FG Group Holdings Inc. - Quarter Report: 2012 June (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

OR

 

o                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                     to                    

 

 

Commission File Number: 1-13906

 

BALLANTYNE STRONG, INC.

 (Exact Name of Registrant as Specified in Its Charter)

 

 

(402) 453-4444

(Registrant’s telephone number, including area code:)

 

Indicate by check mark whether the 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 twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

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

 

 

 

Table of Contents

 

TABLE OF CONTENTS

 

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets, June 30, 2012 and December 31, 2011	3
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011	4
	Condensed Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2012 and 2011	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011	6
	Notes to the Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22
Item 4.	Controls and Procedures	23
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	24
	Signatures	24

 

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PART I.  Financial Information

 

Item 1.  Condensed Consolidated Financial Statements

 

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)

 

		June 30, 2012			December 31, 2011
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	35,854		$	39,889
Accounts receivable (net of allowance for doubtful accounts of $542 and $142, respectively)		29,440			30,579
Unbilled revenue		2,017			2,586
Inventories:
Finished goods, net		10,229			9,349
Work in process		995			301
Raw materials and components, net		5,755			5,270
Total inventories, net		16,979			14,920
Other current assets		7,723			8,446
Total current assets		92,013			96,420
Investment in joint venture		405			1,849
Property, plant and equipment (net of accumulated depreciation of $3,506 and $3,208, respectively)		9,051			9,419
Property held for sale		—			1,810
Note receivable		2,212			2,062
Other non-current assets		2,240			1,896
Total assets		$	105,921		$	113,456
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	27,054		$	31,924
Other accrued expenses		3,403			4,820
Customer deposits/deferred revenue		5,029			5,037
Income tax payable		842			4,135
Total current liabilities		36,328			45,916
Other non-current liabilities		4,501			4,317
Total liabilities		40,829			50,233
Stockholders’ equity:
Preferred stock, par value $.01 per share; Authorized 1,000 shares, none outstanding		—			—
Common stock, par value $.01 per share; Authorized 25,000 shares; issued 16,779 and 16,667 shares at June 30, 2012 and December 31, 2011, respectively; 14,066 and 14,512 shares outstanding at June 30, 2012 and December 31, 2011, respectively		167			167
Additional paid-in capital		37,551			37,234
Accumulated other comprehensive income:
Foreign currency translation		(177		)	(137		)
Minimum pension liability		81			81
Retained earnings		45,620			41,361
		83,242			78,706
Less 2,713 and 2,155 of common shares in treasury, at cost at June 30, 2012 and December 31, 2011, respectively		(18,150		)	(15,483		)
Total stockholders’ equity		65,092			63,223
Total liabilities and stockholders’ equity		$	105,921		$	113,456

 

See accompanying notes to condensed consolidated financial statements.

 

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 Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

Three and Six Months Ended June 30, 2012 and 2011

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2012			2011			2012			2011
Net revenues		$	46,708		$	37,595		$	90,727		$	69,469
Cost of revenues		40,350			30,811			78,030			56,632
Gross profit		6,358			6,784			12,697			12,837
Selling and administrative expenses:
Selling		1,229			1,010			2,056			1,991
Administrative		3,135			2,096			6,202			4,930
Total selling and administrative expenses		4,364			3,106			8,258			6,921
Gain on the sale/disposal/transfer of assets		460			22			1,378			23
Income from operations		2,454			3,700			5,817			5,939
Net interest income (expense)		(11		)	(15		)	(22		)	(26		)
Equity income (loss) of joint venture		(25		)	(184		)	66			(328		)
Other income (expense), net		253			(79		)	413			(79		)
Income before income taxes		2,671			3,422			6,274			5,506
Income tax expense		(868		)	(946		)	(2,024		)	(1,513		)
Net earnings		$	1,803		$	2,476		$	4,250		$	3,993
Basic earnings per share		$	0.13		$	0.17		$	0.30		$	0.28
Diluted earnings per share		$	0.13		$	0.17		$	0.30		$	0.28
Weighted average shares outstanding:
Basic		13,969			14,431			14,103			14,375
Diluted		14,046			14,493			14,171			14,470

 

See accompanying notes to condensed consolidated financial statements.

