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Article by DailyStocks_admin    (11-25-13 11:28 PM)

Description

BALLANTYNE STRONG, INC. Director Sam Freitag bought 97,419 shares on 11-19-2013 at $ 4.39.

BUSINESS OVERVIEW

General Description of Business

General

We are a Delaware corporation and maintain our corporate offices in Omaha, Nebraska. We were founded in 1932 as a designer and manufacturer of film projectors. Over the past 80 years, we have expanded our product lines and services to meet the needs of the ever-changing and technologically-advancing theatre exhibition industry. Further, we have broadened our offerings through acquisitions to include a lighting division that services architectural, entertainment, and other commercial needs. We went public in 1995 and now primarily operate within two business segments: theatre and lighting. Approximately 98%, 98% and 97% of our sales were from theatre products for the years ended 2012, 2011 and 2010, respectively. Our shares are traded on the NYSE MKT under the symbol BTN.

Our centralized Network Operations Center (“NOC”), located in our Omaha, Nebraska, headquarters is staffed with software and network engineers who provide technical support, service and IT solutions for our theatre division. It allows our customers to consider new theatre technologies as they become more advanced and integrated, keeping complex systems and processes within their reach. Our NOC remotely monitors, tracks, programs, upgrades, and fixes a full range of systems for all makes of digital projection, audio systems, menu display boards, and the associated network systems. It is complemented by a responsive team of on-the-ground service technicians spread across North America and Asia who install and service digital and audio equipment and products.

We are a manufacturer, distributor, integrator and service provider to the exhibition theatre industry on a worldwide basis. Through our Strong ® branding, we can fully outfit and automate all aspects of a cinematic theatre including digital projection, cinema screens, library management systems, smart digital signage, flat panels and complete state of the art sound systems, including Dolby Surround, Barco Auro 11.1, and QSC Sound Systems. We manufacture cinema screens in Joliette, Canada, through our Strong/MDI Screens Systems, Inc. subsidiary. We have sales and services offices across North America and Asia.

Through our lighting division, we design, develop, manufacture, distribute, install and service lighting systems for premier architectural sites as well as for a full range of needs for the entertainment and various other industries worldwide. This includes followspots and other specialty lighting for event centers, arenas, exhibit halls, concert tours, staged theatrical performances, and music, dance and various other venues with theatric lighting needs.

In the fourth quarter of 2011, our Board of Directors and management approved a corporate-wide strategic initiative to refocus our worldwide digital equipment distribution business, services platform and cinema screen manufacturing business and exit the analog projector manufacturing business. The strategic initiative consisted of selling our Omaha, Nebraska-based analog projector facility and manufacturing equipment and relocating our corporate headquarters to a new, smaller location in Omaha, which also houses our Network Operations Center. In connection with the strategic initiative, we recorded pre-tax severance charges of approximately $1.4 million, including $1.3 million in 2011 and $0.1 million in 2012. Severance of $0.3 million was paid in 2011 and $1.0 million was paid in 2012. The remaining $0.1 million will result in future cash expenditures in 2013. In March 2012 we sold the analog projector manufacturing machinery and equipment previously identified as available for sale for $1.0 million, resulting in a gain of $0.9 million. In May, 2012, we completed the sale of the corporate headquarters in a sale leaseback transaction, resulting in a gain of $0.5 million. As part of this transaction, rental expense of $0.2 million was recorded through November 2012. The net cash proceeds from the transaction were $2.0 million. The strategic initiative is expected to be completed by the end of the second quarter of 2013.

Operating Segments

We conduct our operations through two primary business segments: Theatre and Lighting. The presentation of segment information reflects the manner in which management assesses performance.

Theatre: This segment consists of the service, manufacture, assembly, distribution and installation of digital projection equipment, screens and accessories primarily for the theatre exhibition industry.

Lighting: This segment consists of the design, manufacture, assembly, distribution, installation and service of lighting systems to worldwide industries for architectural, entertainment and other commercial lighting needs.

Refer to the Business Segment Information set forth in Note 20 of our consolidated financial statements for further information concerning the amounts of revenues, profits and total assets attributable to each segment for the last three fiscal years.

Narrative Description of Business

The following information describes the principal products produced, services rendered, principal markets for, and methods of distribution of each business segment of our Company.

Theatre Segment

Overview

The Company provides a full range of services and theatre exhibition systems primarily for the theatre exhibition industry. The systems include a wide spectrum of premier audio-visual products and accessories such as: digital projectors, state of the art projection screens, servers and library management systems, digital signage and menu boards, flat panels, and sound systems. Services provided include: the monitoring, upgrade, and repair and maintenance of existing systems; the installation of new theatre exhibition systems and related equipment; and complete film-to-digital theatre conversion services, retrofitting existing complexes by removing film projectors and replacing them with digital equipment. The monitoring, upgrade, maintenance and repair of networked systems are performed by our Network Operations Center (“NOC”) using, as much as possible, remote, smart technology to identify and troubleshoot software and other system issues. Hardware upgrades, installations, maintenance and repair services are performed onsite by on-the-ground technicians.

Products

Network Operations Center (“NOC”) —In the era of analog film, cinema exhibitors were able to manage and service their installed projectors and related equipment themselves. But in the digital age, audio to visual technology relies on advanced, integrated networks that require theatre exhibitors to manage their complex digital systems. Our NOC, staffed by software engineers and systems techs, operates 24/7/365 and provides IT solutions to our customers for their full range of digital theatre exhibition equipment to help manage these systems. We are able to monitor our customers’ networked equipment remotely through a secure virtual private network (“VPN”), often providing proactive solutions to systems issues before they cause system failures. Our remote services include systems monitoring and maintenance, software upgrades, and system repairs. By utilizing NOC personnel to solve customer issues whenever possible, we eliminate travel time and expenses normally incurred by sending a technician onsite for repairs. Many issues that don’t involve parts replacements or physical contact with the hardware can be handled remotely using our remote assistance technologies.

Service & Maintenance —We supply digital installations and after-sale maintenance services. Our technicians work closely with our NOC staff to resolve systems issues that cannot be fixed remotely; they are certified to install and service digital and audio equipment for all manufacturers including the equipment of our competitors. We offer cabling, wiring, and installation and maintenance services for digital menu boards and other digital signage on ad hoc, as-needed basis. We also offer long term contractual service packages for maintenance and repairs to a wide range of installed digital equipment for customers including equipment originally installed by our competitors. These long term service packages provide our Company with recurring revenue.

Digital Projectors —Through distribution agreements with NEC and BARCO, we distribute DLP Cinema projectors. Both manufacturers of the projectors use the DLP cinema technology from Texas Instruments. NEC offers DLP Cinema projectors ranging from their NC900 projector for screens up to 31 feet wide to the NC3240S which is a 4K projector designed for screens up to 105 feet wide. BARCO offers DLP Cinema projectors ranging from their DP2K-10SX projector for screens up to 33 feet to the DP4K-32B cinema projector which is an ultra-bright enhanced 4K cinema projector for screens up to 105 feet.

