Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2001

OR

For the transition period from                              to                             

Commission File No. 1-13906

Ballantyne of Omaha, Inc.
(Exact name of Registrant as specified in its charter)

4350 McKinley Street, Omaha, Nebraska 68112
(Address of principal executive offices)

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

        Indicate by check mark 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. o

        As of February 28, 2002, 12,568,302 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 OTC Bulletin Board) was approximately $5.3 million.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on May 22, 2002 (the "Proxy Statement") are incorporated by reference in Part III.

TABLE OF CONTENTS

PART I.

FORWARD-LOOKING STATEMENTS

        Certain statements made in this report are "forward-looking" in nature, as defined in the Private Litigation Reform Act of 1995, which involve risks and uncertainties, including but not limited to, quarterly fluctuations in results; customer demand for the Company's products; the development of new technology for alternate means of motion picture presentation; domestic and international economic conditions in the theatre exhibition industry; the achievement of lower costs and expenses; the continued availability of financing in the amounts and on the terms required to support the Company's future business; credit concerns in the theatre exhibition industry; and other risks detailed from time to time in the Company's other Securities and Exchange Commission filings. Actual results may differ materially from management expectations.

PART I

Item 1. Business

Segments

        Ballantyne of Omaha, Inc. and its subsidiaries ("Ballantyne" or the "Company") designs, develops, manufactures and distributes commercial motion picture equipment, lighting systems, audiovisual equipment and restaurant products. The Company primarily operates within four business segments; 1) theatre, 2) lighting, 3) audiovisual and 4) restaurant.

Theatre

        The Company's business was founded in 1932. Since that time, the Company has manufactured and supplied equipment and services to the theatre motion picture exhibition industry. 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 the Optical Radiation Corporation. That division manufactured the Century® projector and distributed lenses to the theatre and audiovisual industries in North America. 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 access to the Pacific Rim. In April 1998, the Company vertically integrated its motion picture projection business with the acquisition of Design & Manufacturing, Ltd. ("Design"). Design is a supplier of film platter systems to the theatre 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. 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. Customers for these products include The Walt Disney Company, Universal Studios and MegaSystems, Inc. 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 is currently being manufactured by the Company and distributed by MegaSystems, Inc.

        The Company's product lines are distributed on a worldwide basis through a network of over 200 domestic and international dealers. 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.

1

        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 competitors 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.

Lighting

        The Company manufactures and distributes lighting equipment under the names Strong®, Xenotech® and Sky-Tracker®. Strong is a supplier of long-range follow spotlights which are used for both permanent installations and touring applications. Xenotech is a 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 in 1998 and operate sales and rental offices out of facilities in North Hollywood, California; Atlanta, Georgia and Orlando, Florida.

Audiovisual

        This segment provides full service audiovisual services to the hotel and convention industries. Services include design consulting, rental services and equipment sales with offices in Ft. Lauderdale and Orlando, Florida.

Restaurant

        The Company 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. This business is supplemented by the sale of seasonings, marinades and barbeque sauces.

Theatre Exhibition Industry Overview

        The domestic theatre exhibition industry is highly concentrated with management estimating that the top ten exhibitors represent approximately 60% of the total industry. The North American theatre exhibition industry has experienced a severe downturn due to numerous factors including, but not limited to, overbuilding in certain areas coupled with difficulty in closing obsolete theatres, and deteriorating credit ratings. These factors have reduced the industry's access to capital and have forced some exhibitors to file for protection under bankruptcy laws. According to published reports during 2001 and 2000, seven of the top fifteen exhibitors filed for bankruptcy protection. Those exhibitors included Loews Cineplex Entertainment, Carmike, United Artists, Silver Cinemas, Edwards Theaters, General Cinema and Regal Cinemas. These factors significantly curtailed new theatre construction in 2000 and 2001, which has negatively affected the Company. In recent months, there have been indications that the industry is slowly recovering, as shown by higher theatre attendance and by some of the exhibitors mentioned above already emerging from bankruptcy.

        The problems in North America have not yet impacted the overseas marketplace, as foreign exhibitors have not overbuilt to the same extent. However, U.S. based theatre exhibitors curtailing building plans outside the United States could impact the growth in overseas theatre construction. The Company has exposure to the current state of the North American theatre exhibition industry in the form of past due receivables from certain exhibitors and the continued loss of revenue if the industry cannot or decides not to build new theatres due to the problems mentioned above. The bankruptcy of one or more of the Company's major customers could have a material adverse effect on the Company's

2

business, financial condition and results of operations. To offset this impact, management of the Company intends on expanding international distribution channels and reducing costs.

