowance for doubtful accounts $ 118,003 63,995 38,998 143,000 --------- ------- ------- ------- --------- ------- ------- ------- INVENTORY RESERVES Year ended December 31, 1998 - Inventory reserves $ 957,683 293,503 147,191 1,103,995 --------- ------- ------- ------- --------- ------- ------- ------- Year ended December 31, 1997 - Inventory reserves $ 879,486 601,201 523,004 957,683 --------- ------- ------- ------- --------- ------- ------- ------- Year ended December 31, 1996- Inventory reserves $ 773,272 256,428 150,214 879,486 --------- ------- ------- ------- --------- ------- ------- ------- WARRANTY RESERVES Year ended December 31, 1998 - Warranty reserves $ 98,720 446,085 368,882 175,983 --------- ------- ------- ------- --------- ------- ------- ------- Year ended December 31, 1997 - Warranty reserves $ 165,953 403,656 470,889 98,720 --------- ------- ------- ------- --------- ------- ------- ------- Year ended December 31, 1996- Warranty reserves $ 149,137 380,000 363,184 165,953 --------- ------- ------- ------- --------- ------- ------- -------
(1)The deductions from reserves are net of recoveries 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BALLANTYNE OF OMAHA, INC. 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: March 15, 1998 Date: March 15, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ Arnold S. Tenney By: /s/ Ronald H. Echtenkamp ------------------------------------ ------------------------------------ Arnold S. Tenney, Chairman and Ronald H. Echtenkamp, Director Director Date: March 15, 1998 Date: March 15, 1998 By: /s/ Jeffrey D. Chelin By: /s/ Colin G. Campbell ------------------------------------ ------------------------------------ Jeffrey D. Chelin, Director Colin G. Campbell, Director Date: March 15, 1998 Date: March 15, 1998 By: /s/ Yale Richards By: /s/ Marshall Geller ------------------------------------ ------------------------------------ Yale Richards, Director Marshall Geller, Director Date: March 15, 1998 Date: March 15, 1998 20 EX-2.9 2 EXHIBIT 2.9 Exhibit 2.9 ASSET PURCHASE AGREEMENT PARTIES: This Agreement is made and entered into as of the 4th day of June, 1998, by and between ARC, INC. of 33380 Listie Avenue, Acton, California 93510, a California corporation (hereinafter referred to as the "Seller"), and XENOTECH-STRONG, INC., 4350 McKinley Street, Omaha, Nebraska 68112, a Nebraska corporation (the "Buyer"). RECITALS: A. Seller is engaged in the business of providing and operating lighting and special effects equipment for live entertainment shows and productions. B. Buyer desires to purchase from Seller, and Seller desires to sell to Buyer, substantially all of the assets of Seller pertaining to its business. AGREEMENT: NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein and for other food and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: I. DEFINITIONS For all purposes of this agreement, the following terms shall have the following definitions: A. "Contract" shall mean those contracts of Seller, a true and correct list of which is attached hereto as Exhibit 1. B. "Fixtures and Equipment" shall mean all of the lighting equipment, special effects equipment, vehicles, and all other equipment of Seller, a true and correct list of which is attached hereto as Exhibit 2. C. "Inventory" shall mean all of Seller's inventories, a true and correct list of which is attached hereto as Exhibit 3. D. "Purchased Assets" shall mean all of the following Assets of Seller as of the date of the Closing: 1. All Contract rights of Seller, including all customer deposits received by Seller in connection with Contracts not yet performed by Seller; 2. All Fixtures and Equipment; 3. All Inventory; 4. All trademarks, trade names, and all other intangible assets of Seller, including, but not limited to the trade name "ARC EFX"; and 21 5. Any and all other assets of Seller of any kind or nature whatsoever except Seller's cash assets (other than customer deposits) and Seller's accounts receivable. II. SALE OF ASSETS A. At closing, Seller shall sell, assign, transfer, convey and deliver to Buyer the Purchased Assets, free and clear of all liabilities, obligations, liens, security interests and encumbrances of any kind. Buyer shall not assume any liabilities of Seller whatsoever, except for Seller's obligations under the contracts of Seller set forth on Exhibit 1. B. At Closing, Buyer shall wire transfer Seventy-five Thousand Dollars ($75,000) to Seller's bank account, subject to any amounts required to discharge any liens or encumbrances against the purchased Assets, or required by law to be withheld to pay any obligations of Seller. C. At Closing, Buyer shall execute and deliver to Seller its Promissory Note in the principal amount of Fifty Thousand Dollars ($50,000) payable in full on a date which shall be one (1) year after the date of Closing. III. CLOSING The closing of the sale (the "Closing") shall take place on or before June 1, 1998, or as soon thereafter as all of the conditions of the Agreement shall be complied with by the parties. At the Closing, Seller shall deliver to Buyer such bills of sale, endorsements, assignments, and other goods and sufficient instruments of transfer and conveyance as shall be effective to vest in the Buyer good and marketable title to the Purchased Assets as provided in this Agreement. IV. PURCHASE PRICE The Purchase Price shall be One Hundred Twenty five Thousand Dollars ($125,000), subject to adjustment as herein set forth, which shall be paid to Seller in accordance with Article II herein. Buyer and Seller agree that for all purposes, the Purchase Price shall be allocated in the manner set forth on Exhibit 4 attached hereto. V. FURTHER ASSURANCES From time to time, at Buyer's request, whether at or after the closing and without further consideration, Seller will execute and deliver such further instruments of conveyance and transfer and take such other action as Buyer reasonably may require more effectively to convey and transfer to Buyer any of the Purchased Assets. VI. GREG SMITH EMPLOYMENT AGREEMENT Buyer shall engage Greg Smith (the sole shareholder of Seller) as an Employee effective immediately upon the Closing of the transactions herein contemplated, for a term of five (5) years at an annual compensation of sixty-five thousand Dollars ($65,000). At Closing, Buyer and Greg Smith shall enter into a written Employment Agreement in the form and of the content of Exhibit 5, attached hereto, the terms and conditions of which are incorporated herein by this reference. 22 VII. REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents, warrants and covenants to and with Buyer as follows: A. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and has full corporate power and authority to conduct it business as it is presently being conducted and to own, sell and convey its properties as Assets. B. Seller has all necessary corporate power and authority and has taken all corporate action necessary to enter into this Agreement, to consummate the transactions contemplated hereby and to perform its obligations hereunder. This Agreement has been duly executed and delivered by Seller and constitutes a legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its respective terms. C. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby will result in (1) a violation of or a conflict with any of the provisions of the certificate of Incorporation or Bylaws of Seller, (2) a breach of, or a default under, any term or provision of any contract, agreement, indebtedness, lease, commitment, license, franchise, permit, authorization or concession to which Seller is a party, which breach or default would have material adverse effect on the business or financial condition of Seller or its ability to consummate the transactions contemplated hereby, or (3) a violation by Seller of any statute, rule regulation, ordinance, code, order, judgement, writ, injunction, decree or award, which violation would have a material adverse effect on the business or financial condition of Seller or its ability to consummate the transactions contemplated hereby. D. Except as otherwise provided herein, Seller currently has and will have and will transfer to Buyer at Closing, good and marketable title to all of the Purchased assets, free and clear of all mortgages, pledges, liens, security interests, conditional sales agreements, charges, encumbrances, restrictions, liabilities and equities. E. There are no material actions, suits, claims, proceedings or investigations pending or, to the best knowledge of seller, threatened against or affecting the Purchased Assets, at law or in equity, or before or by any federal, state, municipal or other government court, department, commission, board, bureau, agency or instrumentality. F. Seller has disclosed to Buyer all facts known by Seller to be material to the Assets to be acquired by Buyer pursuant to this Agreement. No written representation or warranty by the Seller in this Agreement or any written statement or certificate furnished or to be furnished to the Buyer pursuant hereto, contains or will contain any untrue statement of a material fact known to Seller, or omits or will omit to state a material fact known to Seller necessary to make the statements contained therein not misleading. During the period from the date of this Agreement to the Closing date, Seller represents and covenants that its business shall in all respects continue to be operated only in the ordinary course. Seller shall give prompt notice to Buyer with respect to any material changes in the operation of its business and any matter or event which comes to Seller's attention and which, if it had occurred as of the date hereof, would constitute a material breach of the representations and warranties of Seller contained in this Agreement. G. The execution and delivery of this Agreement to Buyer and the consummation of the transactions contemplated hereby have been duly authorized by Seller's Board of Directors, and by Seller's Shareholders in accordance with the business corporation laws of the State of California. 23 IX. REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller as follows: A. Buyer is a corporation duly organized, validly and in good standing under the laws of the State of Delaware and has full corporate power and authority to conduct its business as it is presently being conducted and to own and lease its properties and Assets. B. Buyer has all necessary corporate power and authority and has taken all corporate action necessary to enter into this Agreement, to consummate the transactions contemplated hereby and to perform its obligations hereunder. This Agreement has been duly executed and delivered by Buyer and constitutes a legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its respective terms. C. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby will result in (1) a violation of or a conflict with any of the provisions of the Certificate of Incorporation or Bylaws of Buyer, (2) a breach of, or a default under, any term or provision of any contract, agreement, indebtedness, lease, commitment, license, franchise, permit, authorization or concession to which Buyer is a party, which breach or default would have a material adverse effect on the business or financial condition of Buyer of its ability to consummate the transactions contemplated hereby, or (3) a violation by Buyer of any statute, rule, regulation, ordinance, code, order, judgement, writ, injunction, decree or award, which violation would have a material adverse effect on the business or financial condition of Buyer or its ability to consummate the transactions contemplated hereby. X. COVENANTS OF SELLER AND BUYER Seller covenants with Buyer and Buyer covenants with Seller as follows: A. Seller shall assign to Buyer all transferable manufacturer, supplier of contractor warranties or guaranties respecting any of the Purchased Assets. B. Effective upon closing of the transactions contemplated hereby, Seller shall no longer use, in any respect, the name or term "ARC EFX, INC." without the express written consent of Buyer. Within seventy-five (75) days after Closing, Seller shall change its corporate name to a name, which bears no resemblance to the name "ARC EFX," and thereafter shall never use a name or names, which shall be similar to such name. XI. BULK SALES Seller agrees to cooperate with Buyer in complying with the provisions of Article 6 of the California Uniform commercial Code Bulk Transfer - relating to bulk transfers in connection with the transactions contemplated by this Agreement. If Buyer shall waive the provisions of the Bulk Sales Law, seller shall indemnify and hold Buyer harmless from any damages, losses or expenses (including reasonable attorneys' fees) suffered by Buyer from any claim which may be asserted against Buyer by creditors of Seller for obligations not assumed by Buyer hereunder which result from noncompliance with the California Bulk Transfer Law. 24 XII. COVENANT NOT TO COMPETE At the Closing, Seller and Greg Smith will execute a Non-Competition Agreement in the form of Exhibit 6 hereto; the effectiveness of this Agreement and of the Non-competition Agreement will be contingent upon the execution of each other. XIII. ACTIONS BY SELLER AND BUYER AFTER THE CLOSING A. Seller and Buyer agree that so long as any books, records, and files relating to the business, Assets or operations of the Seller remain in existence and available, Buyer (at its expense) shall have the right to inspect and to make copies of the same at any time during business hours for any proper purpose with reasonable advance notice. Seller further agrees that it shall preserve and maintain all of its existing books and record relating to the Purchased Assets for a period of at least three (3) years following the date of Closing. B. On and after the Closing date, Seller and Buyer will take all appropriate action and execute all documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the provisions hereof. XIV. INDEMNIFICATIONS A. BY SELLER: It is specifically acknowledged that Buyer does not assume and will not be responsible for any liabilities of Seller, except as may be expressly stated herein. Effective as of the Closing date, Seller shall indemnify and hold harmless Buyer against and in respect of: 1. All liabilities and obligations of, or claims against, Seller not expressly assumed by Buyer in this Agreement. 