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Ballantyne of Omaha (NYSEMKT:BTN)

Q4 2007 Earnings Call

March 17, 2008 4:30 pm ET

Executives

John P. Wilmers – President, Chief Executive Officer & Director

Kevin S. Herrmann – Chief Financial Officer, Treasurer, Controller & Secretary

Analysts

Michael King – Imperial Capital

Sam [Bergman] – [Fabary] Asset Management

Operator

Welcome to the Ballantyne of Omaha 2007 fourth quarter and year end 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 US 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 may be impacted by several factors including but not limited to customer demands for the company’s products, the development of new technology for alternative means for motion picture presentation, domestic and international economic conditions, the achievement of lower cost and expenses, credit concerns in the theater exhibition industry and other risks detailed from time-to-time in the company’s other Securities & 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 conditions section of the company’s SEC filings copies of which can be obtained from the SEC website www.SEC.gove or Ballantyne of Omaha’s websitewww.BallantyneOmaha.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 also would like to 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.

Mr. Wilmers, please proceed.

John P. Wilmers

Thanks to all of you for joining today’s conference call. Kevin Herrman our CFO is here with me today. I will first provide an initial overview of the fourth quarter and full year. Then, I’ll hand off to Kevin who will review our operating results and then provide more detail on the disclosures we made regarding our auction rate security investments and related delay in filing of our 10K. Then, we’ll open the call to questions so, let’s get started with this.

As has been the case in the past several quarters our industry is moving through the early stages of major technology transformation from analog film projection technology to digital cinema. Fueling this transformation are new digital technologies and the substantial cost savings and flexibility that will accrue to film studios by eliminating the production and distribution of celluloid prints. Additionally, the dawn of digital projection allows a greater variety of new, high value theater experiences such as 3D digital cinema which is already proven to be very successful in attracting customers to the movies and enabling higher ticket pricing.

As expected Ballantyne’s quarter four and full year results reflect the impact of this transition on our traditional cinema product sales which continued to slow as anticipated as well as initial contributions from our digital cinema product and service offerings. For the fourth quarter of 07 we had shipments of 51 digital projectors including 20 on extended terms compared to three digital projectors sold in quarter four of 06. For the full year 07 we had shipments of 176 digital projector units including 115 projectors on extended terms compared to the sale of 22 units for the full year of 06, 12 of which were on extended terms. In the interest of being well prepared to seamlessly meet the digital needs of our customers, we have built out our digital cinema capabilities well in advance of broad scale demands. Given our core focus on customer service we believe that is the right approach to the market though it has had an impact on our financial results in recent quarters.

Our Q4 and 07 results also reflected an initial benefit from our acquisition of Marcel Desrochers, Inc. (MDI) a leader in the cinema screen business that we acquired in mid October. MDI reflects our strategy to make well researched acquisitions of cinema product companies and product lines that complement and extend our offerings. We believe such acquisitions are the best use of our cash, provide improved cinema solutions for our customers and allow us to better leverage our long standing and deep industry relationships. We are very thorough in our review of such acquisition opportunities and have found that the process can take significant time and carry some level of expense including the Q4 charge we alluded to in today’s release.

Traditional film equipment sales remained stable though below year ago levels and were offset somewhat by the increase in the contribution from digital projector sales. Traditional projector unit sales in Q4 07 were 190 units including six reconditioned units versus sales of 218 new units in the prior year. For the full year of 07 we had sales of 892 traditional film projectors including 170 reconditioned units versus 2006 sales of 944 units which were all new. We continued to reduce cost in this legacy business to the extent possible while still positioning ourselves to meet the product and parts needs of our customer base. As an example, during the fourth quarter we completed the sale of our design and manufacturing subsidiary in a management led buyout as part of our effort to reduce overhead and monetize assets in our legacy film related business. The unit manufacturers and sells traditional film handling equipment and replacement parts, products for which we anticipate demand will decline as the roll out of digital cinema accelerates. The sale lead to a non-cash charge in the fourth quarter yet yielded approximately $1.7 million which we will utilize to support our growth initiatives.