Our non-exclusive distribution agreements with NEC and BARCO allow us to market digital projectors in North and South America, including the Caribbean. In China we have distribution rights to sell NEC and BARCO and can distribute NEC products in Hong Kong and certain other areas of Asia. We do not have any territorial restrictions for any of our other products and services.

Cinema Servers— Through a formal distribution agreement with GDC Technology (USA), LLC, we distribute GDC’s line of digital cinema servers in North and South America. We also distribute their servers in certain other areas of the world under less formal arrangements. In addition, we distribute servers for other server manufacturers including those manufactured by Doremi. Digital servers and the related integrated media block are used by our customers for the storage and delivery of digital content.

Additional Digital Projection Products— We also distribute certain accessories which, coupled with the cinema projector, server and integrated media block, can fully outfit and automate a projection booth. The significant accessories include, but are not limited to: 1) library management systems; 2) automation products; 3) pedestals; 4) 3D accessories; 5) lenses; and 6) lamps.

Digital Audio Systems— We distribute a range of state of the art digital audio systems, including surround and 3D sound technologies from the following manufacturers: Dolby, Barco and QSC. Our technicians are certified by each manufacturer to install, service and maintain these audio systems.

Cinema Screens —We manufacture multiple standard and large format 2D and 3D screens for cinema and special venue applications through our ISO-certified manufacturing facility in Canada. There are certain digital 3D applications, such as the technology by RealD, that require unique “silver” screens that we manufacture. We manufacture screens for the IMAX Corporation that are primarily used in large-format applications on a global basis.

Digital Menu Boards and Signage —We provide installation, maintenance and service of digital menu boards and other digital signage primarily for the theatre industry.

Xenon Lamps —We distribute xenon lamps for resale to the theatre (both digital and film) and lighting industries through a distributorship agreement with Philips. We also distribute other brands of xenon lamps as requested by our customers.

Lenses —We distribute digital projection lenses throughout the world.

Markets

We market and sell our products directly to end users as well as through certain domestic and international dealers primarily to theatre exhibitors in the cinema world. Sales and marketing professionals target new business opportunities and principally develop business by maintaining regular personal customer contact including conducting site visits, while customer service and technical support functions are dispatched when needed. In addition, we market our products in trade publications such as Film Journal and Box Office and by participating in annual industry trade shows such as CinemaCon, ShowEast, CineAsia in Asia and Cinema Expo in Europe, and other regional exhibitions. Our sales and marketing professionals have extensive experience with the Company’s product lines and have long-term relationships throughout the industry.

Our non-exclusive distribution agreements with NEC and BARCO allow us to market digital projectors in North and South America, including the Caribbean. In China we have distribution rights to sell NEC and BARCO and can distribute NEC products in Hong Kong and certain other areas of Asia. We do not have any territorial restrictions for any of our other products and services.

Competition

Digital Equipment —The markets for our products in the theatre segment have been highly competitive during the analog-to-digital cinema conversion. The primary competitive factors are price, product quality, features and customer support. Competition in the digital cinema equipment market includes one other licensed OEM of the Texas Instruments’ DLP cinema technology besides our partners NEC and BARCO: Christie Digital Systems. We also compete with SONY, which uses its own 4K digital cinema technology

Screens —While there are numerous screen manufacturing companies in the world, the primary competitor in the worldwide cinema screen market is Harkness Screens. Competitive factors include product quality, availability and price.

Service & NOC —The competition in the cinema service industry for installation and after-sale maintenance services is primarily driven by the two largest cinema service companies including Christie Digital Cinema and ourselves. There are several other smaller scale providers in the market. We compete with Christie Digital Systems, BARCO, and Convergent and other providers for NOC services.

Lighting Segment

Overview

Under the trademark Strong ® , we are a developer, manufacturer and supplier of long-range followspots as well as other lighting products for architectural, theatrical, promotional, stage and studio purposes. Our products include an ever-expanding line of LED lighting, which are more effective, efficient and environmentally sound. We provide installation and maintenance services for our lighting product lines for both permanent and touring applications. Our lighting is installed to accentuate premier architectural sites, in sporting arenas and facilities, theatres, auditoriums, theme parks, amphitheaters, stadiums, music venues, and is used in touring applications for the entertainment and other industries. While the majority of our lighting products are mass-produced and fitted to our clients’ project and property needs, we do perform commissioned work for one-of-a-kind lighting needs. For these projects, we can provide project management services, including design, engineering, manufacture, installation, and continued service. Our most notable lighting commission to date is the beacon light atop of Freedom Tower at the new World Trade Center, which will be placed in 2013.

Products

Followspots —We have been a developer, manufacturer and distributor of long-range followspots since 1950. Our followspots are primarily marketed under the Strong ® trademark and include recognized trademarked models such as Super Trouper ® and Gladiator ® . Our long-range followspots are high-intensity general-use illumination products designed for both permanent and touring installations. Lower wattage models are appropriate for small venues and truss mounting; high-intensity xenon models are appropriate for large theatres, arenas and stadiums.

In response to a segment of the marketplace demanding less expensive, smaller and more user and environmentally friendly products, we have introduced certain new followspots over the last few years, including the Canto, Solutions™ and Neeva™ product lines. Canto, the Italian-manufactured followspot line, consists of seven basic models. Our LED lighting fixtures, introduced during 2010, include both Solutions™ and Neeva™. These lights are designed to fill a demand for efficient long-throw LED-based lighting solutions for the entertainment and architectural lighting marketplaces.

Signature Commissioned Lighting— Our Company can provide signature, one-of-a-kind lighting solutions on commissioned, case-by-case basis for architectural sites, entertainment, and various other purposes. We work with internal engineers to design, develop and identify an appropriate manufacturer for the fixture(s) and can provide project management services to clients from inception to installation. We can also work as a member of a larger project management team for highly complex jobs. Jobs of note to date include the beacon light atop Freedom Tower at the new World Trade Center, NASA Space Shuttle lighting, and the beacon light atop the iconic pyramid-shaped Luxor Hotel and Casino in Las Vegas, Nevada.

Markets

We sell our lighting products through a combination of a small direct sales force, dealer network and commissioned sales representatives to arenas, stadiums, theme parks, theatres, auditoriums, equipment rental companies, entertainers and managers and owners of premier architectural sites worldwide. Our followspot products are marketed using the Strong ® trademark and are used in over 100 major arenas throughout the world.

Competition

The markets for our lighting products are also highly competitive. We compete in the lighting industry primarily on the basis of quality, price, branding, and product line variety.

Strategy

Our strategy combines the following key elements:

Expand Service and Network Operations Center within our current market and to other strategic growth markets. We have made significant investments in capital and technical resources over the past several years in strengthening our core service capabilities which include monitoring, installation and repair of equipment, cabling, and wiring. These strengths along with our strong customer relationships, will allow us to expand our core service offerings not only in the theater industry but in to other markets as well. In addition, the technical capabilities within our NOC allow us to meet industry demands for remote systems monitoring for digital equipment and back room operations in other markets outside cinema.

