Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
[Mark one]
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For quarter ended September 30, 2002
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 31, 2002
----- -------------------------------
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 September 30,
2002 (unaudited) and June 30, 2002 1-2
Consolidated Statements of Income for the
three months ended September 30, 2002
(unaudited) and 2001 (unaudited) 3
Consolidated Statements of Changes in Shareholders'
Equity for the three months ended September 30, 2002 4
(unaudited) and 2001 (unaudited)
Consolidated Statements of Cash Flows for the
three months ended September 30, 2002
(unaudited) and 2001 (unaudited) 5-6
Notes to Consolidated Financial Statements
(unaudited) 7-16
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-23
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 24
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K 25
Signatures 26
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
September 30, June 30,
2002 2002
--------- ---------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 6,472 $ 5,106
Accounts receivable trade, net of allowance for doubtful
accounts of $1,831 ($1,994 at June 30, 2002) 24,159 27,262
Notes receivable, trade 10,686 13,390
Inventories, net 23,182 24,928
Deferred taxes 889 893
Prepaid expenses and other 4,904 6,581
Current assets of discontinued operations 2,246 0
--------- ---------
Total Current Assets 72,538 78,160
--------- ---------
MARKETABLE SECURITIES:
Cost $473 ($475 at June 30, 2002) 368 430
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land and buildings 775 2,669
Machinery and equipment 4,044 5,526
Furniture and fixtures 3,653 3,716
Leasehold improvements 455 458
Capital leases 427 428
--------- ---------
9,354 12,797
Less: Accumulated depreciation and amortization (4,478) (6,453)
--------- ---------
Net Property, Plant and Equipment 4,876 6,344
--------- ---------
PATENTS, TRADEMARKS AND ENGINEERING DRAWINGS at cost,
less accumulated amortization of $3,522
($3,432 at June 30, 2002) 2,013 2,061
GOODWILL, net 9,565 9,618
DEFERRED TAXES 6,294 6,277
OTHER ASSETS 5,174 6,025
NON CURRENT ASSETS OF DISCONTINUED OPERATIONS 1,236 0
--------- ---------
TOTAL ASSETS $ 102,064 108,915
========= =========
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
September 30, June 30,
2002 2002
--------- ---------
(Unaudited)
CURRENT LIABILITIES:
Loans payable $ 4,808 $ 5,372
Current portion of long-term debt 16,662 5,416
Accounts payable, trade 10,283 12,816
Notes payable, trade 8,278 7,837
Accrued salaries, commissions, bonus and
profit-sharing 3,296 3,432
Customer deposits 5,135 4,765
Accrued and withheld taxes 1,303 1,719
Income taxes payable 558 1,297
Other accounts payable and accrued liabilities 17,152 13,187
Current liabilities of discontinued operations 320 0
--------- ---------
Total current liabilities 67,795 55,841
--------- ---------
LONG TERM LIABILITIES:
Long-term debt 491 11,873
Other long-term liabilities 6,872 7,447
--------- ---------
Total long-term liabilities 7,363 19,320
--------- ---------
Total liabilities 75,158 75,161
--------- ---------
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 (15,020) (8,527)
Accumulated other comprehensive loss (2,372) (2,017)
Less: Treasury stock, at cost:
Class A - 3,630,202 shares (12,199) (12,199)
Note receivable from key executive for common stock issuance
(675) (675)
--------- ---------
Total shareholders' equity 26,906 $ 33,754
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 102,064 $ 108,915
========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
2
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the three months
ended September 30,
2002 2001
-------- --------
Net Sales $ 32,804 $ 37,475
Cost of goods sold 23,616 26,653
-------- --------
Gross Profit 9,188 10,822
-------- --------
Operating Expenses:
General and administrative 4,552 5,341
Selling 2,935 3,679
Engineering and development 4,091 3,856
Restructuring charges 3,287 10
-------- --------
14,865 12,886
-------- --------
Operating loss (5,677) (2,064)
Other (income) expense:
Interest expense 718 410
Interest income (76) (39)
Royalty income, net (629) (1,239)
Other (income) expense, net 356 (56)
-------- --------
369 (924)
-------- --------
Loss from continuing operations before
income taxes (6,046) (1,140)
Provision (benefit) for income taxes 259 (333)
-------- --------
Loss from continuing operations (6,305) (807)
Discontinued operations (Note 10):
Loss from operations of discontinued
component (less applicable income
taxes of $0) (188) (309)
-------- --------
Net loss $ (6,493) $ (1,116)
======== ========
Net loss per share - basic and diluted
Continuing operations $ (0.42) $ (0.06)
Discontinued operations (0.01) (0.02)
-------- --------
$ (0.43) $ (0.08)
======== ========
Weighted average shares outstanding:
Basic and diluted 15,016 14,680
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES) (UNAUDITED)
Class A Class B Capital Accumulated
Common Stock Common Stock Contributed Other Treasury Stock
----------------- ----------------- In Excess Retained Comprehensive -------------------------