Business Strategy

        The Company's strategy combines the following key elements:

        Expand International Presence.    As construction of new multiple screen motion picture theatres has extended to the international market coupled with the problems currently being encountered by domestic exhibitors, sales of the Company's products to international end users are becoming increasingly important to the Company. International sales, primarily of theatre products, were $12.6 million or 30.5% of consolidated net revenues in 2001 compared to $14.1 million or 29.5% of consolidated net revenues in 2000 and $16.5 million or 19.2% of consolidated revenues in 1999. The decrease was mainly due to lower sales to Canada and Asia. The most significant growth is again expected to come from Latin and South America where favorable demographics and low screen penetration continue to support new development. During 2000, the Company opened a small office in Miami to support this emerging market which contributed in sales to that region increasing by approximately $0.7 million in 2001 compared to 2000. The Company has also expanded its sales efforts in China, India and the United Arab Emirates. The Company is seeking to strengthen and develop its international presence through its international dealer network. The Company believes that as a result of these efforts, it is positioned to expand its brand name recognition and international market share.

        Reduce Inventory and Operating Costs.    The Company has initiated a substantial cost reduction program designed to bring costs in line with revenues and streamline its manufacturing processes to gain efficiencies to offset revenue losses and profits due to the depressed theatre exhibition industry. To this extent, the Company has reduced the number of employees by 114 or 31% since March 2000. Additionally, the Company will continue to reduce inventory levels and turn overstocked inventory into cash. The Company's Board of Directors has also approved a plan to resize the Company's rental operation in North Hollywood, California. The Company anticipates annual savings to approximate $800,000. The Company will continue looking at other segments to bring all costs in line with revenues.

        Explore Digital Projection.    On June 6, 2001, the Company announced that it had suspended funding for a research and development project with Lumavision Display, Inc. ("Lumavision"). Lumavision was to develop a proprietary digital projector for exclusive use by the Company for the digital projection market. The project was suspended due to unresolved differences between the parties concerning the original agreement. The Company felt it was not prudent to continue funding unless a new agreement could be negotiated. In accordance with the agreement, the funding after September 26, 2000 was in the form of notes receivable due from Lumavision. As of December 31, 2001, Lumavision owed the Company $400,000 relating to these notes. The notes were expensed to research and development when the funds were transferred as there was substantial uncertainty as to their ultimate collectibility due to the nature of Lumavision's business. Since the inception of the project, a total of $0.9 million has been expensed as research and development costs including the write-off of the notes.

        Despite the expected shift to digital images ("digital projection"), the motion picture industry remains based on the use of film technology to deliver motion picture images to the public. The widespread adoption and use of digital projection foreseen by many has still not occurred. In addition to the companies who have installed a small number of digital systems, there are several other companies, using various types of digital technology, actively involved in attempting to bring a complete digital solution to the market. Factors that appear to be limiting digital adoption include the economic condition of the theatre exhibition industry; high digital system costs; relatively little product available for digital projection; security, control and implementation issues; and a lack of what are yet acceptable standards for system quality and interoperability. Although digital projection apparently offers

3

significant potential savings via reduced delivery and handling costs, as well as greater consistency in the quality of presentations in the theatre, no models have yet been developed to finance the tremendous expenditures required. While the Lumavision project has been suspended, management is actively exploring alternatives for participating in digital projection through leveraging the Company's market position in the industry as well as its sales and manufacturing abilities. However, no assurance can be given that Ballantyne will in fact be a part of the digital projection marketplace. If Ballantyne is unable to take advantage of future digital projection opportunities or respond to the new competitive pressures, the result could have a material adverse effect on the Company's business, financial condition and operating results.

        Increase Domestic Market Share.    The Company seeks to develop and maintain strong customer relationships by offering a wide variety of standardized commercial theatre products working closely with current and potential 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 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 is currently searching for ways to diversify to become less dependent on the theatre exhibition industry and increase production through its manufacturing plants. The Company has had only limited success in bringing in custom manufacturing work and would like to secure a different product line which would fully utilize its integrated manufacturing process.

        Expand Restaurant Segment.    The Company intends on becoming more aggressive in marketing its restaurant equipment not only domestically, but internationally as well. To that end, the Company has already penetrated certain markets in Latin and South America through its sales office in Miami.

Products

Theatre Products

Motion Picture Projection Equipment

        The Company is a developer, manufacturer and distributor of commercial motion picture projection equipment worldwide. The Company's commercial motion picture projection equipment can fully outfit and automate a motion picture projection booth and 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 industry wide recognized trademarks of Strong®, Simplex®, Century®, Optimax®, and Ballantyne™. The Company manufactures the entire motion picture projection system in-house, except for the audio rack components, lamps and lenses. This equipment may be sold individually or as an integrated system with other components manufactured by the Company.

4

        The Company's film handling equipment consists of 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. The majority of the Company's film transport systems are sold under the Strong™ name, although the Company sells systems on an OEM basis to a competitor.

Lenses

        Pursuant to a distribution agreement with ISCO-Optic GmbH of Germany, ("Isco-Optic") 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 and have won two Academy Awards for technical achievement.

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

Xenon Lamps

        Beginning in late 2000, the Company began distributing xenon lamps for resale to the theatre and lighting industries through an exclusive distributorship agreement with Lighting Technologies International, a specialty discharge lighting company.