Expand Product Sales Opportunities. We will continue to bundle and aggressively cross sell all product and service offerings to existing market channels tapping into our solid customer relationships in the cinema and lighting segments. In addition, we are looking for new product offerings either through distribution channels or via in-house development that fit well with our current product portfolio and our current markets as well as adjacent markets such as security and energy management which lend themselves well to our technical capabilities and expertise .

We will aggressively market our ability to provide industry leading products and services that provide a significant value add to our existing customer base as well as those outside our current niche. This strategy will be deployed globally through our existing teams in North America and Asia, as well as utilizing partnerships as needed.

Leverage Engineering and Project Management Expertise. We will deliver user-friendly solutions to complex projects and products. This strategy utilizes the growing strength of our technical expertise to deliver results on time and on budget for our customers as was evident in the digital deployment for exhibitors such as Regal and Marcus, as well as in the lighting arena for the Signature Commissioned lighting project for the Freedom Tower. As firmware and software increase in complexity, we see opportunity to simplify the existing and emerging technologies for our customers from deployment through daily operational management and servicing.

Pursue Strategic Acquisitions . We are focused on identifying and completing acquisitions within areas where we can effectively leverage our strong competences as an organization, including customer service, global sales, operations management, distribution and channel management, and proven skill in integrating, installing and supporting advanced electronic components and software applications.

Subsidiaries

We have four wholly-owned operational subsidiaries: Strong Technical Services, Inc., Strong/MDI Screen Systems, Inc., Strong Westrex, Inc. and Strong Westrex (Beijing) Trading Inc.

•
Strong Technical Services, Inc. was formed in 2006 to service the film and digital marketplace.

•
Strong/MDI Screen Systems, Inc. manufactures cinema screens and related accessories.

•
Strong Westrex, Inc. is the holding company for our sales and service office in Hong Kong.

•
Strong Westrex (Beijing) Trading Inc. a/k/a American West Beijing Trading Company, Ltd. is located in Beijing, China and is our sales and service business for China.

Manufacturing

We manufacture cinema screens through our screen subsidiary in Joliette, Quebec, Canada. These manufacturing operations consist of a 75,000 square-foot facility for the manufacture of cinema screen systems. These facilities include expanded PVC welding operations with programmable automations, as well as two 90-foot high screen coating towers with state of the art precision coating application software and painting systems. This world class ISO certified operation has the capability of manufacturing multiple standard screens simultaneously to large format 2D and 3D screens for cinema and special venue applications. We are one of the only screen manufacturers in the world with Silver Screen technologies capable of supporting RealD projections.

We manufacture the following lighting products at our manufacturing facility in Omaha, Nebraska: Strong ® , Radiance ® , Sky-Tracker ® , Super Trouper ® , Gladiator ® and Solutions™.

Quality Control

We believe that our quality control procedures and the quality standards for the products we manufacture, distribute or service have contributed significantly to our reputation for high performance and reliability. The inspection of incoming materials and components as well as the testing of all of our products during various stages of the sales and service cycle are key elements of this program.

Trademarks

We own or otherwise have rights to various trademarks and trade names used in conjunction with the sale of our products. We believe our success will not be dependent upon trademark protection, but rather upon our scientific and engineering capabilities and research and production techniques. We consider the following trademarks to be of value to our business: Strong ® , Radiance ® , Sky-Tracker ® , Super Trouper ® , Gladiator ® , and Solutions™.

Employees

We employed 211 persons on a full-time basis at December 31, 2012. Of these employees, 56 were considered manufacturing, 5 were executive, 85 were service related and 65 were considered sales and administrative. We are not a party to any collective bargaining agreement.

Executive Officers of the Company

Gary Cavey, age 63, has been our President, CEO and a member of the Board of Directors since November of 2010.

Christopher Stark, age 52, assumed the responsibilities of VP-Operations in May of 2007 and is currently Senior Vice President and Chief Operating Officer.

Ray F. Boegner, age 63, has been Senior Vice President since 1997. Mr. Boegner joined us in 1985 and has acted in various sales roles for our Company.

Mary A. Carstens, age 56, serves as Senior Vice President, Chief Financial Officer and Treasurer. Ms. Carstens assumed the role of Chief Financial Officer in July of 2011.

David G. Anderson, age 58, serves as Vice President, General Counsel and Secretary. Mr. Anderson assumed the roles in November of 2012.

CEO BACKGROUND

ELECTION OF DIRECTORS

Ballantyne’s Certificate of Incorporation, as amended, and Bylaws, as amended, provide for the annual election of all directors. The Bylaws allow the Board to set the number of directors from time to time and to appoint directors between Annual Meetings. For purposes of this 2013 Annual Meeting the Board of Directors has set the number of directors at seven (7).

At the 2012 Annual Meeting stockholders elected seven (7) directors namely William F. Welsh, II, Gary L. Cavey, Marc E. LeBaron, Mark D. Hasebroock, Donde Plowman, Samuel C. Freitag and James C. Shay. All seven (7) of the presently-serving directors have been nominated for re-election. Information on these current directors and Ballantyne’s corporate governance disclosures follow this proposal.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
“FOR” THE ELECTION OF ALL THE NOMINEES.

BOARD OF DIRECTORS

Set forth below is a list of the seven (7) current directors and certain information regarding them. The chart below also sets forth the year in which each current director became a director of the Company. Each of these individuals has been nominated for election at the 2013 Annual Meeting.

William F. Welsh, II, age 71, was Chairman/CEO of Election Systems & Software from 1993 until his retirement in October 2003. He has served as a director of Lindsay Corporation (NYSE: LNN) since 2001. Mr. Welsh has served as a director of Ballantyne since 2000. The Nominating and Corporate Governance Committee believes that Mr. Welsh’s prior executive level leadership and experience as a Chief Executive Officer give him the operational expertise and breadth of knowledge to understand Ballantye’s business operations. His service on other boards of directors also provides a high level of expertise in strategic matters and corporate governance. All of these qualities are supportive of the Nominating and Corporate Governance Committee’s selection of Mr. Welsh as a director.

Gary L. Cavey, age 63, has been the Company’s President and CEO and a director since November 2010. From 2009 until joining the Company, Mr. Cavey served as COO of Midland Radio Corporation, an international industry leader in the manufacture and sale of two-way wireless communications systems for consumer and industrial applications. From 1999 until 2008, Mr. Cavey was President/CEO & Chairman of MAC Equipment, Inc., a leading manufacturer and marketer of pneumatic conveying and air filtration systems serving numerous industries. In selecting Mr. Cavey to serve as a director, the Nominating and Corporate Governance Committee considered his 15-plus years’ experience serving as a senior executive with his previous employers, his prior and current service on other corporate boards and the Company’s history of having its CEO serve on the Board.

Marc E. LeBaron, age 58, has served as Chairman/CEO of Lincoln Industries from 2001 to present. He previously served as President of Lincoln Industries from 1982 until becoming Chairman/CEO. He is also a director of Assurity Life Insurance Company. Mr. LeBaron has served as a director of Ballantyne since 2005. The Nominating and Corporate Governance Committee believes that Mr. LeBaron’s 30-plus years of organizational leadership experience, his ability to identify and implement business strategy and knowledge of corporate governance give him the operational expertise and breadth of knowledge which qualify him to serve as a director.

