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 March 31, 2003
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 12-3258160
(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 April 30, 2003
----- -----------------------------
Class A Common Stock
$0.01 par value 12,828,647
Class B Common Stock
$0.01 par value 2,185,883
BALDWIN TECHNOLOGY COMPANY, INC.
INDEX
Page
----
Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets at March 31, 2003
(unaudited) and June 30, 2002 1-2
Consolidated Statements of Income for the three
and nine months ended March 31, 2003 (unaudited)
and 2002 (unaudited)
3
Consolidated Statements of Changes in Shareholders'
Equity for the nine months ended March 31, 2003
(unaudited) and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended March 31, 2003 (unaudited) and 2002
(unaudited)
5-6
Notes to Consolidated Financial Statements (unaudited)
7-18
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-29
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 29
Item 4 Controls and Procedures 29
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K 30
Signatures 31
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
March 31, 2003 June 30, 2002
-------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 4,028 $ 4,679
Accounts receivable trade, net of allowance for doubtful
accounts of $1,962 ($1,994 at June 30, 2002) 23,209 27,262
Notes receivable, trade 11,533 13,390
Inventories, net 23,267 24,928
Deferred taxes 878 893
Prepaid expenses and other 4,158 6,581
------------- -------------
Total Current Assets 67,073 77,733
------------- -------------
MARKETABLE SECURITIES:
Cost $504 ($475 at June 30, 2002) 342 430
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land and buildings 856 2,669
Machinery and equipment 2,907 5,526
Furniture and fixtures 3,823 3,716
Leasehold improvements 468 458
Capital leases 195 428
------------- -------------
8,249 12,797
Less: Accumulated depreciation and amortization (3,202) (6,453)
------------- -------------
Net Property, Plant and Equipment 5,047 6,344
------------- -------------
PATENTS AND TRADEMARKS at cost, less accumulated
amortization of $3,652 ($3,432 at June 30, 2002) 2,046 2,061
GOODWILL, net 10,009 9,618
DEFERRED TAXES 7,861 6,277
OTHER ASSETS 4,548 6,025
------------- -------------
TOTAL ASSETS $ 96,926 $ 108,488
============= =============
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)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, 2003 June 30, 2002
-------------- -------------
(Unaudited)
CURRENT LIABILITIES:
Loans payable $ 4,983 $ 5,372
Current portion of long-term debt 12,646 5,416
Accounts payable, trade 11,413 12,389
Notes payable, trade 8,533 7,837
Accrued salaries, commissions, bonus and
profit-sharing 4,001 3,432
Customer deposits 4,859 4,765
Accrued and withheld taxes 1,658 1,719
Income taxes payable 997 1,297
Other accounts payable and accrued liabilities 11,468 13,187
------------- -------------
Total current liabilities 60,558 55,414
------------- -------------
LONG TERM LIABILITIES:
Long-term debt 535 11,873
Other long-term liabilities 6,634 7,447
------------- -------------
Total long-term liabilities 7,169 19,320
------------- -------------
Total liabilities 67,727 74,734
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Class A Common Stock, $.01 par, 45,000,000 shares authorized,
16,458,849 shares issued 165 165
Class B Common Stock, $.01 par, 4,500,000 shares authorized,
2,185,883 shares issued 21 21
Capital contributed in excess of par value 56,986 56,986
Retained Deficit (15,147) (8,527)
Accumulated other comprehensive loss (177) (2,017)
Less: Treasury stock, at cost:
Class A - 3,630,202 shares (12,199) (12,199)
Note receivable from a former executive for common stock issuance
(450) (675)
------------- -------------
Total shareholders' equity 29,199 33,754
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 96,926 $ 108,488
============= =============
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 For the nine months
Ended March 31, ended March 31,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net Sales $ 31,061 $ 37,867 $ 99,153 $ 109,559
Cost of goods sold 22,957 25,884 70,379 75,686
--------- --------- --------- ---------
Gross Profit 8,104 11,983 28,774 33,873
--------- --------- --------- ---------
Operating Expenses:
General and administrative 3,540 4,490 11,197 13,470
Selling 2,871 2,858 8,759 9,708
Engineering and development 3,937 3,607 12,445 11,090
Provision for loss on the disposition of
pre-press operations 0 0 0 (86)
Restructuring charges 67 289 3,404 795
--------- --------- --------- ---------
10,415 11,244 35,805 34,977
--------- --------- --------- ---------
Operating (loss) income (2,311) 739 (7,031) (1,104)
--------- --------- --------- ---------
Other (income) expense:
Interest expense 499 419 1,817 1,279
Interest income (58) (67) (199) (214)
Royalty income, net (1,310) (1,106) (2,468) (3,122)
Other (income) expense, net 62 (94) 494 292
--------- --------- --------- ---------
(807) (848) (356) (1,765)
--------- --------- --------- ---------
(Loss) income from continuing operations before
income taxes (1,504) 1,587 (6,675) 661
(Benefit) provision for income taxes (387) 513 235 317
--------- --------- --------- ---------
(Loss) income from continuing operations (1,117) 1,074 (6,910) 344
Discontinued operations (Note 10):
Loss from operations of discontinued component (less
applicable income taxes of $0) 0 (36) (253) (263)
Gain on sale of discontinued component
(less applicable income taxes of $0) 0 0 543 0
--------- --------- --------- ---------
Net (loss) income $ (1,117) $ 1,038 $ (6,620) $ 81
========= ========= ========= =========
Net (loss) income per share - basic and diluted
Continuing operations $ (0.07) $ 0.07 $ (0.46) $ 0.02
Discontinued operations - loss from
Operations 0.00 0.00 (0.02) (0.01)
Discontinued operations - gain on sale 0.00 0.00 0.04 0.00
--------- --------- --------- ---------
$ (0.07) $ 0.07 $ (0.44) $ 0.01
========= ========= ========= =========
Weighted average shares outstanding:
Basic and diluted 15,015 15,015 15,015 14,882
========= ========= ========= =========
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)
Note
receivable
Class A Class B Capital Accumulated from a former
Common Stock Common Stock Contributed Other Treasury Stock executive for
------------ ------------ In Compre- -------------- Common Compre-
Excess Retained hensive Stock hensive
Shares Amount Shares Amount of Par Deficit Loss Shares Amount Issuance Loss
------ ------ ------ ------ ------ ------- ---- ------ ------ -------- ----
Balance at
June 30, 2002 16,458,849 $165 2,185,883 $21 $56,986 $ (8,527) $ (2,017) (3,630,202) $(12,199) $ (675)
---------- ---- --------- --- ------- -------- --------- ---------- -------- ------
Net loss for the nine
months ended March
31, 2003
(6,620) $(6,620)
Translation
adjustment 1,858 1,858
Unrealized loss on
available-for-sale
securities, net of
tax (68) (68)
Unrealized gain on
forward contracts,
net of tax 50 50
---------
Comprehensive loss $ (4,780)
=========
Note receivable
from a former
executive 225
---------- ---- --------- --- ------- -------- --------- ---------- -------- ------
Balance at
March 31, 2003 16,458,849 $165 2,185,883 $21 $56,986 $(15,147) $ (177) (3,630,202) $(12,199) $ (450)
========== ==== ========= === ======= ======== ========= ========== ======== ======
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 nine months ended March 31,
-----------------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net (loss) income $ (6,620) $ 81
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 1,424 1,471
Accrued retirement pay 448 545
Provision for losses on accounts receivable 176 955
(Gain) loss from disposition of businesses (543) 8
Restructuring charges 3,404 795
Deferred income taxes (1,531) 1,940
Write-off of deferred debt financing costs 0 255
Changes in assets and liabilities, net of businesses sold:
Accounts and notes receivable 6,457 (3,357)
Inventories 923 150
Prepaid expenses and other 2,509 (2,442)
Other assets 1,276 153
Customer deposits 88 417
Accrued compensation 116 (1,670)
Payments against restructuring charges (2,688) (2,695)
Accounts and notes payable, trade (572) (285)
Income taxes payable (269) (3,011)
Accrued and withheld taxes (175) (58)
Other accounts payable and accrued liabilities (2,394) 1,323
Interest payable (239) (231)
----------- -----------
Net cash provided (used) by operating activities 1,790 (5,656)
----------- -----------
Cash flows from investing activities:
Proceeds from disposition of businesses, net 3,736 6,828
Additions of property (695) (1,397)
Additions of patents and trademarks (269) (346)
----------- -----------
Net cash provided by investing activities 2,772 5,085
----------- -----------
Cash flows from financing activities:
Long-term and short-term debt borrowings 471 9,466
Long-term and short-term debt repayments (5,461) (9,694)
Decrease in book overdraft 0 (895)
Principal payments under capital lease obligations (34) (17)
Payment of debt financing costs (526) (222)
Other long-term liabilities 96 493
Purchases of treasury stock 0 (39)
----------- -----------
Net cash used by financing activities (5,454) (908)
----------- -----------
Effects of exchange rate changes 241 73
----------- -----------
Net decrease in cash and cash equivalents (651) (1,406)
Cash and cash equivalents at beginning of period 4,679 6,576
----------- -----------
Cash and cash equivalents at end of period $ 4,028 $ 5,170
=========== ===========
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 nine months
ended March 31,
---------------
2003 2002
---- ----
Cash paid during the period for:
Interest $ 1,578 $ 1,510
Income taxes $ 1,937 $ 3,064
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
controls and accessories equipment for the printing industry.
