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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934

BALLANTYNE OF OMAHA, INC.
(Exact name of Registrant as specified in its charter)

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

Registrant's telephone number, including area code:
(402) 453-4444

        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 

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

BALLANTYNE OF OMAHA, INC. AND SUBSIDIARIES

Index

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Ballantyne of Omaha, Inc. and Subsidiaries
Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

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Ballantyne of Omaha, Inc. and Subsidiaries

Consolidated Statements of Operations

Three and Six Months Ended June 30, 2002 and 2001

(Unaudited)

See accompanying notes to consolidated financial statements.

3

Ballantyne of Omaha, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2002 and 2001

(Unaudited)

See accompanying notes to consolidated financial statements.

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Ballantyne of Omaha, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2002

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, audiovisual equipment and restaurant products. The Company's products are distributed worldwide through a domestic and international dealer network and are sold or rented to movie exhibition companies, sports arenas, auditoriums, amusement parks, special venues, restaurants, supermarkets, convenience stores, hotels and convention centers.

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. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include all normal and recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and related notes included in the Company's latest annual report on Form 10-K. The results of operations for the three-and-six month periods ended June 30, 2002 are not necessarily indicative of the operating results for the full year.

b.

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.

c.

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. For financial reporting purposes estimated useful lives range from 3 to 20 years. The Company generally uses accelerated methods of depreciation for income tax purposes.

d.

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 carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. At June 30, 2002, the Company has adequate carryback potential to fully recover recorded deferred tax assets. Under current tax law, the

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Company has a 5-year carryback for net operating losses in tax years 2001 and 2002. Following 2002, the carryback period will be limited to 2 years. Currently, management believes that recorded deferred tax assets are recoverable. However, as carrybacks become limited or if recovery depends on future taxable income, the Company may be required to provide additional valuation reserves for deferred tax assets.

e.

Revenue Recognition

        The Company recognizes revenue from product sales upon shipment to the customer when collectibility is reasonably assured. 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.

f.

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. Actual results could differ from those estimates.

g.

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. In accordance with the Company's credit facility with General Electric Capital Corporation, certain deposits are required to be transferred to them and then transferred back to the Company on a weekly basis. As of June 30, 2002, there were $278,842 of such deposits not yet transferred back to the Company's operating account included in cash and cash equivalents.

h.

Loss Per Common Share

        Net loss per share—basic has been computed on the basis of the weighted average number of shares of Common Stock outstanding. Net loss per share—diluted has been computed on the basis of the weighted average number of shares of Common Stock outstanding after giving effect to potential common shares from dilutive stock options. Because the Company reported net losses for the three and six month periods ended June 30, 2002 and 2001, respectively, the calculation of net loss per share—diluted excludes potential common shares from stock options as they are anti-dilutive and would result in a reduction in loss per share. If the Company had reported net income for the three and six months ended June 30, 2002, there would have been 150,573 and 118,348 additional shares in the calculation of net income per share—diluted. If the Company had reported net income for the three and six months ended June 30, 2001, there would have been 80,658 and 74,075 additional shares in the calculation of net income per share—diluted.

i.

Stock Based Compensation

        As permitted under SFAS No. 123, Accounting for Stock-Based Compensation, the Company elected to account for its stock based compensation plans under the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Consequently, when both the number of shares and the exercise price is known at the grant date, no compensation expense is recognized for stock options issued to employees and directors unless the exercise price of the option is less than the quoted value of the Company's common stock.

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j.

Long-Lived Assets

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

        On January 1, 2002, the Company adopted SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of, it retains many of the fundamental provisions of that statement. The adoption of SFAS 144 did not have an impact on the Company's financial position and results of operations.

        The Company's most significant long-lived assets subject to these periodic assessments of recoverability are plant and equipment, which have a net book value of $8.8 million at June 30, 2002. Because the recoverability of plant and equipment is based on estimates of future undiscounted cash flows, these estimates may vary due to a number of factors, some of which may be outside of management's control. To the extent that the Company is unable to achieve management's forecasts of future income, it may become necessary to record impairment losses for any excess of the net book value of plant and equipment over its fair value.

k.