Mark D. Hasebroock, age 53, is the founder of Dundee Venture Capital (which was founded in 2010), a venture capital firm investing in growth companies with an e-commerce and web services focus. He is also Co-founder, Director and Secretary of Hayneedle.com (formerly Netshops, Inc.) from 2002 to present. Prior to co-founding Hayneedle, he served as an investment banker with McCarthy & Co., for approximately 13 years. Mr. Hasebroock has served as a director of Ballantyne since 2003. The Nominating and Corporate Governance Committee believes that Mr. Hasebroock’s executive level leadership, technology experience and financial background give him the operational expertise and breadth of knowledge which qualify him to serve as a director.

Samuel C. Freitag , age 57, has been an independent private investor since January of 2004. From July 2002 to December 2003, he was President of McCarthy Capital Corporation, a private equity fund manager of approximately $300 million in capital. From 1986 until 1997; he held various positions with George K. Baum Merchant Bank, LLC, including serving as Senior Managing Director and Director, Investment Banking. Mr. Freitag has served as a director of Ballantyne since June 2011. The Nominating and Corporate Governance Committee believes that Mr. Freitag’s investment banking experience and service on other boards of directors provide him the executive experience and knowledge to qualify him to serve as a director.

Donde Plowman , age 60, has been the Dean of the University of Nebraska-Lincoln’s College of Business Administration and a Professor of Management since July 2010. She was previously the head of the Department of Management at the University of Tennessee from 2007 to 2010. She previously held the position of Professor of Management at the University of Texas in San Antonio from 2007 to 2010, and Associate Dean for graduate programs and research and director of the Ph.D. program at the College of Business from 2000 to 2003. Dr. Plowman has published more than 40 articles and book chapters on management topics and has served as a management training consultant. Dr. Plowman has served as a director of Ballantyne since June 2011. The Nominating and Corporate Governance Committee believes that Dr. Plowman’s experience in business management academics, senior level academic leadership and management experience qualify her to serve as a director.

James C. Shay , age 49, is the Senior Vice President, Finance and Strategic Planning, and Chief Financial Officer for Great Plains Energy, Inc. (NYSE: GXP) and Kansas City Power & Light Company, a position he has held since July 2010. Previously, Mr. Shay served as Chief Financial Officer for Northern Power Systems from 2009 to 2010, Managing Director of Frontier Investment Bank from 2007 to 2009, Chief Financial Officer for Machine Laboratory, LLC (after its acquisition from BHA) from 2004 to 2006 and in various positions with BHA from 1992 until its acquisition of Machine Laboratory LLC in 2004. Mr. Shay is a Certified Public Accountant. Mr. Shay has served as a director of Ballantyne since May, 2012. The Nominating and Corporate Governance Committee believes that Mr. Shay’s extensive background in finance and accounting as well as his executive experience qualify him to serve as a director.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a manufacturer, distributor, integrator and service provider to the exhibition theatre industry on a worldwide basis. Through our Strong ® branding, we can fully outfit and automate all aspects of a cinematic theatre including digital projection, cinema screens, library management systems, smart digital signage, flat panels and complete state of the art sound systems. We manufacture cinema screens in Joliette, Quebec, Canada, through our Strong/MDI Screens Systems, Inc. subsidiary.

Through our lighting division, we design, develop, manufacture, distribute, install and service lighting systems for premier architectural sites as well as for a full range of needs for the entertainment and various other industries worldwide. This includes followspots and other specialty lighting for event centers, arenas, exhibit halls, places of worship, concert tours, staged theatrical performances, and music, dance and various other venues with theatric lighting needs.

We have two primary reportable operating segments: theatre and lighting. Our segments were determined based on the manner in which management organizes segments for making operating decisions and assessing performance. Approximately 98% of fiscal year 2012 revenues were from theatre products and services and approximately 2% were lighting products. Additional information related to our reporting segments can be found in the notes to the consolidated financial statements.

Results of Operations:

Corporate-wide restructuring

In the fourth quarter of 2011, our Board of Directors and management approved a corporate-wide strategic initiative to refocus our worldwide digital equipment distribution business, services platform and cinema screen manufacturing business and exit the analog projector manufacturing business. The strategic initiative consisted of selling our Omaha, Nebraska-based analog projector facility and manufacturing equipment and relocating our corporate headquarters to a new, smaller location in Omaha, which also houses our Network Operations Center. In connection with the strategic initiative, we recorded pre-tax severance charges of approximately $1.4 million, including $1.3 million in 2011 and $0.1 million in 2012. Severance of $0.3 million was paid in 2011 and $1.0 million was paid in 2012. The remaining $0.1 million will result in future cash expenditures in 2013. In March 2012 we sold the analog projector manufacturing machinery and equipment previously identified as available for sale for $1.0 million, resulting in a gain of $0.9 million. In May, 2012, we completed the sale of the corporate headquarters in a sale leaseback transaction, resulting in a gain of $0.5 million. As part of this transaction, rental expense of $0.2 million was recorded through November 2012. The net cash proceeds from the transaction were $2.0 million. The strategic initiative is expected to be completed by the end of the second quarter of 2013.

2012 Compared to 2011

Revenues

Net revenues during the year ended December 31, 2012 decreased 8.3% to $169.1 million from $184.4 million in the year ended December 31, 2011.

Theatre Segment

Sales of theatre products and services decreased 8.2% to $166.3 million in 2012 from $181.2 million in 2011.

Digital Product Sales

Sales of digital products decreased in 2012 to $135.5 million from $138.8 million in 2011. This is a decrease of 2.4% from 2011. Digital projectors and servers accounted for $1.5 million of the decrease in sales from 2011, with sales of digital lenses and lamps accounting for the remaining decrease. A single theatre customer accounted for 26% of digital product sales in 2011, which did not recur in 2012.

Screen Product Sales

We generated screen sales of $13.0 million in 2012, a decrease of 25.3% from the $17.4 million generated in 2011. The decrease primarily resulted from customers accelerating their rollout of 3D systems in prior years thereby decreasing the demand for “silver” screens in 2012.

Film Product Sales

Sales of film projection equipment declined 73.7% to $1.5 million in 2012 from $5.7 million in 2011. Sales of film replacement parts declined to $1.1 million during 2012 from $3.6 million in 2011, while sales of xenon lamps amounted to $0.5 million compared to $1.5 million a year-ago. These declines were expected and sales of these products are expected to continue to decline as the industry continues to transition to digital cinema.

Service Revenues

Service revenues increased 3.1% to $14.6 million from $14.2 million in 2011 as the motion picture industry’s transition to digital cinema resulted in more opportunities for our service team including installation and maintenance of digital projectors. Revenues from servicing digital products rose to $13.9 million or 95% of all service revenues in 2012 from $13.1 million or 92% in 2011. As expected, revenues generated from servicing film equipment decreased to $0.7 million in 2012 compared to $1.1 million a year-ago consistent with the industry transition to digital equipment, resulting from increased demand for installation, maintenance and other services pertaining to the digital conversion.