Shares Amount Shares Amount of Par Deficit Loss Shares Amount
------ ------ ------ ------ ------ ------- ---- ------ ------
Balance at
June 30, 2002 16,458,849 $165 2,185,883 $21 $56,986 $ (8,527) $ (2,017) (3,630,202) $(12,199)
Net loss for the
three months ended
September 30, 2002 (6,493)
Translation adjustment
(365)
Unrealized loss on
available-for-sale
securities, net of
tax (35)
Unrealized gain on
forward contracts, 45
net of tax
Comprehensive
Loss
---------- ---- --------- --- ------- --------- -------- ---------- --------
Balance at
September 30, 2002 16,458,849 $165 2,185,883 $21 $56,986 $ (15,020) $ (2,372) (3,630,202) $(12,199)
========== ==== ========= === ======= ========= ======== ========== ========
Note
Receivable
from Key
Executive for
Common Stock Comprehensive
Issuance Loss
-------- ----
Balance at
June 30, 2002 $(675)
Net loss for the
three months ended
September 30, 2002 $(6,493)
Translation adjustment
(365)
Unrealized loss on
available-for-sale
securities, net of
tax (35)
Unrealized gain on
forward contracts, 45
net of tax
-------
Comprehensive
Loss $(6,848)
----- =======
Balance at
September 30, 2002 $(675)
=====
The accompanying notes to consolidated financial statements are an integral
part of these statements.
4
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the three months
ended September 30,
-----------------------
2002 2001
------- -------
Cash flows from operating activities:
Net loss $(6,493) $(1,116)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 493 617
Accrued retirement pay (651) 123
Provision for losses on accounts receivable 152 708
Restructuring charges 3,287 94
Deferred income taxes (277) 0
Changes in assets and liabilities, net of businesses sold:
Accounts and notes receivable 4,958 1,394
Inventories (271) (3,458)
Prepaid expenses and other 1,573 (1,017)
Other assets 979 134
Customer deposits 619 2,227
Accrued compensation (107) (891)
Payments against restructuring charges (939) (808)
Accounts and notes payable, trade (1,710) 2,131
Income taxes payable (720) (2,300)
Accrued and withheld taxes (406) (40)
Other accounts payable and accrued liabilities 1,721 1,012
Interest payable 124 (135)
------- -------
Net cash provided (used) by operating activities 2,332 (1,325)
------- -------
Cash flows from investing activities:
Proceeds from disposition of businesses, net 0 1,808
Additions of property (212) (565)
Additions of patents, trademarks and drawings (47) (76)
------- -------
Net cash (used) provided by investing activities (259) 1,167
------- -------
Cash flows from financing activities:
Long-term and short-term debt borrowings 0 7,410
Long-term and short-term debt repayments (615) (4,900)
Principal payments under capital lease obligations (3) (18)
Payment of debt financing costs (118) 0
Other long-term liabilities 111 218
Purchases of treasury stock 0 (14)
------- -------
Net cash (used) provided by financing activities (625) 2,696
------- -------
Effects of exchange rate changes (82) 263
------- -------
Net increase in cash and cash equivalents 1,366 2,801
Cash and cash equivalents at beginning of period 5,106 6,590
------- -------
Cash and cash equivalents at end of period $ 6,472 $ 9,391
======= =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
5
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
For the three months
ended September 30,
--------------------
2002 2001
------ ------
Cash paid during the period for:
Interest $ 493 $ 537
Income taxes $1,004 $1,857
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
the 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 businesses (see Note 10), the consolidation of
other operations and headcount reductions related to the consolidations and 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. However, if the loans become payable on demand
and alternative financing sources are not available, management will be required
to take additional actions to reduce operating expenses or sell assets to meet
liquidity needs.
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 months ended September 30, 2002 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 - ACCOUNTING CHANGES:
RECENTLY ISSUED ACCOUNTING STANDARDS:
In August 2001, the Financial Accounting Standards Board 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 that
long-lived assets that are to be abandoned, be treated as held for use and
depreciated over their remaining expected useful lives and broadens the
presentation of discontinued operations in
7
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 is
not expected to materially change the methods used by the Company to measure
impairment losses on long-lived assets. However, as a result of adopting SFAS
144, Baldwin Kansa ("BKA") has been included as a discontinued operation as of
and for the three months ended September 30, 2002 and the amounts for the three
months ended September 30, 2001 have been reclassified.
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. At
September 30, 2002, the Company had outstanding borrowings of $16,550,000 under
the Revolver and Term Loan, plus outstanding letters of credit of $2,963,000.
