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Ballantyne of Omaha, Inc. (NYSEMKT:BTN)

Q1 2007 Earnings Call

May 4, 2007 11:00 am ET

Executives

John Wilmers - President & CEO

Kevin Herrmann - CFO

Analysts

Marla Backer - Soleil Research Associates

Michael Kim - Imperial Capital

Jeff Thomison - Hilliard Lyons

Walter Winnitzki - Nicusa Capital

Rick Fetterman - Fetterman Investments

George Nuni - LAR Management

TRANSCRIPT SPONSOR
Ballantyne of Omaha Logo

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ballantyne of Omaha 2007 First Quarter Conference Call.

This conference call will contain statements that are forward-looking statements relating to the future financial results of Ballantyne of Omaha. Listeners are cautioned that such statements are based upon current expectations and assumptions and involve certain risks and uncertainties within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.

Listeners should note that these statements are only predictions. They are subject to inherent risks and uncertainties, and maybe impacted by several factors, including but not limited to, 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 achievement of lower costs and expenses; credit concerns in the theatre exhibition industry and other risks detailed from time-to-time in the Company's other Securities and Exchange Commission filings.

The Company's actual performance and results could differ materially because of these factors and other factors discussed in the management's discussion and analysis of results of operations and financial condition section of the Company's SEC filings, copies of which can be obtained from the SEC website, www.sec.gov or Ballantyne of Omaha's website, www.ballantyne-omaha.com.

All information in this conference call is as of today and the Company undertakes no obligation to update these statements or to update expectations from prior conversations.

I would also remind listeners that this call is being webcast live over the Internet, and that a replay of the call will be available on Ballantyne's corporate website for 30 days after the call ends.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session (Operator Instructions).

I would now like to turn the conference over to Mr. John Wilmers, President and Chief Executive Officer of Ballantyne of Omaha. Please go ahead.

TRANSCRIPT SPONSOR

Ballantyne of Omaha Logo

Ballantyne of Omaha (ticker: BTN) supplies commercial motion picture and specialty projection equipment utilized by major theater chains and location-based entertainment providers. The company also makes, rents and leases specialty entertainment lighting products.

To sponsor a Seeking Alpha transcript click here.

John Wilmers

Thank you operator. Thank you all for joining today's 2007 first quarter conference call. Kevin Herrmann, our CFO is with me here today. I will first provide an initial overview of the first quarter of '07 and then handoff the call to Kevin who will review a few key points of this quarter's financials and then open the call to Q&A.

So lets get started. The first quarter of '07 was a very encouraging start for the year, highlighted by a substantial increase in the volume of both digital cinema sales, as well as a significant level of activity in our cinema services business. Importantly, a contribution from Strong Technical Services subsidiary, STS, launched less than a year ago, helped to bring first quarter net revenue slightly ahead of those in the period a year ago.

Our Strong Digital Systems business, SDS, completed the sale of 93 projectors in the quarter, substantially ahead of the full year of shipments in 2006. As we have disclosed, 83 of those projectors were sold and installed pursuant to the rollout of the REAL D 3-D technology and in conjunction with the release of Disney's 3-D animated film Meet the Robinsons.

The bulk of the projectors were installed for Regal Cinemas, a major long-term customer of Ballantyne, as well as three additional exhibitors that were added to the program. Though the agreement was complex and Ballantyne agreed to contribute its 44% of the capital cost for the 83 projector installation, we believe the agreement was beneficial for Ballantyne on a number of competitive and customer service fronts.

The sales was completed at a margin inline with our targeted ranges. It substantially expanded our footprint of deployments. It prevented the competition from securing the installations with the major customer, and it enabled us to demonstrate our ability and commitment to deliver top quality equipment installation and service.

Finally, and like a previous contract, where we funded the entire cost of the projectors, our financial commitment was kept below 50%. Strong Technical Services was also active in the quarter with a contract to install 25 projectors for technical. This agreement is significant and that it demonstrates the demand for digital services outside of our projector sales activity.