Lighting Segment

Sales of lighting products decreased to $2.8 million from $3.2 million during 2011. This decrease is primarily due to a decrease in sales of follow spotlights to $1.7 million from $1.8 million a year-ago and a decrease in parts sales to $0.4 million in 2012 from $0.7 million in 2011. Sales of other lighting products remained approximately $0.7 million in 2012 and 2011. Even though demand for lighting for the venue and entertainment sectors of the construction business is still slow, we are moving to focus on a growing segment, architectural accent lighting.

Foreign Revenues

Sales outside the United States (primarily from the theatre segment) decreased to $32.0 million from $41.1 million in 2011. Although sales in Canada and South America increased, sales decreased in the remaining export markets. The largest decreases occurred in China. Export declines in China and other foreign markets are reflective of highly competitive environments combined with sensitivity to the timing of the digital cinema rollout in these countries as well as diminishing film equipment sales. Export sales are also sensitive to worldwide economic and political conditions that lead to volatility in the market.

Gross Profit

Consolidated gross profit decreased 25.2% to $22.6 million from $30.2 million in 2011 and as a percent of total revenue decreased to 13.4% from 16.4% in 2011.

Gross profit in the theatre segment decreased to $21.9 million from $29.2 million in 2011 and as a percentage of theatre sales decreased to 13.2% from 16.1% a year-ago. Our gross margin decreased from the prior year due to a higher concentration of lower margin digital equipment and lamps and a lower concentration of screen sales, which carry strong margins, as well as pricing decreases due to a competitive market.

Gross profit in the lighting segment amounted to $0.7 million or 23.3% as a percentage of revenues in 2012 compared to $1.0 million or 30.9% as a percentage of revenues in 2011.

Selling Expenses

Selling expenses increased 13.5% to $4.5 million from $3.9 million in 2011 and as a percentage of revenues increased to 2.6% from 2.1% a year-ago. The increase in selling expenses is due to higher wages and commissions.

General and Administrative Expenses

General and administrative expenses increased 3.2% to $11.5 million in 2012 from $11.1 million in 2011 and amounted to 6.8% and 6.0% of revenues, respectively. The increase in expenses is primarily due to recruiting costs, higher professional fees and consultants used in the Asia operations offset by lower severance charges.

Segment Operating Income

We generated operating income in the theatre segment of $14.7 million in 2012 compared to $22.8 million in 2011. The results reflect a decrease of $7.8 million in theatre product operating income to $12.6 million in 2012, from $20.4 million in 2011. Operating income of theatre services decreased $0.3 million to $2.1 million in 2012 compared to $2.4 million a year ago.

The lighting segment generated an operating loss of $0.2 million in 2012 compared to operating income of $0.2 million in 2011.

Other Financial Items

Our results for 2012 reflect income of $0.01 million pertaining to our 44.4% share of equity in the income from Digital Link II, LLC compared to a loss of $0.2 million in 2011. The change in 2012 reflects the improvement in the LLC’s net income and sales of equipment by the LLC to customers for projectors previously held in the LLC as compared to 2011.

Other income amounted to $0.1 million in 2012 compared to $0.07 million in 2011. The results primarily reflect the impact of exchange gains and losses due primarily to the U.S. dollar fluctuating against the Canadian dollar from year-to-year.

We recorded income tax expense of approximately $2.6 million in 2012 compared to $4.7 million in 2011. The effective tax rate (calculated as a ratio of income tax expense to pretax earnings, inclusive of equity method investment income (losses)) was approximately 32.0% for 2012 and 31.3% in 2011. The effective tax rate differs from the statutory rates primarily as a result of differing foreign and U.S. tax rates applied to respective pre-tax earnings by tax jurisdiction. The effective tax rate increased in 2012 from 2011 due to lower earnings before tax for the Canada and Asia operations, which have lower tax rates and a reduction in the expected credits the Company will earn in 2012 compared to 2011.

For the reasons outlined herein, we generated net earnings of approximately $5.5 million and basic and diluted earnings per share of $0.39, compared to $10.3 million and basic and diluted earnings per share of $0.72 and $0.71 in 2011, respectively.

2011 Compared to 2010

Revenues

Net revenues during the twelve months ended December 31, 2011 rose 35.3% to $184.4 million from $136.3 million in 2010.

Theatre Segment

Sales of theatre products and services increased 36.3% to $181.2 million in 2011 from $132.9 million in 2010.

Digital Product Sales

Sales of digital products rose 59.5% to $138.8 million from $87.0 million in 2010 due to the following:


•
A significant sale of digital equipment to a theatre customer which represented approximately 26% of digital product revenues during 2011.


•
A general increase in sales volume in the U.S. as theatre exhibition companies continued to convert their theatre complexes to digital-based projection equipment.


•
Sales of lamps rose to $15.3 million from $5.8 million in 2010 while sales of servers rose to $14.3 million from $7.4 million in 2010.

We also continued to integrate projection equipment in our Omaha plant for a large exhibition customer. Revenues generated from the accessories we sell with the integration services increased to $8.6 million in 2011 from $5.0 million in 2010. We do expect this integration business to substantially decline after fiscal 2012 due to the exhibition customer’s digital conversion being substantially completed.

Screen Product Sales

Revenues from the sale of screens decreased 7.9% to $17.4 million in 2011 compared to $18.9 million in 2010 primarily due to lower demand for digital 3D screens. Sales were at record levels in 2010 as exhibition companies pushed to capture the relative new 3D movie Box Office during the 2010 period. We sell screens for both digital cinema and film applications. In some instances, a screen can be used interchangeably with either a digital projector or a film projector. However, there are certain digital 3D applications such as the technology by RealD that require special “silver” screens that we manufacture.

Film Product Sales

The transition to digital cinema has impacted sales of film equipment, accessories and replacement parts and these products are expected to further decline in future periods. As expected, sales declined year-over-year as follows:


•
Sales of projection equipment declined to $5.7 million from $10.9 million.


•
Replacement part sales declined to $3.6 million from $4.7 million.


•
Sales of lamps declined to $1.5 million from $3.4 million.

Service Revenues

Service revenues increased 79.7% to $14.2 million from $7.9 million in 2010 resulting from increased demand for installation, maintenance and other services pertaining to the digital conversion. Digital service revenues rose to $13.1 million from $5.6 million in 2010 as the rollout is creating opportunities for our service group to sell a range of services including, but not limited to, installations, after-sale maintenance, repairs, cabling, wiring and NOC services.

The industry transition to digital is affecting revenues from servicing film equipment which declined to $1.1 million from $2.3 million in 2010.

Lighting Segment

Sales of lighting products declined slightly to $3.2 million from $3.4 million during 2010 due to lower demand for follow spotlights. Lighting products have been impacted by the effects of economic conditions as a significant portion of the business is dependent on the construction or improvements of stadiums and auditoriums around the world.