Comprehensive Income

        The Company's comprehensive income consists solely of net income (loss). The Company had no other comprehensive income for the three and six months ended June 30, 2002 and 2001, respectively.

l.

Reclassification

        Certain amounts of a minor nature in the accompanying financial statements and notes thereto have been reclassified to conform to the 2002 presentation.

m.

Recently Issued Accounting Pronouncements

        During June 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 143 (SFAS 143), Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect SFAS 143 to significantly impact its financial statements.

        On April 30, 2002, the FASB issued SFAS No. 145 (SFAS 145), Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement rescinds Statement No. 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Upon adoption of SFAS 145, companies will be required to apply the criteria in APB Opinion No. 30 in determining the classification of gains and losses resulting from the extinguishments of debt. SFAS 145

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is effective for fiscal years beginning after May 15, 2002. The Company does not expect SFAS 145 to significantly impact its financial statements.

        In June 2002, the FASB issued Statement No. 146 (SFAS 146), Accounting for Costs Associated with Exit or Disposal Activities. This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect SFAS 146 to significantly impact its financial statements.

n.

Environmental

        The Company is subject to various federal, state and local laws and regulations pertaining to environmental protection and the discharge of material into the environment. During 2001, Ballantyne was informed by a neighboring company of likely contaminated soil on certain parcels of land adjacent to Ballantyne's main manufacturing facility in Omaha, Nebraska. The Environmental Protection Agency and the Nebraska Health and Human Services System subsequently determined that certain parcels of Ballantyne property had various levels of contaminated soil relating to a pesticide company which previously owned the property and that 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 is 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. Through June 30, 2002, the Company had not accrued any liability for this environmental loss contingency.

o.

Goodwill

        The Company capitalizes and includes in other assets the excess of cost over the fair value of net identifiable assets of operations acquired through purchase transactions ("goodwill"). The balance of goodwill included in other assets was $2,467,219 at June 30, 2002 and December 31, 2001, respectively. The Company has adopted the provisions of SFAS No. 142, Goodwill and other Intangible Assets, effective January 1, 2002. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed at least annually for impairment. Consequently, the Company stopped amortizing goodwill on January 1, 2002. The Company performed a transitional impairment test at December 31, 2001 concluding that no impairment of goodwill was deemed necessary.

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        Supplemental comparative disclosure as if the change in amortization policy had been retroactively applied to the prior year period is as follows:

3.

Inventories

        Inventories consist of the following:

        The inventory balances are net of reserves for slow moving or obsolete inventory of approximately $2,600,000 and $2,400,000 as of June 30, 2002 and December 31, 2001, respectively.

4.

Plant and Equipment

        Plant and equipment include the following:

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5.

Notes Payable to Lender

        The Company currently has a revolving credit facility (the "Revolver") and a term loan arrangement with General Electric Capital Corporation ("GE Capital"). The Revolver provides for borrowings up to the lesser of $6.0 million or amounts determined by an asset-based lending formula, as defined in the Revolver. Based on the lending formula no borrowings were available under the Revolver as of June 30, 2002. The Company pays interest on any outstanding borrowing 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 4.375% (6.125% at June 30, 2002). The Company also pays a fee of .50% on the unused portion of the Revolver. The term loan portion of the credit facility currently provides for equal monthly principal payments of $31,250 and provides for interest at the Index Rate plus 3.625% (5.375% at June 30, 2002). As of June 30, 2002, the Company had no outstanding borrowings on the Revolver and $1.6 million on the term loan. The credit facility matures on August 30, 2003. All the Company's assets secure the credit facility.

        During July 2002, the Company notified GE Capital that it was in technical default under the credit facility for failing to maintain the required fixed charge coverage ratio at June 30, 2002. Upon the occurrence of the default, and based on the terms of the agreements, the interest rates were increased by two percentage points. As of August 9, 2002, the Company had not obtained a waiver of the default, however, GE Capital had not exercised its rights under the credit facility agreement that included, but is not limited to, making a demand for repayment of all outstanding amounts. The Company and GE Capital are currently discussing alternatives as to how the default could be cured. The Company could be subject to a prepayment fee that could be as high as $142,000 if the outstanding amounts are repaid prior to the original expiration date of the credit facility. In accordance with the credit facility, the proceeds of $0.5 million received in July relating to the sale of certain assets of Xenotech Rental Corp. were used to pay down the term loan leaving a balance of approximately $1.1 million as of August 9, 2002.

