Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
[Mark one]
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For quarter ended September 30, 2004
OR
[ ] 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 1-9334
BALDWIN TECHNOLOGY COMPANY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3258160
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Twelve Commerce Drive, Shelton, Connecticut 06484
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-402-1000
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 Act of 1934 during
the preceding 12 months (or 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 31, 2004
----- -------------------------------
Class A Common Stock
$0.01 par value 12,924,813
Class B Common Stock
$0.01 par value 1,965,419
BALDWIN TECHNOLOGY COMPANY, INC.
INDEX
Page
----
Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets at September 30, 2004 (unaudited) and
June 30, 2004 1-2
Consolidated Statements of Income for the three months ended
September 30, 2004 (unaudited) and 2003 (unaudited) 3
Consolidated Statements of Changes in Shareholders' Equity for the
three months ended September 30, 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended
September 30, 2004 (unaudited) and 2003 (unaudited) 5-6
Notes to Consolidated Financial Statements (unaudited) 7-14
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 15-19
Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
Item 4 Controls and Procedures 19
Part II Other Information
Item 2 Purchases of Equity Securities by Issuer and Affiliated Purchases 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 6 Exhibits 20
Signatures 21
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
September 30, 2004 June 30, 2004
------------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 11,256 $ 12,008
Accounts receivable trade, net of allowance for doubtful
accounts of $2,151 ($2,155 at June 30, 2004) 25,700 24,765
Notes receivable, trade 12,429 12,960
Inventories, net 27,750 24,998
Deferred taxes 452 473
Prepaid expenses and other 4,816 5,448
--------- ---------
Total Current Assets 82,403 80,652
--------- ---------
MARKETABLE SECURITIES:
Cost $590 ($586 at June 30, 2004) 564 640
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land and buildings 1,011 977
Machinery and equipment 3,510 3,314
Furniture and fixtures 3,895 3,741
Leasehold improvements 408 408
Capital leases 379 371
--------- ---------
9,203 8,811
Less: Accumulated depreciation and amortization (4,689) (4,271)
--------- ---------
Net Property, Plant and Equipment 4,514 4,540
--------- ---------
PATENTS, TRADEMARKS AND ENGINEERING DRAWINGS, at cost, less accumulated
amortization of $4,288 ($4,224 at June 30, 2004) 2,398 2,259
GOODWILL, less accumulated amortization of $3,500 ($3,516 at June 30, 2004) 11,118 11,104
DEFERRED TAXES 12,178 12,151
OTHER ASSETS 4,187 3,925
--------- ---------
TOTAL ASSETS $ 117,362 $ 115,271
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
1
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2004 June 30, 2004
------------------ -------------
CURRENT LIABILITIES:
Loans payable $ 2,727 $ 2,757
Current portion of long-term debt 1,050 20,523
Accounts payable, trade 12,976 11,615
Notes payable, trade 11,653 10,840
Accrued salaries, commissions, bonus and
profit-sharing 5,639 6,808
Customer deposits 2,839 2,785
Accrued and withheld taxes 2,084 2,184
Income taxes payable 1,982 3,079
Other accounts payable and accrued liabilities 13,073 11,687
--------- ---------
Total current liabilities 54,023 72,278
--------- ---------
LONG TERM LIABILITIES:
Long-term debt 21,537 1,794
Other long-term liabilities 6,487 6,732
--------- ---------
Total long-term liabilities 28,024 8,526
--------- ---------
Total liabilities 82,047 80,804
--------- ---------
SHAREHOLDERS' EQUITY:
Class A Common Stock, $.01 par, 45,000,000 shares authorized, 16,555,015
shares issued at September 30, 2004 and 16,529,348 shares
issued at June 30, 2004 166 166
Class B Common Stock, $.01 par, 4,500,000 shares authorized,
2,137,883 shares issued at September 30, 2004 and June 30, 2004 21 21
Capital contributed in excess of par value 57,045 57,017
Accumulated Deficit (11,948) (12,667)
Accumulated other comprehensive income 2,752 2,651
Less: Treasury stock, at cost:
Class A - 3,630,202 shares at September 30, 2004
and June 30, 2004 -- --
Class B - 172,464 shares at September 30, 2004
and June 30, 2004 (12,721) (12,721)
--------- ---------
Total shareholders' equity 35,315 34,467
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 117,362 $ 115,271
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
2
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the three months
ended September 30,
---------------------
2004 2003
---- ----
Net Sales $ 39,997 $ 34,511
Cost of goods sold 27,906 23,742
-------- --------
Gross Profit 12,091 10,769
-------- --------
Operating Expenses:
General and administrative 3,991 3,641
Selling 3,342 2,673
Engineering and development 3,358 3,243
Restructuring charges -- 382
-------- --------
10,691 9,939
-------- --------
Operating income 1,400 830
-------- --------
Other (income) expense:
Interest expense 952 937
Interest income (23) (26)
Royalty income, net (754) (651)
Other (income) expense, net (13) (592)