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.
The Company has experienced operating losses, negative cash flows and debt
covenant violations over the past two years. 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 a 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 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 BKA (see Note 10) to reduce the 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. 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 is 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 only if the Company generates non-operating
alternative sources of financing. The entire outstanding balance of $16,550,000
due under the Extended Revolver and Extended Term Loan has been classified as
current as of September 30, 2002 (of which $3,736,000 was paid through October
31, 2002).
Interest on the Extended Revolver and 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
8
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 ending December 31, 2002, $844,000 for the quarter
ending March 31, 2003 and $732,000 for the quarter ending June 30, 2003. The
ability to achieve these 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 covenants will be met. Accordingly, if the covenants are not met, amounts
outstanding under the Extended Credit Facility would become payable on demand.
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. However, if the loans become payable on demand and
alternative financing sources are not available, management will be required to
take additional actions to reduce operating expenses or sell assets to meet
liquidity needs.
The Company maintains relationships with both foreign and domestic banks,
which combined have extended credit facilities to the Company totaling
$23,878,000, including amounts available under the Extended Revolver and
Extended Term Loan. As of September 30, 2002, the Company had $21,359,000
outstanding under these credit facilities including $16,550,000 under the
Extended Revolver and Extended Term Loan. Total debt levels as reported on the
balance sheet at September 30, 2002 are $86,000 lower than they would have been
if June 30, 2002 exchange rates had been used.
NOTE 4 - NET LOSS PER SHARE:
Basic net loss per share includes no dilution and is computed by dividing
net loss available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted net loss per share reflects
the potential dilution of securities that could share in the earnings of an
entity. The weighted average shares outstanding used to compute diluted loss per
share include zero additional shares for each of the three months ended
September 30, 2002 and 2001, which represent potentially dilutive securities.
Outstanding options to purchase 1,644,000 and 1,748,000 shares of the Company's
common stock for the three months ended September 30, 2002 and 2001,
respectively, are not included in the above calculation to compute diluted net
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:
September 30, 2002 June 30, 2002
------------------ -------------
(Unaudited)
Cumulative translation adjustments $(2,324,000) $(1,959,000)
Unrealized loss on investments,
net of deferred taxes of $44,000
($19,000 at June 30, 2002) (61,000) (26,000)
Unrealized gain (loss) on derivatives,
net of deferred taxes of $7,000
($10,000 at June 30, 2002) 13,000 (32,000)
----------- -----------
$(2,372,000) $(2,017,000)
=========== ===========
9
NOTE 6 - INVENTORIES:
Inventories consist of the following:
September 30, 2002 June 30, 2002
------------------ -------------
(Unaudited)
Raw materials $ 11,355,000 $ 12,690,000
In process 6,033,000 6,081,000
Finished goods 5,794,000 6,157,000
------------ ------------
$ 23,182,000 $ 24,928,000
============ ============
Foreign currency translation effects decreased inventories by $158,000
from June 30, 2002 to September 30, 2002.
NOTE 7 - DERIVATIVES:
During the three months ended September 30, 2002, 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 for the three months ended September 30,
2002 and 2001 is $124,000 and $48,000 respectively, associated with this Swap.
As a result of entering into the Amended Credit Facility, as defined in
Note 3, which changed various provisions of the original agreement including the
maturity date, a portion of the Swap no longer qualified as a hedge. Future
changes in the fair value of this portion of the Swap 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 September 30, 2002 resulted in a loss
for the three months ended September 30, 2002 of $65,000, which was recorded in
"Other income and expense" in the accompanying consolidated statement of income.
Hedge ineffectiveness had no material impact on earnings for the three
months ended September 30, 2002 and 2001.
Unrealized net gains (losses) included in AOCI are as follows:
September 30, 2002 September 30, 2001
------------------ ------------------
Balance at beginning of period $ (32,000) $ (299,000)
Additional gains (losses), net 55,000 (645,000)
Amounts reclassified to earnings, net (10,000) 295,000
---------- -----------
Balance at end of period $ 13,000 $ (649,000)
========== ===========
The unrealized net gain of $13,000 at September 30, 2002 is comprised of
gains on currency futures contracts, which expire at various times through
December 18, 2002, and are expected to be reclassified to earnings during that
period.
NOTE 8 -- GOODWILL AND OTHER INTANGIBLE ASSETS:
As discussed in Note 2 of the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2002, the Company adopted Statement of Financial
Accounting Standards No.
10
142, "Goodwill and Other Intangible Assets" ("SFAS 142") effective July 1, 2001
and as a result ceased amortization of goodwill.