2. Any damage or deficiency resulting from any material misrepresentation, breach of warranty, or non fulfillment of any agreement on the part of Seller under this Agreement or from any material misrepresentation in or omission from any certificate or other instrument furnished or to be furnished to Buyer under this Agreement. B. BY BUYER: Buyer agrees that, on and after the date hereof, it shall indemnify and save and hold harmless Seller from and against any and all damages incurred in connection with or arising out of or resulting from (1) any material breach of any covenant or warranty, or the inaccuracy of any representation, made by Buyer in or pursuant to this Agreement; (2) any liability, obligation or commitment of Buyer relating in any way to the Purchased Assets or Assumed Liabilities; or (3) any claim, liability, obligation or commitment of any nature which is specifically assumed by Buyer pursuant to this Agreement. XV. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER The obligations of Buyer to purchase the Purchased Assets from Seller are subject to the satisfaction, on or before the Closing date, of all of the following conditions, which conditions may be waived in writing by Buyer: 25 A. The representations and warranties of Seller contained in this Agreement shall have been true in all material respects when made and, in addition, shall be true in all material respects on and as of the Closing date with the same force and effect as though made on an as of the Closing date. B. Seller and its sole shareholder shall have, or have caused to be performed and observed, in all material respects, all obligations and agreements hereunder and shall have complied with all covenants and conditions contained in this agreement to be performed and complied with by it at or prior to the closing date. C. If, prior to the closing date, any material part of the Purchased Assets is damaged by fire, other casualty, or any cause or activity not attributable to or under the control of Buyer, Seller shall give Buyer written notice thereof and Buyer may, at its option, terminate this Agreement by written notice of such election given to seller no later than five (5) working days after receipt of Seller's notice, and upon giving such notice, both parties shall be fully discharged from all duties hereunder and all obligations hereof. However, if Buyer shall not so elect, or if an immaterial part of the Assets is damaged, then Seller hereby assigns to Buyer all of its rights, title and interest in and to any and all insurance proceeds payable by reason of such destruction or damage to the Purchased Assets and Seller hereby agrees to pay Buyer a sum equal to the deductible amount provided in such policies to the extent necessary to correct such damage. D. There shall not have been, between the date of this Agreement and the Closing date, any materially adverse change in any of the Purchased assets or the current operation of Seller. E. Prior to closing, Buyer shall have completed, to its satisfaction, such financial, technical and legal due diligence of seller as Buyer, its counsel and its accountants shall deem necessary and appropriate. XVI. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER The obligation of Seller to sell the Purchased Assets under this Agreement of Buyer is subject to the satisfaction, on or before the Closing date, of all the following conditions, which conditions may be waived in writing by Seller: A. The representations and warranties of Buyer contained in this Agreement shall have been true in all material respects when made and, in addition, shall be true in all material respects on and as of the Closing date with the same force and effect as though made on and as of the Closing date. B. Buyer shall have, or have caused to be, performed and observed, in all material respects, all covenants, agreements and conditions hereof to be performed or observed by Buyer at or before the Closing. C. Seller shall have received approval from its Board of Directors and Shareholders for consummation of this transaction of the terms and conditions contained herein. 26 XVII. NON-ASSIGNMENT Any party without the prior written consent of the other parties hereunder may assign neither this Agreement nor any of the rights or obligations. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, and no other person shall have any right, benefit or obligation hereunder, as a third-party beneficiary or otherwise. XVIII. EXPENSES Except as otherwise provided in this Agreement, each party shall pay its respective expenses, taxes, charges and liabilities incurred in connection with or arising out of this Agreement, including, without limitation thereto, counsel fees, accounting fees, and other expenses related to the assignment and delivery of the Purchased Assets to buyer. XIX. NOTICES Unless otherwise provided herein, any notices, request, instruction or other document to be given hereunder by either party to the other shall be in writing and delivered personally or mailed by certified mail, postage prepaid, return receipt requested (such mailed notice to be effective on the date such receipt is acknowledged or refused), as follows: IF TO SELLER: ARC EFX, INC. Attention: Greg Smith 33380 Listie Avenue Acton, CA 93510 WITH COPY TO: --------------------- --------------------- --------------------- --------------------- IF TO BUYER: XENOTECH-STRONG, INC. Attn: John P. Wilmers 4350 McKinley Street Omaha, NE 68112 WITH COPY TO: Marks, Clare & Richards David P. Wilson, Esq. 11605 Miracle Hills Dr., Suite 300 Omaha, NE 68154 Or at such other address or designation as is provided by one party to the other in writing. XX. CHOICE OF LAW This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of California (without reference to the choice of law provisions of California law). 27 XXI. SURVIVAL OF WARRANTIES AND REPRESENTATIONS The representations, warranties and covenants of the parties hereto contained herein, or in any certificates or other documents delivered prior to or at the Closing, shall not be deemed waived or otherwise affected by any investigation theretofore made by either party. Each and every representation, warranty and covenant of Seller and buyer and the indemnification provisions set forth in Article XIII herein shall survive the Closing date and remain operative and in full force and effect as herein provided. XXII. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS This Agreement, together with all exhibits and schedules hereto, constitutes the entire agreement between the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written. No supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. XXIII. MULTIPLE COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together constitute one and the same instrument. XXIV. INVALIDITY In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by law, such invalidity, illegality or unenforceable shall not affect any other provision of this agreement or any other such instrument. XXV. CONFIDENTIAL INFORMATION In connection with the negotiation of this Agreement, each party acknowledges that it has had access to confidential information relating to the other party. Each party shall treat such information as confidential, preserve the confidentiality thereof and not duplicate or make use of any other such information, except to advisors, consultants, lenders and affiliates in connection with the transactions contemplated hereby or pursuant to or as required by law. If the transaction is not closed, each party shall return to the other all confidential information in tangible form, belonging or relating to the other party or provide a certificate of destruction of such material acceptable to the other party. 28 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on their respective behalf, by their respective officers thereunto duly authorized, on this 4th day of June, 1998. "Seller" ARC EFX, INC. By: /s/ Greg Smith -------------------------------- Greg Smith, President "Buyer" XENOTECH-STRONG, INC. A Nebraska corporation By: /s/ John P. Wilmers -------------------------------- John P. Wilmers, President 29 STATE OF CALIFORNIA ) ) SS. COUNTY OF LOS ANGELES ) On June 4, 1998, before me, Y. Charles Shoda, notary Public, personally appeared GREG SMITH, President of ARC EFX, INC., personally known to me - OR - proved to me on a basis of satisfactory evidence to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same. WITNESS my hand and official seal. /S/ Y. Charles Shoda -------------------------------- Signature of Notary Public STATE OF NEBRASKA ) ) SS. COUNTY OF DOUGLAS ) On this 5th day of June, 1998, before me, the undersigned, a Notary Public in and for said County, personally appeared the above-named JOHN P. WILMERS, President of XENOTECH STRONG, INC., to me known to be the identical person named in and who executed the foregoing instrument and acknowledged that he executed the same as his voluntary act and deed and the voluntary act deed of said corporation. /s/ Nancy A. Cronin -------------------------------- Notary Public Exhibit 4.4 30 EX-4.4 3 EXHIBIT 4.4 Exhibit 4.4 AMENDMENT NO. 3 TO LOAN AGREEMENT THIS AMENDMENT is made and entered into as of the 1st day of December, 1998, by and among Ballantyne of Omaha, Inc., a Delaware corporation (the "Borrower") and Norwest Bank Nebraska, National Association ("Bank"). WITNESSETH: WHEREAS, Borrower and Bank have previously entered into Loan Agreement dated August 30, 1995 as amended by Amendment No. 1 to Loan Agreement dated November 24, 1995 and Amendment No. 2 to Loan Agreement dated August 29, 1997 (the "Agreement"); WHEREAS, Borrower and Bank have reached agreement regarding certain modifications to the Agreement; and WHEREAS, the parties desire to set forth their agreements regarding the above matters in this Amendment No. 3 to Loan Agreement ("Amendment No. 3"). NOW, THEREFORE, in consideration of the above premises and the mutual covenants and agreements hereinafter set forth, the parties agree as follows: 1. All terms contained herein with an initial capitalized letter which are not otherwise defined herein shall have the meaning ascribed to them in the Agreement. 2. The definition in Section 1.2 of the Note is hereby amended to substitute Exhibit 2.1 to this Amendment No. 3 for Exhibit 2.1 to the Loan Agreement. Concurrently with the execution of this Amendment No. 3, Borrower shall execute and deliver a Note in the form of such new Exhibit 2.1. 3. The definition in Section 1.2 of "Revolving Loan Commitment Amount" is hereby amended to change the amount from $10,000,000 to $20,000,000. 4. The definition in Section 1.2 of "Revolving Loan Stated Maturity Date" is hereby restated in its entirety as follows: REVOLVING LOAN STATED MATURITY DATE means May 31, 2000, or such later date as is agreed to in writing by Bank in the event the Revolving Loan is renewed pursuant to Section 2.1(e). 5. Section 2.1 of the Agreement is hereby restated in its entirety as follows: 2.2 REVOLVING LOAN. From time to time on any Business Day occurring prior to the Revolving Loan Commitment Termination Date, subject to the conditions of this Agreement (including Article 4), Bank agrees to make revolving loan Advances to Borrower in the maximum outstanding principal amount of the Revolving Loan Commitment Amount, pursuant to the loan terms described in this Section 2.1 (the "Revolving Loan"). The Revolving Loan shall be evidenced by the Note, which shall be executed and delivered by Borrower on the date of execution of Amendment No. 3. 31 a. ADVANCES; USE OF PROCEEDS. Advances of principal under the Revolving Loan shall be made upon written or telephone request by Borrower to Bank prior to 3:00 p.m. (Omaha time) on any Business Day. Each request for an Advance under the Revolving Loan shall be deemed a representation that the statements set forth in Section 4.2 are correct and that the proceeds of the requested Advance will be used for purposes permitted below. Upon fulfillment of all applicable conditions set forth in Article 4 of this Agreement and this Section 2.1, bank will disburse the amount of the requested Advance under the Revolving Loan to Borrower. In lieu of the foregoing, Bank and Borrower may enter into a cash management arrangement whereby Bank shall monitor the daily balance of Borrower's demand deposit accounts and make Advances when there is a negative balance or make a payment on the Revolving Loan when there is a positive balance. Any such arrangement shall not relieve Borrower of any of its obligations under this Agreement. On the terms and subject to the conditions hereof, Borrower may from time to time prior to the Revolving Loan Commitment Termination Date, borrow, prepay without penalty and reborrow funds under the Revolving Loan. The proceeds of the Revolving Loan shall be used to fund acquisitions including repurchases of capital stock of Borrower and capital expenditures by Borrower and for working capital. Bank's obligation to make Advances under the Revolving Loan under this Agreement shall terminate on the Revolving Loan Stated Maturity Date. b. INTEREST ON REVOLVING LOAN. Borrower shall pay interest to Bank on the outstanding principal amount of the Revolving Loan at a variable rate equal to the Prime Rate less one-half of one percent (0.5%). Any change in the interest rate resulting from a change in the Prime Rate shall be effective as of the opening of business on the day on which such change in the Prime Rate becomes effective. c. PAYMENTS OF PRINCIPAL AND INTEREST ON REVOLVING LOAN. Borrower shall pay accrued interest on the Revolving Loan monthly on the dates set forth in the Revolving Note. The outstanding principal balance of the Revolving Loan, together with accrued interest, shall be due and payable on the Revolving Loan Stated Maturity Date. d. FEE. Borrower shall pay Bank an origination fee of $15,000 upon execution of this amendment No. 3. In the event the Revolving Loan is renewed by Bank pursuant to Section 2.1 below, Borrower shall pay Bank an origination fee of $10,000 on June 1 of each future year the Revolving Loan continues in place. e. RENEWAL. The Revolving Loan shall be subject to annual review by Bank beginning May 31, 2000 and may be renewed by Bank in its sole discretion for twelve (12) month periods subject to its satisfaction with the financial condition of Borrower. As part of this review, bank shall review the terms and conditions of this Agreement including, without limitation, the financial covenants set forth in Sections 8.1, 8.2, and 8.4 and may condition the continuance of the Revolving Loan on amendments to such terms and conditions. 