The Company has experienced operating losses, negative cash flows and debt
covenant violations over the past two fiscal years. As more fully discussed in
these notes to the consolidated financial statements, the Company has embarked
on restructuring plans (see Note 9) and undertaken other actions aimed at
improving the Company's competitiveness, operating results and cash flow. These
actions have included the sale of certain non-core operating units (see Note
10), the consolidation of manufacturing facilities and headcount reductions
reflecting weak market conditions. As a result of these actions, combined with
the renegotiation of certain of the Company's debt obligations (see Note 3),
management believes that the Company's cash flows from operations, along with
available bank lines of credit and alternative sources of borrowing are
sufficient to finance its working capital and other capital requirements for the
near and long-term future. Management further believes that alternative sources
of financing are available to finance the existing facilities beyond July 1,
2003, which the Company is currently pursuing. As more fully described in Note
3, the Company did not meet a minimum operating income covenant or a tangible
net worth covenant for the quarter ended March 31, 2003; accordingly, amounts
outstanding under certain loan obligations have become payable on demand. The
Banks (as defined in Note 3) have granted a waiver of these covenant violations
for the quarter ended March 31, 2003. If the Company does not obtain alternative
financing prior to the July 1, 2003 maturity date, management will be required
to take additional actions. These actions may include reducing operating
expenses or selling assets in an effort to meet liquidity needs. There can be no
assurances, however, that such actions will be sufficient to meet liquidity
needs in the event a demand for immediate payment is made by the lenders.
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. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. 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,
2002. Operating results for the three and nine months ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 2003. All significant intercompany transactions have been
eliminated in consolidation.
NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS:
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123" ("SFAS 148"). SFAS 148 amends FASB Statement No. 123
"Accounting for Stock-Based Compensation"
7
("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 prescribed by SFAS 123. SFAS 148 also amends the
disclosure provisions of SFAS 123 to require prominent disclosure in both annual
and interim financial statements about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. The amendment relating to the additional disclosure requirements
in the interim financial statements are effective for interim periods beginning
after December 15, 2002. SFAS 148 is not expected to have a material impact on
the operations or cash flows of the Company. However, additional disclosures
have been incorporated into the Company's interim consolidated financial
statements beginning with this quarter ended March 31, 2003.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, (an interpretation of FASB Statements No.
5, 57, and 107 and rescission of FASB interpretation No. 34)" ("FIN 45"). FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. FIN 45 also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 were effective for interim and annual financial
statements for periods ending after December 15, 2002. The initial recognition
and initial measurement provisions did not have a material impact on the
operations or cash flows of the Company. See Note 16 regarding disclosures about
the Company's warranty costs.
RECLASSIFICATIONS:
Certain prior year items have been reclassified to conform to the current
period's presentation.
NOTE 3 - REVOLVING CREDIT FACILITY:
On October 31, 2000, the Company entered into a $35,000,000 revolving
credit facility (the "Credit Facility") with Fleet National Bank and First Union
National Bank (collectively the "Banks"), which had an original scheduled
maturity date of October 31, 2003. The Credit Facility consisted of a
$25,000,000 revolving credit line (the "Revolver") and a $10,000,000 credit line
to be utilized for acquisitions, (the "Acquisition Line"). On January 28, 2002,
the Credit Facility was amended (the "Amended Credit Facility"), to among other
things, remove the Acquisition Line, reduce the Revolver to $21,000,000 (subject
to a borrowing base), and change the maturity date to October 1, 2002. In
addition, $4,000,000 of the existing Revolver was converted into a term loan
(the "Term Loan"), which matured on June 28, 2002, resulting in available
borrowings under the Revolver from July 1, 2002 to October 1, 2002 of
$17,000,000. The Amended Credit Facility required the Company to maintain
certain financial covenants including minimum operating income covenants. The
Revolver has associated commitment fees, which are calculated quarterly, at a
rate of one-half of one percent per annum of the unused portion of the Revolver.
During the quarters ended March 31, 2002 and June 30, 2002, the Company
did not meet its minimum operating income covenants contained in the Amended
Credit Facility, and further the Company did not make the required $4,000,000
principal payment on the Term Loan on June 28, 2002. The Banks granted a
forbearance of the collection of the indebtedness until October 1, 2002 and on
October 30, 2002, the Company and the Banks entered into an amendment to further
amend and extend the Amended Credit Facility and waive the covenant violations
and Term Loan default (the "Extended Credit Facility"). The Extended Credit
Facility, totaling $20,900,000, consists of a $17,000,000 revolving credit line
(the "Extended Revolver") and a $3,900,000 term loan each due July 1, 2003 (the
"Extended Term Loan"). The Extended
8
Credit Facility required the Company to utilize the net proceeds of $3,736,000
from the sale of certain assets of its wholly-owned subsidiary Baldwin Kansa
Corporation ("BKA") (see Note 10) to reduce outstanding borrowings under the
Extended Revolver before October 30, 2002, of which $2,700,000 permanently
reduced the Extended Revolver and $1,036,000 became available for future
borrowings, subject to a borrowing base calculation. At March 31, 2003, the
Company had outstanding borrowings of $12,528,000 under the Extended Revolver
and Extended Term Loan, plus outstanding letters of credit of $3,270,000.
Additionally, beginning in December 2002 and extending through June 2003, the
Company is required to permanently reduce the Extended Revolver by making
monthly principal payments of $125,000. The Company was also required to
permanently reduce the Extended Revolver by $5,000,000 on December 30, 2002 and
by $5,000,000 on March 30, 2003, but only if the Company generated non-operating
alternative sources of financing. As the Company did not generate any
alternative sources of financing since entering into the Extended Credit
Facility on October 30, 2002, the Company was not required to make, and did not
make, the $5,000,000 payment on December 30, 2002 or the $5,000,000 payment on
March 30, 2003. The entire outstanding balance of $12,528,000 due under the
Extended Revolver and Extended Term Loan has been classified as current as of
March 31, 2003 (of which $250,000 was paid through May 15, 2003).
Interest on the Extended Revolver and the Extended Term Loan is charged at
prime plus 2.00% per annum. The Extended Credit Facility is collateralized by a
pledge of the capital stock and certain domestic assets, of the Company's
subsidiaries. The Extended Credit Facility includes certain restrictions, which
limit the incurrence of debt and prohibit dividend payments among other things,
and requires the Company to satisfy certain financial covenants. These financial
covenants, as defined in the Extended Credit Facility, require the Company to
achieve minimum operating income of $945,000 for the quarter ended December 31,
2002, $844,000 for the quarter ended March 31, 2003 and $732,000 for the quarter
ending June 30, 2003. The Company did not meet the minimum operating income
covenant of $844,000 and the tangible net worth covenant (as defined in the
Amended Credit Facility) for the quarter ended March 31, 2003, accordingly,
amounts outstanding under the Extended Credit Facility have become payable on
demand. The Banks have granted a waiver of these covenant violations for the
quarter ended March 31, 2003. The ability to satisfy future covenants depends in
part on management's successful execution of the restructuring plans discussed
in Note 9 and other business factors outside of the control of management. There
can be no guarantee that such future covenants will be met. Management believes
that alternative sources of financing are available to finance the existing
facilities on a long-term basis, which the Company is currently pursuing. If the
Company does not obtain alternative financing prior to the July 1, 2003 maturity
date, management will be required to take additional actions. These actions may
include reducing operating expenses or selling assets in an effort to meet
liquidity needs. There can be no assurances, however, that such actions will be
sufficient to meet liquidity needs in the event demand for immediate payment is
made by the Banks.
The Company maintains relationships with both foreign and domestic banks,
which combined have extended credit facilities to the Company totaling
$20,338,000, including amounts available under the Extended Revolver and the
Extended Term Loan. As of March 31, 2003, the Company had $17,511,000
outstanding under these credit facilities including $12,528,000 under the
Extended Revolver and the Extended Term Loan. Total debt levels as reported on
the balance sheet at March 31, 2003 are $493,000 higher than they would have
been if June 30, 2002 exchange rates had been used.
NOTE 4 - NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share includes no dilution and is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted net income
(loss) per share reflects the potential dilution of securities that could share
in the earnings of an entity. The weighted average shares
9
outstanding used to compute diluted net income (loss) per share include zero
additional shares for each of the three and nine months ended March 31, 2003 and
2002, which represent potentially dilutive securities. Outstanding options to
purchase 1,400,000 and 1,516,000 shares of the Company's common stock for the
three and nine months ended March 31, 2003 and 2002, respectively, are not
included in the above calculation to compute diluted net income (loss) per share
as they have an anti-dilutive effect.
NOTE 5 -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 and consists of cumulative translation adjustments, unrealized gains and
losses on available-for-sale securities and unrealized gains and losses on
derivative instruments. AOCI consists of the following:
March 31, 2003 June 30, 2002
-------------- -------------
(Unaudited)
Cumulative translation adjustments $ (101,000) $ (1,959,000)
Unrealized loss on investments,
net of deferred taxes of $68,000
($19,000 at June 30, 2002) (94,000) (26,000)
Unrealized gain (loss) on derivatives,
net of deferred taxes of $9,000
($10,000 at June 30, 2002) 18,000 (32,000)
------------- -------------
$ (177,000) $ (2,017,000)
============== =============
NOTE 6 - INVENTORIES:
Inventories consist of the following:
March 31, 2003 June 30, 2002
-------------- -------------
(Unaudited)
Raw materials $ 10,937,000 $ 12,690,000
In process 6,980,000 6,081,000
Finished goods 5,350,000 6,157,000
------------- -------------
$ 23,267,000 $ 24,928,000
============= =============
Foreign currency translation effects increased inventories by $1,125,000
from June 30, 2002 to March 31, 2003.