-------- --------
162 (332)
-------- --------
Income before income taxes 1,238 1,162
Provision for income taxes 519 483
-------- --------
Net income $ 719 $ 679
======== ========
Net income per share - basic and diluted
Income per share - basic $ 0.05 $ 0.05
Income per share - diluted $ 0.05 $ 0.05
======== ========
Weighted average shares outstanding:
Basic 14,873 15,015
======== ========
Diluted 15,351 15,015
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES) (UNAUDITED)
Class A Class B Capital
Common Stock Common Stock Contributed
------------ ------------ In Excess Retained
Shares Amount Shares Amount of Par Deficit
------ ------ ------ ------ ------ -------
Balance at
June 30, 2004 16,529,348 $166 2,137,883 $21 $57,017 $ (12,667)
Net income for the
three months ended
September 30, 2004 719
Translation
adjustment
Unrealized gain on
available-for-sale
securities, net of
tax
Unrealized loss on
forward contracts,
net of tax
Comprehensive
Income
Shares issued
Under Stock
Option Plan 25,667 28
---------- ---- --------- --- ------- ---------
Balance at
September 30, 2004 16,555,015 $166 2,137,883 $21 $57,045 $ (11,948)
========== ==== ========= === ======= =========
Accumulated
Other
Comprehensive Treasury Stock
-------------- Comprehensive
Income Shares Amount Income
------ ------ ------ ------
Balance at
June 30, 2004 $ 2,651 (3,802,666) $(12,721)
Net income for the
three months ended
September 30, 2004 $ 719
Translation
adjustment 134 134
Unrealized gain on
available-for-sale
securities, net of
tax (46) (46)
Unrealized loss on
forward contracts,
net of tax 13 13
-----
Comprehensive
Income $ 820
=====
Shares issued
Under Stock
Option Plan
------- ---------- --------
Balance at
September 30, 2004 $ 2,752 (3,802,666) $(12,721)
======= ========== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the three months ended
--------------------------
September 30,
-------------
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 719 $ 679
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 464 485
Accrued retirement pay (165) 75
Provision for losses on accounts receivable 13 10
Restructuring charges -- 382
Deferred income taxes (60) 28
Changes in assets and liabilities
Accounts and notes receivable (302) (1,239)
Inventories (2,493) 366
Prepaid expenses and other 1,094 (313)
Other assets (415) (3)
Customer deposits 27 1,039
Accrued compensation (1,279) 9
Payments against restructuring charges (175) (474)
Accounts and notes payable, trade 2,094 1,709
Income taxes payable (1,081) (374)
Accrued and withheld taxes (97) (404)
Other accounts payable and accrued liabilities 1,597 847
Interest payable (229) (266)
-------- --------
Net cash (used for) provided by operating activities (288) 2,556
-------- --------
Cash flows from investing activities:
Additions of property, plant and equipment (157) (43)
Additions of patents and trademarks (216) (135)
-------- --------
Net cash used by investing activities (373) (178)
-------- --------
Cash flows from financing activities:
Long-term and short-term debt borrowings -- 18,874
Long-term and short-term debt repayments (34) (16,471)
Principal payments under capital lease obligations (24) (49)
Payment of debt financing costs (259) (2,417)
Proceeds of stock option exercise 26
Other long-term liabilities 120 (144)
-------- --------
Net cash used by financing activities (171) (207)
-------- --------
Effects of exchange rate changes 80 427
-------- --------
Net (decrease) increase in cash and cash equivalents (752) 2,598
Cash and cash equivalents at beginning of period 12,008 6,950
-------- --------
Cash and cash equivalents at end of period $ 11,256 $ 9,548
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
For the three months
ended September 30,
---------------------
2004 2003
---- ----
Cash paid during the period for:
Interest $1,181 $ 959
Income taxes $1,552 $ 843
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Baldwin Technology Company, Inc. and its subsidiaries ("Baldwin" or the
"Company") are engaged primarily in the development, manufacture and sale of
accessories and controls for the printing industry.
The accompanying unaudited consolidated financial statements include the
accounts of Baldwin and its subsidiaries and have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and in compliance with the rules and
regulations of the Securities and Exchange Commission. These financial
statements reflect all adjustments, which are in the opinion of management,
necessary to present a fair statement of the results for the interim periods.
These financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's latest Annual
Report on Form 10-K for the fiscal year ended June 30, 2004.
NOTE 2 - LONG TERM DEBT:
On September 15, 2004, the Company amended its primary source of outside
financing, the revolving credit agreement with Maple Bank GmbH. The amendment
increased the size of the facility to $28,000,000 from $20,000,000, extended the
maturity date of the loan to October 2008, and reduced the interest rates and
annual fees associated with the agreement. The credit facility is collateralized
by substantially all of the accounts and notes receivable of the Company and a
portion of the Company's inventory up to a maximum amount of $10,000,000.