Foreign Revenues

Sales outside of the United States (primarily from the theatre segment) fell to $41.1 million from $60.1 million in 2010 resulting in large part to sales volume in Mainland China decreasing to $26.0 million from $34.9 million in 2010. The results out of China reflect increased competition and the shifting of scheduled installations due to changing theatre construction timelines. We also experienced lower sales volume in South America, Canada, Mexico and Europe. The results were primarily due to the timing of the digital cinema rollout in these countries coupled with lower sales of film equipment. Export sales are sensitive to worldwide economic and political conditions that can lead to volatility. Certain areas of the world are more cost conscious than the U.S. market and there are instances where our products are priced higher than local manufacturers making it more difficult to generate sufficient profit to justify selling into these regions. Additionally, foreign exchange rates and excise taxes sometimes make it difficult to market our products overseas at reasonable selling prices.

Gross Profit

Consolidated gross profit increased 22.1% to $30.2 million from $24.7 million in 2010 but as a percent of total revenue decreased to 16.4% from 18.1% in 2010. Gross profit in the theatre segment increased to $29.2 million from $23.8 million in 2010 but as a percentage of theatre sales decreased to 16.1% from 17.9% a year-ago. The higher gross profit was due to the increase in sales volume while the decline in gross margin is reflective of:


•
Higher sales of digital products which carry substantially higher revenue price points but lower gross margins than our other products and services.


•
Lower screen revenues which carry higher manufacturing margins.


•
Lower revenues from film replacement parts which historically carry strong margins.

The gross profit in the lighting segment amounted to $1.0 million or a gross margin of 30.9% compared to $0.9 million or a gross margin of 27.4% during 2010. The results primarily reflect a favorable product mix during 2011.

Selling Expenses

Selling expenses increased 3.0% to $3.9 million from $3.8 million in 2010 but as a percent of total revenue declined to 2.1% from 2.8% in 2010. The results principally reflect additional personnel and their associated costs to expand our domestic sales and service marketing efforts and to expand our sales offices in Mainland China.

General and Administrative Expenses

General and administrative expenses rose 22.5% to $11.1 million in 2011 from $9.1 million in 2010 but as a percent of total revenue decreased to 6.0% from 6.7% in 2010. The increase in expenses was due to severance charges of $1.3 million during the year coupled with additional personnel and related costs necessary to manage the significant growth in revenue experienced during the year. Approximately $1.0 million of the severance charges occurred in the fourth quarter and were a result of a strategic initiative to refocus certain key areas of our Company as discussed throughout this document.

Segment Operating Income

We generated operating income in the theatre segment of $22.8 million in 2011 compared to $17.8 million in 2010. The results reflect an increase in business where product revenues rose 33.6%. We also generated significantly higher operating profit from our service business which increased to $2.4 million from $0.6 million in 2010 on a revenue increase of 79.6%.

Operating income from the lighting segment rose to $0.2 million from less than $0.1 million in 2010 due to a favorable product mix.

Other Financial Items

Our results for 2011 reflect a loss of $0.2 million pertaining to our 44.4% share of equity in the loss from Digital Link II, LLC compared to income of $0.6 million in 2010. The change from 2010 reflects less sales of equipment by the LLC to customers for projectors previously held in the LLC compared to 2010. The loss in 2011 primarily was a result of depreciation expense.

Other income amounted to $0.07 million in 2011 compared to expense of $0.2 million in 2010. The results primarily reflect the impact of foreign exchange gains and losses due primarily to the U.S. dollar fluctuating against the Canadian dollar from year-to-year.

We recorded income tax expense of approximately $4.7 million in 2011 compared to $4.0 million in 2010. The effective tax rate (calculated as a ratio of income tax expense to pretax earnings, inclusive of equity method investment income (losses)) was approximately 31.3% for 2011 and 31.9% in 2010. The effective tax rate differs from the statutory rates primarily as a result of differing foreign and U.S. tax rates applied to respective pre-tax earnings by tax jurisdiction. In addition, our effective rate was lower than the prior year period in part due to estimates for certain Canadian tax credits.

For the reasons outlined herein, we generated net earnings of approximately $10.3 million and basic and diluted earnings per share of $0.72 and $0.71 in 2011, respectively compared to $8.4 million and basic and diluted earnings per share of $0.60 and $0.59 in 2010, respectively.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

We are a manufacturer, distributor, integrator and service provider for the theatre exhibition industry on a worldwide basis. Through our Strong ® branding, we can fully outfit and automate all aspects of a cinematic theatre including digital projection, cinema screens, library management systems, smart digital signage, flat panels and complete state of the art sound systems. We manufacture cinema screens in Joliette, Quebec, Canada, through our Strong/MDI Screens Systems, Inc. subsidiary.

Through our lighting division, we design, develop, manufacture, distribute, install and service lighting systems for premier architectural sites as well as for a full range of needs for the entertainment and various other industries worldwide. This includes followspots and other specialty lighting for event centers, arenas, exhibit halls, places of worship, concert tours, staged theatrical performances, and music, dance and various other venues with theatric lighting needs.

We have two primary reportable core operating segments: theatre and lighting. Our segments were determined based on the manner in which management organizes segments for making operating decisions and assessing performance. Approximately 93.8% of the sales for the first nine months of the year were from theatre products and approximately 6.2% were lighting products. Additional information related to our reporting segments can be found in the notes to the consolidated financial statements.

Results of Operations:

Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012

Revenues

Net revenues during the three months ended September 30, 2013 decreased 52.0% to $18.9 million from $39.3 million during the three months ended September 30, 2012.

Theatre Segment

Sales of theatre products and services decreased 52.3% to $18.3 million in 2013 from $38.4 million in 2012.

Product Sales

Sales of products in the third quarter of 2013 decreased 54.3% to $15.6 million from $34.1 million in 2012 as the industry change to digital projection equipment continues to wind down. Digital equipment and servers accounted for $17.8 million of the $20.0 million decrease in sales when compared to 2012, with sales of film equipment, parts and lamps accounting for the remaining decrease. This was partially offset by an increase in screen sales to $3.7 million in 2013 from $3.0 million a year-ago.

ervice Revenues

Service revenues decreased 36.0% in 2013 to $2.7 million from $4.3 million a year-ago due to non-recurring installation revenue related to the digital product sales. This reduction was partially offset by increasing revenue for recurring after-sale maintenance, repairs and NOC (Network Operation Center) services. As expected, revenues generated from servicing film equipment decreased to $0.1 million in 2013 compared to $0.2 million in the third quarter of 2012.

Lighting Segment

Sales of lighting products decreased 38.3% to $0.5 million from $0.8 million a year-ago.

Export Revenues

Sales outside the United States (mainly theatre sales) decreased to $7.3 million in the second quarter of 2013 from $9.2 million a year ago. This was primarily driven by decreased sales in South America and Asia. Export sales are sensitive to the timing of the digital cinema rollout in these countries in addition to being sensitive to worldwide economic and political conditions that lead to volatility. Certain areas of the world have significant pricing pressures from domestic manufacturers and suppliers. Additionally, foreign exchange rates and excise taxes occasionally make it difficult to market our products overseas at reasonable selling prices.