NOTE 7 - DERIVATIVES:
During the nine months ended March 31, 2003, the Company had currency
futures contracts and an interest rate swap agreement that qualified as cash
flow hedges; accordingly, the gain or loss on these cash flow hedges was
recorded in AOCI and will be recognized when the hedged items affect earnings.
On April 27, 2001, the Company entered into an interest rate swap agreement (the
"Swap") with Fleet National Bank. The effect of this agreement was to convert
$15,000,000 of the Company's variable rate debt into fixed rate debt with an
interest rate of 4.98% with the maturity the same as the then existing credit
facility. Included in interest expense was $137,000 and $386,000, respectively,
for the three and nine months ended March 31, 2003 and $112,000 and $263,000,
respectively, for the three and nine months ended March 31, 2002 associated with
this Swap.
10
As a result of entering into the Extended Credit Facility on October 30,
2002, as defined in Note 3, which changed various provisions of the Amended
Credit Agreement, also defined in Note 3, including the maturity date, the Swap
no longer qualified as an effective cash flow hedge. Future changes in the fair
value of the Swap have and will be recorded in earnings through its maturity
date of October 30, 2003. The adjustment to the fair value of this portion of
the Swap at March 31, 2003 resulted in a gain for the three and nine months
ended March 31, 2003 of $122,000 and $57,000, respectively, which was recorded
in "Other income and expense" in the accompanying consolidated statement of
income.
Except for the Swap, hedge ineffectiveness had no material impact on
earnings for the three and nine months ended March 31, 2003 and 2002.
Unrealized net gains (losses) included in AOCI are as follows:
March 31, 2003 March 31, 2002
-------------- --------------
Balance at beginning of period $ (32,000) $ (299,000)
Additional gains (losses), net 28,000 (201,000)
Amounts reclassified to earnings, net 22,000 343,000
----------- -----------
Balance at end of period $ 18,000 $ (157,000)
=========== ===========
The unrealized net gain of $18,000 at March 31, 2003 is comprised of net
gains on currency futures contracts, which expire at various times through April
29, 2003, and are expected to be reclassified to earnings during that period.
NOTE 8 -- GOODWILL AND OTHER INTANGIBLE ASSETS:
The changes in the carrying amount of goodwill for the nine months ended
March 31, 2003 are as follows (in thousands):
Accessories and Controls
------------------------
Gross
Carrying Accumulated Net
Amount Amortization Book Value
------ ------------ ----------
Balance as of July 1, 2002 $ 12,760 $ 3,142 $ 9,618
Effects of currency translation 469 78 391
---------- ---------- ----------
Balance as of March 31, 2003 $ 13,229 $ 3,220 $ 10,009
========== ========== ==========
Intangible assets subject to amortization are comprised of the following:
As of March 31, 2003 As of June 30, 2002
-------------------- -------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Intangible Assets: Amount Amortization Amount Amortization
------------------ ---------- ----------- ---------- -----------
Patents and trademarks $5,698,000 $3,652,000 $5,493,000 $3,432,000
Other 686,000 465,000 1,021,000 746,000
---------- ---------- ---------- ----------
Total $6,384,000 $4,117,000 $6,514,000 $4,178,000
========== ========== ========== ==========
Amortization expense associated with these intangible assets was $174,000
and $571,000, respectively, for the three and nine months ended March 31, 2003
and $228,000 and $592,000, respectively, for the three and nine months ended
March 31, 2002. The other category is included in "Other assets" on the
accompanying consolidated balance sheets.
11
NOTE 9 -- RESTRUCTURING CHARGES AND RELATED RESERVES:
During March 2000, the Company initiated a restructuring plan (the "March
2000 Plan") that included the consolidation of production into certain
facilities, and a reduction in total employment, primarily in the United States.
The March 2000 Plan was expanded during the fourth quarter of the fiscal year
ended June 30, 2001. The Company recorded restructuring charges in the amounts
of $94,000 and $795,000 for the nine months ended March 31, 2003 and 2002,
respectively, related to the March 2000 Plan. These charges relate primarily to
additional exit costs, which are expensed as incurred. The March 2000 Plan
reduced the Company's worldwide cost base and strengthened its competitive
position as a leading global supplier of auxiliary equipment to the printing and
publishing industry. Prior to the March 2000 Plan, the Company was managed in a
decentralized manner through geographically dispersed autonomous business units.
Given that many of the Company's significant customers have been reorganizing on
a global basis, management decided to restructure the Company along functional
lines on a global basis. Rather than have sales, product development and
production activities at each decentralized business unit, the restructuring
plan included the centralization of these activities.
Activity in the nine months ended March 31, 2003 under the March 2000 Plan
was as follows:
Remaining Additional Charges Remaining
Reserve Restructuring Against Reserve
June 30, 2002 Charges Reserve March 31, 2003
----------- ----------- ----------- --------------
(in thousands)
Severance ............................. $ 557 $ 25 $ (199) $ 384
Facility lease termination costs ...... 1,678 62 (625) 1,114
Other costs ........................... 0 7 (7) 0
----------- ----------- ----------- -----------
Total program ......................... $ 2,235 $ 94 $ (831) $ 1,498
=========== =========== =========== ===========
Severance costs will be paid through the balance of the current fiscal
year ending June 30, 2003. Facility lease termination costs will be paid through
April 2006. As of March 31, 2003, $749,000 is included in "Other accounts
payable and accrued liabilities" and $749,000 is included in "Other long-term
liabilities."
In August 2002, the Company announced additional restructuring activities
(the "August 2002 Plan") primarily in response to weak market conditions. The
August 2002 Plan includes a reduction in employment by approximately 90 people
worldwide as well as plant consolidations. As a result, the Company recorded an
initial restructuring charge of $3,241,000 during the nine months ended March
31, 2003. The initial charge for the August 2002 Plan was recorded to account
for the estimated employee severance and benefit costs of approximately
$2,757,000, lease termination costs of approximately $437,000 and approximately
$47,000 in incremental costs associated with product discontinuance. The
additional charges of $69,000 recorded during the nine months ended March 31,
2003 related primarily to product transfer and other costs, which are being
expensed as incurred.
Activity in the nine months ended March 31, 2003 under the August 2002
Plan was as follows:
Additional Charges Remaining
Initial Restructuring Against Reserve
Reserve Charges Reserve March 31, 2003
----------- ----------- ----------- --------------
(in thousands)
Severance ...................... $ 2,757 $ 0 $ (1,719) $ 1,038
Facility lease termination costs 437 0 (68) 369
Other costs .................... 47 69 (69) 47
----------- ----------- ----------- -----------
Total program .................. $ 3,241 $ 69 $ (1,856) $ 1,454
=========== =========== =========== ===========
12
Severance and other costs will be paid through September 2003, and
facility lease termination costs will be paid through December 2004. As of March
31, 2003, $1,276,000 is included in "Other accounts payable and accrued
liabilities" and $178,000 is included in "Other long-term liabilities."
NOTE 10 - SALE OF BUSINESSES:
During the first quarter of fiscal 2003, the Company committed to a plan
to dispose of substantially all of the assets of BKA; the transaction closed on
October 10, 2002. Under SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," ("SFAS 144") BKA qualified as a component and therefore
the results of BKA's operations are required to be reported as discontinued
operations in the accompanying consolidated statements of income. Accordingly,
BKA's results for each of the nine months ended March 31, 2003 and 2002 have
been aggregated and reported as a single amount in each quarter (2002 amounts
have been reclassified to conform to the 2003 presentation). BKA's net sales
were zero and $978,000, respectively for the three and nine months ended March
31, 2003 and $1,054,000 and $4,076,000, respectively, for the three and nine
months ended March 31, 2002. The consideration received for the transaction,
after certain post-closing adjustments, was approximately $3,736,000 and
resulted in a gain on the sale of discontinued operations of approximately
$543,000 (net of $80,000 in transaction costs), which was recognized in the
second quarter of the fiscal year ending June 30, 2003. During the fourth
quarter of fiscal 2002, the Company recorded an impairment charge of $5,434,000
as a result of a write-off of goodwill associated with this business.
Net assets sold on October 10, 2002 and net assets held for disposal
related to BKA at June 30, 2002 are included in the following categories:
October 10, 2002 June 30, 2002
---------------- -------------
Accounts receivable, net of allowance of $5,000 .............. $ 394,000 $ 635,000
Inventory .................................................... 1,863,000 2,107,000
Prepaid expenses and other current assets .................... 29,000 37,000
Property, plant and equipment, net of accumulated depreciation 1,236,000 1,334,000
Accounts payable ............................................. (169,000) (200,000)
Accrued salaries, commissions, bonus and profit-sharing ...... (61,000) (135,000)
Customer deposits ............................................ (145,000) (24,000)
Accrued and withheld taxes ................................... 0 (2,000)
Other accounts payable and accrued liabilities ............... (34,000) (14,000)
-------------- --------------
Net assets held for disposal ................................. $ 3,113,000 $ 3,738,000
============== ==============
On September 26, 2001, the Company sold substantially all of the assets of
its Roll Handling Group ("RHG") business. The consideration received for the
transaction, subject to certain post-closing adjustments, was approximately
$6,800,000. The Company received $1,808,000 at closing and $4,992,000 in October
2001. Accordingly, during the fourth quarter of fiscal 2001, the Company
recorded an impairment charge of approximately $14,831,000 relating primarily to
goodwill and certain assets of the RHG, including $961,000 of cumulative
translation adjustments related to the foreign operations of the RHG, which were
reclassified and reflected as part of the impairment charge. During the fourth
quarter of the fiscal year ended June 30, 2002, the Company recognized an
additional $250,000 loss on the sale of the RHG, and in the six months ended
December 31, 2002 recognized a further loss of approximately $211,000 upon
finalization of adjustments with the purchaser. The losses are recorded in other
expense.