32 6. Borrower acknowledges and agrees that Sections 3.3 and 3.4 apply to all corporations becoming Subsidiaries of Borrower during the period while the Revolving Loan is outstanding. Borrower shall give bank written notice of its formation or acquisition of any Subsidiary within ten (10) days of such event and shall cause each new Subsidiary to execute and deliver to Bank a Guaranty, Subsidiary Security Agreement and Financing Statements as necessary to perfect the security interests granted under the Subsidiary Security Agreement. Borrower shall also deliver to Bank the corporate documents described in Section 4.1(b) together with an opinion of counsel contemplated in Section 4.1(h) covering the matters relating to said Subsidiary. 7. The following sentence is hereby added at the end of Section 6.9: "As promptly as practicable (but in any event not later than five calendar days) after any officer of Borrower obtains knowledge of the occurrence of any event which constitutes an Event of Default or would constitute an Event of Default with passage of time or the giving of notice, or both, notice of such occurrence, together with a detailed statement of the steps being taken to cure the situation." 8. The following sentence is hereby added at the end of Section 7.5: "Except for repurchases of its own capital stock, Borrower will not purchase any security or otherwise make any investment in any of its Affiliates including, without limitation, Canrad, Inc. or ARC." Nothing herein contained shall restrict Borrower from advancing funds to any wholly-owned Subsidiaries provided that the Subsidiary has executed and delivered to Bank a Guaranty of all obligations of Borrower to bank and a Subsidiary Security Agreement and Financing Statements covering all the assets of the Subsidiary as security for said Guaranty. 9. The second sentence of Section 7.9 is hereby deleted and the following sentence is hereby inserted in Section 7.9: Except for the repurchase of its own capital stock, Borrower will not purchase securities or otherwise make investments or purchase the capital stock or substantially all of the assets of any other company where the aggregate cost of any such purchases and investments exceeds $10,000,000 in any fiscal year of Borrower. In addition, Borrower will demonstrate to bank prior to making any investment or purchase that the obligations of the Borrower in connection with such investment or purchase will not result in an Event of Default under this Agreement. 10. Section 8.1 is hereby restated in its entirety as follows: 8.1 LEVERAGE RATIO. Borrower shall maintain on and as of the end of each fiscal quarter a ratio of Total debt (excluding Indebtedness that is non-interest bearing) to EBITDA for its four most recent completed fiscal quarters of not more than 2.0 to 1.0. 11. Section 8.2 is hereby restated in its entirety as follows: 33 8.2 MINIMUM TANGIBLE NET WORTH. Borrower shall continuously maintain Tangible Net Worth on a consolidated basis of not less than $20,000,000. 12. Section 8.3 is hereby deleted. 13. Section 8.4 is hereby restated in its entirety as follows: 8.4 INTEREST COVERAGE RATIO. Borrower shall achieve on a consolidated basis a ratio of EBITDA to interest expense for its four most recent completed fiscal quarters of not less than 3.0 to 1.0. 14. The word "Commitments" in the second line of Section 9.2 is hereby deleted and in substitution therefor the words "Revolving Loan Commitment" are hereby inserted and the words "all outstanding Loans" in the third and fourth line of Section 9.2 are hereby deleted and in substitution therefor the words "Revolving Loan" are inserted. 15. Borrower acknowledges and agrees that all Collateral Agreements executed by it remain in full force and effect and shall secure the new Revolving Note. 16. This amendment No. 3 is not intended to supersede or amend the Agreement or any documents executed in connection therewith except as specifically set forth herein. Nothing contained herein is intended to reduce, restrict or otherwise affect any warranties, representations, covenants or other agreements made by Borrower or waive any existing Events of Default, if any, under or pursuant to the Agreement. All of the covenants and obligations of Borrower under the Agreement and instruments, documents and agreements executed pursuant to the Agreement are hereby acknowledged, ratified and affirmed by Borrower. 17. Borrower represents and warrants to Bank as follows: a. The execution, delivery and performance by Borrower of this Amendment No. 3 have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the stockholders of Borrower; (ii) result in any breach of or constitute a default under any indenture, loan or credit agreement or any other agreement, lease or instrument to which Borrower is a party or by which it or its properties may be bound; or (iii) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature upon or with respect to any of the properties now owned or hereinafter acquired by Borrower except in favor of Bank; b. No authorization, approval or other action by and notice to or filing with any governmental authority or regulatory body or any person or entity is required for the execution, delivery and performance by Borrower of this Amendment No. 3; and c. Except as disclosed on Exhibit 5.6 attached to this amendment No. 3, there is not pending or , to the knowledge of Borrower, threatened any action or proceeding against or affecting Borrower, or the Subsidiaries before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which may, in any case or in the aggregate, have a material adverse effect on the financial condition, operations, properties or business of the Borrower or subsidiaries or the ability of the Borrower or the Subsidiaries to perform their obligations under the Loan Documents to which it is a party. 34 18. Concurrently with the execution of this amendment No. 3, Borrowers shall deliver to Bank all of the following in form and substance satisfactory to Bank: a. A certificate of its Secretary or Assistant Secretary as to: (i) resolutions of its Board of Directors then in full force and effect authorizing the execution, delivery and performance of this Amendment No. 3 and the new Revolving Note; (ii) the incumbency and signatures of those of its officers authorized to act with respect to this Amendment No. 3, the new revolving Note and each other document executed by Borrower (upon which certificate the bank many conclusively rely until it shall have received a further certificate of the Secretary of Borrower canceling or amending such prior certificate, which further certificate shall be reasonably satisfactory to the Bank); (iii) its Certificate of Incorporation, including all amendments thereto or that there have been no changes to the same since the time the Agreement was entered into; and (iv) its By-laws, including all amendments thereto or that there have been no changes to the same since the time the Agreement was entered into. b. A Certificate of Good Standing from the Secretary of State of Delaware for Borrower; c. The new Revolving Note properly executed by the Borrowers; d. An opinion of counsel to the Borrower in a form acceptable for Bank addressing the matters set forth in paragraph 17 of this amendment No. 3; e. Guaranties, subsidiary Security Agreements, Financing Statements and an opinion of counsel for all new Subsidiaries formed or acquired by Borrower since the time the Agreement was entered into, all as contemplated under paragraph 6 of this Amendment No. 3. 19. Borrower agrees to reimburse Bank for all reasonable out-of-pocket expenses, including, but not limited to, reasonable fees and disbursements of bank's counsel in connection with the preparation and execution of this Amendment No. 3 and any documents related hereto. 20. No failure on the part of Bank to exercise and no delay in exercising, any right under the Agreement as amended hereby shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. 35 21. A CREDIT AGREEMENT MUST BE IN WRITING TO BE ENFORCEABLE UNDER NEBRASKA LAW. TO PROTECT YOU AND US FROM ANY MISUNDERSTANDINGS OR DISAPPOINTMENTS, ANY CONTRACT, PROMISE, UNDERTAKING, OR OFFER TO FOREBEAR REPAYMENT OF MONEY OR TO MAKE ANY OTHER FINANCIAL ACCOMODATION IN CONNECTION WITH THIS LOAN OF MONEY OR GRANT OR EXTENSION OF CREDIT, OR ANY AMENDMENT OF, CANCELLATION OF, WAIVER OF, OR SUBSTITUTION FOR ANY OR ALL OF THE TERMS OR PROVISION OF ANY INSTRUMENT OR DOCUMENT EXECUTED IN CONNECTION WITH THIS LOAN OF MONEY OR GRANT OR EXTENSION OF CREDIT, MUST BE IN WRITING TO BE EFFECTIVE. IN WITNESS WHEREOF, the parties have executed this Amendment No. 3 as of the date and year first above written. BALLANTYNE OF OMAHA, INC., a Delaware Corporation By: /s/ John P. Wilmers ----------------------------------- President By: /s/ Brad French ----------------------------------- Secretary NORWEST BANK NEBRASKA, NATIONAL ASSOCIATION, a national banking association By: /s/ Kevin Munro ----------------------------------- Its: Vice President ----------------------------------- 36 EX-10.3(9) 4 EXHIBIT 10.3.9 Exhibit 10.3.9 CONSULTING AGREEMENT This Agreement made and entered into effective as of the 1st day of January, 1999 by and between Ballantyne of Omaha, Inc., ("Ballantyne"), a Delaware corporation, with its principal offices at 4350 McKinley Street, Omaha, Nebraska 68112, (the "Company"), and Arnold S. Tenney, an individual, whose mailing address is 4000 Chesswood Drive, Downsview, Ontario, Canada M3J 2B9, ("Tenney"). RECITALS: This Agreement is made with reference to the following facts and objectives: A. Tenney is experienced in the overall management and direction of corporations which design, develop, manufacture and distribute products for specialized markets throughout the world. B. Ballantyne, a manufacturer of capital equipment for the theater and restaurant industries, desires to engage Tenney as a consultant to provide managerial and other advisory services to Ballantyne and its subsidiaries, and Tenney is agreeable thereto. NOW, THEREFORE, in consideration of the promises and mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: Section 1. ENGAGEMENT. Company hereby engages Tenney as a consultant for a one year term commencing as of January 1, 1999 and ending on December 31, 1999. Notwithstanding the foregoing, either party may terminate this Contract immediately for cause. Section 2. ACTIVITIES OF CONSULTANT. During the term of this Agreement, Tenney will assist the Company in the continued operation of its business and will render counsel and advice and such other services as the Company and Tenney may mutually agree upon from time to time. Tenney shall devote such time to the business affairs of the company as he, in his sole judgment and discretion, shall deem necessary or appropriate for such purposes. Section 3. COMPENSATION. As compensation for services to be rendered to the Company, the Company will pay Tenney at the rate of Eight Thousand Three Hundred Thirty-Three Dollars and Thirty-Three Cents ($8,333.33) per month. Section 4. INDEPENDENT CONTRACTOR. For the purposes of this Agreement and the services to be rendered hereunder, Tenney shall, at all times, be an independent contractor and shall not be considered an employee of the Company. Section 5. MISCELLANEOUS. The following miscellaneous provisions shall apply to this Agreement: 37 5.1 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding between the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral and written, between the parties with respect thereto. The Agreement may be amended or supplemented any time only by an instrument in writing signed by both parties. 5.2 APPLICABLE LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Nebraska. 5.3 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective personal representatives, heirs, successors and assigns, except that the obligation of Tenney hereunder may not be assigned. 5.4 NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent to the other party by certified mail, return receipt requested, to the address for such party set forth above or such other address as the party may give to the other in the manner set forth for the giving for notice herein. 5.5 HEADINGS. The headings of the sections herein are for convenience only and shall not be construed as in any manner defining, limiting or describing the scope or intent of the particular sections to which they refer, or as affecting the meaning or construction of the language in the body of such sections. 5.6 RECITALS. All recitals are incorporated herewith and made a part of this Agreement. IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto on this 10th day of March, 1999, effective as of January 1, 1999. BALLANTYNE OF OMAHA, INC., "Company" By: /s/ John Wilmers ----------------------------------- John Wilmers, President /s/ Arnold S. Tenney ----------------------------------- Arnold S. Tenney, "Tenney" 38 EX-10.6(1) 5 EXHIBIT 10.6.1 Exhibit 10.6.1 ADDENDUM NO. 1 TO DISTRIBUTORSHIP AGREEMENT BETWEEN ISCO-OPTIC GMBH, AND BALLANTYNE OF OMAHA, INC. This Addendum No. 1 to the Distributorship Agreement is made and entered into effective this 4th day of December, 1998 between ISCO-Optic GmbH, P.O. Box 23 34, D-3400, Gottingen, Germany, hereinafter referred to as "ISCO", and Ballantyne of Omaha, Inc., a Delaware corporation, 4350 McKinley Street, Omaha, Nebraska 68112, hereinafter referred to as "Ballantyne". RECITALS: This Addendum No. 1 is made with reference to the following facts and objectives: 1. Effective March 1, 1993, ISCO and Ballantyne entered into a Distributorship Agreement, pursuant to which ISCO appointed Ballantyne as its exclusive distributor in the territory set forth in annex "B" attached to said Distributorship Agreement, for ISCO products set forth in Annex "A" attached to said Agreement. 