Borrowings under the credit facility are subject to a borrowing base and bear
interest at a rate equal to the three-month Eurodollar rate (as defined in the
Credit Agreement) plus (i) 5.125% for loans denominated in U.S. Dollars or (ii)
5.525% for loans denominated in Euros. The interest rate will be reduced by
0.50% or whole increments thereof for each whole increment of Disclosed EBITDA
(as defined in the Credit Agreement) that equals or exceeds $1,250,000 for any
fiscal quarter commencing with the quarter ending December 31, 2003. In no event
however, may the interest rate be less than 7.625% for EURO based borrowings and
7.5% for dollar based borrowings. Additionally, the amendment granted to the
lender an option to acquire a maximum of $5,000,000 of equity securities (as
defined in the amendment) should the Company choose to issue any such
securities. The amended credit agreement does not require the Company to meet
any financial covenants, except for the limitation on annual capital
expenditures; however, it contains a material adverse effect clause, which
provides that Maple would not be obligated to fund any loan, convert or continue
any loan as a LIBOR loan or issue any new letters of credit in the event of a
material adverse effect. Management does not anticipate that such an event will
occur; however, there can be no assurance that such an event will not occur.
7
JUNE 30, 2004 SEPTEMBER 30, 2004
--------------------------- ---------------------------
CURRENT LONG-TERM CURRENT LONG-TERM
----------- ----------- ----------- -----------
Revolving Credit Facility due October 1, 2008,
interest rate 5.525% plus three-month
Eurodollar rate ............................. $ -- $ -- $ -- $19,781,000
Revolving Credit Facility due August 15,
2005, interest rate 10.00% plus three-
month Eurodollar rate ....................... 18,497,000 -- -- --
Revolving Credit Facility due August 15,
2005, interest rate 11.50% plus three-
month Eurodollar rate ....................... 970,000 -- -- --
Term Loan payable by foreign subsidiary
due December 8, 2006, interest rate 1.5% .... 919,000 1,379,000 909,000 1,364,000
Note payable by foreign subsidiary
through 2008, interest rate 5.95% ........... 120,000 389,000 124,000 370,000
Notes payable by foreign subsidiary
through February 2007, interest rates
ranging from 4.58% to 4.67% ................. 17,000 26,000 17,000 22,000
----------- ----------- ----------- -----------
$20,523,000 $ 1,794,000 $ 1,050,000 $21,537,000
=========== =========== =========== ===========
The Company maintains relationships with both foreign and domestic banks,
which combined have extended short and long term credit facilities to the
Company totaling $34,443,000, including $28,000,000 available under the Maple
GmbH Credit Agreement. As of September 30, 2004, the Company had $25,315,000
outstanding under these credit facilities including $19,781,000 under the Maple
GmbH Credit Agreement.
NOTE 3 - NET INCOME PER SHARE:
Basic net income per share includes no dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted net income per share
reflects the potential dilution of securities that could share in the earnings
of an entity. The weighted average shares outstanding used to compute diluted
net income per share include 478,000 and zero additional shares issued under the
Company's stock option plan, respectively for the three months ended September
30, 2004 and 2003, which represent potentially dilutive securities. Outstanding
options to purchase 640,000 and 1,038,000 shares, respectively, of the Company's
common stock for the three months ended September 30, 2004 and 2003,
respectively, are not included in the above calculation to compute diluted net
income per share as their exercise price exceeded their current market value of
these shares.
NOTE 4 - OTHER COMPREHENSIVE INCOME (LOSS):
Accumulated Other Comprehensive Income (Loss) ("AOCI") is comprised of
various items, which affect equity that result from recognized transactions and
other economic events other than transactions with owners in their capacity as
owners. AOCI is included in stockholders' equity in the consolidated balance
sheets. AOCI consists of the following:
8
September 30, 2004 June 30, 2004
------------------ -------------
(Unaudited)
Cumulative translation adjustments $ 2,859,000 $ 2,725,000
Unrealized gain on investments,
net of deferred taxes of $11,000
($22,000 at June 30, 2004) (15,000) 31,000
Unrealized gain (loss) on forward
Contracts, net of tax 8,000 (5,000)
Minimum pension liability, net of tax (100,000) (100,000)
----------- -----------
$ 2,752,000 $ 2,651,000
=========== ===========
NOTE 5 - INVENTORIES:
Inventories consist of the following:
September 30, 2004 June 30, 2004
------------------ -------------
(Unaudited)
Raw materials $12,981,000 $12,309,000
In process 5,406,000 4,130,000
Finished goods 9,363,000 8,559,000
----------- -----------
$27,750,000 $24,998,000
=========== ===========
Foreign currency translation effects increased inventories by $259,000
from June 30, 2004 to September 30, 2004.
NOTE 6 - DERIVATIVES:
During the three months ended September 30, 2004 and 2003, the Company had
currency futures contracts that qualified as cash flow hedges. The gain or loss
on these cash flow hedges was recorded in AOCI and will be recognized when the
hedged items affect earnings.