        The Company believes that its current cash reserves will be sufficient to pay off the outstanding amounts under the credit facility and to meet its working capital needs and planned 2002 capital expenditures. The Company is working on obtaining alternative sources of financing once the GE Capital credit facility expires including, but not limited to, an asset-based credit facility with another financial institution, convertible debt or a sales leaseback arrangement. If alternative financing cannot be obtained or unforeseen events or conditions restrict the Company from meeting targeted cash flow results the Company has alternative plans including additional reductions in operating costs, additional asset sales and further reductions in working capital. There are no assurances, however, that such alternative plans will be sufficient to meet the Company's cash requirements in the absence of a financing facility.

        Due to the uncertainty regarding the maturity and repayment of the credit facility the amounts outstanding have been classified as a current liability in the accompanying balance sheets.

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6.

Supplemental Cash Flow Information

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

7.

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. On October 3, 2001, Ballantyne announced that 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.

8.

Notes Receivable

        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. On July 31, 2002, the Company received its first scheduled payment under this agreement. 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 during the year ended December 31, 2001.

9.

Related Party Transactions

        On May 9, 2002, the Company announced that its Board of Directors has engaged McCarthy & Co. ("McCarthy") to help the Company develop and explore ways to enhance shareholder value,

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including, but not limited to, a possible sale of the Company, a merger with another company or another transaction. McCarthy is an affiliate of McCarthy Group, Inc., who through affiliates, own 3,917,026 shares, or approximately 31% of Ballantyne Common Stock. The agreement between the Company and McCarthy is for a twelve-month period commencing on May 8, 2002. In the event a sale or merger is consummated, the Company has agreed to pay McCarthy a fee of 3% of the aggregate consideration, as defined. No amounts have been paid to McCarthy during the six months ended June 30, 2002.

10.

Doubtful Accounts

        During June 2002, the Company set up a reserve of approximately $0.4 million relating to receivables from an independent dealer; Media Technology Source of Minnesota, LLC, who filed for Chapter 7 bankruptcy protection on June 25, 2002. The Company expects to write off the receivable upon official notification of the final amount owed during the third quarter.

11.

Stock Options

        During 2002, the Company granted 435,000 stock options to certain employees of the Company with exercise prices ranging from $0.55 to $0.63 per share. As of June 30, 2002, all but 20,000 of these stock options were fully vested. As the exercise price for the stock options was equal to the quoted value of the Company's common stock on the grant date, no compensation expense was recognized.

12.

Subsequent Events

        On July 31, 2002, the Company sold certain assets and operations of Xenotech Rental Corp. in North Hollywood, California to the division's former General Manager for cash of $0.5 million. The Company recorded a gain of approximately $80,000 on the sale. Additionally, in accordance with the credit facility with GE Capital, the $0.5 million in proceeds was used to pay down the term loan of the Company.

13.

Business Segment Information

        The presentation of segment information reflects the manner in which management organizes segments for making operating decisions and assessing performance.

        The Company's operations are conducted principally through four business segments: Theatre, Lighting, Audiovisual and Restaurant. During the fourth quarter of 2001 the Company began breaking out audiovisual as a separate segment. As such, amounts for the three and six months ended June 30, 2001 have been reclassified to conform with the 2002 presentation. Theatre operations include the design, manufacture, assembly and sale of motion picture projectors, xenon lamphouses and power supplies, sound systems and the sale of film handling equipment, xenon lamps and lenses for the theatre exhibition industry. The lighting segment operations include the 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 audiovisual segment includes the sale and rental of audiovisual presentation equipment to the hotel and convention industries. The restaurant segment includes the design, manufacture, assembly and sale of pressure and open fryers, smoke ovens and rotisseries and the sale of seasonings, marinades and barbeque 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.

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Summary by Business Segments