 

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Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

Three and Six Months Ended June 30, 2012 and 2011

(In thousands)

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2012			2011			2012			2011
Net earnings		$	1,803		$	2,476		$	4,250		$	3,993
Currency translation adjustment
Unrealized net change arising during period		(359		)	87			(40		)	417
Other Comprehensive Gain (Loss)		(359		)	87			(40		)	417
Comprehensive Income		$	1,444		$	2,563		$	4,210		$	4,410

 

See accompanying notes to condensed consolidated financial statements.

 

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Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2012 and 2011

(In thousands)

(Unaudited)

 

		Six Months Ended June 30,
		2012			2011
Net cash (used in) operating activities		$	(4,215	)	$	(183	)
Cash flows from investing activities:
Capital expenditures		(172		)	(2,036		)
Proceeds from sale of assets		3,043			74
Net cash provided by (used in) investing activities		2,871			(1,962		)
Cash flows from financing activities:
Purchase of treasury stock		(2,667		)	—
Proceeds from exercise of stock options		—			146
Excess tax benefits from share-based compensation		—			293
Proceeds from employee stock purchase plan		—			164
Net cash (used in) provided by financing activities		(2,667		)	603
Effect of exchange rate changes on cash and cash equivalents		(24		)	91
Net (decrease) in cash and cash equivalents		(4,035		)	(1,451		)
Cash and cash equivalents at beginning of period		39,889			22,250
Cash and cash equivalents at end of period		$	35,854		$	20,799

 

See accompanying notes to condensed consolidated financial statements.

 

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Ballantyne Strong, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

Three Months Ended June 30, 2012 and 2011
(Unaudited)

 

1.  Nature of Operations

 

Ballantyne Strong, Inc. (“Ballantyne” or the “Company”), a Delaware corporation, and its wholly owned subsidiaries Strong Westrex, Inc., Strong Technical Services, Inc., Strong/MDI Screen Systems, Inc., and Strong Westrex (Beijing) Trading Inc., design, develop, manufacture, service and distribute theatre and lighting systems. The Company’s products and services are sold to movie exhibition companies, sports arenas, auditoriums, amusement parks and special venues.

 

2.  Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and all majority owned and controlled domestic and foreign subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The condensed consolidated financial statements included in this report are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America for annual reporting purposes or those made in the Company’s Annual Report on Form 10-K.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year-ended December 31, 2011.

 

The condensed consolidated balance sheet as of December 31, 2011 was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary to present a fair statement of the financial position and the results of operations and cash flows for the respective interim periods.  The results for interim periods are not necessarily indicative of trends or results expected for a full year.

 

Use of Management Estimates

 

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results and changes in facts and circumstances may alter such estimates and affect results of operations and financial position in future periods.

 

Fair Value of Financial and Derivative Instruments

 

The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

·                  Level 1 - inputs to the valuation techniques are quoted prices in active markets for identical assets or liabilities

·                  Level 2 - inputs to the valuation techniques are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly

·                  Level 3 — inputs to the valuation techniques are unobservable for the assets or liabilities

 

The following tables present the Company’s financial assets and liabilities measured at fair value based upon the level within the fair value hierarchy in which the fair value measurements fall, as of June 30, 2012:

 

Fair Values Measured on a Recurring Basis:

 

		Level 1			Level 2			Level 3			Total
		$ in thousands
Cash and cash equivalents		$	35,854		$	—		$	—		$	35,854
Notes Receivable		$	—		$	—		$	2,212		$	2,212

 

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Quantitative information about the Company’s level 3 fair value measurements at June 30, 2012 is set forth below:

 

$ in thousands		Fair Value at June 30, 2012			Valuation Technique		Unobservable input		Range
Notes Receivable		$	2,212		Discounted cash flow		Probability of Default		0%
							Prepayment rates		0%
							Loss severity		0%

 

The significant unobservable inputs used in the fair value measurement of the Company’s notes receivable are prepayment rates, probability of default and loss severity in the event of default.  Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement.  Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and directionally opposite change in the assumption used for prepayment rates.