Unrealized net gains (losses) included in AOCI are as follows:
September 30, 2004 September 30, 2003
------------------ ------------------
Balance at beginning of period $ (5,000) $ (4,000)
Additional gains (losses), net 8,000 (13,000)
Amounts reclassified to earnings, net 5,000 6,000
-------- --------
Balance at end of period $ 8,000 $(11,000)
======== ========
Additionally, during the quarter ended September 30, 2003, the effects of
an interest rate swap, then in effect, to convert variable rate debt into fixed
rate debt, increased interest expense $148,000 and the adjustment to fair value
of the ineffective portion of the swap resulting in a gain of $149,000 was
recorded in other income and expense. The swap matured in October 2003.
The unrealized net gain of $8000 at September 30, 2004 is comprised of net
gains on currency futures contracts, which expire at various times through the
year, and are expected to be reclassified to earnings during the year.
9
NOTE 7 -- GOODWILL AND OTHER INTANGIBLE ASSETS:
The changes in the carrying amount of goodwill for the three months ended
September 30, 2004 are as follows:
Accessories and Controls
------------------------
Gross Accumulated Net
Carrying Amount Amortization Book Value
--------------- ------------ ------------
Balance as of July 1, 2004 $ 14,620,000 $ 3,516,000 $ 11,104,000
Effects of currency translation (2,000) (16,000) 14,000
------------ ------------ ------------
Balance as of September 30, 2004 $ 14,618,000 $ 3,500,000 $ 11,118,000
============ ============ ============
Intangible assets subject to amortization are comprised of the following:
As of September 30, 2004 As of June 30, 2004
------------------------ -------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Intangible Assets: Amount Amortization Amount Amortization
------------------ ---------- ------------ ---------- ------------
Patents and trademarks $6,686,000 $4,288,000 $6,483,000 $4,224,000
Other 916,000 705,000 923,000 668,000
---------- ---------- ---------- ----------
Total $7,602,000 $4,993,000 $7,406,000 $4,892,000
========== ========== ========== ==========
Amortization expense associated with these intangible assets was $161,000
and $164,000, respectively, for the three months ended September 30, 2004 and
2003. The other category is included in "Other assets" on the accompanying
consolidated balance sheets.
NOTE 8 -- RESTRUCTURING CHARGES AND RELATED RESERVES:
The following table details the components of the restructuring charges
and the remaining reserve balances as of September 30, 2004 and June 30, 2004
related to the March 2000 Plan.
Activity related to the March 2000 Plan in the three months ended
September 30, 2004 was as follows:
Remaining Payments Remaining
Reserve Against Reserve
June 30, 2004 Reserve September 30, 2004
------------- --------- ------------------
Facility lease termination costs...... $ 792,000 $(113,000) $ 679,000
--------- --------- ---------
Total program......................... $ 792,000 $(113,000) $ 679,000
========= ========= =========
Facility lease termination costs will be paid through April 2006.
The following table details the components of the restructuring charges
and the remaining reserve balances as of September 30, 2004 and June 30, 2004
related to the August 2002 Plan.
10
Activity related to the August 2002 Plan in the three months ended
September 30, 2004 was as follows:
Remaining Payments Remaining
Reserve Against Reserve
June 30, 2004 Reserve September 30, 2004
------------- ------- ------------------
Severance.............................. $151,000 $(19,000) $132,000
Facility lease termination costs....... 158,000 (43,000) 115,000
Other costs............................ 32,000 -- 32,000
-------- -------- --------
Total program.......................... $341,000 $(62,000) $279,000
======== ======== ========
Severance and lease termination costs will be paid through October 2006.
NOTE 9 - PENSION AND OTHER POST-RETIREMENT BENEFITS:
The following table sets forth the components of net periodic benefit costs for
the Company's defined benefit plans for the three months ended September 30,
2004 and 2003:
Pension Benefits
--------------------
For the three months
Ended September 30,
-------------------
2004 2003
-------- --------
Service cost $ 67,000 $ 66,000
Interest cost 15,000 15,000
Expected return on plan assets (1,000) (1,000)
Amortization of transition obligation 3,000 3,000
Amortization of net actuarial gain - (8,000)
-------- --------
Net periodic benefit cost $ 84,000 $ 75,000
======== ========
During the three months ended September 30, 2004 and 2003 the Company made
no contributions to the plans.
NOTE 10 - BUSINESS SEGMENT INFORMATION:
Operating segments are defined as material components of an enterprise
about which separate information is available that is evaluated regularly by the
chief operating decision maker, or decision-making group, in deciding how to
allocate resources and assess performance.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2004. An operating
segment's financial performance is primarily evaluated based on operating
profit.
11
The tables below present information about reported segments for the three
months ended September 30, 2004 and 2003 (in thousands).
Three months ended
September 30,
-------------
(Unaudited)
-----------
2004 2003
---- ----
Net Sales:
Accessories and Controls $ 39,997 $ 34,511
------------- ---------------
Total Net Sales $ 39,997 $ 34,511
============= ===============
Foreign currency translation effects increased net sales by $2,593,000 for
the three months ended September 30, 2004.