2. The original term of said Distributorship Agreement was for ninety-six (96) months from the effective date of said Agreement, terminating on April 30, 2001. 3. The parties desire to extend the term of said Agreement for an additional sixty (60) months beyond the original termination date, pursuant to the terms and conditions set forth in this Addendum No. 1. AGREEMENT: NOW, THEREFORE, for good and valuable consideration, the parties hereto agree as follows: 1. Section 10, Paragraphs A, B and D, of the Distributorship Agreement are hereby amended to read as follows: 10. TERMINATION OF AGREEMENT. A. This Agreement shall remain in effect for a period of One Hundred and Fifty-Six (156) months from and after March 1, 1993, and shall terminate on April 30, 2006. B. Either party shall have the right to terminate this Agreement at the end of the One Hundred and Fifty-Six (156) month period without show of cause by notifying the other party of its intention to so terminate this Agreement not less than twelve (12) months prior to the expiration date. C. No change. 39 D. This Agreement shall be automatically renewed at the end of this One Hundred and Fifty-Six (156) month period, determined as set forth above, for a period of two years, and shall be renewable for two year periods thereafter unless either party notifies the other party, without show of cause, not less than twelve (12) months prior to the end of any such two year period, of its intention not to renew this Agreement. E. No change. F. No change. 2. Except as provided in this Addendum No. 1, the Distributorship Agreement of March 1, 1993, as supplemented, amended and modified by this Addendum No. 1, shall remain in full force and effect, and the parties reaffirm their obligations therein as herein amended. IN WITNESS WHEREOF, the parties have executed this first Addendum as of this 4th day of December 1998. ISCO-Optic GmbH ("ISCO") By: /s/ Christian Lindstedt --------------------------------- President BALLANTYNE OF OMAHA, INC., "BALLANTYNE" By: /s/ John P. Wilmers --------------------------------- President 40 EX-10.10(2) 6 EXHIBIT 10.10.2 Exhibit 10.10.2 AMENDMENT NO. 2 TO MANAGEMENT SERVICES AGREEMENT Amendment No. 2 to Management Services Agreement dated as of January 1, 1999 by and between BALLANTYNE OF OMAHA, INC., a Delaware corporation ("Ballantyne") and CANRAD, INC., a Delaware corporation ("Canrad"). W I T N E S S E T H: WHEREAS, Ballantyne and Canrad are parties to a Management Services Agreement dated as of September 12, 1995 (the "Agreement"), which Agreement was amended by Amendment No. 1 dated as of July 1, 1997, and WHEREAS, Ballantyne and Canrad desire to further amend this Agreement with respect to services to be rendered pursuant to said Agreement; NOW, THEREFORE, in consideration of the promises, mutual covenants and agreements herein set forth, the parties hereto, desiring to be legally bound, do hereby agree as follows: 1. Section 2.2(a) of the Agreement is hereby amended and restated in its entirety as follows: "(a) advice and assistance as to the general and corporate policies and strategic planning and direction of Ballantyne and its subsidiaries;" 2. Except as expressly amended hereby, all of the terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused the execution of this Amendment on the 10th day of March, 1999, effective January 1, 1999. BALLANTYNE OF OMAHA, INC. By: /s/ John Wilmers ------------------------------------ John Wilmers, President CANRAD, INC. By: /s/ Arnold S. Tenney ------------------------------------ Arnold S. Tenney, Chairman of the Board 41 EX-11 7 EXHIBIT 11 Exhibit 11 Ballantyne of Omaha, Inc. and Subsidiaries Computation of Earnings Per Share of Common Stock Three-Year Period Ended December 31, 1998
1998 1997 1996 ---- ---- ---- BASIC EARNINGS Earnings applicable to common stock $ 8,343,734 $ 7,709,339 $ 5,036,693 Weighted average common shares outstanding * 14,098,491 13,854,304 11,605,091 ----------- ----------- ----------- Basic earnings per share $ 0.59 $ 0.56 $ 0.43 ----------- ----------- ----------- ----------- ----------- ----------- DILUTED EARNINGS Earnings applicable to common stock $ 8,343,734 $ 7,709,339 $ 5,036,693 Weighted average common shares outstanding * 14,098,491 13,854,304 11,605,091 Assuming conversion of option outstanding * 650,859 976,119 890,231 ----------- ----------- ----------- Weighted average common shares outstanding, as adjusted 14,749,350 14,830,423 12,495,322 ----------- ----------- ----------- Diluted earnings per share $ 0.57 $ 0.52 $ 0.40 ----------- ----------- ----------- ----------- ----------- -----------
*Adjusted for all stock splits, including the 5% stock dividend issued on March 1, 1999. 42 EX-13 8 EX. 13 Exhibit 13 TAKING IT TO THE NEXT LEVEL 1998 ANNUAL REPORT BALLANTYNE OF OMAHA [GRAPHIC OMITTED] ON THE COVER: The Company's Pattern Profile Projector (P3) illuminates a rock formation at the Red Rocks Amphitheater near Denver, Colorado with the Ballantyne of Omaha Logo at over 450 feet. For more information on the P3, see page 9. CONTENTS 1 Financial Highlights 2 Letter to Shareholders 4 Management's Review of Operations Financial Review 10 Management's Discussion and Analysis 15 Selected Five-Year Financial Data 16 Report of Independent Accountants 17 Consolidated Financial Statements 21 Notes to Consolidated Financial Statements 36 Report of Management 37 Directors and Officers Corporate Directory Shareholder Information This report contains forward-looking statements that involve risks and uncertainties, including but not limited to, quarterly fluctuations in results; customer demand for the Company's products; the development of new technology for alternate means of motion picture presentation; 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. FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share amounts) 1998 1997 1996 ------- ------ ------ Net Revenues $75,057 70,205 51,754 Net Income 8,344 7,709 5,037 Net Income Per Share - Diluted .57 .52 .40 Domestic Revenues 53,079 51,657 37,628 Sales To Foreign Customers $21,978 18,548 14,126 ------- ------ ------ Total Assets $56,553 46,752 32,462 Working Capital 31,002 27,403 19,742 Total Debt $12,276 242 458 ------- ------ ------ Gross Profit as a % of Revenues 31.4% 29.5% 29.7% Net Income as a % of Revenues 11.1% 11.0% 9.7% Operating Income as a % of Revenues 17.3% 16.5% 16.1% Return on Ending Equity 24.1% 21.6% 21.0% ------- ------ ------
BALLANTYNE 1 PRESIDENT'S LETTER [PHOTO OMITTED] TO OUR SHAREHOLDERS "Taking It To The Next Level" is indicative of the momentum achieved and the direction that Ballantyne of Omaha, Inc. has taken over the past year. For that reason, we are proud to present this update of our progress and operating results. The expansion of megaplex building continues worldwide as the concept of providing entertainment to the moviegoing public reaches beyond the simple addition of theatre screens. In order to sustain the growth we have seen in recent years, theatre owners are developing exciting new concepts in areas of architecture, presentation and signage, patron comfort, concessions, and alternative attractions such as special venue features, game rooms and retail shopping and dining areas. Our ability to deliver large volume product orders on a timely basis is facilitating this screen growth, an advantage that distinguishes the Company from its competitors. This selling point proved extremely valuable in 1998 as consolidated theatre chains began demanding extremely large volume orders. 1998 was the seventh consecutive year of record results for the Company. We achieved record revenue, net income and earnings per share during the year despite a period of transition in the cinema exhibition industry. During the year, revenue increased to $75.1 million and net income rose to $8.3 million or $0.57 per diluted share. The increase is attributable to record motion picture projection system sales in both domestic and foreign markets, and to continued improvements in our manufacturing efficiency. Sales to foreign customers rose 19.0% to $22.0 million from $18.5 million in 1997, driven largely by strong demand for our theatre products in Canada and Europe, which more than offset flat demand in the emerging markets in Asia and South America. A testament to our financial strength is the authorized repurchase by the Board of Directors of 2.6 million shares of our stock. Over 1.8 million shares have been repurchased to date. Throughout 1998, a number of steps were taken by management to insure our position in the marketplace as the world's largest and preeminent supplier of motion picture theatre projection equipment. New sales offices were established in Europe and Southeast Asia in 1998 as the growth of multiplexing continues to spread in areas around the World. We expect to see further growth as major international 2 BALLANTYNE exhibitors capitalize on the re-stabilization of economic conditions in Asia and in the burgeoning Euro economy. Additionally, an ongoing sales goal for 1999 and beyond is to continue market penetration into Mexico and Central and South American countries. Sales growth in Canada has also been notable. Close, strategic alliances with dealers and exhibitors in these growing areas of the World is an encouraging element to our long-term growth prospects. In 1998, we entered into an agreement with Mega Systems, Inc., located in St. Augustine, Florida. Mega Systems will assist Ballantyne in the marketing of custom, large film format special venue projection equipment to designers and producers of such products as ride-film attractions, large screen, and 3-D movie features. Ballantyne has established a reputation as a leader and innovator in the design and manufacturing of this specialized variety of equipment. Diversification is another major element of Ballantyne's near and long-term plans. A key acquisition in 1998 was the purchase of Design and Manufacturing, Ltd. located in Fisher, Illinois. Design and Manufacturing is a major supplier of film transport systems and component parts for other cinema products. The additional capacity realized by this acquisition has also allowed us to improve manufacturing efficiencies and gross margins. Strong Communications, a new operating division of Ballantyne in 1998, was created to address the growing need for sophisticated audio visual systems such as those found in corporate board rooms and hotel meeting rooms. The entertainment lighting and rental division set its sights higher in 1998 with the development of three new products that will impact future sales and rental earnings for the division. The Strong Truss Trouper was introduced in October and is expected to be a popular new light for use in concerts and theatrical productions. A massive new light fixture, the Pattern Profile Projector, debuted at year end. This powerful xenon light is designed to project logos or other images over great distances and should find considerable acceptance for promotional events as we enter the new millennium. And finally, Nocturn is the name of a new line of high-tech blacklight products featuring ultraviolet light fixtures, and expendable products such as fluorescent paints and plastics used extensively in discotheques, theatres and other themed amusement parks and attractions. In December, manufacturing and other business functions previously performed at our North Hollywood facility, were consolidated into the Omaha location in order to gain added efficiency. Sales, rental and technical support operations remain in California and give us a strategic base of operations for that important entertainment market. Our aggressive pursuit of additional market share in all of our operating divisions, new acquisitions, and a strong balance sheet as we approach the new century, indicates that 1999 will be another excellent year. We are grateful for our good fortune and deeply appreciate the continued confidence that our investors have shown. Sincerely, /s/ John P. Wilmers John P. Wilmers President, Chief Executive Officer BALLANTYNE 3 MANAGEMENTS REVIEW OF OPERATIONS [GRAPHIC OMITTED] KEEPING PACE WITH OUR INDUSTRY ...our exposure to global markets is expanded and enhanced. There is no such thing as staying in one place in the entertainment equipment business. You are either moving forward or you are moving backward. In 1998, Ballantyne's management took the steps necessary to remain a leader in the race for motion picture exhibitor and entertainment lighting customers. To achieve this, it was prudent for our company to move our operating goals upward. To take the Company to the next level. What fuels our growth is taking advantage of opportunity. To gain this opportunity, we need to remain competitive and forward thinking. SALES PRESENCE When opportunity knocks, anywhere in the world, we are determined to answer. New sales offices were opened in Asia and Europe in 1998 so that our exposure to global markets is expanded and enhanced. The Asian market, while still turbulent, has incredible potential. Other multinational companies are investing in this huge market potential and Ballantyne has followed suit with continued support for our Hong Kong subsidiary, Strong-Westrex, and penetration into every Far East region. [PHOTO OMITTED] 4 BALLANTYNE [GRAPHIC OMITTED] Theatre Product Sales ($ in millions)
1994 1995 1996 1997 1998 $25.7 $35.4 $47.2 $62.3 $65.8