Gross Profit

Consolidated gross profit decreased 10.3% to $3.3 million in the third quarter of 2013 from $3.7 million a year-ago and as a percent of total revenue increased to 17.7% from 9.5% in 2012. Gross profit in the theatre segment decreased to $3.3 million in 2013 from $3.4 million in 2012 and as a percentage of theatre sales increased to 18.1% from 8.9% a year-ago. The decrease in gross profit was driven by lower revenues in digital equipment sales. However, gross margin as a percentage of revenue increased as digital equipment sales, which carry lower margins, declined to make up a smaller percentage of total sales.

The gross profit in the lighting segment was $0.03 million or 4.9% as a percentage of revenues in the third quarter of 2013 compared to $0.3 million or 35.9% as a percentage of revenues in 2012. The decrease in gross margin was due to decreased volumes.

Selling Expenses

Selling expenses decreased 37.0% to $0.9 million in the third quarter of 2013 compared to $1.3 million a year-ago, but increased as a percentage of revenues to 4.5% in 2013 from 3.4% in 2012. The increase in selling expenses as a percentage of revenues is primarily due to decreased revenues. The decrease in selling expenses is due to lower consultant and tradeshow expenses.

Administrative Expenses

Administrative expenses increased 7.6% to $2.5 million in the third quarter of 2013 from $2.3 million in 2012, and as a percent of total revenue to 13.4% in 2013 from 6.0% in 2012. The increase in expenses is primarily due to acquisition costs of $0.2 million.

Other Financial Items

Our results for the third quarter of 2013 reflect minimal gains pertaining to our 44.4% share of equity in the income from Digital Link II, LLC. This compares to a loss of approximately $0.1 million during the third quarter of 2012.

The third quarter of 2013 includes a minimal loss in other income (expense) compared to $0.2 million in 2012, primarily related to net gains (losses) on foreign currency transactions.

We recorded minimal income tax expense in the third quarter of 2013 and 2012. The effective tax rate (calculated as a ratio of income tax expense to pretax earnings, inclusive of equity method investment earnings) was approximately 47.8% and 0.1% in the quarters ending September 30, 2013 and 2012, respectively. The effective tax rate differs from the statutory rates primarily as a result of differing foreign and U.S. tax rates applied to respective pre-tax earnings by tax jurisdiction. The effective rate increased in 2013 from 2012 due to a higher proportion of earnings before tax being within our US operations which has a higher rate. In addition the effective tax rate for the three months ended September 30, 2013 were impacted as the Company also recorded $0.03 million of additional tax expense due to return to provision adjustments related to filing the 2012 tax returns.

As a result of the items outlined above, we generated a minimal net gain and basic and diluted earnings per share in the three months ended September 30, 2013 compared to a loss of $0.3 million in 2012 and basic and diluted loss per share of $0.02 a year-ago.

Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012

Revenues

Net revenues during the nine months ended September 30, 2013 decreased 45.5% to $70.9 million from $130.0 million during the nine months ended September 30, 2012.

Theatre Segment

Sales of theatre products and services decreased 48.0% to $66.5 million in 2013 from $127.8 million in 2012.

Product Sales

Sales of products decreased 50.1% to $58.1 million in 2013 from $116.5 million in 2012 as the industry change to digital projection equipment continues to wind down. Digital equipment and servers accounted for $50.8 million of the $58.4 million decrease in sales compared to 2012, with sales of film equipment and lamps accounting for the remaining decrease. This was partially offset by an increase in screen sales to $10.8 million in 2013 from $9.3 million a year-ago.

Service Revenues

Service revenues decreased 25.4% to $8.4 million in 2013 from $11.2 million a year-ago due to non-recurring installation revenue related to the digital product sales. This reduction was partially offset by increasing revenue for recurring after-sale maintenance, repairs and NOC (Network Operations Center) services. As expected, revenues generated from servicing film equipment decreased to $0.2 million in 2013 compared to $0.6 million in 2012.

Lighting Segment

Sales of lighting products increased 98.6% to $4.4 million from $2.2 million a year-ago, primarily due to the completion of the beacon and uplights on the World Trade Center. This project shows our continuing focus on a growing market, architectural accent lighting.

Export Revenues

Sales outside the United States (mainly theatre sales) increased to $23.1 million in 2013 from $22.4 million in 2012. This was driven by increased sales in South America. Export sales fluctuations in these markets are reflective of highly competitive environments combined with sensitivity to the timing of the digital cinema rollout in these countries as well as diminishing film equipment sales. Export sales are also sensitive to worldwide economic and political conditions that lead to volatility in the market.

Gross Profit

Consolidated gross profit decreased 27.3% to $11.9 million in 2013 from $16.4 million a year-ago and as a percent of total revenue increased to 16.8% from 12.6% in 2012. Gross profit in the theatre segment decreased to $11.1 million in 2013 from $15.9 million in 2012 and as a percentage of theatre sales increased to 16.6% from 12.4% a year-ago. The decrease in gross profit was driven by lower revenues in digital equipment sales. However, gross margin as a percentage of revenue increased as digital equipment sales, which carry lower margins, declined to make up a smaller percentage of total sales.

The gross profit in the lighting segment amounted to $0.9 million or 19.8% as a percentage of revenues in 2013 compared to $0.5 million or 24.2% as a percentage of revenues in 2012. The increase in gross margin was due to the completion of the World Trade Center.

Selling Expenses

Selling expenses decreased 24.1% to $2.6 million during 2013 compared to $3.4 million a year-ago and as a percentage of revenues increased to 3.6% from 2.6% a year-ago. The increase in selling expenses as a percentage of revenues is primarily due to decreased revenues. The decrease in selling expenses is due to lower travel, consultant and tradeshow expenses.

General and Administrative Expenses

General and administrative expenses decreased 12.5% to $7.5 million in 2013 from $8.5 million in 2012 and amounted to 10.6% and 6.6% of revenues in 2013 and 2012, respectively. The decrease in expense is primarily due to salaries, travel expenses and lower professional fees.

Other Financial Items

The gain on sale of assets in 2012 is the result of selling the analog projector manufacturing machinery and equipment previously identified as held for sale in connection with our corporate-wide restructuring initiative we began in 2011.

Our results for 2013 reflect losses of $0.1 million pertaining to our 44.4% share of equity in the income from Digital Link II, LLC. This loss compares to minimal income during the nine months ended September 30, 2012.

Other income of $0.5 million in 2013, compared to $0.2 million in 2012, primarily related to net gains on foreign currency transactions.

We recorded income tax expense of approximately $0.5 million in 2013 compared to $2.0 million in 2012. The effective tax rate (calculated as a ratio of income tax expense to pretax earnings, inclusive of equity method investment earnings) was approximately 21.0% and 33.7% in the nine months ending September 30, 2013 and 2012, respectively. The effective tax rate differs from the statutory rates primarily as a result of differing foreign and U.S. tax rates applied to respective pre-tax earnings by tax jurisdiction. The effective rate decreased in 2013 from 2012 due to a higher proportion of earnings before tax being within our Canadian operations, Strong/MDI Screen Systems, Inc., which has a lower rate.