Three months ended
September 30,
-------------
(Unaudited)
-----------
2004 2003
---- ----
Operating income (loss):
Accessories and Controls $ 3,299 $ 2,504
Corporate (1,899) (1,674)
-------- --------
Total operating income (loss) 1,400 830
Interest expense, net (929) (911)
Royalty income, net 754 651
Other income (expense), net 13 592
-------- --------
Income (loss) from
continuing operations
before income taxes $ 1,238 $ 1,162
======== ========
Included in operating income for the three months ended September 30, 2003
are restructuring charges of $379,000 related to accessories and controls and
$3,000 related to corporate.
September 30, June 30,
2004 2004
---- ----
(Unaudited)
Identifiable assets:
Accessories and Controls $ 103,766 $ 100,956
Corporate 13,596 14,315
--------------- ------------
Total identifiable assets $ 117,362 $ 115,271
=============== ============
NOTE 11 - STOCK OPTIONS:
On January 1, 2003, the Company adopted the disclosure provisions of
Financial Accounting Standards Board ("FASB") Statement No. 148, "Accounting for
Stock-Based Compensation - transition and disclosure" ("SFAS 148"), which
amended FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation, effective as of the beginning of the fiscal year. Baldwin
continues to apply the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") in accounting for
stock-based compensation. In accordance with APB No. 25, compensation costs for
stock options is recognized in income based on the excess, if any, of the quoted
market price over the exercise price of the stock on
12
the date of grant. The exercise price for all stock option grants equals the
fair market value on the date of grant, therefore no compensation expense is
recorded.
The pro forma net income (loss) and income (loss) per share information
have been determined for employee stock plans under the fair value method using
the Black-Scholes option-pricing model at the date of grant. The following table
illustrates the effect on net income (loss) and income (loss) per share if the
Company had applied the fair value recognition provisions of SFAS 123 for the
three months ended September 30, 2004 and 2003 (in thousands):
Three Months Ended
September 30,
-------------
(Unaudited)
2004 2003
---- ----
Net income (loss), as reported $ 719 $ 679
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
(13) (26)
--------------- ---------------
Pro forma net income (loss) $ 706 $ 653
=============== ===============
Income (loss) per share:
Basic and diluted - as reported $ 0.05 $ 0.05
=============== ===============
Basic and diluted - pro forma $ 0.05 $ 0.04
=============== ===============
On August 17, 2004, the Compensation and Stock Option Committee and, for
options granted to the Chief Executive Officer, the Independent Directors, of
the Board of Directors of the Company granted non-qualified options to purchase
360,000 shares of Class A common stock to certain executives and key employees
under the Company's 1996 Stock Option Plan (the "1996 Plan") at an exercise
price of $3.41 per share, the fair market value on the date of grant.
NOTE 12 - CUSTOMERS:
During the three months ended September 30, 2004, two customers each
accounted for more than 10% of the Company's net sales. Koenig and Bauer
Aktiengesellschaft ("KBA") accounted for approximately 18% and 16% of the
Company's net sales for the three months ended September 30, 2004 and 2003,
respectively, and Mitsubishi accounted for approximately 10% for the three
months ended September 30, 2004 and 2003.
NOTE 13 - WARRANTY COSTS:
The Company's standard contractual warranty provisions are to repair or
replace, at the Company's option, product that is proven to be defective. The
Company estimates its warranty costs as a percentage of revenues on a product by
product basis, based on actual historical experience within the Company. Hence,
the Company accrues estimated warranty costs at the time of sale. In addition,
should the Company become aware of a specific potential warranty claim, a
specific charge is recorded and accounted for separate from the percent of
revenue discussed above.
13
Warranty Amount
---------------
2004 2003
---- ----
Warranty reserve at June 30, 2004 and 2003 $ 2,714,000 $ 1,665,000
Additional warranty expense accruals 987,000 853,000
Payments against reserve (888,000) (786,000)
Effects of currency rate fluctuations 56,000 49,000
--------------- ---------------
Warranty reserve at September 30, 2004 and 2003 $ 2,869,000 $ 1,781,000
=============== ===============
NOTE 14 - LEGAL PROCEEDINGS AND SETTLEMENTS:
On November 14, 2002, the Dusseldorf Higher Regional Court ("DHRC")
announced its judgment in favor of Baldwin in a patent infringement dispute
against its competitor, technotrans AG ("Technotrans"). Subsequent to November
14, 2002, Technotrans filed an appeal of the DHRC ruling with the German Supreme
Court in Karlsruhe. That court has not yet reached a decision on the appeal.