 

The following table reconciles the beginning and ending balance of the Company’s Notes Receivable fair value:

 

Balance, December 31, 2011		$	2,062
Issuances of new notes		150
Balance, June 30, 2012		$	2,212

 

The following table presents the Company’s financial assets and liabilities measured at fair value based upon the level within the fair value hierarchy in which the fair value measurements fall, as of December 31, 2011:

 

		Level 1			Level 2			Level 3			Total
		$ in thousands
Cash and cash equivalents		$	39,889		$	—		$	—		$	39,889
Foreign currency forward contracts		$	—		$	4,723		$	—		$	4,723
Notes Receivable		$	—		$	—		$	2,062		$	2,062

 

The fair value of the foreign currency forward exchange contracts is measured based on the total amount of currency to be purchased and forward exchange rates as of the period end. See footnote 9 for additional information on the Company’s foreign exchange contracts.

 

The carrying values of all other financial assets and liabilities including accounts receivable, accounts payable and accrued expenses reported in the consolidated balance sheets equal or approximate their fair values due to the short-term nature of these instruments.  All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is evidence of impairment).  During the six months ended June 30, 2012 we did not have any significant non-recurring measurements of nonfinancial assets or liabilities.

 

Current Year Adoption of Accounting Pronouncements

 

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Presentation of Comprehensive Income, which amends ASC 220, Comprehensive Income, by requiring all non-owner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance was effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2011. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers certain portions of ASU No. 2011-05 indefinitely and will be further deliberated by the FASB at a future date. The Company adopted the requirements of ASU 2011-05 by presenting a single Condensed Consolidated Statement of Comprehensive Income immediately following the Statement of Income.  There was no other impact on the Company’s condensed consolidated financial statements.

 

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  This update is intended to develop common fair value measurement and disclosure requirements and improve understandability.  The Company prospectively adopted the requirements of ASU 2011-04 with expanded disclosures related to its fair value measurements.  This update did not have a material effect on the condensed consolidated financial statements.

 

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Recently Issued Accounting Pronouncements

 

There are no recently issued accounting pronouncements which the Company believes will materially impact its consolidated financial statements.

 

3.  Earnings Per Common Share

 

Basic earnings per share have been computed on the basis of the weighted average number of shares of common stock outstanding. Diluted earnings per share has been computed on the basis of the weighted average number of shares of common stock outstanding after giving effect to potential common shares from dilutive stock options and certain non-vested shares of restricted stock. The following table provides the reconciliation between basic and diluted earnings per share:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2012			2011			2012			2011
(In thousands, except per share data)
Basic earnings per share:
Earnings applicable to common stock		$	1,803		$	2,476		$	4,250		$	3,993
Basic weighted average common shares outstanding		13,969			14,431			14,103			14,375
Basic earnings per share		$	0.13		$	0.17		$	0.30		$	0.28
Diluted earnings per share:
Earnings applicable to common stock		$	1,803		$	2,476		$	4,250		$	3,993
Basic weighted average common shares outstanding		13,969			14,431			14,103			14,375
Dilutive effect of stock options and restricted stock awards		77			62			68			95
Dilutive weighted average common shares outstanding		14,046			14,493			14,171			14,470
Diluted earnings per share		$	0.13		$	0.17		$	0.30		$	0.28

 

For the three and six month periods ended June 30, 2012 and June 30, 2011, options to purchase 50,000 shares of common stock were outstanding but were not included in the computation of diluted earnings per share as the option’s exercise price was greater than the average market price of the common shares for the respective periods.

 

4.  Warranty Reserves

 

Historically, the Company has generally granted a warranty to its customers for a one-year period following the sale of manufactured film projection equipment and on selected repaired equipment for a one-year period.  In most instances, the digital products are covered by the manufacturing firm’s OEM warranty; however, there are certain customers where the Company may grant warranties in excess of the manufacturer’s warranty for digital products.  The Company accrues for these costs at the time of sale or repair.  The following table summarizes warranty activity for the three and six months ended June 2012 and 2011:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2012			2011			2012			2011
(In thousands)
Warranty accrual at beginning of period		$	1,051		$	956		$	1,028		$	848
Charged to expense		98			74			223			226
Amounts written off, net of recoveries		(297		)	(77		)	(406		)	(126		)
Foreign currency adjustment		(6		)	8			1			13
Warranty accrual at end of period		$	846		$	961		$	846		$	961

 

5.  Digital Link II Joint Venture

 