Much of our efforts these past few years have been in preparation for this year the period in which we anticipate a broad scale rollout of digital projection technology both conventional and 3D. All eyes are on the actions of industry leaders Regal, AMC and Cinemark and digital cinema implementation partners. DCIP which is the entity they have formed to fund the roll out of digital installations within their 16,000 screens. While the disruptions in the capital markets have certainly slowed DCIP’s progress, they have been very clear in their expectation that they aim to secure in excess of $1 billion by midyear at which time they will be able to begin the analog to digital conversion process. In addition to DCIP, Access IT has opened its program to all equipment providers and should provide another source of funding and digital equipment demand and we’re excited at the prospect of working with them. Of course, timing and the exact ramp of the roll out is very difficult to project so we will not even tray. Suffice it to say that we are extremely focused on the opportunity and believe we have built a strong combination of state of art technology in our NEC STARS product line and our new line of MDI screen systems as well as Strong Technical Services, our industry leading service organization with over 39 technicians who have been vigorously trained to install and service all brands of digital service systems.

We just completed a very successful four days in Las Vegas at our industries leading annual trade show, ShowWest where we for the first time the NEC presence at ShowWest was entirely within the Ballantyne Strong booth. There was substantial excitement and optimism at ShowWest about the coming wave of digital conversions as well as a number of announcements that underscored momentum of complementary technologies as partners such as Real D and Imax. Additionally, ShowWest was a buzz on the positive contribution being made to the exhibition industry by digital 3D and the enormous success of recent releases such as the sold out Hannah Montana Concert series.

With that brief overview, let me now turn the call over to our CFO Kevin Herrmann to walk you through our financials.

Kevin S. Herrmann

Despite a decrease of sales of traditional film products Q4 2007 net revenues increased versus the year ago principally due to digital equipment sales which reached $1.7 million during the quarter compared to less than $100,000 last year and also from a partial periods contribution of approximately $900,000 of revenues from our MDI Screen acquisition which was completed in mid Q4 as John alluded to earlier. Gross margin declined year-over-year in Q4 again, reflecting decreased film product sales that typically carry higher margins and we were also impacted by increasing lower margin distribution and service revenues. We do see substantial room to increase our service margins over time as we secure greater economies of scale from a higher concentration of digital deployment.

Selling, general and administrative expense increased to $2.7 million compared to $2.3 million in Q4 2006 reflecting the addition of MDI overhead, Sarbanes-Oxley compliance cost and the write off of approximately $140,000 of acquisition related expenses. Our Q4 results also reflect a loss of $92,000 related to our equity in the non-cash loss of our Digital Link II joint venture principally related to depreciation. The results also reflect the loss of $142,000 pertaining to the disposal of our design subsidiary but which provided us with approximately $1.7 million of cash. These factors all yielded a net loss for the fourth quarter of approximately $276,000 or $0.02 per diluted share compared to a new loss of $449,000 also a $0.02 per diluted share loss.

Net revenues rose to $51.5 million for the year compared to $49.7 million in 2006. While our net income amounted to $.2 million compared to $1.6 million a year ago due primarily to the early stages of digital cinema transitions as I discussed in further detail for the Q4 results. The company ended fiscal 2007 with total cash and cash equivalents and investments of $17.2 million including $13 million of investments in AAA rated auction rate securities issued by five different closed in funds including those from such funds as Alliance Berstein, Black Rock and [TIMCO]. Ballantyne has no reason to believe that any of the issues of these securities are presently at risk or that the AAA rated credit quality of the assets backing the securities are impacted by the current reduced market liquidity of these securities. Ballantyne also believes that it maintains sufficient liquidity to run our business via its cash position that we hold in a commercial bank and our ability to draw on our line of credit. Effective with the fourth quarter and for the full year 2007 we have reclassified these securities from cash and cash equivalents to investments in accordance with current accounting guidance. We also have reclassified prior year amounts for the periods ended December 31, 2006 and 2005 to reflect this treatment. The company selected balance sheet and cash flow items reflected in the press release reflect that treatment. As discussed in the press release we have requested an automatic 15 day extension for the filing of our Form 10K to allow us to verify that we are properly disclosing these securities.

With that I will turn it back to John.

John P. Wilmers

Operator, we can now proceed with the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) One moment please for our first question. (Operator Instructions) Our first question is from the line of Michael King with Imperial Capital. Please proceed with your question.

Michael King – Imperial Capital

Just looking ahead of the transition to digital what are you seeing in terms of your traditional analog shipments going into the second quarter? Are you seeing some of the similar trends that we have been so far at this level? Or, are you actually starting to see some of the exhibitors starting to trail off?