During fiscal 2002, the operating results and future prospects of the BKA
reporting unit deteriorated resulting in the fair value of that reporting unit
(determined based on the present value of estimated future cash flows) becoming
less than BKA's book value. Management determined that the implied fair value of
BKA's goodwill was zero, resulting in the write-off of BKA's goodwill of
$5,434,000 during the fourth quarter of the fiscal year ended June 30, 2002.
The changes in the carrying amount of goodwill by segment (in thousands)
for the three months ended September 30, 2002 are as follows:
Accessories and Controls
------------------------------------------
Gross
carrying Accumulated Net
Amount Amortization Book Value
------ ------------ ----------
Balance as of July 1, 2002 $ 12,760 $3,142 $ 9,618
Goodwill Amortization 0 0 0
Impairment losses recognized 0 0 0
Effects of currency translation (94) (41) (53)
-------- ------- -------
Balance as of September 30, 2002 $ 12,666 $ 3,101 $ 9,565
======== ======= =======
Intangible assets subject to amortization are comprised of the following:
As of September 30, 2002 As of June 30, 2002
------------------------------- ------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Intangible Assets: Amount Amortization Amount Amortization
------------------ ------ ------------ ------ ------------
Patents and trademarks $ 5,535,000 $ 3,522,000 $ 5,424,000 $ 3,363,000
Other 1,032,000 741,000 1,021,000 746,000
------------- -------------- ------------- -------------
Total $ 6,567,000 $ 4,263,000 $ 6,445,000 $ 4,109,000
============= ============== ============= =============
The other category is included in "Other assets" on the accompanying
consolidated balance sheets. Amortization expense associated with these
intangible assets was $191,000 and $204,000 for the three months ended September
30, 2002 and 2001, respectively.
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.
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 $46,000
and $10,000 for the three months ended September 30, 2002 and 2001,
respectively, related to the March 2000 Plan. These charges relate primarily to
additional exit costs, which are 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 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. Products that were previously being produced at multiple facilities
have been consolidated with similar product lines at existing facilities.
11
Activity in the three months ended September 30, 2002 under the March 2000
Plan was as follows:
Remaining Additional Charges Remaining
Reserve Restructuring Against Reserve
June 30, 2002 Charges Reserve September 30, 2002
------------- ------- ------- ------------------
(in thousands)
Severance................................................. $ 557 $ 5 $ (101) $ 461
Facility lease termination costs.......................... 1,678 34 (228) 1,484
Other costs............................................... 0 7 (7) 0
--------- ------ ------ ------
Total program............................................. $ 2,235 $ 46 $ (336) $1,945
========= ====== ====== ======
During the three months ended September 30, 2001, the Company recorded a
restructuring charge of $94,000 (of which $84,000) related to BKA) under the
March 2000 Plan representing additional exit costs which were expensed as
incurred.
Severance costs will be paid through December 2002. Facility lease
termination costs will be paid through April 2006. As of September 30, 2002,
$982,000 is included in "Other accounts payable and accrued liabilities" and
$963,000 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, which
will reduce total employment by approximately 90 in various employee groups
worldwide, including production, sales, engineering and administration. The
August 2002 Plan includes the closing of one domestic facility, with the related
production being shifted to another domestic facility. As a result, the Company
recorded an additional restructuring charge of $3,241,000 during the three
months ended September 30, 2002. 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 August 2002 Plan is expected to reduce operating costs by
approximately $4,800,000 annually after full implementation, which is expected
to occur by the end of March 2003.
Activity in the three months ended September 30, 2002 under the August
2002 Plan was as follows:
Charges Remaining
Initial Against Reserves
Reserve Reserves September 30, 2002
------- -------- ------------------
(in thousands)
Severance................................................. $ 2,757 $ (603) $2,154
Facility lease termination costs.......................... 437 0 437
Other costs............................................... 47 0 47
--------- ------ ------
Total program............................................. $ 3,241 $ (603) $2,638
========= ====== ======
Severance and other costs will be paid through June 2003, and facility
lease termination costs will be paid through December 2004. As of September 30,
2002, $2,460,000 is included in "Other accounts payable and accrued liabilities"
and $178,000 is included in "Other long-term liabilities." Management believes
that the nature and scope of these restructuring activities will be sufficient
to restore the Company's profitability and cash flows from operations.