On March 6, 2007, the Company entered into an agreement with RealD to form an operating entity Digital Link II, LLC (the “LLC”). Under the agreement, the LLC was formed with the Company and RealD as the only two members with membership interests of 44.4% and 55.6%, respectively. The LLC was formed for purposes of commercializing certain 3D technology and to fund the deployment of digital projector systems and servers to exhibitors.  Summarized financial data for the LLC is as follows (unaudited):

 

Balance Sheet		June 30, 2012			December 31, 2011
		(In thousands)
Current assets		$	2,405		$	3,758
Non-current assets		1,016			3,723
Current liabilities		699			1,890
Non-current liabilities		1,940			1,588
Equity		$	782		$	4,003

 

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		Three Months Ended June 30,						Six Months Ended June 30,
Statement of Operations		2012			2011			2012			2011
(In thousands)
Revenue		$	1		$	1		$	2		$	2
Cost of sales		(32		)	(359		)	(127		)	(642		)
Selling and administrative expenses		(25		)	(42		)	(26		)	(79		)
Operating income (loss)		(56		)	(400		)	(151		)	(719		)
Other income (expense)		(16		)	(34		)	410			(77		)
Net income (loss)		$	(72	)	$	(434	)	$	259		$	(796	)

 

The Company accounts for its investment by the equity method. Under this method, the Company recorded its proportionate share of LLC net income or loss based on the LLC’s financial statements as of June 22, 2012 and June 24, 2011, respectively.  The LLC uses four 13-week periods for a total of 52 weeks to align its fiscal year-end with that of its majority interest holder, RealD.  The Company’s portion of income (loss) of the LLC was approximately ($0.03) million and $0.07 million for the three and six months ended June 30, 2012.  The Company’s portion of loss of the LLC was approximately ($0.2) million and ($0.3) million for the three and six months ended June 30, 2011, respectively.

 

In the past, the Company sold digital theatre projection equipment, in the normal course of business, to the LLC.  The LLC in turn provides and sells the digital projection equipment to third party customers under system use agreements or through sales agreements. Revenue recognized by the Company on the sale transaction to the LLC is limited by its 44.4% ownership in the joint venture which will be recognized upon sale of the equipment to the third parties. There were no sales to the LLC during the three and six months ended June 30, 2012 and 2011.  However, the Company recognized $0 and $0.2 million of gross margin during the three and six months ended June 30, 2012, respectively, related to the LLC’s sale of equipment to third parties.  The total receivable balance due from the LLC was insignificant at June 30, 2012 and December 31, 2011. No revenue was recognized related to LLC transactions for the three and six months ended June 30, 2011.

 

During the first quarter of 2012 the Company received a $1.5 million return on the investment in the LLC.  The Company received no distributions from the LLC in the six months ended June 30, 2011.

 

6.  Corporate-wide strategic initiative

 

Restructuring

 

In the fourth quarter of 2011, the Board of Directors and management of the Company approved a corporate-wide strategic initiative to refocus its worldwide digital equipment distribution business, services platform and cinema screen manufacturing business. The strategic initiative consisted of selling the Company’s Omaha, Nebraska-based analog projector facility and manufacturing equipment and relocating its corporate headquarters to a new, smaller location in Omaha, which will also house its Network Operations Center. The Board and management determined that the best course of action for long-term success and future growth opportunities was to focus on its equipment distribution, cinema service and screen businesses while exiting the analog projector manufacturing business. Total life to date severance charges for the strategic initiative that began in 2011 are approximately $1.3 million.  The strategic initiative is expected to be completed by the end of 2012.

 

The following table reconciles the beginning and ending restructuring balance for the six months ended June 30, 2012 (in thousands):

 

Accrued severance at beginning of period		$	963
Severance Paid		(696		)
Accrued severance at end of period		$	267

 

Assets Held For Sale

 

In connection with the strategic initiative discussed above, the Company reclassified its Nebraska-based analog projector facility, corporate headquarters and manufacturing equipment to held for sale. The assets were recorded at their carrying value of $1.8 million at December 31, 2011 as it was lower than the assets fair value less costs to sell. The following table summarizes the assets held for sale at June 30 2012 and December 31, 2011:

 

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		June 30, 2012			December 31, 2011
		(In thousands)
Real Estate		$	—		$	1,696
Machinery and Equipment		—			114
Total		$	—		$	1,810