The Euro Dollar's introduction was symbolic of the changes taking place in the rapidly consolidated European market. A new sales office located in Wetzler, Germany, places Ballantyne in the heart of where the action is on that continent. Our growth also remained strong in North America as the multiplexing concept continues to favorably impact theatre construction throughout North America. Salesmanship and our stature in the theatre equipment industry yielded, at year's end, the single largest sales commitment in our history from Regal Cinemas, Inc., headquartered in Knoxville, Tennessee. Regal is the worldwide leader in the movie theatre business with over 3500 screens operating at over 400 locations in 30 states. [PHOTO OMITTED] BALLANTYNE 5 MANAGEMENTS REVIEW OF OPERATIONS [GRAPHIC OMITTED] DIVERSIFICATION An on-going goal of the Company is to broaden our earnings base and to increase profitability through diversification of our product line and through strategic acquisitions. Design and Manufacturing, Ltd. has been a long-time supplier of film transport systems and other component parts for our cinema operation. Design and Manufacturing was acquired in April 1998; the resulting benefits of improved efficiency and greater profit margins was immediate. The newly acquired company is now a wholly-owned subsidiary and Jack Spitz, previous owner of the company, remains president of that operation. [PHOTO OMITTED] Jack Spitz, President; Design and Manufacturing, Inc. 6 BALLANTYNE ...creation of a new operating division known as Strong Communications. Strong Communications was established in 1998 with our first office located in Orlando, Florida. By years end, additional offices were established in Ft. Lauderdale and Tampa, Florida. The appeal of Florida as a destination for meetings and conventions had a major bearing on the decision to base the business in Orlando. Our knowledge of the entertainment industry and experience with visual technologies created an opportunity, through Strong Communications, to provide sophisticated audio visual products and services to the marketplace. The scope of services at Strong Communications includes design consulting, equipment sales and rental services in the ever-changing, fast moving audio visual business. This includes design and installation services and systems integration for corporate boardrooms, conference rooms, training facilities, educational classrooms and auditoriums, religious assembly halls, theme parks, and simulation applications. Also included in Strong's services are equipment rental and show staging services for special events, corporate meetings, annual meetings, product introductions and specialty entertainment venues. BALLANTYNE 7 [PHOTO OMITTED] MANAGEMENTS REVIEW OF OPERATIONS New Products New Strategies New Markets ...strategic alliance established with Mega Systems. In terms of product line expansion, 1998 was a significant year. Special venue projection has always been an area where Ballantyne projector products have excelled. The leadership that we hold in this industry, which includes IMAX(R) and other ride-film attractions, continued its grip on the marketplace with a strategic alliance established with Mega Systems, Inc., a leader in this very specialized but growing form of entertainment. Mega Systems provides consulting services for giant screen, large format film applications. A joint development between Ballantyne and Mega Systems resulted in the creation of the Cine Kinetic 870, a dual intermittent movement projector that is a significant departure from traditional projector design. In addition to a rock steady picture, the new projector greatly extends the life of film prints, which is particularly useful with short, frequently shown features such as those found in IMAX attractions. [PHOTO OMITTED] 8 BALLANTYNE Another new product, Nocturn Ultra Violet Visual Effects, reaches toward the expanded use of quality UV products and light fixtures in a variety of entertainment locations. New cinema theatre architecture and theme parks are using Nocturn's UV lighting fixtures, paints and plastics. Nocturn expects to take advantage of resurging interest in UV in worldwide markets. The Follow Spotlight division broke through with an exciting new product in 1998. The Strong Xenon Truss Trouper 1.2 was developed as a powerful, dependable versatile spotlight designed for use in the lighting trusses above stages. Singer/songwriter Billy Joel was the first major act to hit the road with the Truss Trouper. Joel's production company utilizes 14 Truss Troupers in his concert lighting setup. Other big-name performers are expected to include this new light in their shows. A collaborative effort between the Xenotech and Strong Spotlight engineering department resulted in the creation of the first Pattern Profile Projector (P3). The P3 is a spectacular new product that has the capacity to project logos or other graphics on mountains, buildings and clouds at distances up to a mile. The cover of this report features a Ballantyne logo projected on a rock formation above the Red Rocks Amphitheater in Denver, Colorado. [PHOTOS OMITTED] BALLANTYNE 9 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 Annual Report. Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, including but not limited to, quarterly fluctuations in results; customer demand for the Company's products; the development of new technology for alternate means of motion picture presentation; 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. The following table sets forth, for the periods indicated, the percentage of net revenue represented by certain items reflected in the Company's consolidated statements of income: RESULTS OF OPERATIONS:
Years Ended December 31, ---------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net revenues 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues 68.6 70.5 70.3 71.4 70.0 Gross profit 31.4 29.5 29.7 28.6 30.0 Operating expenses 14.1 13.1 13.6 14.8 15.4 Income from operations 17.3 16.4 16.1 13.8 14.6 Net income 11.1 11.0 9.7 7.9 8.2
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 Net revenues for 1998 increased $4.9 million or 6.9% to $75.1 million from $70.2 million for 1997. The increase reflects higher revenues from theatre and lighting products. The following table shows comparative net revenues for theatre, lighting and restaurant segments for the respective years:
Year Ended December 31, ------------------------------- 1998 1997 ---- ---- Theatre $65,814,807 $62,306,249 Lighting 7,107,905 5,360,617 Restaurant 2,134,655 2,538,245 ----------- ----------- Total net revenues $75,057,367 $70,205,111 ----------- ----------- ----------- -----------
The increase in total net revenues primarily reflects higher sales of theatre products. The increase in theatre products relate to higher sales of commercial motion picture projection equipment ("projection equipment"), which rose $4.2 million or 8.6% from $48.9 million in 1997 to $53.1 million in 1998. This reflects increased sales of projection equipment to both foreign and domestic customers as motion picture exhibitors continue to build new multi-screen theatre complexes. 10 BALLANTYNE Offsetting the higher sales of projection equipment among theatre sales were lower sales of ISCO-Optic lenses which decreased $.6 million to $5.8 million in 1998 from $6.4 million in 1997. ISCO-Optic is a trademark of ISCO-Optic GmbH. Replacement part sales for the theatre segment were also lower in 1998 decreasing from $6.9 million in 1997 to $6.8 million in 1998. Sales of ISCO-Optic lenses and replacement parts fluctuate from quarter to quarter and are not directly related to the volume of projection equipment sold, but are more a reflection of the needs of current customers which have projection systems previously purchased from the Company. Lighting segment revenue also contributed to the increase in total net revenues, contributing $7.1 million in sales and rentals, an increase of $1.7 million over the $5.4 million contributed in 1997. This increase was entirely due to acquisitions made by the Company during 1998 and 1997. Restaurant sales decreased $0.4 million from $2.5 million in 1997 to $2.1 million in 1998. The decrease was due to lower sales of pressure fryers and smokers. Overall, consolidated net revenues from domestic customers increased $1.4 million to $53.1 million in 1998 from $51.7 million in 1997. The increase was smaller than the previous year due to a temporary slowdown in the middle of the year by a few of the larger theatre exhibition companies, however, as the year progressed, sales returned to expected levels. Net revenues from foreign customers increased $3.5 million or 18.5% to $22.0 million from $18.5 million in 1997. This increase was attributable to higher sales in Canada and Europe, however, sales were lower in Asia and Mexico compared to the prior year. Gross profit increased $2.8 million or 13.7% in 1998 to $23.6 million, and as a percent of revenue increased to 31.4% from 29.5% in 1997. The higher gross profit as a percentage of net revenues was primarily due to the theatre segment where the gross margin increased to 32.8% in 1998 from 28.7% in 1997. This increase can be attributed to synergies obtained through the purchase of Design & Manufacturing, Ltd. ("Design") in April 1998 and certain manufacturing efficiencies due to an increase in production volume during 1998. 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. Restaurant margins as a percent of sales increased from 25.6% in 1997 to 27.7% mainly due to a change in product mix while lighting segment margins decreased from 41.2% in 1997 to 19.7%. The decline in lighting margins was due to lower rental revenues as a percentage of total revenues in 1998. Rental revenue generally carries a higher margin than product sales. Operating expenses in 1998 increased approximately $1.4 million or 15.4% from 1997. As a percentage of net revenues, such expenses increased to 14.1% in 1998 from 13.1% in 1997. The increase can be attributed to the acquisition of Design and to costs related to the lighting segment. Operating expenses as a percentage of revenue are relatively high for Design because a majority of Design's sales 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 segment was due to the Company making a concerted effort to grow this segment but has not yet seen the revenue growth that was anticipated. Net interest expense was $36,265 in 1998 compared to net interest income of $254,030 in 1997. The change from the prior year reflects lower cash on hand and higher interest expense due to borrowings on the Company's line of credit with Norwest Bank. These borrowings were necessitated due to lower cash flows from operations and the repurchase of 1.8 million shares of common stock during the third and fourth quarters of 1998. BALLANTYNE 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's effective tax rate in 1998 was 35.5% compared to 34.7% in 1997. The increase reflects higher state taxes related to the Company having operations in more states than the prior year. 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. For the reasons outlined above, net income increased $0.6 million or 8.2% to $8.3 million in 1998 from $7.7 million in 1997. Basic earnings per share were $0.59 per share in 1998 compared to $0.56 per share in 1997. Diluted earnings per share were $0.57 per share in 1998 compared to $0.52 per share in 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 Net revenues for 1997 increased 35.7% to $70.2 million from $51.8 million for 1996. The following table sets forth comparative consolidated net revenues of theatre, lighting and restaurant products for the respective years:
Year Ended December 31, ------------------------- 1997 1996 ---- ---- Theatre $62,306,249 $47,230,543 Lighting 5,360,617 2,157,125 Restaurant 2,538,245 2,366,196 ----------- ----------- Total net revenues $70,205,111 $51,753,864 ----------- ----------- ----------- -----------
The increase for 1997 reflects higher revenues from the sale of theatre products and the sale and rental of lighting products. The increase in theatre products reflects increased sales of commercial motion picture projector equipment which rose $11.8 million or 31.8%. This increase was mainly attributable to increased sales of such equipment to domestic customers, however, sales to foreign customers, for all Company products, rose $4.4 million or 31.3% to $18.5 million in 1997 from $14.1 million in 1996. Also contributing to the increase in the theatre sales were higher sales of ISCO-Optic lenses and replacement parts. Sales of ISCO-Optic lenses increased $1.9 million or 44.6% to $6.4 million from $4.5 million in 1996, while sales of replacement parts increased $1.2 million or 19.6% to $7.3 million from $6.1 million in 1996. These increases reflect the continued demand for theatre products and a higher installed base of motion picture projectors. Net revenues from lighting products increased $3.2 million or 148.5% from $2.2 million in 1996 to $5.4 million in 1997. The increase primarily reflects the acquisition of Xenotech in the second quarter of 1997 and the acquisition of Sky-Tracker in the third quarter of 1997. The remaining increase in lighting products was attributable to an increase in sales of follow spotlights, which increased approximately $231,000 over 1996. Net sales of restaurant products increased by $258,394 or 13.9%, mainly due to an increase in the sales of pressure fryers and accessories. Gross profit as a percentage of net revenues remained relatively constant from year to year. The increase attributable to improved efficiencies was offset by greater console sales, which carry a lower margin. Operating expenses increased $2.1 million or 30.1% for 1997 as compared to 1996. However, as a percentage of net revenues, such expenses decreased to 13.1% in 1997 from 13.6% in 1996 as a result of an increase in net revenues from theatre products without a proportional increase in selling and general and administrative expenses. 12 BALLANTYNE Interest expense decreased to $31,902 from $473,627 in 1996 reflecting the repayment of the Company's Industrial Revenue Bonds in March 1997 and the absence of borrowings under the Company's line of credit. Interest income rose $175,813 to $285,932 for 1997 compared to $110,119 in 1996. The increase was attributed to more excess cash during 1997 compared to 1996 which was a direct result of more cash flow from operations and from proceeds from the equity offering in August of 1996. The Company's effective tax rate for 1997 was 34.7% compared to 36.6 % for 1996. The decline from 1996 reflects a lower state income tax related to the state of Nebraska's "Throwback" law in which only a portion of the Company's sales are subject to Nebraska taxes. 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. Due to the reasons described above, net income increased $2.7 million or 53.1% to $7.7 million in 1997 from $5.0 million in 1996. Basic earning per share were $0.56 per share in 1997 compared to $0.43 per share in 1997. Diluted earnings per share were $0.52 per share in 1997 compared to $0.40 per share in 1996. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1998, the Company maintained a $20 million line of credit with Norwest Bank Nebraska, N.A. (the "Norwest Facility"). At December 31, 1998, $7.8 million of the Norwest Facility was unused. Borrowings outstanding under the Norwest Facility bear interest, payable monthly, at a rate equal to the Prime Rate less 0.5% (7.25% at December 31, 1998). All of the Company's assets secure the Norwest Facility. The Company was in compliance with all restrictive covenants at December 31, 1998 and 1997. Historically, the Company has funded its working capital requirements through cash flow generated by its operations. Net cash provided by operating activities ("operating cash flow") for the years ended December 31, 1998, 1997 and 1996 were $0.49 million, $5.3 million and $0.9 million, respectively. The decrease in operating cash flow was primarily due to a $2.6 million decrease in accounts payable, a $5.2 million increase in accounts receivable and a $3.1 million increase in inventory in 1998. The decrease in accounts payable relates mainly to the timing of payments to vendors compared to the prior year. The increase in accounts receivable relates to higher sales in the months of November and December than the previous year. The Company anticipates that internally generated funds and borrowings available under the Norwest Facility will be sufficient to meet its working capital needs, planned 1999 capital expenditures and to pursue opportunities to expand its markets and businesses. Net cash used in investing activities for the years ending December 31, 1998, 1997 and 1996 were $7.5 million, $4.7 million and $1.0 million, respectively. Investing activities in 1998 reflect the purchase 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 $3.6 million in 1998 and primarily relate to the purchase of rental equipment in the lighting segment and plant equipment in the theatre segment. Net cash used in financing activities in 1998 was $0.15 million compared to net cash provided by financing activities of $1.1 million in 1997 and $6.0 million in 1996. The reasons for the change from prior years relate BALLANTYNE 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS to the repurchase of treasury stock for $12.4 million during 1998. The stock repurchase was financed by borrowings on the Norwest Facility. Also, the Company received $1.8 million from the exercise of certain stock options in 1997 compared to only $0.09 million in 1998. Net cash provided by financing activities in 1996 was higher due to a secondary offering of the Company's common stock in August of that year. 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. 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 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 14 BALLANTYNE 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 could incur substantial liabilities and potential losses 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." This represents the Company's most reasonable likely worst case, year 2000 scenario. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.133 establishes accounting and reporting standards for derivatives and hedging. It requires that all derivatives be recognized as either assets or liabilities at fair value and establishes specific criteria for the use of hedge accounting. The Company's required adoption date is January 1, 2000. SFAS No. 133 is not to be applied retroactively to financial statements of prior periods and as of December 31, 1998, the Company had no derivatives or hedging activities. SELECTED FIVE-YEAR FINANCIAL DATA
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- STATEMENT OF INCOME DATA Net revenue $75,057 70,205 51,754 38,441 28,758 Gross profit 23,554 20,725 15,357 10,990 8,631 Net income $ 8,344 7,709 5,037 3,040 2,355 Net income per share (1) Basic $ 0.59 0.56 0.43 0.29 0.19 Diluted $ 0.57 0.52 0.40 0.29 0.19 BALANCE SHEET DATA Working capital $31,002 27,403 19,742 8,625 7,079 Total assets 56,553 46,753 32,462 19,828 16,674 Total debt 12,276 242 458 8,059 1,607 Stockholders' equity $34,615 35,623 24,029 5,055 10,015
(1) Adjusted for all stock dividends and stock splits BALLANTYNE 15 INDEPENDENT AUDITOR'S REPORT BOARD OF DIRECTORS AND SHAREHOLDERS BALLANTYNE OF OMAHA, INC. We have audited the accompanying consolidated balance sheets of Ballantyne of Omaha, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ballantyne of Omaha, Inc. and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP KPMG PEAT MARWICK LLP Omaha, Nebraska January 18, 1999 16 BALLANTYNE BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997 ---- ---- Current assets: Cash and cash equivalents $ 594,686 $ 7,701,507 Accounts receivable (less allowance for doubtful accounts of $396,785 in 1998 and $215,823 in 1997) 17,255,221 11,728,231 Inventories 21,434,395 17,445,632 Recoverable income taxes -- 490,766 Deferred income taxes 864,568 626,133 Other current assets 43,611 118,028 ------------ ------------ Total current assets 40,192,481 38,110,297 Plant and equipment, net 12,695,989 7,399,990 Other assets, net 3,664,710 1,242,211 ------------ ------------ Total assets $ 56,553,180 $ 46,752,498 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ -- $ 70,000 Accounts payable 5,936,825 8,351,392 Accrued expenses 2,500,614 2,286,001 Income taxes payable 752,809 -- ------------ ------------ Total current liabilities 9,190,248 10,707,393 Deferred income taxes 471,319 250,315 Long-term debt, excluding current installments 47,372 171,761 Notes payable to bank 12,229,000 -- 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 14,450,702 shares in 1998 and 13,548,594 shares in 1997 144,507 135,486 Additional paid-in capital 31,211,329 22,741,511 Retained earnings 15,610,511 12,746,032 ------------ ------------ 46,966,347 35,623,029 Less cost of common shares in treasury, at cost 1,801,800 shares in 1998 (12,351,106) -- ------------ ------------ Total stockholders' equity 34,615,241 35,623,029 ------------ ------------ Total liabilities and stockholders' equity $ 56,553,180 $ 46,752,498 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. BALLANTYNE 17 BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ---- ---- ---- Net revenues $ 75,057,367 $ 70,205,111 $ 51,753,864 Cost of revenues 51,503,053 49,480,113 36,396,527 ------------ ------------ ------------ Gross profit 23,554,314 20,724,998 15,357,337 Operating expenses: Selling 3,740,582 3,350,758 2,711,744 General and administrative 6,844,407 5,819,876 4,335,709 ------------ ------------ ------------ Total operating expenses 10,584,989 9,170,634 7,047,453 ------------ ------------ ------------ Income from operations 12,969,325 11,554,364 8,309,884 Interest income 103,207 285,932 110,119 Interest expense (139,472) (31,902) (473,627) ------------ ------------ ------------ Net interest income (expense) (36,265) 254,030 (363,508) ------------ ------------ ------------ Income before income taxes 12,933,060 11,808,394 7,946,376 Income taxes 4,589,326 4,099,055 2,909,683 ------------ ------------ ------------ Net income $ 8,343,734 $ 7,709,339 $ 5,036,693 ------------ ------------ ------------ ------------ ------------ ------------ Net income per share: Basic $ 0.59 $ 0.56 $ 0.43 ------------ ------------ ------------ ------------ ------------ ------------ Diluted $ 0.57 $ 0.52 $ 0.40 ------------ ------------ ------------ ------------ ------------ ------------ Weighted average shares outstanding: Basic 14,098,491 13,854,304 11,605,091 ------------ ------------ ------------ ------------ ------------ ------------ Diluted 14,749,350 14,830,423 12,495,322 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements 18 BALLANTYNE BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Additional Total Preferred Common Paid-in Retained Treasury Stockholders' Stock Stock Capital Earnings Stock Equity ----------- ----------- ---------- ---------- ----------- ------------- Balance at December 31, 1995 $ -- 99,000 4,956,215 -- -- 5,055,215 Net income -- -- -- 5,036,693 -- 5,036,693 Issuance of 2,846,250 shares of common stock, net of offering expenses -- 28,463 13,622,324 -- -- 13,650,787 Issuance of 86,625 shares of common stock upon exercise of stock options -- 867 226,633 -- -- 227,500 Issuance of 21,814 shares of common stock under the employees stock purchase plan -- 218 58,534 -- -- 58,752 ----------- ----------- ---------- ---------- ----------- ---------- Balance at December 31, 1996 -- 128,548 18,863,706 5,036,693 -- 24,028,947 Net income -- -- -- 7,709,339 -- 7,709,339 Issuance of 684,075 shares of common stock upon exercise of stock options -- 6,840 1,838,042 -- -- 1,844,882 Issuance of 9,865 shares of common stock under the employees stock purchase plan -- 98 60,673 -- -- 60,771 Income tax benefit related to stock option plans -- -- 1,979,090 -- -- 1,979,090 ----------- ----------- ---------- ---------- ----------- ---------- Balance at December 31, 1997 -- 135,486 22,741,511 12,746,032 -- 35,623,029 Net income -- -- -- 8,343,734 -- 8,343,734 Issuance of 25,950 shares of common stock upon exercise of stock options -- 259 88,997 -- -- 89,256 Issuance of 15,679 shares of common stock under the employees stock purchase plan -- 156 99,405 -- -- 99,561 Issuance of 259,058 shares for business combination -- 2,590 2,797,410 -- -- 2,800,000 Income tax benefit related to stock option plans -- -- 10,767 -- -- 10,767 Purchase of treasury stock -- -- -- -- (12,351,106) (12,351,106) Issuance of 5% stock dividend declared January 28, 1999, payable March 1, 1999 -- 6,016 5,473,239 (5,479,255) -- -- ----------- ----------- ---------- ---------- ----------- ---------- Balance at December 31, 1998 $ -- 144,507 31,211,329 15,610,511 (12,351,106) 34,615,241 ----------- ----------- ---------- ---------- ----------- ---------- ----------- ----------- ---------- ---------- ----------- ----------
See accompanying notes to consolidated financial statements. BALLANTYNE 19 BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASHFLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income $ 8,343,734 $ 7,709,339 $ 5,036,693 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of plant and equipment 1,476,275 783,338 470,040 Other amortization 376,948 218,434 137,080 Loss on sale of fixed assets 7,297 -- -- Deferred income taxes (17,431) (261,265) 14,901 Changes in assets and liabilities, net of assets acquired: Accounts receivable (5,243,401) (2,210,958) (3,377,475) Inventories (3,065,576) (4,676,096) (2,594,966) Other current assets 77,776 (2,326) (51,829) Accounts payable (2,561,127) 2,069,566 2,083,256 Accrued expenses 104,361 294,212 164,944 Income taxes payable 1,254,342 1,352,094 (986,778) Other assets (253,836) (5,420) 5,882 ------------ ------------ ------------ Net cash provided by operating activities 499,362 5,270,918 901,748 ------------ ------------ ------------ Cash flows from investing activities: Business combinations (3,886,922) (1,150,000) -- Capital expenditures (3,594,472) (3,531,913) (1,016,930) Proceeds from sale of equipment 28,500 -- -- ------------ ------------ ------------ Net cash used in investing activities (7,452,894) (4,681,913) (1,016,930) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from line of credit 12,229,000 -- -- Payments on long-term debt (220,000) (835,744) (7,983,436) Net proceeds from equity offering -- -- 13,650,787 Proceeds from employee stock purchase plan 99,561 60,771 58,752 Proceeds from exercise of stock options 89,256 1,844,882 227,500 Purchase of common stock for treasury (12,351,106) -- -- ------------ ------------ ------------ Net cash provided by (used in) financing activities (153,289) 1,069,909 5,953,603 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (7,106,821) 1,658,914 5,838,421 Cash and cash equivalents at beginning of year 7,701,507 6,042,593 204,172 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 594,686 $ 7,701,507 $ 6,042,593 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 20 BALLANTYNE BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. Company Ballantyne of Omaha, Inc., a Delaware corporation ("Ballantyne" or the "Company"), and its wholly-owned subsidiaries Strong Westrex, Inc., Design & Manufacturing, Inc., Xenotech Rental Corp. and Xenotech Strong, Inc., design, develop, manufacture and distribute commercial motion picture equipment, lighting systems 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 25.6% 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. All significant intercompany balances and transactions have been eliminated in consolidation. b. Stock Dividend and Splits The Company's Board of Directors declared a 5% stock dividend of the Company's common stock on January 28, 1999. The stock dividend is payable March 1, 1999 to shareholders of record on February 15, 1999. The stock dividend resulted in the issuance of 601,455 shares of common stock. The dividend has been accounted for as if it occurred on December 31, 1998. 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. The Company's Board of Directors declared a 3-for-2 stock split of the Company's common stock on January 29, 1997. The stock split was in the form of a 50% common stock dividend payable March 5, 1997 to shareholders of record on February 10, 1997. Unless otherwise noted, share and per share data have been restated to reflect the stock dividend and stock splits 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. BALLANTYNE 21 BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 d. 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. Accumulated amortization as of December 31, 1998 and 1997 amounted to $928,393 and $1,254,435, respectively. 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. e. Plant and Equipment Significant expenditures for the replacement or expansion of plant and equipment are capitalized. Depreciation of plant and equipment is provided over the estimated useful lives of the respective assets using the straight-line method. Estimated useful lives range from 3 to 20 years. f. 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. g. 