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 144, BKA qualifies as a component and therefore the
results of BKA's operations are required to
12
be reported as discontinued operations in the accompanying consolidated
statements of income. Accordingly, BKA's results for each of the three months
ended September 30, 2002 and 2001 have been aggregated and reported as a single
amount in each quarter (2001 amounts have been reclassified to conform to the
2002 presentation). BKA's sales for the three months ended September 30, 2002
and 2001 were $837,000 and $1,064,000, respectively. The consideration received
for the transaction, after certain post-closing adjustments, was approximately
$3,736,000, which will result in a gain on the sale of discontinued operations
of approximately $574,000 to be recognized in the second quarter of the fiscal
year ending June 30, 2003. As more fully discussed in Note 8, 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 held for disposal related to BKA at September 30, 2002 and
related amounts at June 30, 2002 are included in the following categories:
September 30, 2002 June 30, 2002
------------------ -------------
Accounts receivable, net of allowance of $5,000.................................. $ 358,000 $ 635,000
Inventory........................................................................ 1,859,000 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................................................................. (155,000) (200,000)
Accrued salaries, commissions, bonus and profit-sharing.......................... 0 (135,000)
Customer deposits................................................................ (165,000) (24,000)
Accrued and withheld taxes....................................................... 0 (2,000)
Other accounts payable and accrued liabilities................................... 0 (14,000)
------------- -------------
Net assets held for disposal..................................................... $ 3,162,000 $ 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 three months ended
September 30, 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.
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.
13
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 business 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
months ended September 30, 2002 and 2001 (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
September 30
(Unaudited)
-----------
2002 2001
---- ----
Net Sales:
Accessories and Controls $32,804 $32,684
Divested operations 0 4,791
------- -------
Total Net Sales $32,804 $37,475
======= =======
Foreign currency translation effects increased net sales by $1,517,000 ($0
related to the divested operations) for the three months ended September 30,
2002.
Three months ended
September 30,
(Unaudited)
-----------
2002 2001
---- ----
Operating (loss) income:
Accessories and Controls $(2,004) $ 1,378
Corporate (3,673) (2,522)
Divested operations 0 (920)
------- -------
Total operating loss (5,677) (2,064)
Interest expense, net (642) (371)
Royalty income, net 629 1,239
Other income (expense), net (356) 56
------- -------
Loss from continuing operations
before income taxes $(6,046) $(1,140)
======= =======
Included in operating (loss) income for the three months ended
September 30, 2002 and 2001 are restructuring charges of $2,612,000 and $10,000,
respectively, related to accessories and controls and $675,000 and zero,
respectively, related to corporate.
September 30, June 30,
2002 2002
---- ----
(Unaudited)
Identifiable assets:
Accessories and Controls $ 86,758 $ 94,079
Corporate 11,452 14,443
Divested operations 3,854 393
-------- --------
Total identifiable assets $102,064 $108,915
======== ========
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
14
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, subject to
stockholder approval, to the 1996 Plan that would (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
any 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, and (c) provide that Non-Employee Directors shall be
eligible to receive Options under the 1996 Plan.
Also in August 2002, the Board of Directors authorized, subject to
stockholder approval of the amendment to the 1996 Plan set forth above, 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 person who is then a 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.
The Board of Directors also approved in August 2002, subject to
stockholder approval, amendments to the 1996 Plan set forth above, and to the
1998 Non-Employee Directors' Stock Option Plan that would prohibit the granting
of any options thereunder after the next annual meeting of the Company's
stockholders.
NOTE 13 - RELATED PARTIES:
On October 25, 2002, John T. Heald, Jr. resigned as President, Chief
Executive Officer and Director of the Company. 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 from 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. In accordance with Mr. Heald's employment agreement, the Company will not
demand payment of the promissory note for a period of six months following Mr.
Heald's termination. Notwithstanding the foregoing, 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. The balance
of the loan, including interest, was $707,000 and $699,000 at September 30, 2002
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, 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 interest payments due on the loan from
Mr. Nathe during the second quarter of the fiscal
15
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, and, following 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 an equal 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 $808,000 and $1,544,000
at September 30, and June 30, 2002, respectively.
NOTE 14 - CUSTOMERS:
For the three months ended September 30, 2002, two customers each
accounted for more than 10% of the Company's net sales. Koenig and Bauer
Aktiengesellschaft ("KBA") accounted for approximately 12% and Mitsubishi
accounted for approximately 10% of the Company's net sales during the period.
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 September 30, 2002, the Company's
consolidated balance sheet included approximately $1,410,000 of trade
receivables from Goss, of which approximately $689,000 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 $634,000 during
the quarter ended September 30, 2001.
NOTE 15 - SUBSEQUENT EVENTS:
On November 14, 2002, the Company received news from Germany that the
Dusseldorf Higher Regional Court announced its judgment in favor of Baldwin in
the patent infringement dispute against its competitor, Technotrans. The Company
is currently considering the impact of the Court's ruling.
16
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 substantially all of the assets of its
Baldwin Kansa subsidiary ("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 will result in the recognition
of a gain on the sale of discontinued operations of approximately $574,000 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 business 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 year ended June 30, 2002 which
should be read in conjunction herewith.