 

During the first quarter of 2012, the Company sold the analog projector manufacturing machinery and equipment previously classified as held for sale.  The equipment was sold in March 2012 for approximately $1.0 million, resulting in a gain of approximately $0.9 million.  In May 2012, the Company completed a sale leaseback transaction for the analog projector and corporate headquarters facility.  The net cash proceeds from the transaction was $2.0 million.  The Company leased the facility back at no cash rent through November 2012.  However, the $0.2 million estimated fair value of the lease will be recognized as rent expense over the lease period and was included in the net proceeds to calculate the $0.5 million gain resulting from the sale of the facility.  The Company is responsible for all taxes, utilities, insurance and other operational costs while it is occupying the facility.  In the event the Company remains in the building after November 2012, with the consent of the landlord, rent will be charged at 150% of fair market rental rates.

 

7.  Income Taxes

 

The effective tax rate (calculated as a ratio of income tax expense to pretax earnings, inclusive of equity method investment losses) was approximately 32.5% and 32.3% for the three and six months ended June 30, 2012, respectively, as compared to 27.6% and 27.5% for the three and six months ended June 30, 2011, 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 Company’s estimated annual effective rate was higher in the three and six months ended June 30, 2012 compared to the comparable periods of 2011 due to lower earnings before tax for the Canada and Asia operations, which have lower tax rates.

 

The Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant taxable authorities. The Company has examinations not yet initiated for Federal purposes for fiscal years 2005 through 2011. In most cases, the Company has examinations open for State or local jurisdictions based on the particular jurisdiction’s statute of limitations. The Company does not currently have any examinations in process. As of June 30, 2012, total unrecognized tax benefits amounted to approximately $0.2 million.

 

8.  Stock Compensation

 

The Company recognizes compensation expense for all share-based payment awards made to employees and directors based on their estimated fair values.  Share-based compensation expense approximated the following for the three and six months ended June 30, 2012 and 2011 (in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2012			2011			2012			2011
Share based compensation expense (benefit)		$	118		$	(3	)	$	279		$	95

 

Long-Term Incentive Plan

 

The Company’s 2010 Long-Term Incentive Plan (“2010 Plan”) provides the Compensation Committee with the discretion to grant stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, or performance units.  Vesting terms vary with each grant and may be subject to vesting upon a “change in control” of the Company. The total number of shares reserved for issuance under the 2010 Plan was 600,000 shares. During the six months ended June 30, 2012, the Company awarded 139,000 options and 56,000 restricted stock shares under the 2010 Plan.

 

Options

 

As noted above, under the 2010 Plan, the Company granted options to purchase 139,000 shares of the Company’s common stock during the six months ended June 30, 2012.  Options to purchase shares of common stock were granted with exercise prices equal to the fair value of the common stock on the date of grant and vest over a four-year period.  The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following assumptions:

 

Expected dividend yield at date of grant		0	%
Expected stock price volatility		57.0	%
Risk-free interest rate		1.3	%
Expected life of options (in years)		6

 

The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant.  The expected volatility was based on historical monthly price changes of the Company’s stock based on the expected life of the options at the date of grant.  The expected life of options is the average number of years the Company estimates that options will be outstanding.  The Company considers groups of associates that have similar historical exercise behavior separately for valuation purposes.

 

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The following table summarizes the Company’s activities with respect to its stock options for the six months ended June 30, 2012 as follows:

 

		Number of Options		Weighted Average Exercise Price Per Share			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2011		52,200		$	8.14		8.86		$	—
Granted		139,000		4.70
Exercised		—		—
Forfeited		—		—
Outstanding at June 30, 2012		191,200		$	5.64		9.19		$	180,710
Exercisable at June 30, 2012		16,667		$	8.32		8.33		$	—

 

The aggregate intrinsic value in the table above represents the total that would have been received by the option holders if all in-the-money options had been exercised on June 30, 2012.