As a result of the items outlined above, we generated net earnings of approximately $1.9 million and basic and diluted earnings per share of $0.13 in 2013 compared to earnings of $4.0 million during 2012 and basic and diluted earnings per share of $0.28 a year-ago.

Liquidity and Capital Resources

During the past several years, we have met our working capital and capital resource needs from either our operating or investing cash flows or a combination of both. We ended the third quarter with total cash and cash equivalents of $26.3 million compared to $40.2 million at December 31, 2012.

We are party to a $20 million Revolving Credit Agreement and Note (collectively, the “Revolving Credit Agreement”) with Wells Fargo Bank, N.A. (“Wells Fargo”). The borrowings from the Revolving Credit Agreement will primarily be used for working capital purposes and for other general corporate purposes. The Company’s accounts receivable, general intangibles and inventory secure the Revolving Credit Agreement. Since inception of the agreement, no amounts have been borrowed on the Revolving Credit Agreement. At September 30, 2013, the Company had availability of $20 million.

Cash Flows from Operating Activities

Cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization, deferred taxes, and the effect of working capital changes.

Net cash provided by operating activities was $5.8 million in the first nine months of 2013, which included net income of $1.9 million, plus non-cash charges (benefits) for gain on assets, deferred tax expense, depreciation and amortization, reserve provisions and non-cash stock compensation totaling $2.4 million. Changes in working capital provided cash from operating activities of $1.5 million. Additional changes in working capital was driven by a decrease in accounts receivable, partially offset by increases in inventories and decreases in accounts payable and customer deposits. Accounts receivable balances decreased $13.6 million due to collections of the higher sales volume of the prior quarter 2012 as compared to the third quarter of 2013. Accounts payable decreased $7.7 million as the Company paid for fourth quarter 2012 inventory purchases.

Net cash used in operating activities was $5.3 million in the first nine months of 2012, which included net income of $4.0 million, plus non-cash charges (benefits) for gain on assets, deferred tax expense, depreciation and amortization, reserve provisions and non-cash stock compensation totaling $2.0 million. Changes in working capital used cash from operating activities of $11.3 million. This is primarily due to a decrease in accounts payable, as well as accruals and timing of tax deposits, partially offset by a decrease in the balance of accounts receivables and other current assets. Accounts payable decreased $12.7 million as the Company paid for fourth quarter 2011 inventory purchases. Accounts receivable balances decreased $6.5 million due to collections of the higher sales volume of the prior fourth quarter 2011 as compared to the third quarter of 2012.

Cash Flows from Investing Activities

Net cash used in investing activities amounted to $19.4 million in 2013 compared to net cash provided by investing activities of $4.7 million in 2012. This is primarily due to the deposit of $17.4 million for the acquisition of Convergent prior to quarter end. The acquisition’s effective date was October 1, 2013. The remaining cash used in investing activities in 2013 was for capital expenditures of $0.2 million and the acquisition of Elite of $1.7 million. Cash was provided by a $1.5 million distribution from our joint venture investment in Digital Link II and $3.0 million from the sale of the analog facility and equipment in 2012, which was partially offset by $0.2 million of capital expenditures.

Cash Flows from Financing Activities

Net cash used in financing was minimal in 2013. Cash of $2.7 million was used in 2012 to purchase treasury stock.

Hedging and Trading Activities

Our primary exposure to foreign currency fluctuations pertain to our subsidiaries in Canada and China. In certain instances, we may enter into a foreign exchange contract to manage a portion of this risk. For the nine months ended September 30, 2013 we recorded minimal realized and unrealized gains associated with these contracts in our condensed consolidated statement of income. This compares to gains $0.2 million in the comparative period of 2012.

We do not have any trading activities that include non-exchange traded contracts.

Seasonality

Generally, our quarterly revenue and earnings fluctuate moderately from quarter to quarter. As we increase our sales in our current markets, and as we expand into new markets in different geographies, it is possible we may experience different seasonality patterns in our business. As a result, the results of operations for the period ended September 30, 2013 are not necessarily indicative of the results that may be expected for an entire fiscal year.

Litigation

From time to time we may be involved in various claims and legal actions which are routine litigation matters incidental to the business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial condition, results of operations or liquidity.

Recently Issued Accounting Pronouncements

There are no recently issued accounting pronouncements which we believe will materially impact its consolidated financial statements.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements in conformity with U.S. generally accepted accounting principles; management must make a variety of decisions which impact the reported amounts and the related disclosures. These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In making these decisions, management applies its judgment based on its understanding and analysis of the relevant circumstances and our historical experience.

Our accounting policies and estimates that are most critical to the presentation of our results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as our critical accounting policies. See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for our year ended December 31, 2012. We periodically re-evaluate and adjust our critical accounting policies as circumstances change. There were no significant changes in our critical accounting policies during the nine months ended September 30, 2013.

CONF CALL

Tricia Ross - Financial Profiles
Thank you. Good morning everyone and welcome to today’s third quarter 2013 earnings call.

Today’s call and webcast may contain forward-looking statements related to the company's future operating results. Except for the historical information, it may include forward-looking statements that involve risks and uncertainties, including but not limited to quarterly fluctuations and 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, the management of growth and other risks detailed from time-to-time in the company’s Securities and Exchange Commission filings. Actual results may differ materially from management’s expectations.

Joining us today from management are President and CEO, Gary Cavey; and CFO, Mary Carstens.

At this time I would like to turn the call over to Gary. Gary.

Gary Cavey - President & Chief Executive Officer
Thank you, Tricia. Good morning everybody. Thanks for joining us. Earlier today Ballantyne reported her results for the 2013 third quarter. The results were largely consistent with our expectations and reflect a subdued capital spending environment that we are seeing both domestically and internationally.

Most notably, we continue to see a decline in the sales of theater equipment. However as in our offset, we continue to see positive momentum in our cinema screen business and higher gross margins as our overall revenue mix becomes more favorable.

As a result, on a year-over-year basis, despite a drop in net revenues we posted slightly better bottom line results, which were just about breakeven for the 2013 third quarter. Of course the most significant recent development was the acquisition of Convergent Media Systems; a leader in digital signage and content creation and distribution systems.

As we indicated on our conference call last month, this acquisition accelerates our transition into an end-to-end solutions provider and significantly enhances our growth profile. We will now be able to capitalize on growing demand for digital signage and enterprise video solutions, and we expect to continue growing the percentage of revenue coming from reoccurring managed services contact going forward.

With the acquisition on Convergent, we believe we’ve entered an industry that is extremely well positioned to benefit from dramatic shifts in advertising spent. The overall advertising market in North America is $185 billion annually and the digital advertising segment is accounting for a rapidly growing share of that market.

According to a recent report from eMarketer, a leading authority on the digital marketing industry, the digital ad segment is projected to grow from approximately 25% of the North American adverting market in 2013 to more than 31% in 2017. Most of this shift in advertising spend will come from the print, radio and directories segments.

The Digital Out-of-Home, DOOH segment is a relatively small component of the overall digital ad market, but this is experiencing strong growth. This segment is projected to grow from approximately $4 billion in 2013 to more than $7 billion in 2017 according to PQ Media, a leading research firm focused on the DOOH industry.

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