Also during the fourth quarter of fiscal 2001, the Company decided to exit
its Print on Demand ("POD") business, which resulted in the write-off of
$687,000 of goodwill during the fourth quarter of the fiscal year ended June 30,
2001. The remaining assets of the POD business were not material.
13
NOTE 11 - 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.
On October 10, 2002, the Company sold substantially all of the assets of
BKA. BKA is accounted for as a discontinued operation in accordance with SFAS
144.
On September 26, 2001, the Company sold substantially all of the assets of
the RHG. The Company also completed the sale of the POD business in November
2001. Together the RHG and the POD businesses are included in divested
operations.
The accounting policies of the 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, 2002. An operating segment's
financial performance is primarily evaluated based on operating profit.
The tables below present information about reported segments for the three
and nine months ended March 31, 2003 and 2002 (in thousands). All prior periods
have been restated to conform to the current period's presentation. The results
for BKA are reported as discontinued operations for all periods and therefore
are excluded from segment operating results.
Three months ended Nine months ended
March 31, March 31,
(Unaudited) (Unaudited)
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net Sales:
Accessories and Controls $ 31,061 $ 37,867 $ 99,153 $ 104,768
Divested operations 0 0 0 4,791
----------- ----------- ----------- -----------
Total Net Sales $ 31,061 $ 37,867 $ 99,153 $ 109,559
=========== =========== =========== ===========
Foreign currency translation effects increased net sales by $6,869,000 ($0
related to the divested operations) for the nine months ended March 31, 2003.
Three months ended Nine months ended
March 31, March 31,
(Unaudited) (Unaudited)
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Operating (loss) income:
Accessories and Controls $ (174) $ 2,540 $ (520) $ 5,766
Corporate (2,137) (1,777) (6,511) (6,092)
Divested operations 0 (24) 0 (778)
----------- ----------- ----------- -----------
Total operating (loss) income (2,311) 739 (7,031) (1,104)
Interest expense, net (441) (352) (1,618) (1,065)
Royalty income, net 1,310 1,106 2,468 3,122
Other income (expense), net (62) 94 (494) (292)
----------- ----------- ----------- -----------
(Loss) income from
continuing operations
before income taxes $ (1,504) $ 1,587 $ (6,675) $ 661
=========== =========== =========== ===========
14
Included in operating income (loss) are restructuring charges of $67,000
and $2,729,000, respectively, for the three and nine months ended March 31, 2003
and $287,000 and $647,000, respectively, for the three and nine months ended
March 31, 2002 related to accessories and controls and zero and $675,000,
respectively, for the three and nine months ended March 31, 2003 and $2,000 and
$148,000, respectively, for the three and nine months ended March 31, 2002
related to corporate.
March 31, June 30,
2003 2002
-------- --------
(Unaudited)
Identifiable assets:
Accessories and Controls $ 92,895 $ 94,079
Corporate 4,011 14,016
Divested operations 20 393
-------- --------
Total identifiable assets $ 96,926 $108,488
======== ========
NOTE 12 - COMMON STOCK:
On August 13, 2002, the Compensation and Stock Option Committee of the
Board of Directors granted non-qualified options to purchase 154,500 shares of
the Company's Class A Common Stock ("Class A") to certain executives and key
personnel under the Company's 1996 Stock Option Plan (the "1996 Plan") at an
exercise price of $0.82 per share, the fair market value on the date of the
grant.
In August 2002, the Board of Directors approved an amendment to the 1996
Plan to: (a) increase the total number of shares of Class A that may be issued
pursuant to Options (as defined in the 1996 Plan) from 875,000 shares to
1,875,000 shares; (b) prohibit the granting of Options to purchase any shares of
the Company's Class B Common Stock ("Class B") under the 1996 Plan after the
date of the next annual meeting of the Company's stockholders, (c) provide that
Non-Employee Directors shall be eligible to receive Options under the 1996 Plan
and (d) make certain other technical and clarifying amendments. The stockholders
approved the amendment to the 1996 Plan on November 21, 2002.
Also in August 2002, the Board of Directors authorized the grant under the
1996 Plan, on the day after the next annual meeting of the Company's
stockholders and on the day after each succeeding annual meeting of the
Company's stockholders, to each Non-Employee Director, of an Option to purchase
5,000 shares of Class A of the Company at an exercise price per share equal to
100% of the fair market value of a share of Class A on the date such Option is
granted.
In August 2002, the Board of Directors also amended, subject to
stockholder approval of the amendments to the 1996 Plan set forth above, the
1998 Non-Employee Directors' Stock Option Plan to prohibit the granting of any
further options thereunder.
On November 22, 2002, the Compensation and Stock Option Committee of the
Board of Directors granted non-qualified options to purchase 25,000 shares of
Class A under the 1996 Plan at an exercise of price of $0.58 per share, the fair
market value on the date of the grant.
NOTE 13 - 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
15
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 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 (loss) income and (loss) earnings 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 (loss) income and (loss) earnings per share if the
Company had applied the fair value recognition provisions of SFAS 123 for the
three and nine months ended March 31, 2003 and 2002 (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
(Unaudited) (Unaudited)
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net (loss) income, as reported $ (1,117) $ 1,038 $ (6,620) $ 81
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related tax
effects (40) (73) (121) (220)
------------ ------------ ------------ ------------
Pro forma net (loss) income $ (1,157) $ 965 $ (6,741) $ (139)
============ ============ ============ ============
(Loss) earnings per share:
Basic - as reported $ (0.07) $ 0.07 $ (0.44) $ 0.01
============ ============ ============ ============
Basic - pro forma $ (0.08) $ 0.06 $ (0.45) $ (0.01)
============ ============ ============ ============
Diluted - as reported $ (0.07) $ 0.07 $ (0.44) $ 0.01
============ ============ ============ ============
Diluted - pro forma $ (0.08) $ 0.06 $ (0.45) $ (0.01)
============ ============ ============ ============
NOTE 14 - RELATED PARTIES:
On October 25, 2002, John T. Heald, Jr. resigned as President, Chief
Executive Officer and a Director of the Company. Mr. Heald was employed by the
Company from March 21, 2001 to November 21, 2002. In accordance with Mr. Heald's
employment agreement, the Company sold 375,000 shares of Class B to Mr. Heald in
October 2001 at $1.80 per share in exchange for a recourse demand promissory
note in the amount of $675,000. The promissory note bears interest, payable
annually, at a rate of 5% per annum. Of the 375,000 shares issued, 189,117
shares were treasury shares and the balance of 185,883 shares were newly issued
shares. The promissory note is collateralized by the shares, pursuant to a loan
and pledge agreement between Mr. Heald and the Company dated October 17, 2001.
If at any time, Mr. Heald sells any of these shares, he is to pay the Company
$1.80 times the number of shares sold within five days of receipt of the funds
from such sale. In November 2002, the Company amended the loan and pledge
agreement, and the promissory note, to evidence a reduction of the outstanding
principal due from Mr. Heald on the loan by $225,000 in exchange for a reduction
in deferred compensation payments to be made by the Company to Mr. Heald and
further, the Company will not demand payment of the promissory note for a period
of two years following Mr. Heald's termination. The reduction represented the
then present value of Mr. Heald's
16
deferred compensation benefit that accrued to Mr. Heald. The balance of the
loan, including interest, was $495,000 and $699,000 at March 31, 2003 and June
30, 2002, respectively.
In accordance with the terms of the employment agreement between the
Company and Gerald A. Nathe, Chairman, President and Chief Executive Officer of
the Company, the Company loaned Mr. Nathe $1,817,000 to enable Mr. Nathe to
purchase 315,144 shares of Class B from a non-employee shareholder in November
1993 in exchange for a recourse demand promissory note for said amount. The note
bore interest, payable on the anniversary dates of the loan, at LIBOR rates plus
1.25%, reset on the first day of each succeeding January, April, July and
October. The note, was collateralized by the shares pursuant to a loan and
pledge agreement between Mr. Nathe and the Company dated November 30, 1993, as
amended and restated on November 25, 1997. Upon termination of Mr. Nathe's
employment, the Company has agreed not to demand payment for a period of six
months following termination, or twelve months following termination if Mr.
Nathe's employment terminates by reason of death. Notwithstanding the foregoing,
if at any time Mr. Nathe sells any of these shares, he is to pay the Company
$5.77 times the number of shares sold within five days of receipt of the funds
from such sale. The Board of Directors of the Company forgave the interest
payment due on the loan from Mr. Nathe during the second quarter of the fiscal
year ended June 30, 2002 in the amount of $112,000. Such amount was recorded as
compensation expense to Mr. Nathe, and included in "General and administrative
expenses."