 

The following table summarizes information about stock options outstanding and exercisable at June 30, 2012:

 

		Options Outstanding at June 30, 2012							Options Exercisable at June 30, 2012
Range of option exercise price		Number of options		Weighted average remaining contractual life		Weighted average exercise price per option			Number of options		Weighted average remaining contractual life		Weighted average exercise price per option
$4.07 to 8.32		191,200		9.19		$	5.64		16,667		8.33		$	8.32

 

Restricted Stock Plans

 

The Company’s 2005 Restricted Stock Plan (the “Plan”) provides for the award of restricted stock awards.  A total of 250,000 shares were reserved to be issued under the Plan.  These shares are subject to such restrictions on transferability and other restrictions, if any, as the Compensation Committee may impose. During the six months ended June 30, 2012, the Company awarded 28,210 restricted shares under the Plan, which shares vested and became unrestricted immediately.

 

The Ballantyne Strong, Inc. Non-Employee Directors’ Restricted Stock Plan (Non-Employee Plan) provides for the award of restricted shares to outside directors. A total of 250,000 shares are reserved for issuance under the Non-Employee Plan. During the six months ended June 30, 2012, the Company granted 28,200 restricted shares under the Non-Employee Plan to the Board of Directors. These shares will vest the day preceding the Company’s 2013 Annual Meeting of Stockholders.

 

As noted above, the Company awarded a total of 112,410 restricted shares under the 2010 Plan, the Plan and the Non-Employee Plan during the six months ended June 30, 2012.  In connection with the restricted stock granted to certain employees and non-employee directors, the Company accrues compensation expense based on the estimated number of shares expected to be issued utilizing the most current information available to the Company at the date of the financial statements. The Company estimates the fair value of restricted stock awards based upon the market price of the underlying common stock on the date of grant.

 

As of June 30, 2012, the total unrecognized compensation cost related to non-vested restricted stock awards was approximately $0.4 million which is expected to be recognized over a weighted average period of 2.5 years.

 

The following table summarizes restricted stock activity for the six months ended June 30, 2012:

 

		Number of Restricted Stock Shares		Weighted Average Grant Price Fair Value
Non-vested at December 31, 2011		12,600		$	5.93
Granted		112,410		5.16
Shares vested		(40,810	)	5.22
Shares forfeited		—		—
Non-vested at June 30, 2012		84,200		$	5.24

 

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Employee Stock Purchase Plan

 

The estimated grant date fair value of purchase rights outstanding under the Employee Stock Purchase Plan at June 30, 2012 was $3.43 per share using the Black-Scholes option-pricing model made with the following weighted average assumptions:

 

Expected dividend yield at date of grant		0	%
Expected stock price volatility		41.0	%
Risk-free interest rate		0.21	%
Expected term (in years)		1

 

The Company recorded insignificant share-based compensation expense pertaining to the stock purchase plan with insignificant associated tax benefits for each of the three and six months ended June 30, 2012 and 2011. At June 30, 2012, the total unrecognized estimated compensation cost was insignificant.

 

9.  Foreign Exchange Contracts

 

The Company’s primary exposure to foreign currency fluctuations pertains to its subsidiaries in Canada and China. In certain instances the Company may enter into foreign exchange forward contracts to manage a portion of this risk. The Company has not designated its foreign exchange forward contracts as hedges.

 

The following table presents the gross fair value of derivative instruments, all of which are not designated as hedging instruments:

 

				Asset Derivatives
(in thousands)		Classification		June 30, 2012			December 31, 2011
Foreign exchange forward contracts		Other current assets		$	—		$	4,723

 

The above fair value at December 31, 2011 is netted with $4.7 million in other current liabilities, resulting in a net amount of $7 thousand of net liability.  All cash flows related to our foreign currency exchange contracts are classified as operating cash flows.  We recognized in other income, the following realized and unrealized gains from foreign currency forward exchange contracts:

 

				Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)		Classification		2012			2011			2012			2011
Foreign exchange forward contracts		Other Income (Loss)		$	6		$	(66	)	$	162		$	(17	)

 

See Note 1 for further information related to the Company’s foreign exchange forward contracts.

 

10.  Commitments, Contingencies and Concentrations

 

Concentrations

 

The Company’s top ten customers accounted for approximately 55.8% and 57.8% of total consolidated net revenues for the three and six months ended June 30, 2012, respectively, and were from the theatre segment. Trade accounts receivable from these customers represented approximately 45.6% of net consolidated receivables at June 30, 2012. Sales to CDF2 Holdings, LLC represented approximately 20.9% and 18.2% of consolidated sales for the three and six months ended June 30, 2012, respectively. Additionally, receivables from this customer represented approximately 27.8% of net consolidated receivables at June 30, 2012, respectively. While the Company believes its relationships with such customers are stable, most arrangements are made by purchase order and are terminable at will by either party. A significant decrease or interruption in business from the Company’s significant customers could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company could also be adversely affected by such factors as changes in foreign currency rates and weak economic and political conditions in each of the countries in which the Company sells its products.