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. h. Research and Development Research and development costs are charged to operations in the period incurred. Such costs charged to operations amounted to approximately $746,000, $647,000 and $485,000 for the years ended December 31, 1998, 1997 and 1996, respectively. i. Advertising Costs Advertising and promotional costs are expensed as incurred and amounted to approximately $1,046,000, $904,000 and $528,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 22 BALLANTYNE j. Fair Value of Financial Instruments Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instruments could be exchanged into a current transaction between willing parties. Cash and cash equivalents, accounts receivable, debt, notes payable to bank and accounts payable reported in the consolidated balance sheets equal or approximate fair values. k. 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. l. 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. m. Earnings Per Common Share Basic earnings per share of common stock have been computed on the basis of the weighted average number of shares of common stock outstanding. Diluted earnings per share has been computed on the basis of the weighted average number of shares of common stock outstanding after giving effect to potential common shares from dilutive stock options. Diluted earnings per share includes an increase in the weighted average shares outstanding for dilutive stock options of 650,859, 976,119 and 890,231 for 1998, 1997 and 1996, respectively. n. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of The Company reviews long-lived assets and certain identifiable intangibles 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 exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. o. Reclassifications Certain of the 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. BALLANTYNE 23 BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 3. Equity Offerings On June 30, 1997, the Company completed a public offering pursuant to a Registration Statement on Form S-3 (the "S-3 Offering"). Pursuant to the S-3 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 S-3 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 S-3 Offering. On August 1, 1996, the Company completed an offering of its shares of capital stock pursuant to a Registration Statement on Form S-1 (the "Offering"). Pursuant to the Offering, the Company sold 1,100,000 shares of common stock to the public at the price of $12.125 per share. In addition, the Company granted the underwriters an option, exercisable until August 31, 1996, to purchase an aggregate of up to 165,000 additional shares of common stock at $12.125 per share less underwriting discounts and commissions, to cover over-allotments, if any. The underwriters purchased all 165,000 shares on August 16, 1996. The net proceeds to the Company from the Offering were $13,650,787. Share information and per share prices have not been adjusted for the stock dividend or stock splits for the above offerings. 4. Inventories Inventories consist of the following:
December 31, ------------ 1998 1997 ---- ---- Raw materials and supplies $16,404,416 $13,857,783 Work in process 3,115,163 2,451,078 Finished goods 1,914,816 1,136,771 ----------- ----------- $21,434,395 $17,445,632 ----------- ----------- ----------- -----------
24 BALLANTYNE 5. Plant and Equipment Plant and equipment include the following:
December 31, ------------ 1998 1997 ---- ---- Land $ 343,500 $ 313,500 Buildings and improvements 4,456,186 3,344,292 Machinery and equipment 12,729,984 7,139,044 ----------- ----------- 17,529,670 10,796,836 Less accumulated depreciation 4,833,681 3,396,846 ----------- ----------- Net plant and equipment $12,695,989 $ 7,399,990 ----------- ----------- ----------- -----------
6. Long-term Debt Long-term debt consists entirely of non-competition contracts payable in installments related to the acquisition of Xenotech, Inc. and Sky-Tracker of America, Inc. in 1997. Annual maturities of long-term debt at December 31, 1998 are as follows:
Year Amount ---- ------ 1999 $ -- 2000 20,000 2001 -- 2002 50,000 ------------ 70,000 Less amounts representing imputed interest (22,628) ------------ Present value of non-competition contracts $ 47,372 ------------ ------------
The Company maintains a $20 million line of credit with Norwest Bank, N.A. At December 31, 1998, $7.8 million of the line of credit was unused. Borrowings outstanding under the line of credit bear interest, payable monthly, at a rate equal to the Prime Rate less 0.5% (7.25% at December 31, 1998). The Company's line of credit expires on May 31, 2000. The amounts outstanding have been classified as long-term based on the maturity date of the agreement. All of the Company's assets secure the credit facility. The Company was in compliance with all restrictive covenants relating to the line of credit at December 31, 1998 and 1997. BALLANTYNE 25 BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 7. Income Taxes The provisions for income taxes consists of:
Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Current: Federal $ 4,190,431 $ 4,124,265 $ 2,623,375 State 391,000 237,000 267,400 Foreign 25,326 (945) 4,007 Deferred-Federal (17,431) (261,265) 14,901 ----------- ----------- ----------- $ 4,589,326 $ 4,099,055 $ 2,909,683 ----------- ----------- ----------- ----------- ----------- -----------
Actual tax expense differs from the "expected" tax expense (computed by applying the U.S. Federal corporate tax rate of 34% to income before income taxes) as follows:
Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Computed "expected" tax expense $ 4,397,240 $ 4,014,854 $ 2,701,768 State income taxes, net of Federal benefit 258,060 156,420 176,484 Non-deductible amortization 16,356 16,356 16,356 Other (82,330) (88,575) 15,075 ----------- ----------- ----------- $ 4,589,326 $ 4,099,055 $ 2,909,683 ----------- ----------- ----------- ----------- ----------- -----------
Deferred tax assets and the deferred tax liability were comprised of the following:
December 31, ------------ 1998 1997 ---- ---- Deferred tax assets: Inventory reserves $558,610 $441,929 Accounts receivable reserve 134,907 73,380 Other 255,703 174,533 -------- -------- Total deferred assets 949,220 689,842 Deferred tax liability: Depreciation and amortization 555,971 314,024 -------- -------- Net deferred tax asset $393,249 $375,818 -------- -------- -------- --------
There was no valuation allowance for deferred tax assets as of December 31, 1998 or 1997. Based upon the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, management believes it is more likely than not the Company will realize the benefits of deferred tax assets as of December 31, 1998. 26 BALLANTYNE Deferred tax assets and liabilities are included in the accompanying balance sheets based on their classification as current or long-term as follows:
1998 1997 ---- ---- Current deferred tax assets $864,568 $626,133 Long-term deferred tax liability 471,319 250,315 -------- -------- Net deferred tax assets $393,249 $375,818 -------- -------- -------- --------
8. Supplemental Cash Flow Information Supplemental disclosures to the consolidated statements of cash flows are as follows:
Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Interest paid $ 139,472 $ 31,902 $ 473,627 ---------- ---------- ----------- ---------- ---------- ----------- Income taxes paid $3,352,415 $3,072,840 $3,878,500 ---------- ---------- ----------- ---------- ---------- -----------
Other non-cash activities in 1998 included recording an income tax benefit relating to the Company's stock option plans for $10,767. See Note 10 for non-cash activities concerning acquisitions. Other non-cash activities in 1997 included recording the present value of non-compete contracts for approximately $248,000 and an income tax benefit relating to the Company's stock option plans for $1,979,090. Other non-cash activities in 1996 included approximately $382,300 of capital lease obligations for equipment. 9. Related Party Transactions Amounts charged to operations of the Company by Canrad were management fees of $150,000, $225,000 and $300,000 for the years ended December 31, 1998, 1997 and 1996. Included in accrued expenses are payables to Canrad of $171,377 and $110,524 as of December 31, 1998 and 1997. One member of the Board of Directors serves as General Counsel for the Company. Fees paid to the Board Member's firm in 1998, 1997 and 1996 were not significant. 10. Acquisitions 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. 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. In connection with the acquisition, goodwill of approximately $2.5 million was recorded and will be amortized BALLANTYNE 27 BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 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 June of 1998, the Company purchased substantially all of the assets of a distributor of follow spotlights for a purchase price of $125,000. 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. No goodwill was recorded in connection with the acquisition. 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 payable by the Company in equal installments of $50,000. During 1998, the Company prepaid certain payments under the contract. The present value of the non-compete payments has been included in other assets and long-term debt in the accompanying consolidated balance sheets. 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 payable in equal installments and is included in other assets and long-term debt in the accompanying consolidated balance sheets. The purchase prices for all acquisitions in 1998 and 1997 were assigned to the assets acquired and liabilities assumed based upon the fair market value of such assets and liabilities. The allocations of the purchase prices for 1998 and 1997 are as follows:
1998 1997 ---- ---- Accounts receivable $ 283,589 $ 426,657 Inventories 923,187 868,413 Other current assets 3,359 12,000 Plant and equipment 3,213,599 787,606 Other assets 2,520,000 479,332 Accounts payable (146,560) (522,104) Accrued expenses (110,252) (242,766) Income taxes payable -- (56,476) Long-term debt -- (602,662) Purchase price paid in stock (2,800,000) -- ----------- ----------- Cash paid $ 3,886,922 $ 1,150,000 ----------- ----------- ----------- -----------
28 BALLANTYNE The following unaudited pro forma financial information presents combined results of operations of the Company as if the 1998 acquisitions had occurred as of the beginning of 1997, after giving effect to certain adjustments, including amortization of goodwill and related income tax effects. The pro forma impact of the 1997 acquisitions would not be material. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the acquisitions constituted a single entity during such periods.
Years Ended December 31, ------------------------ 1998 1997 ---- ---- Net revenues $ 75,750,256 $ 72,970,757 -------------- -------------- -------------- -------------- Net income $ 8,784,851 $ 9,053,828 -------------- -------------- -------------- -------------- Earnings per share: Basic $ 0.62 $ 0.65 -------------- -------------- -------------- -------------- Diluted $ 0.60 $ 0.61 -------------- -------------- -------------- --------------
11. Common Stock a. Option Plans The Company has adopted a 1995 Incentive and Non-Incentive Stock Option Plan and a 1995 Non-Employee Directors Non-Incentive Stock Option Plan (the "Plans"). A total of 777,131 shares of Ballantyne common stock have been reserved for issuance pursuant to these Plans at December 31, 1998. The 1995 Stock Option Plan provides for the granting of incentive and non-incentive stock options. The 1995 Outside Directors Stock Option Plan provides for the granting of non-incentive stock options only. The per share exercise price of incentive stock options may not be less than 100% of the fair market value of a share of Ballantyne common stock on the date of grant (110% of fair market value in the case of an incentive stock option granted to any person who, at the time the incentive stock option is granted, owns (or is considered as owning within the meaning of Section 424 (d) of the Internal Revenue Code of 1986, as amended) stock possessing more than 10% of the total combined voting powers of all classes of stock of the Company or any parent or subsidiary). With respect to non-incentive stock options, the per share exercise price may not be less than 85% of the fair market value of a share of Ballantyne common stock on the date of grant. BALLANTYNE 29 BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 Information as to shares subject to stock option plans is as follows:
Number Exercise price Weighted average of Options Per Option Exercise Price ---------- ---------- -------------- Options outstanding at December 31, 1995 1,182,431 $ 2.50 - 2.79 $ 2.54 Granted 38,981 3.08 3.08 Exercised (90,956) 2.50 2.50 --------- ---------- ------------- Options outstanding at December 31, 1996 1,130,456 2.50 -3.08 2.57 Granted 199,238 8.09 -11.43 10.35 Exercised (548,179) 2.50 -3.08 2.57 --------- ---------- ------------- Options outstanding at December 31, 1997 781,515 2.50 -11.43 3.91 Granted 336,000 7.29 -11.94 10.92 Exercised (27,248) 2.50 -11.43 3.28 --------- ---------- ------------- Options outstanding at December 31, 1998 1,090,267 $ 2.50 -11.94 $ 6.38 --------- ---------- ------------- --------- ---------- ------------- Exercisable options at December 31, 1998 1,043,017 $ 2.50 -11.94 $ 6.12 --------- ---------- ------------- --------- ---------- -------------
Options Outstanding at December 31, 1998 Exercisable at December 31, 1998 ---------------------------------------- -------------------------------- Weighted Weighted Weighted Weighted average average average average remaining exercise remaining exercise Range of option Number contractual price per Number contractual price per exercise price of options life option of options life option - --------------- ---------- ----------- --------- ---------- ----------- --------- $ 2.50 to 3.08 557,393 5.44 2.55 557,393 5.44 2.55 $ 7.30 to 11.94 532,874 8.32 10.38 485,624 8.69 10.23 - --------- ----- ------- ---- ----- ------- ---- ----- $ 2.50 to 11.94 1,090,267 6.85 6.38 1,043,017 6.96 6.12 - --------- ----- --------- ---- ---- --------- ---- ---- - --------- ----- --------- ---- ---- --------- ---- ----