Replacement Parts

        The Company has a significant installed base of over 30,000 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.

Special Venue Products

        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.

5

Lighting Products

Spotlight

        The Company has been a developer, manufacturer and distributor of long-range follow spotlights since 1950. Ballantyne's long-range follow spotlights are marketed under the Strong® trademark and recognized brand names such as Super Trouper®, Gladiator® and Roadie®. The Super Trouper® follow spotlight has been the industry standard since 1958. The Company's long-range follow spotlights are high-intensity general use illumination products designed for both permanent installations such as indoor arenas, theatres, auditoriums, theme parks, amphitheatres and stadiums 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 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 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 sells its long-range follow spotlights through dealers and to end users to arenas, stadiums, theme parks, theatres, auditoriums and equipment rental companies. These spotlight products are used in over 100 major arenas.

Promotional and Other Lighting Products

        The Company, through its wholly-owned subsidiary, Xenotech Strong, Inc. ("Xenotech") is a supplier (through both rental and 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 Britelights® and Xenotech® trademarks, while the high intensity searchlights are marketed under the Sky-Tracker® trademark.

        Xenotech's specialty illumination products have been used in numerous feature films and have also been used at live performances such as the 2002 Super Bowl half-time show, the opening and closing ceremonies of the 2002 Winter Olympics 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 worldwide.

        The Company's high intensity searchlights come in single or multiple head configurations, primarily for use in outside venues requiring extremely bright lighting that can compete with other forms of outdoor illumination. These high intensity searchlights are marketed through the Company's Sky-Tracker division under the Sky-Tracker® trademark. Sky-Tracker's products are used at Walt Disney World, Universal Studios, the Olympics and numerous grand openings. The Company's promotional lighting products are primarily marketed directly to customers throughout the world by a direct sales force.

Audiovisual Products

        The Company, through its division Strong Communications, is a full service audiovisual company established to meet the need for presentation equipment by hotels and convention centers. Strong Communications provides design consulting, rental services and equipment sales with offices in Orlando and Fort Lauderdale, Florida.

6

Restaurant Products

        The Company's restaurant product line consists of commercial food service equipment, principally pressure fryers and barbeque/slow roast ovens. The Company's pressure fryers account for the majority of its commercial food service equipment net sales. The Company recently introduced an open fryer to its food service line. The Company's restaurant product line is marketed under the Flavor-Crisp® and Flavor-Pit® trademarks. The Company's commercial food service equipment is supplemented by seasonings, marinades and barbeque sauces manufactured to the Company's specifications by various food product contractors.

        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 to the Hobart Corporation represented approximately 22.2% of restaurant sales during the year ended December 31, 2001.

Sales, Marketing and Customer Service

        The Company markets and sells its products primarily through a network of over 200 domestic and international dealers to theatre exhibitors, sports arenas, amusement park operators and convenience/fast food stores. The Company also sells directly to end-users. The sales effort is supplemented by a small internal sales force. The Company services its customers in large part through the 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. In addition, the Company markets its products in trade publications such as Film Journal and Box Office and by participating in annual industry trade shows such as ShoWest, ShowEast, CineAsia in Asia and Cinema Expo in Europe, among others. The Company's sales and marketing professionals in all four business segments have extensive experience with the Company's product lines and have long-term relationships with many current and potential customers.

        For the year ended December 31, 1999 sales to National Cinema Supply and Regal Cinemas represented approximately 16% and 21%, of consolidated net revenues, respectively. During the years ended December 31, 2001 and 2000 no single customer represented 10% or more of the Company's revenues. However, the loss of one or several major customers could have a material adverse affect on the Company.

Backlog

        At December 31, 2001 and 2000, the Company had backlogs of $5.0 million and $6.5 million, respectively. Such backlogs mainly consisted of orders received with a definite shipping date within twelve months, however these orders are subject to cancellation. 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.

Manufacturing

        The Company's manufacturing operations are primarily conducted at its Omaha, Nebraska manufacturing facility and its manufacturing facility in Fisher, Illinois. The Company's manufacturing operations at both locations consist primarily of engineering, quality control, testing, material planning, machining, fabricating, assembly, packaging and shipping. The Company believes the central locations of Omaha and Fisher 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

7

(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 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, electronic sub-assemblies and sheet metal. The Company utilizes a single contract manufacturer for each of its intermittent movement components, lenses and xenon lamps for its commercial motion picture projection equipment and aluminum kettles for its pressure fryers. Although 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. The Company believes that its manufacturing capabilities, combined with its emphasis on customer service, have contributed to retaining strong customer relationships and developing new business opportunities.

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. However, the Company has experienced certain warranty issues with a "xenon switching power supply" as discussed in further detail in the warranty section of this document.

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 were approximately $465,000, $1,502,000 and $839,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The high level of expenses in 2000 and 1999 mainly relates to a particular model of "xenon switching power supply", which is a component of a complete motion picture projection system. Due to certain problems encountered in the field during 1999, the Company made a decision during 2000 to dispose of a number of these power supplies returned by customers instead of reworking and reselling them as used equipment. While there can be no assurance that future warranty issues will not arise relating to the problem discussed above or that other issues will not also arise, the Company believes it has taken the proper steps to limit future warranty exposure.