In February 2002, the Company amended Mr. Nathe's employment agreement and
loan and pledge agreement, reflecting a repayment by Mr. Nathe of a portion of
the principal on the loan. Mr. Nathe issued a substitute recourse demand
promissory note for $1,500,000, the outstanding principal balance on the date
thereof, with interest payable annually at an annual rate of 5%.
In August 2002, the Company amended Mr. Nathe's employment agreement, the
loan and pledge agreement, and the promissory note, to evidence a reduction of
the outstanding principal due from Mr. Nathe on the loan by $750,000 in exchange
for a reduction in deferred compensation payments to be made by the Company to
Mr. Nathe. The reduction represented the then present value of a portion of Mr.
Nathe's deferred compensation benefit that had accrued to Mr. Nathe. The balance
of the loan, including interest, was $827,000 and $1,544,000 at March 31, 2003
and June 30, 2002, respectively.
NOTE 15 - CUSTOMERS:
During the nine months ended March 31, 2003, two customers each accounted
for more than 10% of the Company's net sales. Koenig and Bauer
Aktiengesellschaft ("KBA") accounted for approximately 14.4% and 12.1%, of the
Company's net sales for the three and nine months ended March 31, 2003,
respectively and Mitsubishi accounted for approximately 8.5% and 10.0%,
respectively for the three and nine months ended March 31, 2003.
On September 10, 2001, one large OEM customer, Goss Graphic Systems, Inc.
("Goss") filed for bankruptcy protection under a prearranged Chapter 11
proceeding in the U.S. Bankruptcy Court. Goss' European and Asian subsidiaries
are not included in this proceeding. The Company received timely payments, on a
post petition basis, from the foreign subsidiaries of Goss, and continues to
monitor the status of all Goss payments. At March 31, 2003, the Company's
consolidated balance sheet included approximately $1,632,000 of trade
receivables from Goss, of which approximately $911,000 relates to Goss' European
and Asian subsidiaries, which are not included in the bankruptcy proceeding. The
balance of $721,000 is fully reserved. As a result of this bankruptcy filing,
the Company increased its bad debt reserve related to Goss by $0 and $634,000
during the nine months ended March 31, 2003 and 2002, respectively.
17
NOTE: 16 - 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.
Warranty Amount
---------------
Warranty reserve at June 30, 2002 $ 1,516,000
Additional warranty expense accruals 3,112,000
Payments against reserve (3,159,000)
Effects of currency rate fluctuations 121,000
-----------
Warranty reserve at March 31, 2003 $ 1,590,000
===========
NOTE 17 - LEGAL PROCEEDINGS:
On November 14, 2002, the Dusseldorf Higher Regional Court ("DHRC")
announced its judgment in favor of Baldwin in the patent infringement dispute
against its competitor, technotrans AG ("Technotrans"). Based on the DHRC
ruling, the Company is determining the amount of compensation to which it is
entitled. Technotrans has filed an appeal of the DHRC ruling with the German
Supreme Court in Karlsruhe. Technotrans has also filed to invalidate the
Company's patent with the German Patent Court in Munich. No amounts have been
recorded in the consolidated financial statements with regard to the contingent
gain from the DHRC judgment.
In February 2002, Epic Products International ("EPIC"), a licensee of one
of the Company's subsidiaries, filed a demand for arbitration with the American
Arbitration Association in Dallas, Texas claiming breach of the license
agreement and demanding, among other things, damages in an unspecified amount
alleging that Baldwin failed to make royalty payments to EPIC as and when due.
In October 2002, EPIC amended its arbitration claim to add additional damages
and allegations. In February 2003, EPIC and the Company agreed to settle their
dispute for a net payment of $737,000, representing the settlement of all
existing claims and an amendment to the license agreement on a prospective
basis. This settlement amount was to be paid by the Company over a five-month
period ending May 31, 2003; $650,000 has been paid through May 14, 2003. As a
result of this settlement, the Company included $250,000 in additional royalty
income for the three and nine months ended March 31, 2003. The consolidated
financial statements at March 31, 2003 include an accrual for the unpaid balance
of this settlement amount.
18
BALDWIN TECHNOLOGY COMPANY, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain factors,
which have affected the consolidated financial statements of Baldwin Technology
Company, Inc. ("Baldwin" or the "Company").
During the first quarter of the fiscal year ending June 30, 2003, the
Company committed to a plan to dispose of certain assets of its wholly-owned
subsidiary, Baldwin Kansa Corporation ("BKA"); the transaction closed on October
10, 2002. The consideration received for the transaction, after certain
post-closing adjustments, was approximately $3,736,000, which resulted in the
recognition of a gain on the sale of discontinued operations of approximately
$543,000 in the second quarter of the fiscal year ending June 30, 2003. During
the fourth quarter of the fiscal year ended June 30, 2002, the Company recorded
an impairment charge of $5,434,000 related to the goodwill associated with this
business as the recorded value of this goodwill exceeded the assessment of its
fair value made by the Company. For a further discussion, see Note 10 to the
consolidated financial statements. The effects of this transaction on the
consolidated financial statements are discussed below where significant.
On September 26, 2001, the Company sold substantially all of the assets of
its Roll Handling Group ("RHG"). The Company recorded an impairment charge
during the fiscal year ended June 30, 2001 of approximately $14,831,000 as a
result of the write-off of assets, primarily patents and goodwill, associated
with this business. The Company recorded a similar write-off of goodwill of
approximately $687,000 in the fourth quarter of the fiscal year ended June 30,
2001, associated with the Company's Print on Demand ("POD") business as the
Company also exited this business. As a result, the revenues and corresponding
expenses attributable to the RHG and the POD businesses are included in these
consolidated financial statements only for the periods owned by the Company. The
effects of these transactions on the consolidated financial statements are
discussed below where significant.
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 and (viii) the ability to successfully implement the Company's
restructuring initiatives. 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, 2002
which should be read in conjunction herewith.
19
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123" ("SFAS 148"). SFAS 148 amends 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 prescribed by
SFAS 123. SFAS 148 also amends the disclosure provisions of SFAS 123 to require
prominent disclosure in both annual and interim financial statements about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. The amendment relating to the
additional disclosure requirements in the interim financial statements are
effective for interim periods beginning after December 14, 2002. SFAS 148 is not
expected to have a material impact on the operations or cash flows of the
Company. However, additional disclosures have been incorporated into the
Company's interim consolidated financial statements beginning with this quarter
ended March 31, 2003.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 provides new guidance on the recognition of
impairment losses on long-lived assets, excluding goodwill, to be held and used
or to be disposed of and also broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. SFAS 144 also requires long-lived assets that are to be
abandoned, be treated as held for use and depreciated over their remaining
expected lives and broadens the presentation of discontinued operations in the
income statement to a component of an entity rather than a segment of a
business. SFAS 144 was effective for the Company beginning July 1, 2002 and has
not materially changed the methods used by the Company to measure impairment
losses on long-lived assets, but as a result of the adoption of SFAS 144, BKA
has been included as a discontinued operation in the consolidated statements of
income for the three and nine months ended March 31, 2003 and the corresponding
amounts relating to BKA for the prior periods ended March 31, 2002 have been
reclassified to conform to this presentation.
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,
2002.
NINE MONTHS ENDED MARCH 31, 2003 VS. NINE MONTHS ENDED MARCH 31, 2002
CONSOLIDATED RESULTS
Net sales for the nine months ended March 31, 2003 decreased by
$10,406,000 or 9.5% to $99,153,000 from $109,559,000 for the nine months ended
March 31, 2002. Currency rate fluctuations attributable to the Company's
overseas operations increased net sales by $6,869,000 in the current period,
while the previously noted divestitures of the RHG and the POD businesses
decreased net sales by $4,791,000. Excluding the effects of currency rate
fluctuations and the previously noted divestitures of the RHG and the POD
businesses, net sales would have decreased by $12,484,000. This decrease is
associated with a slowness in the global printing equipment marketplace and was
primarily the result of decreased product volumes, principally spray dampening
equipment, and sheeters.
Gross profit for the nine months ended March 31, 2003 was $28,774,000
(29.0% of net sales) as compared to $33,873,000 (30.9% of net sales) for the
nine months ended March 31, 2002, a decrease of $5,099,000 or 15.1%. Currency
rate fluctuations attributable to the Company's overseas operations increased
gross profit by $2,220,000 in the current period,
20
while the previously noted divestitures of the RHG and the POD businesses
decreased gross profit by $1,048,000. Excluding the effects of currency rate
fluctuations and the divestitures of the RHG and the POD businesses, gross
profit would have decreased by $6,271,000. Gross profit as a percentage of net
sales decreased primarily due to lower sales levels in the current period and to
additional warranty costs associated with two customers and higher freight costs
in the current period.
Selling, general and administrative expenses amounted to $19,956,000
(20.1% of net sales) for the nine months ended March 31, 2003 as compared to
$23,178,000 (21.2% of net sales) for the same period in the prior fiscal year, a
decrease of $3,222,000 or 13.9%. Currency rate fluctuations increased these
expenses by $1,000,000 in the current period while the previously noted
divestitures of the RHG and the POD businesses decreased selling, general and
administrative expenses by $1,167,000. Excluding the effects of currency rate
fluctuations and the divestitures of the RHG and the POD businesses, selling,
general and administrative expenses would have decreased by $3,055,000. Selling
expenses decreased by $1,119,000, which primarily relates to decreased
compensation and travel costs associated with the Company's restructuring
efforts, partially offset by increased subcontracting and advertising costs.