17
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"). FAS 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. FAS 144 is 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 FAS
144, BKA has been included as a discontinued operation as of and for the period
ended September 30, 2002 and the amounts for the prior period ended September
30, 2001 have been reclassified to conform to this presentation.
For further information regarding the Company's critical accounting
policies, please refer to Management's Discussion and Analysis section of the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2002 VS. THREE MONTHS ENDED SEPTEMBER 30, 2001
CONSOLIDATED RESULTS
Net sales for the three months ended September 30, 2002 decreased by
$4,671,000, or 12.5%, to $32,804,000 from $37,475,000 for the three months ended
September 30, 2001. Currency rate fluctuations attributable to the Company's
overseas operations increased net sales by $1,517,000 in the current period.
Excluding the effects of currency rate fluctuations and the previously noted
divestitures of the RHG and the POD business, net sales would have decreased by
$1,397,000, which is primarily the result of decreased sales of spray dampening
equipment, fluid management products and dryers, offset by increased sales of
consumables.
Gross profit for the three months ended September 30, 2002 was $9,188,000
(28.0% of net sales) as compared to $10,822,000 (28.9% of net sales) for the
three months ended September 30, 2001, a decrease of $1,634,000 or 15.1%.
Currency rate fluctuations increased gross profit by $547,000 in the current
period; otherwise, gross profit would have decreased by $2,181,000. Gross profit
as a percentage of net sales decreased primarily due to the decreased margins
associated with sales of spray dampening equipment and cleaning products and
additional warranty costs associated with two customer installations in the
current period.
Selling, general and administrative expenses amounted to $7,487,000 (22.8%
of net sales) for the three months ended September 30, 2002 as compared to
$9,020,000 (24.1% of net sales) for the same period in the prior fiscal year, a
decrease of $1,533,000 or 17.0%. Currency rate fluctuations increased these
expenses by $218,000 in the current period. Otherwise, selling, general and
administrative expenses would have decreased by $1,751,000. Selling expenses
decreased by $874,000 which primarily relates to the exclusion of expenses
associated with the divested RHG business, to decreased travel costs, and to
decreased compensation and commission expenses associated with reduced sales,
partially offset by increased marketing and trade show costs. General and
administrative expenses decreased by $877,000 primarily due to the exclusion of
these costs associated with the previously noted divested RHG, and to decreased
costs as a result of the Company's restructuring efforts. Excluding the effects
of currency rate fluctuations and the previously noted divestitures of the RHG
and the POD business, selling, general and administrative expenses would have
decreased by $729,000 in the current period.
Engineering and development expenses increased by $235,000 over the same
period in the prior fiscal year. Currency rate fluctuations decreased these
expenses by $239,000 in the current period. Otherwise, these expenses would have
decreased by $4,000. This decrease relates primarily to the exclusion of these
expenses associated with the divested RHG business, offset by increased research
and development labor and project costs. As a percentage of net sales,
engineering and development expenses increased by 2.2% to 12.5% for the three
months ended September 30, 2002 compared to 10.3% for the same period in the
prior fiscal year. Excluding the effects of currency rate fluctuations and the
previously noted divestitures of the RHG and the POD business, engineering and
development expenses would have increased by $573,000 in the current period.
The Company recorded a restructuring charge of $3,287,000 for the three
months ended September 30, 2002. This restructuring charge represents $46,000 in
additional exit costs, which were related to the restructuring plan announced in
March 2000 (the "March 2000
18
Plan") and $3,241,000 related to the restructuring plan initiated in August 2002
(the "August 2002 Plan"). The charge for the August 2002 Plan was recorded to
account for the estimated costs of employee severance and benefit costs of
approximately $2,757,000 and approximately $437,000 in lease termination costs
and approximately $47,000 in incremental costs associated with product
discontinuance. The August 2002 Plan includes the closing of one domestic
facility, with the related production being shifted to another domestic
facility. The workforce reduction consists of approximately 90 employees in
various employee groups worldwide, including production, sales, engineering and
administration. The August 2002 Plan is expected to reduce operating costs by
approximately $4,800,000 annually after full implementation, which is expected
to occur by the end of March 2003.
Interest expense for the three months ended September 30, 2002 was
$718,000 as compared to $410,000 for the three months ended September 30, 2001.
Currency rate fluctuations increased interest expense by $23,000 in the current
period. Otherwise, interest expense would have increased by $285,000. This
increase was primarily due to both higher interest rates and deferred debt
financing cost amortization during the period. Interest income amounted to
$76,000 and $39,000 for the three months ended September 30, 2002 and 2001,
respectively. This increase in interest income is primarily due to increased
funds available for investment, primarily in Asia-Pacific in the current period.
Currency rate fluctuations increased interest income by $5,000 in the current
period.
Royalty income for the three months ended September 30, 2002 was $629,000
as compared to $1,239,000 for the three months ended September 30, 2001. 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.