John P. Wilmers

I think what we’re seeing Michael is basically what we saw last year, it’s pretty consistent with last year’s role of the equipment. It’s the same situation, I think the reduction will be close to the same in terms of percentage from the 790 from 900 and something. As you recall, we always talked about the number last year was going to be close to the number previous and it was, the difference was the mix. I think you’re going to see that same kind of percentage of used to new continue through this year and as the DCIP and that keeps moving one month further down the road it appears that will cause the situation to continue in that direction. When we start a full scale roll out of digital it may accelerate but at this rate I don’t know if there will be a full scale roll out of digital through the end of this year. So, I think it’s going to be pretty consistent with last year, I guess a long answer to the question.

Michael King – Imperial Capital

Okay. Fair enough. Then, with the ShowWest show concluding recently can you talk a little bit about some of the things that you’ve been hearing on the digital roll out? I know it’s hard to predict one or the other buying groups was the NATO CBG Group so just curious what you’ve been hearing there and any other independent exhibitors that might be jumping on board.

John P. Wilmers

I think regarding CBG, I think a lot of those people in the CBG are getting anxious because one of the things they’re not being able to take advantage of is the 3D other than if they go out and purchase machines on their own and of course, they’re not really interested in that so I think that’s going to be the catalyst I think to push the CBG Group to align with one of the short list providers. They’ve been talking to all the major providers of the program and it appears it will be just a matter of who they pull the trigger with. So, I think that’s the emphasis there. Again, we’ve got Access IT which is opening their Phase II up to everyone, we discussed that with them and again, as soon as they find – they’ve got their four VPFs now that they’ve signed for their Phase II which is a very big plus for them and we hope to see something from them in the second quarter, late second quarter hopefully we’ll see some activity there. DCIP they hope to have a couple of VPFs done by the end of this month, they’ve told us. So, there’s that situation, they feel they need four before they can pull their trigger but then again, they have to secure their financing although they seem to think they have a certain amount of it in place and could access it as soon as they get their VPFs finished. So again, it’s one of those things, Kodak is still active out there as is Technicolor. We’re doing installs for both of those groups with our Strong Service Company, so it’s moving but it’s not moving truly any faster than it has been. It’s trickling and we’re just waiting for it to pop here.

We had, like everyone else, thought that by the end of the year the financing would have been in place but then of course, the debt markets took care of that for DCIP and we thought first quarter was going to be the kicker because of course, we have some deals out there that call for equipment to be paid for by the end of the first quarter. So, we felt very confident. As we sit here today obviously, we all know we’re not going to have a roll out by the end of the third quarter. We’re hoping for the end of the second quarter, in or around that time we might see a beginning, a trickling out of the roll out.

Michael King – Imperial Capital

Okay. Then Kevin just a question for you on the auction rate securities exposure, can you talk about the liquidity there in a little more detail? Is that a situation that you expect to change to rotate out of auction rate securities into something with more clarity? Any color you can provide would be helpful.

Kevin S. Herrmann

Well obviously we’re working with our broker to resolve the issue and everything is in hindsight where obviously once we cash these out we will be putting them probably into a different type of investment at least in the short terms until the markets completely rectify themselves. We have a constant dialog with the broker and also our bank and we believe that right now the underlying investments behind these are still AAA rated and with the funds, some of the funds that I mentioned including some others that there is not an exposure that we can see at this time. However, with the market that are in place right now, there is some uncertainty out there of when it’s going to get back to where the auctions aren’t failing. We’re still receiving full interest in cash on these investments. We don’t have a need right now for the cash that we would have been generating from these investments so we were not actively out trying to sell them when the market started going down with them. So, that’s really all I can say right now that we’re monitoring the situation, we don’t believe that we have a valuation issue at this time and that it’s going to rectify itself.

John P. Wilmers

It’s a timing issue Michael. Obviously, if we needed cash right now then we’d – well, we’d always have our line of credit too so it’s sitting there and the bank is being very cooperative because obviously they’re the ones that put us in these securities. I’m not concerned I’m sure it’s strictly a timing issue and not a valuation issue and hopefully we’ll be able to report back to everyone in a maximum of 30 to 60 days and say, “Yes we’ve moved the investment to a more,” I don’t want to say secure but a more clear I guess is the term you used and you’re right, a clearer investment to benefit the stockholders and not put us at risk.