8

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. Research and development costs charged to operations amounted to approximately $497,000, $1,056,000 and $846,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The significant reduction in expense in 2001 relates primarily to the Company suspending funding for a research and development project with Lumavision Display, Inc. See the "Business Strategy" section of this document under the caption "Explore Digital Projection" for a further discussion.

Competition

        Although the Company is one of the leaders 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. 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. Certain of the Company's competitors for its motion picture projection equipment have significantly greater resources than the Company. 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. For a further discussion of potential new competition, see the "Business Strategy" section of this document under the caption "Explore Digital Projection".

        The markets for the Company's long-range follow spotlights, other lighting, audiovisual and restaurant products are also highly competitive. The Company competes in the lighting and audiovisual industries 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 spotlight, other lighting, audiovisual 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 does not currently own any patents. The Company believes its success will not be dependent upon patent or trademark protection, but rather upon its scientific and engineering "know-how" and research and production techniques.

Employees

        As of February 28, 2002 the Company had a total of 253 employees. Of these employees 186 were considered manufacturing or rental related, 3 were executive and 64 were considered sales and administrative. The Company is not a party to any collective bargaining agreement and believes that its relationship with its employees is good.

Environmental Matters

        Health, safety and environmental considerations are a priority in the Company's planning for all new and existing products. The Company's policy is to operate its plants and facilities in a manner that protects the environment and the health and safety of its employees and the public. The Company's operations involve the handling and use of substances that are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the soil,

9

air and water and establish standards for their storage and disposal. A risk of environmental liabilities is inherent in manufacturing activities. During 2001, Ballantyne was informed by a neighboring company of likely contaminated soil on certain parcels of land adjacent to Ballantyne's main manufacturing facility in Omaha, Nebraska. The Environmental Protection Agency and the Nebraska Health and Human Services System subsequently determined that certain parcels of Ballantyne property had various levels of contaminated soil relating to a pesticide company that formerly owned the property and which burned down in 1965. Based on discussions with the above agencies, it is likely that some degree of environmental remediation will be required, however, the investigation is not yet at a stage where Ballantyne has been able to determine whether it is liable or, if liability is probable, to reasonably estimate the loss or range of loss. Estimates of Ballantyne's liability are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, the extent of collective actions and the financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation.

Stockholder Rights Plan

        On May 26, 2000 the Board of Directors of the Company adopted a Stockholder Rights Plan (the "Rights Plan"). Under terms of the Rights Plan, which expires June 9, 2010, the Company declared a distribution of one right for each outstanding share of common stock. The rights become exercisable only if a person or group (other than certain exempt persons as defined) acquires 15 percent or more of Ballantyne common stock or announces a tender offer for 15 percent or more of Ballantyne's common stock. Under certain circumstances, the Rights Plan allows stockholders, other than the acquiring person or group, to purchase the Company's common stock at an exercise price of half the market price.

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

Executive Officers of the Company

        John P. Wilmers, age 57, has been CEO of the Company since March 1997 and a Director since 1995. Mr. Wilmers joined the Company in 1981 and has served in various positions in the Company including Executive Vice President of Sales from 1992 to 1997. Mr. Wilmers is a past President of the Theatre Equipment Association, a member of the Nebraska Variety Club and a sustaining member of the Society of Motion Picture and Television Engineers. Mr. Wilmers attended the University of Minnesota at Duluth.

        Brad J. French, age 49, joined the Company as the Controller in 1990 and was named Secretary and Treasurer in 1992. Mr. French was named Chief Financial Officer of the Company in January 1996. During 2000, Mr. French was also named the Company's Chief Operating Officer.    Prior to joining the Company, Mr. French held several accounting positions with UTBHL, Inc. (f/k/a Hanovia Lamp, Inc.), a subsidiary of Canrad, Inc. and Purolator Products, Inc. Mr. French earned a B.S. from Union College.

        Ray F. Boegner, age 52, has been Senior Vice President since 1997. Mr. Boegner joined the Company in 1985 and has acted in various sales roles. Prior to joining the Company, he served as Vice President of Marketing at Cinema Film Systems. Mr. Boegner earned a B.A. from Citrus College and a B.S. from the University of Southern California.

10

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 166,000 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 2.0 acres with a 31,600 square foot building. The Company leases sales and rental facilities for its audiovisual segment 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 2001, no issues were submitted to a vote of stockholders.

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters

        The Common Stock is listed and traded on the OTC Bulletin Board under the symbol "BTNE". Prior to December 18, 2000, the Company had been trading on the NYSE under the symbol "BTN". The Company was delisted from the NYSE for failing to maintain the appropriate market capitalization and stockholders' equity requirements set by the NYSE. The following table sets forth the high and low per share sale price for the Common Stock as reported by the OTC Bulletin Board and the NYSE.