STS also supported the installation of 83 projectors that were sold by SDS during that period. The installations provided an invaluable trained opportunity for our technical team helping to prepare them for future engagements. Our greatest importance in this activity is our belief that our customers are very pleased with the equipment and service they have received from Ballantyne.

We continue to view service and customer satisfaction as our key competitive factors in this industry, and in these early stages of the digital rollout we are investing significant resources to ensure complete customer satisfaction. We remain committed to building out our service group, both geographically and in its technical understanding so that we retain a leadership position in the market.

As expected, sales within our traditional film based equipment business decline versus the prior year reflecting the impact of the ongoing transition to digital. Excluding the sale of reconditioned units, traditional projector unit sales in quarter one ’07 were a 193 versus sales of 238 units in the prior year.

We continue to reduce cost in this legacy business as possible while still positioning ourselves to meet the product and parts needs of our customer base. Ballantyne’s goal is to secure a substantial piece of the digital cinema products and services opportunity, and we are pleased with our progress thus far.

As for the question of when the ramp begins? We can only repeat what we are hearing in the marketplace and the common wisdom is that there will continue to be a modest level of activity throughout the year building toward the larger beta test by major exhibitors and our funding plans slated for the late fall early winter.

Our efforts this year are largely focused on being well prepared for that opportunity. From there we would anticipate a rollout of large-scale deployments starting in 2008. We are managing our business and building our service team to meet this expected timing.

Now let me turn the call over to Kevin, our CFO who can discuss our quarterly results in a more detail and review our REAL D deployment structure.

Kevin Herrmann, Chief Financial Officer

Thanks John. Just a few comments on the P&L before I move on to review the unique structure of our digital projector sale in conjunction with REAL D. As we indicated in today's news release, $1.3 million contribution from our new service business, Strong Technical Services combined with some digital projector sales helped to bring total Q1 revenue above the year ago level.

Gross margins declined year-over-year in Q1 and as in past quarters reflected decline in our traditional film products business, as well as from the impact of lower margin distribution revenues. Although we continue to take cost out of the traditional business, we still feel the impact on the gross profit line as those revenues decline. However, I should note, that the gross margin was higher in the period than we had anticipated as production demand exceeded our expectations.

Finally, our service gross margins are hampered to a degree by the early stage of nature of that business and its related overhead. SG&A expenses amounted to $2.2 million, a modest increase over the year ago level of $2.1 million, primarily reflecting additional cost related to the STS operation, which offset some cost reduction efforts.

Let me now turn to the unique structure of our projector shipment in conjunction with REAL D. As we had reported to fund the cost of these projection systems and their installation, we formed Digital Link II, LLC with REAL D as a majority holder and Ballantyne with the 44% stake in the entity. Effectively we sold the equipment and provided the installation to the LLC and invested approximately $2.4 million to fund the equipment purchase.

Given the structure, Ballantyne did not recognize any revenue from the sale. However, we were able to book our share of the gain on the sale of the equipment to the entity. That gain of approximately $233,000 as reflected as a line item in our Q1 P&L, and also net of our 44% ownership in the LLC. When you back into these numbers, as I know you will, you will see our profit margin on the sale, fell inline with our targeted 7% to 10% gross profit range.

Going forward as the LLC recoups it’s investment we are virtual pantries and or through the outright purchase of the equipment by the exhibitor. We will receive our pro rata share of any funds received less admin expenses, which go to REAL D, that cash received will not be reflected as revenue but as a return of capital in the future.

Importantly, there are purchase clauses in the contract that would require the exhibitor to purchase the equipment outright. Such purchases attributed by the exhibitor’s rollout of digital projection equipment beyond the specified percentage of screens at each theater complex, where installations were made. As we fully expect the rollout to occur, this provision gives us comfort that our capital will ultimately be returned.