The Company has also adopted the 1995 Employee Stock Purchase Plan. The Employee Stock Purchase Plan 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 and participants are limited to purchasing 1,000 shares of Ballantyne common stock in any offering period. At December 31, 1998, 194,159 shares of Ballantyne common stock have been reserved pursuant to the Employee Stock Purchase Plan. b. Warrants The Company has granted Merita Bank, Ltd., a warrant to purchase 509,355 shares of Ballantyne common stock. During 1997, Merita Bank, Ltd. exercised 170,100 shares under its warrant leaving 339,255 shares remaining to be purchased at December 31, 1998 at an exercise price of $2.50 per share. 30 BALLANTYNE c. Accounting for Stock-Based Compensation The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans and the exercise price of all options issued have equaled the market value of the stock on the date of grant. Accordingly, no compensation cost has been recognized for any of the aforementioned stock compensation plans. Had compensation cost for the Company's stock compensation plans been determined consistent with Statement of Financial Accounting Standards (SFAS) No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Net income As reported $ 8,343,734 $ 7,709,339 $ 5,036,693 Pro forma $ 6,489,170 $ 7,136,263 $ 3,843,285 Basic earnings per share As reported $ 0.59 $ 0.56 $ 0.43 Pro forma $ 0.46 $ 0.51 $ 0.33 Diluted earnings per share As reported $ 0.57 $ 0.52 $ 0.40 Pro forma $ 0.44 $ 0.48 $ 0.31
The average fair value of each option granted in 1998, 1997 and 1996 was $7.77, $8.18 and $2.03, 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:
Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Risk-free interest rate ................. 4.73% 6.15% 6.15% Dividend yield .......................... 0% 0% 0% Expected volatility ..................... 78% 75.7% 75% Expected life in years .................. 3-10 3-10 3-10
12. Commitments, Contingencies, Concentrations and Leases a. Commitments and Contingencies The Company has in place a profit sharing plan for key management employees. Amounts due pursuant to the plan are based upon the attainment of specific operating levels that are established by the Board of Directors. Amounts charged to operations pursuant to the profit sharing plan amounted to $945,562, $1,127,795 and $913,676 for 1998, 1997 and 1996, respectively. The amounts payable of $945,818 and $1,125,256 at December 31, 1998 and 1997, respectively, are included in accrued expenses in the accompanying consolidated balance sheets. BALLANTYNE 31 BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 b. Retirement Plans The Company sponsors a defined contribution 401-K plan (the "Plan") for all employees. Pursuant to the provisions of the Plan, employees may defer up to 6% of their compensation. The Company will match 50% of the amount deferred. An additional amount of up to 9% of the employee's compensation for the year may also be deferred with no matching contribution by the Company. The contributions made to the Plan by the Company for the years ended December 31, 1998, 1997 and 1996 amounted to $182,077, $150,577 and $99,826, respectively. c. Concentrations For the years ended December 31, 1998, 1997 and 1996, sales to a customer represented approximately fifteen percent (15%), twenty percent (20%) and sixteen percent (16%) of consolidated net revenues, respectively. The balance in trade receivable owed by this customer was $751,233 at December 31, 1998 and $1,912,551 at December 31, 1997. For the year ended December 31, 1998, sales to another customer represented approximately fourteen percent (14%) of consolidated net revenues. The balance in trade receivable owed by this customer was $1,888,594 at December 31, 1998. 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 on going credit evaluations of its customers financial condition. Sales to foreign customers were approximately $22,000,000, $18,500,000 and $14,100,000 for 1998, 1997 and 1996, respectively. These sales were principally to customers in Mexico, Canada, Europe and Asia. To minimize credit risk, the Company generally requires sales to foreign customers be guaranteed by letter of credit or are shipped C.O.D. d. Leases The Company leases manufacturing facilities and office space from an employee of a wholly-owned subsidiary. The lease expires on March 31, 2002 with the Company having the option to renew the lease for one additional five-year term. The Company expects to renew or replace this lease in the ordinary course of business. The Company also leases other properties and equipment under operating leases which contain renewal and escalation clauses. Aggregate minimum rental commitments for leases having noncancelable lease terms of more than one year are as follows: 1999 - $270,286; 2000 - $233,043; 2001 - $229,391; 2002 - $130,391 and 2003 - $40,162. e. Litigation The Company is involved in certain pending litigation arising under the normal course of business. Management believes the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial statements of the Company. 32 BALLANTYNE 13. Business Segment Information During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information about operating segments, products and services, geographic areas and major customers. The presentation of segment information reflects the manner in which management organizes segments for making operating decisions and assessing performance. Prior year amounts have been presented to conform with the current presentation format. 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 and lenses for the theatre exhibition industry. The lighting segment operations include the sale and rental of follow spotlights, stationary searchlights and computer operated lighting systems for the motion picture production, television, live entertainment, theme parks and architectural industries. The restaurant segment includes the design, manufacture, assembly and sale of pressure fryers, smoke ovens and rotisseries and the sale of seasonings, marinades and barbecue sauces, mesquite and hickory woods and point of purchase displays. The Company allocates resources to business segments and evaluates the performance of these segments based upon reported segment gross profit. However, certain key operations of a particular segment are tracked on the basis of operating profit. There are no significant intersegment sales. All intersegment transfers are recorded at historical cost. BALLANTYNE 33 BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 SUMMARY BY BUSINESS SEGMENTS
1998 1997 1996 ---- ---- ---- Net revenue Theatre $ 65,814,807 $ 62,306,249 $ 47,230,543 Lighting 7,107,905 5,360,617 2,157,125 Restaurant 2,134,655 2,538,245 2,366,196 ------------ ------------ ------------ Total $ 75,057,367 $ 70,205,111 $ 51,753,864 Gross profit Theatre $ 21,559,565 $ 17,866,879 $ 13,978,101 Lighting 1,402,676 2,208,095 742,070 Restaurant 592,073 650,024 637,166 ------------ ------------ ------------ Total 23,554,314 20,724,998 15,357,337 Corporate overhead (10,584,989) (9,170,634) (7,047,453) ------------ ------------ ------------ Operating income 12,969,325 11,554,364 8,309,884 Net interest income(expense) (36,265) 254,030 (363,508) ------------ ------------ ------------ Income before income taxes $ 12,933,060 $ 11,808,394 $ 7,946,376 ------------ ------------ ------------ ------------ ------------ ------------ Identifiable assets Theatre $ 48,484,693 $ 42,239,030 $ 31,454,096 Lighting 7,187,781 3,665,474 117,014 Restaurant 880,706 847,994 891,110 ------------ ------------ ------------ Total $ 56,553,180 $ 46,752,498 $ 32,462,220 ------------ ------------ ------------ ------------ ------------ ------------ Expenditures on capital equipment Theatre $ 1,072,110 2,980,764 1,016,930 Lighting 2,522,362 551,149 -- Restaurant -- -- -- ------------ ------------ ------------ Total $ 3,594,472 $ 3,531,913 $ 1,016,930 ------------ ------------ ------------ ------------ ------------ ------------ Depreciation and amortization Theatre $ 1,243,061 $ 833,661 $ 607,120 Lighting 610,162 168,111 -- Restaurant -- -- -- ------------ ------------ ------------ Total $ 1,853,223 $ 1,001,772 $ 607,120 ------------ ------------ ------------ ------------ ------------ ------------
34 BALLANTYNE SUMMARY BY GEOGRAPHICAL AREA:
1998 1997 1996 ---- ---- ---- Net revenue United States $53,078,993 $51,656,965 $37,628,386 Canada 9,845,049 5,960,640 3,463,236 Asia 4,256,493 4,787,409 5,116,753 Mexico 1,726,712 2,722,675 1,157,667 Europe 4,197,172 3,735,009 3,185,001 Other 1,952,948 1,342,413 1,202,821 ----------- ----------- ----------- Total $75,057,367 $70,205,111 $51,753,864 ----------- ----------- ----------- ----------- ----------- ----------- Identifiable Assets United States $55,677,111 $45,792,078 $31,749,027 Canada -- -- -- Asia 876,069 960,420 713,193 Mexico -- -- -- Europe -- -- -- Other -- -- -- ----------- ----------- ----------- Total $56,553,180 $46,752,498 $32,462,220 ----------- ----------- ----------- ----------- ----------- -----------
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. 14. Quarterly Financial Data (Unaudited) The following is a summary of the unaudited quarterly results of operations for 1998 and 1997.
First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- 1998: Net revenue $17,271,887 15,412,796 20,852,022 21,520,662 Gross profit 5,308,422 4,768,704 6,570,393 6,906,795 Net income 1,901,418 1,425,732 2,418,041 2,598,543 Basic earnings per share .13 .10 .17 .20 Diluted earnings per share .13 .09 .16 .19 1997: Net revenue $14,724,814 16,348,995 17,378,858 21,752,444 Gross profit 4,356,047 4,932,506 5,147,498 6,288,947 Net income 1,568,200 1,855,250 2,052,831 2,233,058 Basic earnings per share .12 .14 .15 .16 Diluted earnings per share .11 .13 .14 .15
BALLANTYNE 35 BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES REPORT OF MANAGEMENT The consolidated financial statements of Ballantyne of Omaha, Inc. and Subsidiaries and the other information contained in the Annual Report were prepared by and are the responsibility of management. The Statements have been prepared in accordance with generally accepted accounting principles and necessarily include amounts based on management's best estimates and judgements. In fulfilling its responsibilities, management relies on a system of internal controls, which provide reasonable assurance that the financial records are reliable for preparing financial statements and maintaining accountability of assets. Internal controls are designed to reduce the risk that material errors or irregularities in the financial statements may occur and not be timely detected. These systems are augmented by written policies, careful selection and training of qualified personnel, an organizational structure providing for the division of responsibilities and a program of financial, operational and systems reviews. The Audit Committee, composed of non-employee directors, is responsible for recommending to the Board of Directors, the independent accounting firm to be retained each year. The Audit Committee meets regularly, and when appropriate separately, with the independent certified accountants and management to review company performance. The independent certified public accountants and the Audit Committee have unrestricted access to each other in the discharge of their responsibilities. /s/ John P. Wilmers John P. Wilmers President and Chief Executive Officer /s/ Brad French Brad French Secretary/Treasurer and Chief Financial Officer 36 BALLANTYNE DIRECTORS AND OFFICERS OFFICERS Arnold S. Tenney Chairman John Wilmers President and Chief Executive Officer Brad French Secretary/Treasurer and Chief Financial Officer Ray F. Boegner Senior Vice-President DIRECTORS Colin G. Campbell (1) (2) Principal Intrepid Partners Jeffrey D. Chelin Vice President Finance and Chief Financial Officer ARC International Corporation Ronald H. Echtenkamp (1) (2) Former President and Chief Executive Officer Marshall S. Geller Chairman and Chief Executive Officer Geller & Friend Capital Partners, Inc. Yale Richards (1) (2) Senior Partner Marks, Clare & Richards Arnold S. Tenney (2) President and Chief Executive Officer ARC International Corporation John Wilmers (1) Member of the Audit Committee (2) Member of the Compensation Committee CORPORATE DIRECTORY BALLANTYNE of Omaha, Inc. 4350 McKinley Street Omaha, NE 68112 (402) 453-4444 (402) 453-7238 (fax) SHAREHOLDER INFORMATION SHARES TRADED New York Stock Exchange Symbol: BTN TRANSFER AGENT ChaseMellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 COUNSEL Marks, Clare & Richards Omaha, Nebraska Cline, Williams, Wright, Johnson & Oldfather Omaha, Nebraska AUDITORS KPMG Peat Marwick LLP Omaha, Nebraska BANKERS Norwest Bank Nebraska, N.A. Omaha, Nebraska ANNUAL MEETING The Annual Meeting of Shareholders will be held on May 18, 1999 at: The Westin Aquila Hotel 1615 Howard Street Omaha, Nebraska 68102 ADDITIONAL INFORMATION The form 10K annual report for December 31, 1998, filed with the U.S. Securities and Exchange Commission is available upon request. For copies of annual and quarterly reports write to: The Secretary Ballantyne of Omaha, Inc. 4350 McKinley Street Omaha, NE 68112 BALLANTYNE 37 BALLANTYNE OF OMAHA, INC. 4350 MCKINLEY STREET OMAHA, NE 68112 PHONE: 402/453-4444 800-424-1215 FAX: 402/453-7238 WWW.BALLANTYNE-OMAHA.COM MEMBER - NYSE:BTN EX-23 9 EXHIBIT 23 EXHIBIT 23 ACCOUNTANTS' CONSENT The Board of Directors Ballantyne of Omaha, Inc.: We consent to incorporation by reference in the Registration Statement No. 333-03849 on Form S-8 and No. 333-22357 on Form S-3 of Ballantyne of Omaha, Inc. of our report dated January 18, 1999, relating to the consolidated balance sheets of Ballantyne of Omaha, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, and related schedule, which report appears in the December 31, 1998 Annual Report on Form 10-K of Ballantyne of Omaha, Inc. (Signed) KPMG Peat Marwick LLP Omaha, Nebraska March 30, 1999 43 EX-27 10 EXHIBIT 27
5 This schedule contains summary financial information extracted from the consolidated financial statements of the Company and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 594,686 0 17,652,006 396,785 21,434,395 40,192,481 17,529,670 4,833,681 56,553,180 9,190,248 12,276,372 0 0 144,507 34,470,734 56,553,180 75,057,367 75,057,367 51,503,053 51,503,053 10,311,867 273,122 139,472 12,933,060 4,589,326 8,343,734 0 0 0 8,343,734 0.59 0.57 Adjusted for all stock dividends and stock splits.
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