        On February 28, 2002 the last reported per share sale price for the Common Stock was $0.63 and there were approximately 237 holders of record with an estimated 4,200 owners of the Company's Common Stock held in the name of nominees. As a result of trading on the OTC Bulletin Board, the trading market and prices for the Company's Common Stock may be adversely affected.

11

Dividend Policy

        The Company intends to retain its earnings to assist in financing its business and does not anticipate paying 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. 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(1)

(1)

All amounts in thousands (000's) except per share data.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

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

Critical Accounting Policies:

        The Company's accounting policies are disclosed in Note 2 to the consolidated financial statements in this Form 10-K. The more critical of these policies include the following:

Inventories

        Inventories are stated at the lower of cost (first-in, first-out) or market and include appropriate elements of material, labor and manufacturing overhead. The Company's policy is to evaluate all

12

inventory quantities for amounts on-hand that are potentially in excess of estimated usage requirements, and to write down any excess quantities to estimated net realizable value. Inherent in the estimates of net realizable values are management estimates related to the Company's future manufacturing schedules, customer demand and the development of digital technology which could make the Company's theatre products obsolete, among other items.

Long-Lived Assets and Goodwill

        The Company reviews long-lived assets and goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

        During December 2001, the Board of Directors approved a plan to restructure Xenotech Strong, Inc. Pursuant to the plan, the Company intends on exiting certain rental activities in the North Hollywood and Los Angeles area and move operations to a smaller location. The Company recorded charges of approximately $600,000 and $115,000 in December relating to the impairment of certain fixed assets and goodwill, respectively.

Revenue Recognition

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

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

13

Results of Operations

        The following table sets forth, for the periods indicated, the percentage of net revenues represented by certain items reflected in the Company's consolidated statements of operations.

Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000

Revenues

        Net revenues in 2001 decreased $6.4 million or 13.3% to $41.3 million from $47.7 million in 2000. As discussed in further detail below, the majority of the decrease relates to lower sales of theatre products. The following table shows comparative net revenues for theatre, lighting, audiovisual and restaurant products for the respective years:

Theatre Segment

        As stated above, the decrease in consolidated net revenues primarily related to lower sales of theatre products which decreased $5.4 million or 15.2% from $35.7 million in 2000 to $30.3 million in 2001. In particular, sales of projection equipment decreased $5.1 million from $26.9 million in 2000 to $21.8 million in 2001. This decrease resulted from a continued downturn in the construction of new theatre screens in North America. Screen growth continues to be the main force behind the Company's theatre sales. The North American theatre exhibition industry has been experiencing a severe downturn due to numerous factors including, but not limited to, over construction in certain areas of the country coupled with the difficulty in closing obsolete theatres and deteriorating credit ratings in the industry. In particular, some theatre exhibition companies have filed for protection under federal bankruptcy laws. The bankruptcy of one or more of the Company's major customers could have a material adverse effect on the Company's business, financial condition and results of operations. The liquidity problems of the theatre exhibition industry result in continued exposure to the Company. This exposure is in the form of receivables from those exhibitors and continued depressed revenue levels if the industry cannot or decides not to build new theatres. In recent months, there have been indications that the industry is slowly recovering, as shown by higher theatre attendance and by certain theatre exhibitors already emerging from bankruptcy. While the Company feels the sharp decreases in theatre sales during 2001 and 2000 will subside, it is likely that 2002 sales will still be below those of 2001.

14

        Sales of theatre replacement parts were also impacted by the downturn in the theatre exhibition industry decreasing from $6.9 million in 2000 to $5.3 million in 2001. In particular, exhibitors are closing older theatres, which creates two problems from the Company's perspective. First, exhibitors are scrapping older projectors that normally require more repair than the newer ones in service and second; there are fewer projectors in service due to the theatre closings. The Company is also experiencing more competition for replacement part sales as other manufacturing firms, with ties to the theatre exhibition industry, attempt to find alternative revenue sources. Sales of lenses were also impacted by the theatre industry downturn decreasing approximately $0.4 million from $1.9 million in 2000 to $1.5 million in 2001. In its ongoing efforts to obtain more product lines, the Company began distributing xenon lamps in late 2000 through an exclusive distributorship agreement with Lighting Technologies International and generated sales of $1.7 million during 2001.

        Sales outside the United States (mainly theatre sales) were also lower in 2001 decreasing $1.5 million from $14.1 million in 2000 to $12.6 million in 2001. Sales to Canada decreased by $1.9 million as the problems in the theatre exhibition industry were felt throughout North America. Sales to Europe and Asia were also lower compared to the prior year due to less demand and to the strength of the dollar in certain countries making it more expensive to buy U.S. goods. This in turn created more competition from local manufacturers in those countries. The overall softness of foreign sales was somewhat offset by stronger sales to Mexico and Latin and South America as screen growth continues to improve in those regions.