In the end, as John reviewed the structure enabled us to tie-up these installations with our equipment, retain a strong position with key customers and demonstrate our expertise and capabilities in the digital round.

Turning now to the balance sheet, where our cash position was $23.1 million at March 31st, compared to $22.6 million at December 31. This increase was achieved in spite of our investment in the Digital Link II entity.

Other notable balance sheet changes included $1.3 million increase in accounts receivable, which really just reflects the timing of certain sales and collections as well increases in inventory and accounts payable, principally reflecting purchases from NEC to supply projectors for past and future projects. Given the accounts payable position relative to smaller increases in inventory in AR, we are expecting a decrease in cash in the second quarter.

With that, I’ll turn the call back to John for some final remarks on the business.

John Wilmers

Thanks Kevin. One final comment before we open the call to questions. I want to address the issue of our excess cash and our acquisition program where I am devoting the substantial amount of my time.

We remain very active in our acquisition review and have a few key prospects in our sites. All of the businesses we are looking at our complementary to our traditional and digital cinema business and distribution channels and we expect would be accretive to earnings.

Additionally, at this point besides the targeted acquisitions as modest, relative to scope of our existing business with anticipated cash purchase prices ranging from $3 million to $6 million. However, we would not rule out a larger transaction should one present itself down the road.

We continue to view such transactions, has been the best and highest return use of our excess cash and we look forward to report into Tier One this process in the coming months and quarters. At this point, we cannot provide any further detain on this initiative.

Now I would like to open the call with any questions you may have. Operator, would know how to proceed with the Q&A session?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Marla Backer of Research Associates. Please go ahead.

Marla Backer - Soleil Research Associates

Thank you. Hi guys great quarter.

John Wilmers

Thank you.

Marla Backer - Research Associates, Soleil

You mentioned that the original 75 projector order which came -- I recall came from Regal. You mentioned it was expanded to include three new exhibitors. Okay, can we get a little bit more color on that expansion?

First of all, I guess one thing is, would you be willing to say who the exhibitors were, but short of that, are these new customers do these represents potentially new customers as digital upgrade proceeds?

John Wilmers

Well Marla, remember that basically everyone in this industry is our customer either by new equipment and/or parts as we talked about the past. But, the people added to this were Harkins Theaters in Phoenix area, Classic Cinemas in the Chicago area, and Santiago’s Cinemas.

They all have been our customers to some degree in the past. So, and again as I said we have such an install base everyone out there is our customers.

Marla Backer - Research Associates, Soleil

Right but, but…

John Wilmers

I can say they’re new customers frankly.

Marla Backer - Research Associates, Soleil

But was this their initial -- their initial testing of digital equipment?

John Wilmers

I believe. I really, I know it is for Classic, but we’re only talking of two there. I am not positive on the Harkins deal whether they have any other digital product in their theaters.

Marla Backer - Research Associates, Soleil

But basically it looks like we’re starting to see at least some data testing at some of -- mid size and smaller circuits at this point. So, I mean it basically just look positive, I think?

John Wilmers

Definitely. And remember, we’re talking to all of our customers. We’re talking to the, obviously to the DCIP partners, of course. We are talking to the cinema-buying group other than National Association of Theater Owners and all of these people. So, they’re the pass-way for us to the smaller independent exhibitor, as appose of the large circuit such as DCIP, the Regal’s and AMC’s.

Marla Backer - Research Associates, Soleil

Okay. And then one other question, a follow up question on the Digital Link. You said that you would recognize revenue there either as the exhibitor’s purchase equipment or as the VPF revenue comes in...

Kevin Herrmann

Marla, this is Kevin. We are not saying that we’re going to recognize the revenue.

Marla Backer - Research Associates, Soleil

No, do not make it revenue, no sorry I that miss spoke not recognize revenue, but you will recognize your share as a return on capital.

Kevin Herrmann

Fair enough.