Technotrans also filed to revoke the Company's patent with the Federal Patent
Court in Munich, Germany. On July 21, 2004, the German Federal Patent Court
upheld the validity of the Company's patent. Technotrans has appealed that
judgment. No amounts have been recorded in the consolidated financial statements
with regard to the potential contingent gain resulting from the DHRC judgment;
however, the Company is considering a claim for damages based on the favorable
rulings in both the patent infringement case and the patent validity
confirmation.
14
BALDWIN TECHNOLOGY COMPANY, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the following
statements and certain other statements contained herein are based on current
expectations. Such statements are forward-looking statements that involve a
number of risks and uncertainties. The Company cautions investors that any such
forward-looking statements made by the Company are not guarantees of future
performance and that actual results may differ materially from those in the
forward-looking statements. Some of the factors that could cause actual results
to differ materially include, but are not limited to the following: (i) the
ability to obtain, maintain and defend challenges against valid patent
protection on certain technology, primarily as it relates to the Company's
cleaning systems, (ii) material changes in foreign currency exchange rates
versus the U.S. Dollar, (iii) changes in the mix of products and services
comprising revenues, (iv) a decline in the rate of growth of the installed base
of printing press units and the timing of new press orders, (v) general economic
conditions, either domestically or in foreign locations, (vi) the ultimate
realization of certain trade receivables and the status of ongoing business
levels with the Company's large OEM customers, (vii) competitive market
influences. Additional factors are set forth in Exhibit 99 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2004 which should
be read in conjunction herewith.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For further information regarding the Company's critical accounting
policies, please refer to the Management's Discussion and Analysis section of
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2004. There have been no material changes during the three months ended
September 30, 2004.
THREE MONTHS ENDED SEPTEMBER 30, 2004 VS. THREE MONTHS ENDED SEPTEMBER 30, 2003
CONSOLIDATED RESULTS
Net sales for the three months ended September 30, 2004 increased by
$5,486,000, or 16%, to $39,997,000 from $34,511,000 for the three months ended
September 30, 2003. Currency rate fluctuations attributable to the Company's
overseas operations increased net sales by $2,593,000 in the current period.
Excluding the effects of currency translation net sales increased $2,893,000 or
8%.
The net sales increase reflects increased sales in Europe, $2,100,000 in the
commercial cleaning systems market, particularly in Germany, and the newspaper
cleaning systems market in Sweden. In Asia, particularly Japan, net sales
increased approximately $600,000. Increased sheeter sales in the commercial
market, related to timing of customer orders were partially offset by lower
revenue in the newspaper market. In the Americas, particularly the U.S., sales
were relatively flat.
Gross profit for the three months ended September 30, 2004 was $12,091,000
(30.2% of net sales) as compared to $10,769,000 (31.2% of net sales) for the
three months ended September 30, 2003, an increase of $1,322,000 or 12.2%.
Currency rate fluctuations increased gross profit by $824,000 in the current
period. Excluding the effects of currency rate fluctuation, gross profit would
have increased by $498,000. Gross profit as a percentage of net
15
sales decreased primarily due to an unfavorable mix of products particularly in
Japan, higher material costs for imported products in the U.S. as a result of
the declining U.S. dollar coupled with unfavorable absorption in the U.S.,
partially offset by improved volume in Germany.
Selling, general and administrative expenses amounted to $7,333,000 for
the three months ended September 30, 2004 as compared to $6,314,000 for the same
period in the prior fiscal year, (both amounts representing 18.3% of respective
period sales) a increase of $1,019,000 or 16.1%. Currency rate fluctuations
increased these expenses by $369,000 in the current period. Otherwise, selling,
general and administrative expenses would have increased by $650,000. Selling
expenses increased by $460,000, which primarily relates to increased
compensation costs in Germany and higher test installation costs in Sweden.
General and administrative expenses increased by $190,000 primarily in the U.S.
due to increased compensation and consulting costs in the period.
Engineering and development expenses increased by $115,000 over the same
period in the prior fiscal year. Currency rate fluctuations increased these
expenses by $217,000 in the current period. Excluding the effects of currency
rate fluctuations, engineering and development expenses would have decreased by
$102,000 in the current period. This decrease relates primarily to decreased
employee compensation and related costs. As a percentage of net sales,
engineering and development expenses decreased to 8.3% for the three months
ended September 30, 2003 compared to 9.4% for the same period in the prior
fiscal year.
The Company recorded restructuring charges of $0 for the three months
ended September 30, 2004 compared to $382,000 for the same period in the prior
fiscal year. The restructuring charge in the prior fiscal year period primarily
represented employment reductions in the United States and the United Kingdom
announced in August 2003 associated with the restructuring activities initiated
in August 2002 (the "August 2002 Plan").
Interest expense for the three months ended September 30, 2004 was
$952,000 as compared to $937,000 for the three months ended September 30, 2003.
Currency rate fluctuations increased interest expense by $85,000 in the current
period. Otherwise, interest expense would have decreased by $70,000. This
decrease reflects the maturity of a swap arrangement in October 2003, which
increased interest expense $148,000 for the quarter ended September 30, 2003.