Lighting Segment

        Sales and rentals in the lighting segment decreased $0.7 million from $6.1 million in 2000 to $5.4 million in 2001. Sales and rentals from the Company's entertainment lighting division in North Hollywood, California continued to be disappointing with revenues decreasing from $1.9 million in 2000 to $1.4 million in 2001. This division is being adversely affected by a weakened motion picture production economy in the Hollywood and Los Angeles area. In December 2001, the Company's Board of Directors approved a plan to reorganize certain activities relating to this division. In connection with the plan of reorganization, the Company incurred charges of approximately $0.7 million relating to the impairment and write-off of goodwill, rental equipment and other assets. The Company anticipates incurring other charges such as severance payments and relocation expenses relating to the reorganization in the first quarter of 2002.

        The Company's entertainment lighting division in Florida and Georgia generated $2.5 million in sales and rentals compared to $2.3 million a year ago. This division again sold certain high intensity searchlights used at the Kennedy Space Center in Cape Canaveral, Florida, generating approximately $1.2 million in 2001 compared to approximately $0.8 million in 2000. Subsequent to year-end, the Company was notified that an anticipated 2002 sale of these lights would not materialize due to governmental budget constraints. As such, 2002 lighting segment revenues are expected to fall well below 2001 levels.

        Sales of follow spotlights decreased approximately $0.4 million from $1.9 million in 2000 to $1.5 million in 2001 due to a combination of fewer arenas being constructed and increased competition.

Audiovisual

        Sales and rentals of audiovisual products decreased 3.3% to $4.0 million in 2001 from $4.1 in 2000, as a slowing economy coupled with the events of September 11, 2001 severely affected the convention and hotel industries in Ft. Lauderdale and Orlando, Florida. Hotel chains and convention centers are the primary customers for this segment. The Company feels it will take sometime for the industry to return to normal activity and most likely even longer for substantial growth to occur. Management

15

continues to monitor this situation carefully and intends to consider options with respect to the segment.

Restaurant Segment

        Restaurant sales decreased approximately $0.2 million to $1.6 million in 2001 from $1.8 million in 2000 due to softer replacement part sales.

Gross Profit

        Overall, consolidated gross profit decreased $2.9 million to $4.8 million in 2001 from $7.7 million in 2000 and as a percentage of net revenues ("gross margin") decreased to 11.6% compared to 16.1% in 2000. The decrease mainly related to the theatre segment where gross profit decreased $1.9 million and where the gross margin decreased from 14.0% to 10.1% during 2001. The decreases were due in part to changes in product mix as theatre revenues consisted of fewer replacement part sales and more xenon lamp sales. Replacement part sales generally carry a higher margin than theatre projector sales while xenon lamp sales carry a significantly lower margin. Also contributing to the lower gross profit were negative manufacturing variances created by less volume through the Company's manufacturing facilities. This has resulted in the level of sales not being sufficient to fully absorb the Company's manufacturing overhead. Additionally, the amount of sales coupled with current inventory levels has caused plant labor utilization to drop considerably leading to large manufacturing inefficiencies. To correct these problems, the Company has been and will continue reducing its cost structure and lowering inventory levels to increase labor utilization and absorb more manufacturing overhead.

        Gross profit in the lighting segment was lower by approximately $0.2 million compared to 2000 due to lower margins from rental activities related to a lack of sufficient rental revenues to cover certain fixed rental expenses at the Company's entertainment lighting unit in North Hollywood, California. As discussed earlier, the Company is reorganizing this unit.

        Gross profit in the audiovisual segment also decreased during the year from $1.7 million in 2000 to $1.0 million in 2001 due to a drop in rental revenues at a time when the segment was growing it's infrastructure. As such, the segment did not cover fixed costs in a profitable manner. The audiovisual segment is similar to the lighting segment in that a substantial amount of costs are fixed in the short-term. The Company is currently evaluating projected revenue levels to determine what level of cost reductions, if any, need to be made in 2002 to assure margins in sufficient amounts to make the segment profitable.

        Restaurant margins were flat at $0.2 million for both 2001 and 2000.

Operating Expenses

        Operating expenses decreased approximately $2.8 million compared to 2000 and as a percentage of net revenues, decreased to 24.3% in 2001 from 27.0% in 2000. Included in the 2001 expenses were special charges during the fourth quarter relating to goodwill impairment of approximately $0.1 million and an impairment of certain receivables from the Company's lens supplier of approximately $0.7 million. Included in the 2000 expenses were restructuring charges of approximately $0.7 million relating to personnel reductions, $0.5 million relating to a reserve set up for the default of a term loan to a former Chairman of the Board, and the impairment of approximately $1.2 million of receivables. After taking into consideration all the special charges for 2001 and 2000, normal and recurring operating expenses decreased approximately $1.2 million during 2001, due to a combination of the savings from personnel reductions and lower selling costs. The Company is continually aligning operating costs with projected future revenue and will continue this process until the appropriate levels have been achieved.