Marla Backer - Research Associates of Soleil

Okay. So my question is those systems when installed specifically for Meet the Robinsons, which was 3-D, would we expected to see any VPS is come in on non-3-D format?

John Wilmers

Yes. This is both 3-D and 2-D.

Marla Backer - Research Associates of Soleil

Okay.

John Wilmers

And the you know very simply we provided the funds, we bought the equipments Digital Link II provided the equipment to the cinemas with Put/Call agreement what it does is that the theatre company is compelled to buy the equipment after they install more than one third of that cinema with digital equipment. At that time they buy it fair market value, which is calculated as the original cost less any VPS that have paid toward it over the period of time.

Marla Backer - Research Associates of Soleil

Okay. Thank you.

John Wilmers

Thank you.

Operator

Our next question comes from the line of Michael Kim (ph) of Imperial Capital. Please proceed with the question.

Michael Kim - Imperial Capital

Hi John, hi, Kevin how you guys are you doing?

John Wilmers

Just fine. Thank you.

Michael Kim - Imperial Capital

Nice quarter and just a couple -- hoping you can apply little more color on Technicolor and that installation there, what are your expenses on that, how that might expend in the next couple of quarters and also you just talk about some general feedback you got post launch with the in front of Meet the Robinsons.

And what other movies or events you could see driving similar type installation levels in over the next couple of quarters? Thanks.

John Wilmers

Well with Technicolor obviously we did for them was integration and installation. As, I am sure you most of you all know we do make a small part we manufacture small part of the system being the pedestal what we did for Technicolor is they shift to us certain components and we installed them in the pedestals that we create and than we coupled them with our machines and send them to the sites. And then did the installation for them.

So its what we always wanted to do with the Technicolor plan while with any of the other plans we want to be provider of the product and we want to integrate the product and we want to install and service the product going forward. As far as the…

Michael Kim - Imperial Capital

Does that mean that you have a sort of on going service arrangement for them for the rest of the year or that are occurring…

John Wilmers

Well it’s a, it should be a recurring. We went through process with them quoting our Q and they gave us this particular part of that business and we fully expect to continue to do that for them going forward. As far as after this that Meet the Robinsons I guess that the thing to say as we found as I mentioned earlier that everyone was happy as far as we know with the installation, the performance of the equipment, and everything that went along with that.

And as far as what might else come forward over the year, we talked always about the data programs that are have been talked about coming at the end of the year and then they rollout next year we also have a couple of more 3-D projects coming out we got a concert by U2 that’s a getting a lot of talk and the lot of hype and we expect to see some additional 3-D types screens for that.

There is also another couple of films coming out in the fall that are predominantly going to be in 3-D. So those opportunities in the 3-D area along with the opportunity for the beta tests, and the rollout coming into 2008.

Michael Kim - Imperial Capital

Okay. Great. And then just in terms of near term business, obviously, analog is still very important part of your business there. Can you talk about how many recondition units you were able to ship during the quarter, and also from an overall standpoint, if you see you know, the rest of the year is seeing similar deliveries in film projectors as we saw in the first quarter?

John Wilmers

Yeah, in the first quarter, we shipped the total of 245 projectors. And as I mentioned, there were 193 that were new so the balance are recondition machines. We expect we still have a number here, but they all have purchase orders against them.

So, we expect to be shipping the rest of them, as we go forward throughout the balance of the year. We expect that but all indications are that our mechanical or analog business will continue at a space that -- at a fix pace that basically was demonstrated in the first quarter.

We have said before that, we thought that our total performance in the mechanical business this year would be somewhere similar to last year in 900 to 1000 piece or machines. And we’re seeing the first quarter kind of support those numbers. So, we are confident that, that’s going to continue through the end of the year.

Michael Kim - Imperial Capital

And that was that mix, primarily going more international or do you see it going more international or is it…

John Wilmers

We remained pretty consistent at domestic or pretty consistent at 30%, 25 to 30% of the business been international. This the recondition units and the mechanical units that we are selling are basically going in the U.S. I mean as 70, 30 clip basically.