General and administrative expenses decreased by $1,936,000 primarily due to
decreased compensation costs primarily as a result of the Company's
restructuring efforts. The prior year period included a $439,000 bad debt charge
related to accounts receivable from a major OEM customer, interest forgiveness
of $112,000 related to a loan to an officer of the Company partially offset by a
reversal of approximately $300,000 of previous accruals associated with the
Company's profit-sharing contribution.
Engineering and development expenses increased by $1,355,000 over the same
period in the prior fiscal year to $12,445,000 for the nine months ended March
31, 2003 from $11,090,000 for the nine months ended March 31, 2002. Currency
rate fluctuations increased these expenses by $1,046,000 in the current period,
while the previously noted divestitures of the RHG and the POD businesses
further reduced these expenses by $659,000. Excluding the effects of currency
rate fluctuations and the previously noted divestitures of the RHG and the POD
businesses, engineering and development expenses would have increased by
$968,000 in the current period. This increase relates primarily to increased
research and development, labor and project costs and to increased travel and
subcontracting costs. As a percentage of net sales, engineering and development
expenses increased by 2.2% to 12.6% for the nine months ended March 31, 2003
compared to 10.1% for the same period in the prior fiscal year.
The Company recorded a restructuring charge of $3,404,000 for the nine
months ended March 31, 2003. This restructuring charge is comprised of
$3,310,000 related to the restructuring plan initiated in August 2002 (the
"August 2002 Plan") and $94,000 in additional exit costs, which are expensed as
incurred and related to the restructuring plan announced in March 2000 (the
"March 2000 Plan"). The initial charge for the August 2002 Plan of $3,241,000
was recorded to account for the estimated costs of employee severance and
benefit costs of approximately $2,757,000, approximately $437,000 in lease
termination costs and approximately $47,000 in incremental costs associated with
product discontinuance. The additional charges of $69,000 recorded during the
nine months ended March 31, 2003, relate primarily to product transfer costs,
which are being expensed as incurred. The August 2002 Plan includes the closing
of one domestic facility, with the related production being shifted to another
domestic facility, which was completed in January 2003. The workforce reduction
consists of approximately 160 employees in various employee groups worldwide,
including production, sales, engineering and administration. The August 2002
Plan is expected to reduce operating costs by approximately $6,900,000 annually
after full implementation, which is expected to occur by the end of the current
fiscal year ending June 30, 2003.
Interest expense for the nine months ended March 31, 2003 was $1,817,000
as compared to $1,279,000 for the nine months ended March 31, 2002. Currency
rate
21
fluctuations increased interest expense by $104,000 in the current period while
the previously noted divestitures of the RHG and the POD businesses further
reduced interest expense by $40,000. Excluding the effects of currency rate
fluctuations and the divestitures of the RHG and the POD businesses, interest
expense would have increased by $474,000. This increase was primarily due to
both higher interest rates in effect for the nine months ended March 31, 2003,
primarily as a result of the October 30, 2002 credit facility amendment and
deferred debt financing cost amortization during the period. Interest income
amounted to $199,000 and $214,000 for the nine months ended March 31, 2003 and
2002, respectively. Currency rate fluctuations increased interest income by
$24,000 in the current period.
Net royalty income for the nine months ended March 31, 2003 was $2,468,000
as compared to $3,122,000 for the nine months ended March 31, 2002. The decrease
in royalty income is primarily due to a decrease in the number of units sold in
the current period by two of the Company's licensees, which was offset by a
$250,000 credit relating to a settlement associated with one of the Company's
licensees.
Other income (expense), net amounted to an expense of $494,000 for the
nine months ended March 31, 2003 compared to $292,000 for the nine months ended
March 31, 2002. Other income (expense), net includes net foreign currency
transaction losses of $294,000 and gains of $32,000 for the nine months ended
March 31, 2003 and 2002, respectively, of which losses of $5,000 and $77,000,
respectively, resulted from the ineffective portions of derivative financial
instruments, which qualify as cash flow hedges. Net foreign currency transaction
losses in the prior year period included losses of $206,000 associated with
certain derivative financial instruments which ceased to qualify as hedges
pursuant to SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133") and as a result of the RHG divestiture. Other expense,
net for the nine months ended March 31, 2003 includes an additional loss on the
sale of the RHG of approximately $211,000 as a result of finalizing certain
adjustments with the buyer and a credit of $60,000 for an interest rate swap,
which no longer qualified as a hedge pursuant to SFAS 133. Other income and
expense in the prior year period included a $133,000 charge for an interest rate
swap which no longer qualified as a hedge pursuant to SFAS 133 and a $255,000
write-down of deferred financing costs; both were recorded as a result of the
renegotiation of the Amended Credit Facility (as defined below under "Liquidity
and Capital Resources at March 31, 2003"). Currency rate fluctuations decreased
other expenses by $5,000 in the current fiscal year period.
The Company recorded income tax expense of $235,000 for the nine months
ended March 31, 2003 as compared to $317,000 for the nine months ended March 31,
2002. The effective tax rate for the nine months ended March 31, 2003 differs
from the statutory rate as no benefit was recognized for losses incurred in
certain countries as the realization of such benefits was not more likely than
not. Currency rate fluctuations increased the provision for income taxes by
$54,000 in the current period.
Loss from operations of discontinued operations for the nine months ended
March 31, 2003 was $253,000 as compared to $263,000 for the nine months ended
March 31, 2002 and relates to BKA. The decrease in the loss is primarily the
result of reduced revenues and gross profit margins, being more than offset by
decreased operating expenses in the current period, as the business is included
only for three months in the current year period. A gain on the sale of BKA of
$543,000 was recorded in the quarter ended December 31, 2002 as a result of the
sale of the entity being completed on October 10, 2002.
The Company's net loss amounted to $6,620,000 for the nine months ended
March 31, 2003, compared to net income of $81,000 for the nine months ended
March 31, 2002. Currency rate fluctuations increased the net loss by $11,000 in
the current period. Net loss per share amounted to $0.44 basic and diluted for
the nine months ended March 31, 2003, as
22
compared to net income per share of $0.01 basic and diluted for the nine months
ended March 31, 2002.
SEGMENT RESULTS
ACCESSORIES AND CONTROLS GROUP
Net sales for the nine months ended March 31, 2003 decreased by
$5,615,000, or 5.4%, to $99,153,000 from $104,768,000 for the nine months ended
March 31, 2002. Currency rate fluctuations attributable to the Company's
overseas operations increased net sales for the current period by $6,869,000;
otherwise, net sales would have decreased by $12,484,000 in the current period.
Operating loss amounted to $520,000 (0.1% of net sales) for the nine
months ended March 31, 2003, as compared to operating income of $5,766,000 (5.5%
of net sales) for the same period in the prior fiscal year, a decrease of
$6,286,000. Currency rate fluctuations increased the current fiscal year's
operating income by $118,000. Otherwise, operating income would have decreased
by $6,404,000 in the current period. This decrease is primarily the result of
the overall decrease in sales discussed above, and to increased restructuring
charges, consulting costs, and engineering and development project costs in the
current fiscal year period offset by a $251,000 bad debt charge related to a
major OEM customer in the prior fiscal year period. Operating income for the
nine months ended March 31, 2003 and 2002, includes restructuring charges of
$2,729,000 and $647,000, respectively, associated with both the March 2000 Plan
and the August 2002 Plan.
THREE MONTHS ENDED MARCH 31, 2003 VS. THREE MONTHS ENDED MARCH 31, 2002
CONSOLIDATED RESULTS
Net sales for the three months ended March 31, 2003 decreased by
$6,806,000, or 18.0%, to $31,061,000 from $37,867,000 for the three months ended
March 31, 2002. Currency rate fluctuations attributable to the Company's
overseas operations increased net sales by $3,733,000 in the current period,
otherwise, net sales would have decreased by $10,539,000. This decrease is
associated with a slowness in the global printing equipment marketplace and was
primarily the result of decreased product volumes, principally spray dampening
equipment, and sheeters.
Gross profit for the three months ended March 31, 2003 was $8,104,000
(26.1% of net sales) as compared to $11,983,000 (31.6% of net sales) for the
three months ended March 31, 2002, a decrease of $3,879,000 or 32.4%. Currency
rate fluctuations increased gross profit by $1,114,000 in the current period.
Excluding the effects of currency rate fluctuation, gross profit would have
decreased by $4,993,000. Gross profit as a percentage of net sales decreased
primarily due to lower sales levels in the current period and to increased
material and freight costs.
Selling, general and administrative expenses amounted to $6,411,000 (20.6%
of net sales) for the three months ended March 31, 2003 as compared to
$7,348,000 (19.4% of net sales) for the same period in the prior fiscal year, a
decrease of $937,000 or 12.8%. Currency rate fluctuations increased these
expenses by $526,000 in the current period, while the previously noted
divestures of the RHG and the POD businesses decreased these expenses by
$24,000. Otherwise, selling, general and administrative expenses would have
decreased by $1,439,000. Selling expenses decreased by $302,000, which primarily
relates to decreased compensation and travel costs associated with reduced
employment levels. General and
23
administrative expenses decreased by $1,137,000 primarily due to reduced
compensation, travel and other employee related costs primarily as a result of
the Company's restructuring efforts offset slightly by increased subcontracting
costs in the current year period.