Interest income remained generally flat and amounted to $23,000 and $26,000 for
the three months ended September 30, 2004 and 2003, respectively.
Net royalty income for the three months ended September 30, 2004 was
$754,000 as compared to $651,000 for the three months ended September 30, 2003.
Other income (expense), net amounted to income of $13,000 for the three
months ended September 30, 2004 compared to income of $592,000 for the three
months ended September 30, 2003. Other income (expense), net includes net
foreign currency transaction gains of $13,000 and $518,000 for the three months
ended September 30, 2004 and 2003, respectively. The decrease is primarily
attributable to prior year currency fluctuations associated with the Company's
then outstanding loan from Maple Bank GmbH. During fiscal year 2004 the loan was
a dollar based loan recorded on the books of the Company's Netherland subsidiary
and subject to foreign currency fluctuations. During the quarter ended September
30, 2004 the loan was converted from a dollar based loan to euro based loan.
Additionally, included in other income and (expense) for the three months ended
September 30, 2003 is income resulting from the ineffective portions of
derivative financial instruments which qualify as cash flow hedge gains of
$151,000 and expenses of ($186,000) related to the write off of deferred
alternative financing costs.
The Company recorded an income tax provision of $519,000 for the three
months ended September 30, 2004 as compared to $483,000 for the three months
ended September 30, 2003.
16
The effective tax rate of 41.9% (41.6% for the quarter ended September 30, 2003)
for the three months ended September 30, 2004, reflects taxable income in the
higher tax jurisdictions in which tax loss carryforwards are not available or
are subject to limitations. The effective tax rate for the three months ended
September 30, 2004 differs from the statutory rate as no benefit is recognized
for losses incurred in certain countries as the realization of such benefits was
not more likely than not.
The Company's net income amounted to $719,000 for the three months ended
September 30, 2004, compared to net income of $679,000 for the three months
ended September 30, 2003. Currency rate fluctuations increased net income by
$75,000 in the current period. Net income per share amounted to $0.05 basic and
diluted for the three months ended September 30, 2004 and for the three months
ended September 30, 2003.
SEGMENT RESULTS
ACCESSORIES AND CONTROLS GROUP
Net sales for the three months ended September 30, 2004 increased by
$5,486,000, or 16%, to $39,997,000 from $34,511,000 for the three months ended
September 30, 2003. Currency rate fluctuations attributable to the Company's
overseas operations increased net sales for the current period by $2,593,000;
otherwise, net sales would have increased by $2,893,000 in the current period.
Operating income amounted to $3,299,000 (8.2% of net sales) for the three
months ended September 30, 2004, as compared to an operating income of
$2,504,000 (7.3% of net sales) for the same period in the prior fiscal year, an
increase of $795,000. Currency rate fluctuations increased the current fiscal
year's operating income by $255,000 otherwise operating income would have
increased by $540,000. This increase is primarily the result of the improved
sales volume noted above coupled with zero restructuring expense in the quarter
ended September 30, 2004 versus $379,000 of restructuring expense recorded in
the period ended September 30, 2003.
17
LIQUIDITY AND CAPITAL RESOURCES AT SEPTEMBER 30, 2004
Cash flows from operating, investing and financing activities, as
reflected in the Consolidated Statement of Cash Flows, are summarized as
follows:
2004 2003
---- ----
Cash provided by (used for):
Operating activities $ (288,000) $ 2,556,000
Investing activities (373,000) (178,000)
Financing activities (171,000) (207,000)
Effect of exchange rate changes on cash 80,000 427,000
---------------- ---------------
Net (decrease) increase in cash and
cash equivalents $ (752,000) $ 2,598,000
================ ===============
Cash provided by operating activities decreased $2,844,000 during the
quarter ended September 30, 2004 versus the prior year period. Management
incentive compensation plan payments, commensurate with fiscal year 2004
results, of $1,700,000, higher income tax payments of $700,000 particularly in
Japan, coupled with a build up in inventory in anticipation of second quarter
shipments primarily account for the change.
The Company utilized $373,000 and $178,000 for investing activities for
the three months ended September 30, 2004 and 2003 respectively, for additions
to property, plant and equipment and patents and trademarks.
On September 15, 2004, the Company amended its primary source of outside
financing, the revolving credit agreement with Maple Bank GmBH. The amendment
increased the size of the facility to $28,000,000 from $20,000,000, extended the
maturity date of the loan to October 2008, and reduced the interest rates and
annual fees associated with the agreement. The credit facility is collateralized
by substantially all of the accounts and notes receivable of the Company and a
portion of the Company's inventory up to a maximum amount of $10,000,000.