Michael King – Imperial Capital

Okay. Then, just touching on the line of credit can you talk a little about your availability is on that line of credit?

Kevin S. Herrmann

Well, even without some of the discussions that we had with our bank – we have a $4 million line of credit as it sits today that we have not tapped into.

Michael King – Imperial Capital

Okay. Would you anticipate tapping into it for working capital purposes this quarter?

Kevin S. Herrmann

Obviously, we monitor that situation but no, not at this time.

Operator

(Operator Instructions) One moment please for our next question. Our next question is from the line of Sam [Bergman] with the [Fabary] Asset Management. Please proceed with your question.

Sam [Bergman] – [Fabary] Asset Management

A couple of questions, can you give us any other color on that Imax deal for the large scale cinema screens?

John P. Wilmers

Yeah, it’s pretty much a five year deal and it encompasses the large, you know, over 40 foot screens – well actually under 40, all over 40 we have the agreement with them and it’s an exclusive agreement with them over five years. We’re expecting great things from the deal they have with AMC and as a matter of fact, we just had an order the other day for a Mexico large, the big Imax location. So, it’s a real good one, it’s good for both companies, we’ve got a great facility up there that does this well and with their 3D coming out – or is out but then again, their digital going forward we look forward to working with them on screen surfaces and things that can enhance that whole experience. Number one was getting that deal signed between MDI and them and now it’s going to be trying to expand what we do with Imax. We’re excited about that.

Sam [Bergman] – [Fabary] Asset Management

Can you [inaudible] a yearly revenue amount on that?

John P. Wilmers

On that particular deal?

Sam [Bergman] – [Fabary] Asset Management

On the deal with MDI.

John P. Wilmers

MDI, they were in the $4 million area in terms of revenue and we’re hoping to take that up by 50% this year.

Sam [Bergman] – [Fabary] Asset Management

Currently do you still have a manufacturing facility that at one time you were looking to sell and because of not a very high capacity utilization? Where does that stand right now?

John P. Wilmers

Yeah, in Fisher Illinois that made our platter systems or film transports and that’s a product that’s specifically a film product. There’s really no crossover whatsoever to digital. The situation in Fisher, there they also had a good outside business. So, it was attractive to the general managers who’s worked for us since we’ve had the place to run the company until the platter business went away because he had built an outside business so it was a win/win deal. It was for him, he ends up with an ongoing business and we ended up divesting of a company that really wouldn’t fit in our whole business plan going forward as the film business went away. It really was a good deal for both of us.

Sam [Bergman] – [Fabary] Asset Management

I see. The last question, the service business is that broken out with revenue for the quarter? Or, can you at this time?

Kevin S. Herrmann

Yes, we could I believe. We will be disclosing this in our 10K but the service business for the quarter was approximately $1 million which is similar to a year ago because we really haven’t had the transition to digital cinema yet. You won’t see the growth in the service business until that roll out because most of the service is still on the film side which is as we’ve been talking for the last several months, the film side of the business is a maturing industry for the service and its been pretty static over the last couple of years.

Sam [Bergman] – [Fabary] Asset Management

Presently you have what 39 people trained? What would be the ramp that you’d have to do, if any, before the digital business that’s going to take place at the end of the year or into 09?

John P. Wilmers

With the way that we’re staffed today we figure we can do about 60 to 70 screens a week as we’re staffed today. Now, the plan obviously is to not only get better as you do these things and increase how many you can do with the people you can have but, we have a number of targets that we’re hiring to augment to bring that number up. You know you’ve got a lot of customers out there wanting to do a lot of installing and we’re bringing this company up so we can meet the demands of all of them.

Operator

Mr. Wilmers, there are no further questions at this time.

John P. Wilmers

Okay. Thanks to all of you for participating today in the call. We’ve been building towards this moment for the past several years and now see the launch of the industry wide digital conversion right there on the horizon though the exact timing will be driven by the completion of funding as we all know. It is clear that digital cinema is here to stay and that our company is ideally positioned for a leading role in outfitting exhibitors for this new technology. As we often repeat Ballantyne’s long term track record for quality and excellent customer service and out in depth understanding of our customer’s business needs remains our key strengthens in the market. I’d like to close by saying that we appreciate our investors patience during the transition period and thank you for your support and interest. We look forward to communicating with you on our next conference call. Thanks very much.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

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