Engineering and development expenses increased by $330,000 over the same
period in the prior fiscal year. Currency rate fluctuations increased these
expenses by $489,000 in the current period. Excluding the effects of currency
rate fluctuations, engineering and development expenses would have decreased by
$159,000 in the current period. This decrease relates primarily to decreased
research and development project and subcontracting costs due primarily to the
Company's restructuring efforts. As a percentage of net sales, engineering and
development expenses increased by 3.2% to 12.7% for the three months ended March
31, 2003 compared to 9.5% for the same period in the prior fiscal year.
The Company recorded a restructuring charge of $67,000 for the three
months ended March 31, 2003. This restructuring charge represents $39,000 in
additional exit costs, which were related to the March 2000 Plan and $28,000 in
product transfer costs related to the August 2002 Plan as these costs are
expensed as incurred.
Interest expense for the three months ended March 31, 2003 was $499,000 as
compared to $419,000 for the three months ended March 31, 2002. Currency rate
fluctuations increased interest expense by $49,000 in the current period.
Otherwise, interest expense would have increased by $31,000. This increase was
primarily due to both higher interest rates in effect for the three months ended
March 31, 2003 as a result of the October 30, 2002 credit facility amendment and
deferred debt financing cost amortization during the period. Interest income
amounted to $58,000 and $67,000 for the three months ended March 31, 2003 and
2002, respectively. This decrease in interest income is primarily due to
decreased funds available for investment. Currency rate fluctuations increased
interest income by $14,000 in the current period.
Net royalty income for the three months ended March 31, 2003 was
$1,310,000 as compared to $1,106,000 for the three months ended March 31, 2002.
The increase in royalty income is primarily due to a $250,000 credit relating to
a settlement associated with one of the Company's licensees.
Other income (expense), net amounted to expense of $62,000 for the three
months ended March 31, 2003 compared to income of $94,000 for the three months
ended March 31, 2002. Other income (expense), net includes net foreign currency
transaction losses of $111,000 and gains of $88,000 for the three months ended
March 31, 2003 and 2002, respectively. Currency rate fluctuations increased
other expenses by $14,000 in the current fiscal year period. Other income and
expense in the prior year period also included a $151,000 charge for an interest
rate swap which no longer qualified as a hedge pursuant to SFAS 133 and a
$255,000 write-down of deferred financing costs; both were recorded as a result
of the renegotiation of the Amended Credit Facility. Other expense, net for the
three months ended March 31, 2003 includes a $122,000 gain related to an
adjustment in a portion of the fair value of the Swap which no longer qualified
as a hedge.
The Company recorded an income tax benefit of $387,000 for the three
months ended March 31, 2003 as compared to income tax expense of $513,000 for
the three months ended March 31, 2002. The effective tax rate for the three
months ended March 31, 2003 differs from the statutory rate as no benefit was
recognized for losses incurred in certain countries as the realization of such
benefits was not more likely than not. Currency rate fluctuations decreased the
benefit for income taxes by $23,000 in the current period.
Loss from operations of discontinued operations for the three months ended
March 31, 2003 was zero as compared to $36,000 for the three months ended March
31, 2002.
24
The Company's net loss amounted to $1,117,000 for the three months ended
March 31, 2003, compared to net income of $1,038,000 for the three months ended
March 31, 2002. Currency rate fluctuations increased the net loss by $18,000 in
the current period. Net loss per share amounted to $0.07 basic and diluted for
the three months ended March 31, 2003, as compared to net income per share of
$0.07 basic and diluted for the three months ended March 31, 2002.
SEGMENT RESULTS
ACCESSORIES AND CONTROLS GROUP
Net sales for the three months ended March 31, 2003 decreased by
$6,806,000, or 18.0%, to $31,061,000 from $37,867,000 for the three months ended
March 31, 2002. Currency rate fluctuations attributable to the Company's
overseas operations increased net sales for the current period by $3,733,000;
otherwise, net sales would have decreased by $10,539,000 in the current period.
Operating loss amounted to $174,000 (0.1% of net sales) for the three
months ended March 31, 2003, as compared to income of $2,540,000 (6.7% of net
sales) for the same period in the prior fiscal year, a decrease of $2,714,000.
Currency rate fluctuations decreased the current fiscal year's operating income
by $61,000. Otherwise, operating income would have decreased by $2,775,000 in
the current period. This decrease is primarily the result of the overall
decrease in sales discussed above, and to increased restructuring charges and
consulting costs in the current fiscal year period. Operating income for the
three months ended March 31, 2003 and 2002, includes restructuring charges of
$67,000 and $287,000, respectively, associated with both the March 2000 Plan and
the August 2002 Plan.
LIQUIDITY AND CAPITAL RESOURCES AT MARCH 31, 2003
LIQUIDITY AND WORKING CAPITAL
On October 31, 2000, the Company entered into a $35,000,000 revolving
credit facility (the "Credit Facility") with Fleet National Bank and First Union
National Bank (collectively the "Banks"), which had an original scheduled
maturity date of October 31, 2003. The Credit Facility consisted of a
$25,000,000 revolving credit line (the "Revolver") and a $10,000,000 credit line
to be utilized for acquisitions, (the "Acquisition Line"). On January 28, 2002,
the Credit Facility was amended (the "Amended Credit Facility"), to among other
things, remove the Acquisition Line, reduce the Revolver to $21,000,000 (subject
to a borrowing base), and change the maturity date to October 1, 2002. In
addition, $4,000,000 of the existing Revolver was converted into a term loan
(the "Term Loan"), which matured on June 28, 2002, resulting in available
borrowings under the Revolver from July 1, 2002 to October 1, 2002 of
$17,000,000. The Amended Credit Facility required the Company to maintain
certain financial covenants including minimum operating income covenants. The
Revolver has associated commitment fees, which are calculated quarterly, at a
rate of one-half of one percent per annum of the unused portion of the Revolver.
During the quarters ended March 31, 2002 and June 30, 2002, the Company
did not meet its minimum operating income covenants contained in the Amended
Credit Facility, and further the Company did not make the required $4,000,000
principal payment on the Term Loan on June 28, 2002. The Banks granted a
forbearance of the collection of the indebtedness until October 1, 2002 and on
October 30, 2002, the Company and the Banks entered into an amendment to extend
the Amended Credit Facility, waive the covenant violations and Term Loan default
and extend the forbearance period through July 1, 2003 (the "Extended Credit
Facility"). The Extended Credit Facility, totaling $20,900,000, consists of a
$17,000,000 revolving credit line
25
(the "Extended Revolver") and a $3,900,000 term loan each due July 1, 2003 (the
"Extended Term Loan"). The Extended Credit Facility required the Company to
utilize the net proceeds of $3,736,000 from the sale of certain assets of its
wholly-owned subsidiary Baldwin Kansa Corporation ("BKA") to reduce outstanding
borrowings under the Extended Revolver before October 30, 2002, of which
$2,700,000 permanently reduced the Extended Revolver and $1,036,000 became
available for future borrowings. At December 31, 2002, the Company had
outstanding borrowings of $12,689,000 under the Extended Revolver and Extended
Term Loan, plus outstanding letters of credit of $3,150,000. Additionally,
beginning in December 2002, and extending through June 2003, the Company is
required to permanently reduce the Extended Revolver by making monthly principal
payments of $125,000. The Company was also required to permanently reduce the
Extended Revolver by $5,000,000 on December 30, 2002 and further is required to
permanently reduce the Extended Revolver by $5,000,000 on March 30, 2003, but
only if the company generates non-operating alternative sources of financing. As
the Company did not generate any alternative sources of financing since entering
into the Extended Credit Facility on October 30, 2002, the Company was not
required to make, and did not make, the $5,000,000 payment on December 30, 2002.
The entire outstanding balance of $12,528,000 due under the Extended Revolver
and Extended Term Loan has been classified as current as of March 31, 2003 (of
which $250,000 was paid through May 15, 2003).
Interest on the Extended Revolver and the Extended Term Loan is charged at
prime plus 2.00% per annum. The Extended Credit Facility is collateralized by a
pledge of the capital stock and certain assets, of the Company's domestic
subsidiaries. The Extended Credit Facility includes certain restrictions, which
limit the incurrence of debt and prohibit dividend payments among other things,
and require the Company to satisfy certain financial covenants. These financial
covenants, as defined in the Extended Credit Facility, require the Company to
achieve minimum operating income of $945,000 for the quarter ended December 31,
2002, $844,000 for the quarter ending March 31, 2003 and $732,000 for the
quarter ending June 30, 2003. The Company did not meet the above minimum
operating income covenant of $844,000 and the tangible net worth covenant (as
defined in the Amended Credit Facility) for the quarter ended March 31, 2003,
accordingly, amounts outstanding under the Extended Credit Facility have become
payable on demand. The Banks have granted a waiver of these covenant violations
for the quarter ended March 31, 2003. The ability to satisfy future covenants
depends in part on management's successful execution of the restructuring plans
discussed in Note 9 to the consolidated financial statements, and other business
factors outside of the control of management. There can be no guarantee that
such covenants will be met. Management believes that alternative sources of
financing are available to finance the existing facilities beyond July 1, 2003,
which the Company is currently pursuing. However, if the Company does not obtain
alternative financing prior to the July 1, 2003 maturity date, management will
be required to take additional actions. These actions may include reducing
operating expenses or selling assets in an effort to meet liquidity needs. There
can be no assurances, however, that such actions will be sufficient to meet
liquidity needs in the event the demand for immediate payment is made by the
Banks.