16

Other Financial Items

        As discussed earlier, the Company began the process of reorganizing its rental operation in North Hollywood, California during December 2001. To that end, the Company took a charge of approximately $0.6 million relating to the impairment of certain assets held for rental. This charge was included as part of loss on disposal of assets in the Company's consolidated statement of operations leaving a net loss on disposals of approximately $0.5 million.

        Net interest expense was approximately $0.3 million in 2001 compared to $1.0 million in 2000 due entirely to lower outstanding borrowings on the Company's credit facilities.

        The Company's effective tax rate for the income tax benefit for 2001 was 32.9% compared to 36.4% in 2000. The change in the tax rate resulted from the differing impact of permanent differences and to certain states that do not allow carrybacks of net operating losses. Net deferred tax assets were $1.3 million as of December 31, 2001. 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 that the Company will realize the benefits of deferred tax assets as of December 31, 2001.

        For the reasons outlined above, the Company experienced a net loss in 2001 of approximately $4.1 million compared to a net loss of $3.9 million in 2000. This translated into a net loss per share—basic and diluted of $0.32 per share in 2001 compared to a net loss per share—basic and diluted of $0.31 per share in 2000.

Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999.

Revenues

        Net revenues for 2000 decreased $38.4 million or 44.7% to $47.7 million from $86.1 million for 1999. As discussed in further detail below, the majority of the decrease relates to substantially lower sales of theatre products. The following table shows comparative net revenues for theatre, lighting, audiovisual and restaurant products for the respective years:

Theatre Segment

        As stated above, the decrease in consolidated net revenues primarily related to lower sales of theatre products, which decreased $38.4 million or 51.8% from $74.1 million in 1999 to $35.7 million in 2000. In particular, sales of projection equipment decreased $32.5 million from $59.5 million in 1999 to $27.0 million in 2000. This decrease resulted from a sharp downturn in the construction of new theatres in North America. During 2000, the North American theatre exhibition industry began to experience poor operating results due to numerous factors including, but not limited to, over construction in certain areas of the country coupled with the difficulty in closing obsolete theatres, deteriorating credit ratings in the industry, rising interest rates and lower theatre attendance. In particular, some theatre exhibition companies have either filed for or are considering protection under federal bankruptcy laws. To date, the Company has only been slightly impacted by these bankruptcies however, the bankruptcy of one or more of the Company's major customers could have a material adverse effect on the

17

Company's business, financial condition and results of operations. Liquidity problems of the theatre exhibition industry result in continued exposure to the Company. This exposure is in the form of receivables from those exhibitors and continued depressed revenue levels if the industry cannot build new theatres. The Company's backlog as of December 31, 2000 is approximately $6.5 million compared to $10.7 million in the prior year. The Company believes the reduction in backlog is a result of customers committing to orders in a less timely manner, as they know the Company's available capacity is higher than prior years.

        The Company also experienced substantially lower sales (both domestically and internationally) of lenses, which decreased approximately $3.9 million from $5.8 million in 1999 to $1.9 million in 2000. This decrease is related to the lower projection equipment sales however, lens sales do not always fluctuate with the volume of projection equipment sold as the lens can be sold individually. Sales of theatre replacement parts were directly impacted by the downturn in the theatre exhibition industry decreasing from $8.8 million in 1999 to $6.9 million in 2000. Replacement part sales are not directly related to the volume of projection equipment sold, but are more a reflection of the needs of customers who have previously purchased projection equipment from the Company.

        Foreign sales were also lower in 2000 decreasing $2.4 million from $16.5 million in 1999 to $14.1 million in 2000. This decrease mainly related to lower shipments to Canada and Mexico as the problems in the theatre exhibition industry discussed earlier were felt throughout North America.

Lighting Segment

        Sales and rentals in the lighting segment decreased $1.0 million from $7.1 million in 1999 to $6.1 million in 2000. Sales of spotlights decreased $0.3 million to $1.9 million in 2000 from $2.2 million in 1999. Sales and rentals of entertainment, promotional and architectural lighting products decreased $0.7 million to $4.2 million in 2000 from $4.9 million in 1999, as sales and rentals in the Los Angeles area continued to be lower than anticipated.

Audiovisual

        The increase in revenue of $1.4 million was due to increased market share in the audiovisual market in the central and southern Florida area known for its convention and hotel industry. Since the audiovisual division was started in 1998, the Company has been slowly increasing its infrastructure to grow it.

Restaurant Segment

        Restaurant sales decreased $0.4 million to $1.8 million in 2000 compared to $2.2 million in 1999 due to softer sales of pressure fryers.