Michael Kim - Imperial Capital

Okay. Great. Awesome. Well, thanks very much. And next quarter.

John Wilmers

Thank you, Michael.

Operator

Our next question comes from the line of Jeff Thomison of Hilliard Lyons. Please proceed with your question.

Jeff Thomison - Hilliard Lyons

Thank you. Good morning, John and Kevin.

John Wilmers

Good morning.

Kevin Herrmann

Good morning

Jeff Thomison - Hilliard Lyons

You know I think arguably Ballantyne is becoming an interesting balance sheet story as much as anything else and perhaps you could review with us your owned property plan equipment, there in Omaha and anywhere else?

And then also what kind of rate are you earning on your 23 million in cash and then I don’t know if you touched on this Kevin or not, but what was the swing in the other income expense item?

Kevin Herrmann

Okay, well. I guess getting back to your first question on the fixed assets. Obviously, yes, but John and I were looking at on a continuous basis as we transition to being more of a distributor. What we do with the assets that are related to the film products and what to do going forward.

And importantly, you still need a building to do the distributor and to do the integration that were going on right now, and much of the equipment is fully depreciated in parts of the equipment we paid for it all, we owned the building, we owned it half right.

And so as we look forward, it’s hard to generate cash flow from these assets and that could be through releasing opportunities, you know, that could be through a number of different ways of looking at it. So without getting into a lot specifics a lot of our assets are in good shape right now.

It just, as we plan for the future, what's the best way to monetize them.

John Wilmers

Yeah. One other things we got there Jeff, is basically reducing our footprints here in this facility, which is 160,000 square feet and basically looking at leasing the other part of it as Kevin said we've looked into any number of things like go into smaller facilities and everything, but all of our study show that the fact that we own this place, we own the land, we own everything here, that we wouldn't want to get, you know, the right direction is to utilized this place for our ongoing business along with expanding other ways of using the property as opposed to moving out of it.

We also have the facility over in Fisher, Illinois, and that makes a very key part of our business. Our Film business and we’re looking at that situation over there and going to make a decision very soon on how we're going handle those assets.

So, I think what Kevin said is right, this is day-to-day for Kevin and I in terms of looking at the what is now here and under utilize facility, but if we as I said shrink the footprint we use, we can probably and we've look to what local realtors and look at ways of generating some revenue from other unused parts of the building.

Jeff Thomison - Hilliard Lyons

And how much land do you have there?

John Wilmers

Well, 12 acres.

Jeff Thomison - Hilliard Lyons

Okay. And what about the cash return?

Kevin Herrmann

Yeah. As far as the cash, a lot of the cash is invested in municipal as commercial paper. And so well the effective rate maybe look low, we don't have to pay federal income taxes on that.

Jeff Thomison - Hilliard Lyons

Right.

Kevin Herrmann

So, it's kind of skew for a little a bit, but most of the rates are in the 4% to 5.5% range and than on top of that we may get the extra benefit of not having to pay federal taxes on it, which is obviously very significant.

So, we've been actually pretty pleased with the banking firm that we're using, that really help us monetize that rate may not be in the form of an actual rate that you can state. If you have the effective rate it's pretty significant.

Jeff Thomison - Hilliard Lyons

I think what's a fair 4% to 5% easily that we were receiving on that?

Kevin Herrmann

Yeah. And I believe you had a question on the other income and expense.

Jeff Thomison - Hilliard Lyons

Right.

Kevin Herrmann

Yeah. That account is really use for non-operating cash receipts, and items like cash discount. This quarter, we did have some higher cash discounts in a year ago, it's really just due to the timing of, which customer you're selling to, and what products you're selling to them.

And then I believe last year, we did have a few non-operating sales that we made of some items that we never sell before, they may have done some inventory or something like that, that we sold under there, nothing significant, there’s not really due to one particular item. Only the cash discounts will play the biggest swing from year-to-year.