Borrowings under the credit facility are subject to a borrowing base and bear
interest at a rate equal to the three-month Eurodollar rate (as defined in the
Credit Agreement) plus (i) 5.125% for loans denominated in U.S. Dollars or (ii)
5.525% for loans denominated in Euros. The interest rate will be reduced by
0.50% or whole increments thereof for each whole increment of Disclosed EBITDA
(as defined in the Credit Agreement) that equals or exceeds $1,250,000 for any
fiscal quarter commencing with the quarter ending December 31, 2003. In no event
however, may the interest rate be less than 7.625% for EURO based borrowings and
7.5% for dollar based borrowings. Additionally, the agreement granted to the
lender an option to acquire a maximum of $5,000,000 of equity securities (as
defined in the amendment) should the Company choose to issue any such
securities. The amended credit agreement does not require the Company to meet
any financial covenants, except for the limitation on annual capital
expenditures; however, it contains a material adverse effect clause, which
provides that Maple would not be obligated to fund any loan, convert or continue
any loan as a LIBOR loan or issue any new letters of credit in the event of a
material adverse effect. Management does not anticipate that such an event will
occur; however, there can be no assurance that such an event will not occur.
Management also expects that as a result of the aforementioned amendment and
full amortization of fiscal year 2004 debt financing costs that reported
interest expense for the full year ending June 30, 2005 will be approximately
$2,000,000 lower than fiscal year ended June 30, 2004.
The Company maintains relationships with both foreign and domestic banks,
which combined have extended credit facilities to the Company totaling
$34,443,000, including $28,000,000 available under the Maple GmbH Credit
Agreement. As of September 30, 2004, the Company had $25,315,000 outstanding
under these credit facilities including $19,781,000 under the Maple GmbH Credit
Agreement.
18
The Company believes that its cash flows from operations, along with the
available bank lines of credit and alternative sources of borrowings, if
necessary are sufficient to finance its working capital and other capital
requirements through the term of the credit agreement with Maple.
At September 30, 2004 and June 30, 2004, the Company did not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance entities, special purpose
entities or variable interest entities, which would have been established for
the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, the Company is not exposed to
any financing, liquidity, market or credit risk that could arise if the Company
had engaged in such relationships.
The following summarizes the Company's contractual obligations at
September 30, 2004 and the effect such obligations are expected to have on its
liquidity and cash flow in future periods (in thousands):
Fiscal Years ending June 30,
Total at
September
30, 2004 2005* 2006 2007 2008 2009 2010
-------- ----- ---- ---- ---- ---- ----
and
thereafter
Contractual Obligations:
Loans payable $ 2,727 $ 2,727 $ - $ - $ - $ - $ -
Capital lease obligations 229 77 85 35 19 13 -
Long-term debt 22,588 1,031 1,043 578 124 19,812 -
Non-cancelable operating lease obligations 11,015 3,346 3,742 2,012 1,100 769 46
---------- --------- -------- ------- ------- ------- -------
Total contractual cash obligations $ 36,559 $ 7,181 $ 4,870 $ 2,625 $ 1,243 $20,594 $ 46
========== ========= ======== ======= ======= ======= =======
*Includes only the remaining nine months of the fiscal year ending June 30,
2005.
IMPACT OF INFLATION
The Company's results are affected by the impact of inflation on
manufacturing and operating costs. Historically, the Company has used selling
price adjustments, cost containment programs and improved operating efficiencies
to offset the otherwise negative impact of inflation on its operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
A discussion of market risk exposures is included in Part II Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk" of the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2004. There have
been no material changes during the three months ended September 30, 2004.
ITEM 4: CONTROLS AND PROCEDURES:
The Company maintains disclosure controls and procedures designed to
ensure that the information required to be disclosed in the reports that the
Company files or submits under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
these disclosure controls and procedures as of the end of our fiscal quarter
September 30,2004, the period covered by this report. Based on that evaluation,
the Company's Chief Executive Officer and Chief Financial
19
Officer have concluded that the Company's disclosure controls and procedures are
effective to achieve their stated purpose. However, there is no assurance that
the Company's disclosure controls and procedures will operate effectively under
all circumstances. No changes were made to the Company's internal control over
financial reporting during the fiscal quarter ended September 30, 2004, that
have materially affected, or are reasonably likely to materially effect, the
Company's internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM 2. PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASES
There has been no activity under the Company's stock repurchase program
for the quarter ended September 30, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on November 9, 2004.
(b) A brief description of matters voted upon and the results of the voting
follows:
Proposal 1 - To elect two Class II Directors to serve for three-year terms or
until their respective successors are elected and qualify.
SCHEDULE OF VOTES CAST FOR EACH DIRECTOR
Total Vote for Total Vote Withheld
Each Director from Each Director
------------- ------------------
Class A
Mark T. Becker 12,022,778 87,390
Class B
Gerald A. Nathe 13,808,160 0
ITEM 6. EXHIBITS
31.01 Certification of the Principal Executive Officer pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
31.02 Certification of the Principal Financial Officer pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.01 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350 (filed herewith).
32.02 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350 (filed herewith).
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALDWIN TECHNOLOGY COMPANY, INC.
BY /s/ Vijay C. Tharani
----------------------
Vice President, Chief Financial
Officer and Treasurer
Dated: November 15, 2004
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