Gross Profit

        Overall, consolidated gross profit decreased $17.5 million to $7.7 million in 2000 from $25.2 million in 1999. The decrease relates to the theatre segment where gross profit decreased $17.2 million compared to 1999. Additionally, gross profit in the theatre segment as a percentage of net revenues ("gross margin") decreased from 29.9% to 14.0% during 2000. Contributing to the lower gross profit were lower theatre revenues that resulted in lost gross profit of approximately $11.5 million. Contributing to both the lower gross profit and gross margin were negative manufacturing variances created by less volume through the Company's manufacturing facilities. This has resulted in the level of sales not being sufficient to fully absorb the Company's manufacturing overhead. Additionally, the amount of sales coupled with current inventory levels has caused plant labor utilization to drop considerably leading to large manufacturing inefficiencies. To correct these problems, the Company is in the process of reducing its cost structure, lowering inventory and bringing custom manufacturing work

18

into its plants to increase labor utilization and absorb more manufacturing overhead. To this extent, the Company has reduced the number of employees by 113 compared to the same time one year ago, most of which were manufacturing personnel. The Company was also impacted by increases in inventory reserves and higher warranty expenses during 2000. Charges for inventory reserves rose to $1.5 million in 2000 from $0.6 million in 1999. The increase in expense related to reserves for certain slow-moving or obsolete inventory. Warranty expense rose to $1.5 million in 2000 compared to $0.8 million in 1999. The increase in expense mainly related to a particular model of "xenon switching power supply" which is a component of a complete motion picture projection system. Due to certain problems encountered in the field, the Company made a decision during 2000 to dispose of a number of these power supplies returned by customers instead of reworking them and reselling them as used equipment. The Company also increased the warranty reserve to cover future exposure for the power supplies still in service.

        Gross profit in the lighting segment decreased by $0.7 million during 2000. The decrease was due to lower margins from rental activities related to a lack of sufficient rental revenues to cover certain fixed rental expenses at the Company's entertainment lighting unit in North Hollywood, California. Margins on sales of spotlights, were also negatively impacted by the manufacturing inefficiencies and variances discussed earlier.

        Audiovisual gross profit rose to $1.7 million in 2000 compared to $1.2 million in 1999 due to higher rental revenues.

        Restaurant gross profit and margins were lower due to the same manufacturing inefficiencies and variances discussed previously.

Operating Expenses

        Operating expenses for the year increased approximately $0.4 million compared to 1999 and as a percentage of net revenues, increased to 27.0% in 2000 from 14.5% in 1999. Included in the 2000 expenses was a reserve of approximately $0.5 million taken for a term loan in default by the former Chairman of the Board. While the Company is vigorously pursuing collection of the defaulted loan, the Company was not able to predict its outcome with any reasonable degree of certainty and accordingly recorded the reserve. Additionally during the year, the Company incurred approximately $0.7 million in personnel reduction charges and also reserved for or wrote off approximately $1.2 million of receivables related to specific customers who have been financially impacted by the current state of the theatre industry. To that end, bad debt expense rose from $0.15 million in 1999 to $1.2 million in 2000. As stated previously, theatre exhibitors have been experiencing poor operating results which has created liquidity problems and forced some exhibitors to file for protection under federal bankruptcy laws. While the Company believes that it has sufficiently reserved for all probable bad debts, the bankruptcy of one or more of the Company's major customers could have a material adverse effect on the Company's financial condition and results of operations. The Company is continuing to reduce costs to align operating expenses with projected future revenue by reducing personnel, lowering selling costs and implementing certain wage reductions and freezes. As stated earlier, the Company has reduced the number of employees by 31% compared to a year ago as one step in this process.

Other Financial Items

        Net interest expense was approximately $1.0 million in 2000 compared to $0.9 million in 1999 due to higher average borrowings and a higher interest rate on the Company's line of credit.

        The Company's effective tax rate for the income tax benefit year-to-date was 36.4% compared to 34.3% a year ago. The change in the tax rate resulted from the differing impact of permanent differences on the loss for the year compared to income a year ago.

19

        For the reasons outlined above, the Company experienced a net loss for the year of approximately $3.9 million compared to net income of $7.8 million in 1999. This translated into a net loss per share—basic and diluted of $0.31 per share in 2000 compared to net income per share—basic of $0.62 per share and net income per share—diluted of $0.59 per share in 1999.

Liquidity and Capital Resources

        On August 30, 2001, the Company entered into an $8.0 million revolving credit facility and a $1,875,000 term loan agreement with General Electric Capital Corporation ("GE Capital"). The new credit facilities replace a previous lending arrangement with Wells Fargo Bank Nebraska, N.A. The revolving credit facility (the "Revolver") provides for borrowings up to the lesser of $8.0 million or amounts determined by an asset-based lending formula, as defined (approximately $1.9 million was available for borrowings under the Revolver as of December 31, 2001). The Company pays interest on the Revolver at a rate equal to the latest rate for 30-day dealer placed commercial paper determined on the last business day of each month (the "Index Rate") plus 3.375% (5.395% at December 31, 2001). The Company also paid a fee of .25% on the unused portion of the Revolver. The Revolver matures on August 30, 2003 with the Company having two one-year renewal options. The $1,875,000 term loan provides for equal monthly principal payments of $31,250, with a balloon payment due on August 30, 2003 and provides for interest at the Index Rate plus 3.625% (5.645% at December 31, 2001).