Jeff Thomison - Hilliard Lyons

Okay.

John Wilmers

I think that we cover everything.

Jeff Thomison - Hilliard Lyons

I think so.

John Wilmers

Okay.

Jeff Thomison - Hilliard Lyons

I may come back. But that's good.

John Wilmers

Okay. Thanks.

Operator

(Operator Instructions) Our next question comes from the line of Walter Winnitzki of Nicusa Capital. Please proceed with your question.

Walter Winnitzki - Nicusa Capital

Hi, John. Hi, Kevin.

John Wilmers

Hi, Walter. Good morning.

Walter Winnitzki - Nicusa Capital

Got two questions. Kevin, first an easy one, maybe if you can remind us what the STS contribution was in Q4, that will be helpful?

Kevin Herrmann

All right. I believe they did $1 million around $1 million in total revenues in fourth quarter.

Walter Winnitzki - Nicusa Capital

Okay.

Kevin Herrmann

So, obviously the upswing between the fourth quarter and the first quarter. This is primarily due to the Meet the Robinsons, and the Technicolor where we didn’t have the last year and all of the service revenue is being recorded on STS.

Walter Winnitzki - Nicusa Capital

Okay. Good. John, maybe if you step back and review with us maybe some of the feedback that you’ve gotten from some of your largest exhibition companies maybe specially the DCIP partners relative to kind of, their selection of hardware suppliers on the projector side, they are all doing data test kind of.

What you think when that’s going to be made or they are likely to go with one or have multiple sources, any feel for when they are going to share with you rollout plans, they have all talked about Q4 for new install builds and Q1 they are going to begin for reconverting, and any feel or when will you get some kind of feel for kind of what their mechanical needs they are going to look like for in 2008, my sense is probably, it will be somewhere below that 900 to 1000 figure but, I’ll just ask you about that?

John Wilmers

Well, I think number one, I think its, the next time we meet after the second quarter I would be really be able to answer that much better, only because we feel that the, we’re going to start hearing in June what specifics about this projected roll out in the fourth quarter or third and fourth quarter of this year.

They are all very much aware that they want to get in line, the product is available and the services that are going be required to put them in. So, I think the best thing for me to say is, on the next call I think we’re going be able to be a lot more positive about when and the numbers and who is going to be using what.

Having said that, we’re working with the DCIP, we’re working with all three of their partners. Obviously we did a lot of work for Regal on this last one, the 75 machines and also if you go back and remember Monster House last year where we did another 12 with them.

So, if you looked at the footprint, you’d say wow, you guys are pretty entrenched at Regal. And, but we also have machines in Cinemark, obvious not as many as we do have in the other one. And AMC, we continue to work with them on what they are going to be using going forward.

So, I think to sit and say this guy is going to go all with us, this guy is going all with Christie or Barco. I think, I don’t think anyone could say positively or really. We feel confident about our position, as we’ve always felt with all three of these guys.

And we feel more confident with one, than others of course. But one or the other, yes we do. But we feel very confident that we will have, I hate to say that, but our players share of a business from all three of those guys.

And in addition to that we also feel very confident about the independence around the country and the cinema buying group people and those kinds of splinter type groups other than the big guys. We feel very good about position with them. So, I think the answer to question I can tell you anything positive about how much of this guy were going to get or how much of that guy.

We feel confident but after the second quarter when we meet again, I think we will really have a much better handle on this whole data situation. Because they all know they need to get orders well in advance of this occurring so. I think that would be the most prudent way of addressing that and then dealing with it. I think we’ll have a lot more to say next time.

Walter Winnitzki - Nicusa Capital

Okay. You also have better inside as to what they are you going to do with your mechanical orders?

John Wilmers

Yes, well, through out this year if we just pick the big guys, all three of those people that we talked about, the big guys the DCIP guys are all buying mechanical machines from us this year through and we have orders going through the end of the year.