 

Financial instruments that potentially expose the Company to a concentration of credit risk principally consist of accounts receivable. The Company sells product to a large number of customers in many different geographic regions. To minimize credit concentration risk, the Company performs ongoing credit evaluations of its customers’ financial condition.

 

Leases

 

The Company and its subsidiaries lease plant and office facilities, furniture, autos and equipment under operating leases expiring through 2023. These leases generally contain renewal options and the Company expects to renew or replace certain of these leases in the ordinary course of business.

 

The Company’s future minimum lease payments for operating leases are as follows:

 

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		Payments due by period ($ in thousands)
		Total			Remainder 2012			2013			2014			2015			2016			Thereafter
Operating leases		$	4,229		$	174		$	506		$	524		$	342		$	353		$	2,330

 

11.  Business Segment Information

 

As of June 30, 2012, the Company’s operations were conducted principally through two business segments: Theatre and Lighting. Theatre operations include the sale and service of digital projection equipment, sound systems, xenon lamps, lenses and other accessories. The lighting segment operations include the design, assembly and sale of follow spotlights, stationary searchlights and computer operated lighting systems for the motion picture production, television, live entertainment, theme parks and architectural industries. The Company allocates resources to business segments and evaluates the performance of these segments based upon reported segment operating profit.  All significant intercompany sales are eliminated in consolidation.

 

Summary by Business Segments

 

		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)		2012			2011			2012			2011
Net revenue
Theatre
Products		$	42,749		$	33,783		$	82,401		$	62,381
Services		3,299			2,923			6,964			5,392
Total theatre		46,048			36,706			89,365			67,773
Lighting		660			889			1,362			1,696
Total revenue		$	46,708		$	37,595		$	90,727		$	69,469
Operating Income (Loss)
Theatre
Products		$	3,655		$	4,951		$	7,479		$	8,789
Services		497			161			1,088			407
Total theatre		4,152			5,112			8,567			9,196
Lighting		(196		)	54			(213		)	116
Total segment operating income		3,956			5,166			8,354			9,312
Unallocated general and administrative expenses		(1,962		)	(1,488		)	(3,915		)	(3,396		)
Interest, net		(11		)	(15		)	(22		)	(26		)
Gain on sale of assets		460			22			1,378			23
Equity income (loss) of joint venture		(25		)	(184		)	66			(328		)
Other income (loss)		253			(79		)	413			(79		)
Income before income taxes		$	2,671		$	3,422		$	6,274		$	5,506

 

Summary by Geographical Area

 

		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)		2012			2011			2012			2011
Net revenue
United States		$	39,234		$	27,742		$	77,525		$	48,127
China		4,880			4,708			7,998			12,346
Canada		1,032			901			2,413			1,299
Asia (excluding China)		605			991			1,006			1,489
Mexico		145			573			395			1,453
South America		459			1,699			602			2,961
Europe		175			499			342			1,110
Other		178			482			446			684
Total		$	46,708		$	37,595		$	90,727		$	69,469

 

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		June 30, 2012			December 31, 2011
		(In thousands)
Identifiable assets
United States		$	71,750		$	80,885
Canada		18,964			17,671
Asia (excluding China)		7,406			6,963
China		7,801			7,937
Total		$	105,921		$	113,456

 

Net revenues by business segment are to unaffiliated customers. Identifiable assets by geographical area are based on location of facilities. Net sales by geographical area are based on destination of sales.

 

12.  Subsequent Events

 

In July 2012, the Company was notified by the Chinese Customs Authority (the “Authority”) that they will be reviewing the Company’s 2010 tax filings for outstanding Value Added Tax (VAT) due to the Authority.  The Company is currently assessing the situation and is unable to determine the impact, if any, there will be to the financial statements.  However, the Company believes it has all significant VAT taxes appropriately accrued in the financial statements at June 30, 2012.

 

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