The Company maintains relationships with both foreign and domestic banks,
which combined have extended credit facilities to the Company totaling
$20,338,000, including amounts available under the Extended Revolver and the
Extended Term Loan. As of March 31, 2003, the Company had $17,511,000
outstanding under these lines of credit including $12,528,000 under the Extended
Revolver and the Extended Term Loan. Total debt levels as reported on the
balance sheet at March 31, 2003 are $493,000 higher than they would have been if
June 30, 2002 exchange rates had been used.
On April 27, 2001, the Company entered into an interest rate swap
agreement with Fleet National Bank to fix the LIBOR portion of its interest rate
at 4.98% for a principal amount of $15,000,000 with the maturity the same as the
Credit Facility. The effect of this interest rate swap added $137,000 and
$386,000 to interest expense for the three and nine months ended
26
March 31, 2003, respectively, and $112,000 and $263,000 to interest expense for
the three and nine months ended March 31, 2003, respectively.
The Company's working capital decreased by $15,804,000 or 70.8% from
$22,319,000 at June 30, 2002, to $6,515,000 at March 31, 2003. Foreign currency
rate fluctuations accounted for an increase of $1,307,000; otherwise, working
capital would have decreased by $17,111,000. Working capital decreased primarily
due to a portion of long-term debt being reclassified to short-term and to the
additional reserve recorded as a result of the Company's restructuring plan
initiated in August 2002. Excluding the effects of currency translation, the
impacts of the sale of BKA and the portion of long-term debt being reclassified
as short-term, working capital would have decreased by $4,157,000 from June 30,
2002 to March 31, 2003. This decrease was primarily the result of reductions in
accounts and notes receivable, inventories and prepaid expenses and other
current assets, offset partially by reductions in other accrued liabilities due
primarily to the active managing of working capital by the Company.
The Company generated $2,772,000 and $5,085,000 from investing activities
for the nine months ended March 31, 2003 and 2002, respectively. The decrease in
cash generated by investing activities is primarily the result of the proceeds
from the sale of the RHG and the POD businesses in the prior fiscal year period
offset by the proceeds from the sale of BKA in the current fiscal year period.
Capital expenditures for the nine months ended March 31, 2003 and 2002 were
$964,000 and $1,743,000, respectively.
Net cash used by financing activities was $5,454,000 for the nine months
ended March 31, 2003 as compared to $908,000 for the nine months ended March 31,
2002. The difference was primarily due to higher net debt repayments in the
current fiscal year period primarily sourced with the proceeds from the sale of
BKA.
On September 10, 2001, one large OEM customer, Goss Graphic Systems, Inc.
("Goss") filed for bankruptcy protection under a prearranged Chapter 11
proceeding in the U.S. Bankruptcy Court. Goss' European and Asian subsidiaries
are not included in this proceeding. The Company has received timely payments,
on a post petition basis, from the foreign subsidiaries of Goss, and continues
to monitor the status of all Goss payments. At March 31, 2003, the Company's
consolidated balance sheet included approximately $1,039,000 of trade
receivables from Goss, of which approximately $911,000 relates to Goss' European
and Asian subsidiaries, which are not included in the bankruptcy proceeding. The
balance of $721,000 is fully reserved. As a result of this bankruptcy filing,
the Company increased its bad debt reserve related to Goss by $0 and $634,000
during the nine months ended March 31, 2003 and 2002, respectively.
During March 2000, the Company initiated a restructuring plan (the "March
2000 Plan") that included the consolidation of production into certain
facilities, and a reduction in total employment. This plan was expanded during
the fourth quarter of the fiscal year ended June 30, 2001. The Company recorded
restructuring charges in the amounts of $94,000 and $795,000 for the nine months
ended March 31, 2003 and 2002, respectively, related to the March 2000 Plan.
These charges relate primarily to additional exit costs, which were expensed as
incurred. The restructuring plan is expected to reduce the Company's worldwide
cost base and strengthen its competitive position as a leading global supplier
of auxiliary equipment to the printing and publishing industry. Prior to the
restructuring, the Company was managed in a decentralized manner through
geographically dispersed autonomous business units. Given that many of the
Company's significant customers have been reorganizing on a global basis,
management decided to restructure the Company along functional lines on a global
basis. Rather than have sales, product development and production activities at
each decentralized business unit, the restructuring plan included the
centralization of these activities. Severance costs will be paid through the
balance of the current fiscal year ending June 30, 2003. Facility lease
termination costs will be paid through April 2006. As of March 31, 2003,
$749,000 of these restructuring
27
costs are included in "Other accounts payable and accrued liabilities" and
$749,000 is included in "Other long-term liabilities."
In August 2002, the Company announced additional restructuring activities
(the "August 2002 Plan") primarily in response to weak market conditions. The
August 2002 Plan includes a reduction in employment by approximately 90 people
worldwide, as well as plant consolidations. As a result, the Company recorded an
initial restructuring charge of $3,241,000 during the nine months ended March
31, 2003. As of March 31, 2003, $1,276,000 is included in "Other accounts
payable and accrued liabilities" and $178,000 is included in "Other long-term
liabilities" related to the August 2002 Plan. The charge for the August 2002
Plan was recorded to account for the estimated employee severance and benefit
costs of approximately $2,757,000, lease termination costs of approximately
$437,000 and approximately $47,000 in incremental costs associated with product
discontinuance. The additional charges of $69,000 recorded during the nine
months ended March 31, 2003 related primarily to product transfer costs, which
are being expensed as incurred. The August 2002 Plan is expected to reduce
operating costs by approximately $6,900,000 annually after full implementation,
which is expected to occur by the end of the current fiscal year ending June 30,
2003. Remaining severance costs of approximately $1,085,000 will be paid through
September 2003 and remaining facility lease termination costs of approximately
$369,000 will be paid through December 2004.
Management believes that the nature and scope of the above restructuring
activities will be sufficient to restore the Company's profitability and cash
flows from operations; however, there can be no assurances.
The Company is currently negotiating alternative financing sources.
Although these negotiations are ongoing, there can be no assurance that the
Company will be successful in negotiating a replacement of the Extended Credit
Facility beyond July 1, 2003. The Company believes however, that its cash flows
from operations, along with the available bank lines of credit and alternative
sources of borrowing are sufficient to finance its working capital and other
capital requirements for the near and long-term future.
At March 31, 2003 and June 30, 2002, 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 March
31, 2003 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 2008
March and
31, 2003 2003* 2004 2005 2006 2007 thereafter
------- ------- ------- ------- ------- ------- ----------
Contractual Obligations:
Loans payable $ 4,983 $ 4,983 $ 0 $ 0 $ 0 $ 0 $ 0
Capital lease obligations 193 13 55 59 62 4 0
Long-term debt 13,181 409 12,282 120 120 117 133
Non-cancelable operating lease obligations 14,824 1,165 4,242 3,619 2,834 1,491 1,473
------- ------- ------- ------- ------- ------- -------
Total contractual cash obligations $33,181 $ 6,570 $16,579 $ 3,798 $ 3,016 $ 1,612 $ 1,606
======= ======= ======= ======= ======= ======= =======
*Includes only the remaining three months of the fiscal year ending June 30,
2003.
28
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2 to the consolidated financial statements for information
concerning recently issued accounting standards.
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, 2002. There have
been no material changes during the nine months ended March 31, 2003.
ITEM 4: CONTROLS AND PROCEDURES:
The Chief Executive Officer and Chief Financial Officer of the Company
(its principal executive officer and principal financial officer, respectively)
have concluded, based on their evaluation as of a date within 90 days prior to
the date of the filing of this Report on Form 10-Q, that the Company's controls
and procedures are effective to ensure that information required to be disclosed
by the Company in the reports filed by it under the Securities and Exchange Act
of 1934, as amended, are recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and include controls and
procedures designed to ensure that information required to be disclosed by the
Company in such reports is accumulated and communicated to the Company's
management, including the Chief Executive Officer and Chief Financial Officer of
the Company, as appropriate, to allow timely decisions regarding required
disclosure.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of such evaluation.
29
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.60 Employment Agreement dated February 14, 2003 and effective
May 12, 2003 between Baldwin Technology Company, Inc. and
Karl S. Puehringer (filed herewith).
10.61 Employment Agreement dated February 14, 2003 and effective
January 31, 2003 between Baldwin Technology Company, Inc.
and Shaun J. Kilfoyle (filed herewith).
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1354 (filed herewith).
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1354 (filed herewith).
(b) Reports on Form 8-K. There were no reports on Form 8-K filed for the
three months ended March 31, 3003.
30
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: May 15, 2003
31
CERTIFICATIONS
I, Gerald A. Nathe, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Baldwin
Technology Company, Inc. ("the registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/Gerald A. Nathe
----------------------------------------
Gerald A. Nathe
Chairman, President and Chief Executive Officer
Date: May 15, 2003
32
CERTIFICATIONS
I, Vijay C. Tharani, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Baldwin
Technology Company, Inc. ("the registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/Vijay C. Tharani
----------------------------------------
Vijay C. Tharani
Vice President and Chief Financial Officer
Date: May 15, 2003
33