Now that doesn’t mean at the end of the third quarter they don’t say A guys, we’re going to change that now to digital. You know, and this sort of thing. But right now, what we see is that playing out this year the mechanicals will continue to shipped to all three of those large customers.

Next year, of course, I would think if in fact it rolls, as everyone is saying it is, then we’re going to see a decrease in the mechanical business. There is no way around it because a lot of these machines that we shipped in the first quarter and that we’ve shipped in the previous months, April, have been to those three large customers so, we’re still selling the mechanical machines to these guys.

But next year of course, if we have a change and we do start the rollout as everyone has suggested, it will decrease.

Walter Winnitzki - Nicusa Capital

Okay, great. Thanks.

Operator

Our next question comes from the line of Rick Fetterman of Fetterman Investments. Please proceed with your question.

Rick Fetterman - Fetterman Investments

Good morning John and Kevin.

John Wilmers

Good morning.

Rick Fetterman - Fetterman Investments

Do you expect significant number of future transactions that are going to be similar to the digital link or the outright financing that you did last year or do you think that these are more one off?

John Wilmers

Well, as we said Rick that isn’t our intension. We don’t really look to do that. It was done as we mentioned for strategic reasons. We’d certainly like to do it as trade out sales. That’s what our intension is, but I am not going to shut the door now.

We’ve got a couple more 3D things coming out before the end of the year. And lets see how our customers react the major ones to that and then we will make the decision then. But it’s not our intent, that’s not our long-term plan. This is an interim thing to basically take care of our major customers.

Rick Fetterman - Fetterman Investments

With respect to the digital link transaction, was there actual $2.4 million cash out of pocket or was this a contribution, not a contribution but of the equipment by any see and exchange for getting the virtual print fees or the ultimate sale fees when that money comes back?

John Wilmers

I just start by saying, yes it is cash moved in, it’s one of the things we’ve been struggling with the last few days because of our auditors and how they caused us or made us treat it. So let me, go ahead and tell him Kevin how it were. It was actually cash that went in to the LLC.

Kevin Herrmann

Yes Rick, I think you’ve got a look at the accounting treatment versus the economic treatment. And it was a normal sale like you normally would, but we sold equipment to Digital Link they paid us for -- Digital Link paid us this for the equipment and then we turned around and contributed 44% back into the LLC to pay for all of this.

And so what you’re seeing on the account and the cash flow statement and in our financial statement is something different and that’s really the accounting treatment so, it was cash we are getting cash back in, but we end, at the end of the period we did invest $2.4 million of cash back into that LLC.

Rick Fetterman - Fetterman Investments

All right. I understand and thank you.

Kevin Herrmann

You welcome.

Operator

Our next question comes from the line of George Nuni from LAR Management. Please proceed.

George Nuni - LAR Management

Hello, I just have a quick question with regard to the LLC and related to what just discussed. First of all, I was wondering where the investment in the LLC was on the balance sheet I understand you showed in the list?

Kevin Herrmann

Yeah, on the balance sheet that you’re going to see in the QA, it is a normal and it’s going to show it’s an investment and this is and it’s a long-term investment.

George Nuni - LAR Management

Okay so, its, its just not listed in the press release and now it is a selected item.

Kevin Herrmann

It is not listed in the press release, if you look at the cash flow statement is down below you’ll see a non-cash investing activity that $2.3 million or $2.4 million that’s the amount of the investment that’s going to be sitting on our balance sheet at the end of first quarter.

George Nuni - LAR Management

Okay fine. And you’ll be accounting for that investment under the equity method.

Kevin Herrmann

Yes.

George Nuni - LAR Management

All right, and then, is that…

Kevin Herrmann

Earnings or loss going forward will take our for our other share.

George Nuni - LAR Management

All right. And the LLC will be recording the virtual print fees as income.