Other income (expense), net amounted to expense of $356,000 for the three
months ended September 30, 2002 compared to income of $56,000 for the three
months ended September 30, 2001. Other income (expense), net includes net
foreign currency transaction gains of $2,000 and losses of $50,000 for the three
months ended September 30, 2002 and 2001, respectively, of which losses of
$93,000 and $37,000, respectively, resulted from the ineffective portions of
derivative financial instruments which qualify as cash flow hedges. Currency
rate fluctuations increased other expenses by $1,000 in the current fiscal year
period. Other expense, net for the three months ended September 30, 2002
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 $65,000 loss
related to an adjustment in a portion of the fair value of the Swap which no
longer qualified as a hedge.
The Company recorded income tax expense of $259,000 for the three months
ended September 30, 2002 as compared to an income tax benefit of $333,000 for
the three months ended September 30, 2001. The effective tax rate used for the
three months ended September 30, 2002 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 $14,000 in the current
period.
Loss from discontinued operations for the three months ended September 30,
2002 was $188,000 as compared to $309,000 for the three months ended September
30, 2001. The decrease in the loss is primarily the result of reduced operating
expenses in the current period, as the prior period included approximately
$84,000 in restructuring costs associated with the discontinued operation.
The Company's net loss amounted to $6,493,000 for the three months ended
September 30, 2002, compared to $1,116,000 for the three months ended September
30, 2001. Currency rate fluctuations decreased the net loss by $61,000 in the
current period. Net loss per share
19
amounted to $0.43 basic and diluted for the three months ended September 30,
2002, as compared to $0.08 basic and diluted for the three months ended
September 30, 2001.
SEGMENT RESULTS
ACCESSORIES AND CONTROLS GROUP
Net sales for the three months ended September 30, 2002 increased by
$120,000, or 0.1%, to $32,804,000 from $32,684,000 for the three months ended
September 30, 2001. Currency rate fluctuations attributable to the Company's
overseas operations increased net sales for the current period by $1,517,000;
otherwise, net sales would have decreased by $1,397,000 in the current period.
This decrease is primarily the result of decreased sales of spray dampening
equipment and fluid management products, offset by increased sales of
consumables.
Operating loss amounted to $2,004,000 (6.1% of net sales) for the three
months ended September 30, 2002, as compared to operating income of $1,378,000
(4.2% of net sales) for the same period in the prior fiscal year, a decrease of
$3,382,000. Currency rate fluctuations increased the current fiscal year's
operating income by $91,000. Otherwise, operating income would have decreased by
$3,473,000 in the current period. This decrease is primarily the result of the
overall decrease in sales discussed above, and to the restructuring charges and
increased consulting costs and increased engineering and development project
costs in the current fiscal year period. Operating income for the three months
ended September 30, 2002 and 2001, includes restructuring charges of $2,612,000
and $10,000, respectively, associated with both the March 2000 Plan and the
August 2002 Plan.
LIQUIDITY AND CAPITAL RESOURCES AT SEPTEMBER 30, 2002
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. At
September 30, 2002, the Company had outstanding borrowings of $16,550,000 under
the Revolver and Term Loan, plus outstanding letters of credit of $2,963,000.
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.
The Company has experienced operating losses, negative cash flows and debt
covenant violations over the past two fiscal years. 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 a 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
(the "Extended Revolver") and a $3,900,000 term loan due July 1, 2003 (the
20
"Extended Term Loan"). The Extended Credit Facility required the Company to
utilize the net proceeds of $3,736,000 from the sale of BKA to reduce the
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. 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 is 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 generates non-operating alternative sources of financing. The entire
outstanding balance of $16,550,000 due under the Extended Revolver and Extended
Term Loan has been classified as current as of September 30, 2002 (of which
$3,736,000 was paid through October 31, 2002).
Interest on the Extended Revolver and 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 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 ending December 31,
2002, $844,000 for the quarter ending March 31, 2003 and $732,000 for the
quarter ending June 30, 2003. The ability to achieve these 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 covenants will be met. Accordingly, if the
covenants are not met, amounts outstanding under the Extended Credit Facility
would become payable on demand. 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 loans become payable on
demand and alternative financing sources are not available, management will be
required to take additional actions to reduce operating expenses or sell assets
to meet liquidity needs.
The Company maintains relationships with both foreign and domestic banks,
which combined have extended credit facilities to the Company totaling
$23,878,000, including amounts available under the Extended Revolver and
Extended Term Loan. As of September 30, 2002, the Company had $21,359,000
outstanding under these lines of credit including $16,550,000 under the Revolver
and Term Loan. Total debt levels as reported on the balance sheet at September
30, 2002 are $86,000 lower 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 $124,000 and
$48,000 to interest expense for the three months ended September 30, 2002 and
2001, respectively.
The Company's working capital decreased by $17,576,000 or 78.7% from
$22,319,000 at June 30, 2002, to $4,743,000 at September 30, 2002. Foreign
currency rate fluctuations accounted for a decrease of $177,000. 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. On October 10, 2002, subsequent to
the balance sheet date, the Company sold the assets of its BKA operations. The
net proceeds of $3,736,000 were utilized to reduce outstanding bank debt.
The Company utilized $259,000 and generated $1,167,000 from investing
activities for the three months ended September 30, 2002 and 2001, respectively.
The decrease in cash provided by investing activities is primarily the result of
the proceeds from the sale of the RHG
21
and the POD business in the prior fiscal year period. Net capital expenditures
made to meet the normal business needs of the Company for the three months ended
September 30, 2002 and 2001 were $259,000 and $641,000, respectively.
Net cash used by financing activities was $625,000 for the three months
ended September 30, 2002 as compared to net cash provided by financing
activities of $2,696,000 for the three months ended September 30, 2001. The
difference was primarily caused by net debt borrowings in the prior period.
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 September 30, 2002, the Company's
consolidated balance sheet included approximately $1,410,000 of trade
receivables from Goss, of which approximately $689,000 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 $634,000 during
the quarter ended September 30, 2001.
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.
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 $46,000
and $10,000 for the three months ended September 30, 2002 and 2001,
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. As of
September 30, 2002, $982,000 of these restructuring costs are included in "Other
accounts payable and accrued liabilities" and $963,000 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, which
will reduce total employment by approximately 90 in various employee groups
worldwide, including production, sales, engineering and administration. As a
result, the Company recorded an additional restructuring charge of $3,241,000
during the three months ended September 30, 2002. As of September 30, 2002,
$2,460,000 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. Remaining severance costs of approximately $2,154,000 will be paid through
June 2003 and remaining facility lease termination costs of approximately
$437,000 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.
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
22
and alternative sources of borrowing are sufficient to finance its working
capital and other capital requirements for the near and long-term future.
At September 30, 2002 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 or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. As such,
the Company is not exposed to any financing, liquidity, market or credit risk
that could arise if the Company had engaged in such relationships.
The following summarizes the Company's contractual obligations at
September 30, 2002 and the effect such obligations are expected to have on its
liquidity and cash flow in future periods (in thousands):
Fiscal Years ending June 30,
Total at
September
30, 2002 2003* 2004 2005 2006 2007 2008
-------- ----- ---- ---- ---- ---- ----
and
thereafter
----------
Contractual Obligations:
Loans payable $ 4,808 $ 4,808 $ 0 $ 0 $ 0 $ 0 $ 0
Capital lease obligations 99 23 27 26 20 3 0
Long-term debt 17,153 4,279 12,457 98 98 98 123
Non-cancelable operating lease obligations 13,594 3,117 3,307 2,935 2,324 1,026 885
------- ------- ------- ------ ------ ------ ------
Total contractual cash obligations $35,654 $12,227 $15,791 $3,059 $2,442 $1,127 $1,008
======= ======= ======= ====== ====== ====== ======
*Includes only the remaining nine months of the fiscal year ending June 30,
2003.
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.
23
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 three months ended September 30, 2002.
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.
24
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.56 Severance Agreement dated September 11, 2002 and
effective August 2, 2002 between Baldwin Technology
Company, Inc. and Peter E. Anselmo (filed herewith).
10.57 Consulting Agreement dated and effective August 2,
2002 between Baldwin Technology Company, Inc. and
Peter E. Anselmo (filed herewith).
10.58 First Amendment and Waiver to Amended and Restated
Credit Agreement among Baldwin Americas Corporation,
Baldwin Europe Consolidated, Inc. and Baldwin Asia
Pacific Corporation, as Borrowers, Baldwin Technology
Company, Inc., Baldwin Technology Corporation,
Baldwin Europe Consolidated BV, Baldwin Graphic
Systems, Inc., Baldwin Germany GmbH, Baldwin Japan,
Ltd. and Baldwin Kansa Corporation (collectively the
"Guarantors"), the other credit parties signatory
thereto, Fleet National Bank, as Agent, and Wachovia
Bank National Association f/k/a First Union National
Bank, as lender, dated as of October 30, 2002 (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. The Company filed a Current Report on
Form 8-K dated August 12, 2002, relating to items 5 and 7.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALDWIN TECHNOLOGY COMPANY, INC.
BY /s/ Vijay C. Tharani
---------------------
Vice President, Chief Financial
Officer and Treasurer
Dated: November 19, 2002
26
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: November 19, 2002
27
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: November 19, 2002
28