Kevin Herrmann

The LLC will be recording that is income since we are using the equity method of accounting, now that and only flows down to us on the basis of the net income.

George Nuni - LAR Management

Right.

Kevin Herrmann

With the LLC. However, the way this is structured, its structured and I have a lot of profits or loss going forward, because any virtual print fees they come in the door really decrease the amount of future cash at the LLC gets feedback from the exhibitor. So, it’s going to be kind of wash, or we are going to receive the virtual print fees, like I mean offsetting depreciation expense amount and an offsetting admin cost that to Real D.

In the end, the benefits from the virtual print fees are that it returns our capital faster to us and it also lessens the amount of exposure to the exhibitor they don’t have to pay as much for the equipment or whoever they are funding plan is on the future.

George Nuni - LAR Management

All right. Any if the share market value that they eventually pay for it, will it be the fair market value at that point in time or the original invoice price.

John Wilmers

John, It’s the original cost less the virtual print fees received from the studios and also net of any admin cost paid back to Real D.

George Nuni - LAR Management

All right I suppose at that point in time then the LLC will have gain on the sale for the depreciation taken right?

John Wilmers

Well no, I guess back to that there is no really no gain I mean there could be some small gains and losses here, but because the exhibitor is not going to pay, he is going to pay less for each virtual print fees that happens now it’s kind of wash.

George Nuni - LAR Management

Yeah.

John Wilmers

That wouldn’t anticipate a lot of gain or loss on this joint venture that LLC going forward.

George Nuni - LAR Management

Okay.

John Wilmers

We made the money on the sale and basically this is a, this is called you know, the quick call, where the cinema when they do, do over a third of their machines in that cinema as a, with digital machines then they are compelled or if sooner they want to buy the equipment they can do so, less those virtual print fees paid against that versus the original cost.

George Nuni - LAR Management

Okay, great. Thank you very much.

John Wilmers

Thanks.

Operator

(Operator Instructions) We do have a follow up question from the line of Rick Fetterman - Fetterman Investments. Please proceed.

Rick Fetterman - Fetterman Investments

Hello. Is there a maintenance and service agreement that went along with the 83 projectors sold under the Digital Link arrangement?

John Wilmers

We are still in the process of negotiating that Rick with Regal Cinemas. I’ll bring you back to the Monster House last year and we negotiated an agreement with Regal and we expect to do the same here.

Rick Fetterman - Fetterman Investments

All right. Thank you.

Operator

Mr. Wilmer, there are no further questions at this time. I will turn the conference back over to you to continue with your presentation and closing remarks.

John Wilmers

Okay. Thank you all for your participation today. We are very pleased with our progress in positioning the company for the digital cinema opportunity.

Though we are and others in the industry have helped to initialize the market in the early stages by providing some of the underlying funding for digital employments as in our Digital Link program. That’s not our long-term strategy as I mentioned earlier.

Accordingly the progress of the funding plan that will support the roll out of the digital cinema is critical component to future growth of this future growth opportunity and we believe that funding is no track.

As the footprint of digital cinema continues to expand and it’s benefits are increasingly efficiently appreciated by exhibitors, tomb studios and even audiences the opportunity for our company gains scope.

In our view the digital cinema concept has been clearly proven and it underscores the substantial opportunities still to come. We believe that it is our company’s role to be a leader in the digital cinema revolution and we’re working each day to maintain that position.

Thank you again for your interest and we look forward to speaking to you again after the next quarter. Thanks very much.

Operator

Ladies and Gentlemen, that does conclude the conference call for today. We thank you for participation and after you please disconnect your lines. Have a great weekend everybody.

TRANSCRIPT SPONSOR

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Ballantyne of Omaha (ticker: BTN) supplies commercial motion picture and specialty projection equipment utilized by major theater chains and location-based entertainment providers. The company also makes, rents and leases specialty entertainment lighting products.

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Source: Ballantyne of Omaha Q1 2007 Earnings Call Transcript
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