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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 December 31, 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 January 31, 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 December 31, 2002 (unaudited) and
June 30, 2002 1-2
Consolidated Statements of Income for the three and six months
ended December 31, 2002 (unaudited) and 2001 (unaudited) 3
Consolidated Statements of Changes in Shareholders'
Equity for the six months ended December 31, 2002 (unaudited) and
2001 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
December 31, 2002 (unaudited) and 2001 (unaudited) 5-6
Notes to Consolidated Financial Statements (unaudited) 7-17
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 18-27
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 28
Item 4 Controls and Procedures 28
Part II Other Information
Item 4 Submission of Matters to a Vote of Security Holders 29
Item 6 Exhibits and Reports on Form 8-K 29
Signatures 30
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
December 31, June 30,
2002 2002
------------ ---------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 5,586 $ 5,106
Accounts receivable trade, net of allowance for doubtful
accounts of $1,853 ($1,994 at June 30, 2002) 23,608 27,262
Notes receivable, trade 13,665 13,390
Inventories, net 23,295 24,928
Deferred taxes 889 893
Prepaid expenses and other 4,948 6,581
--------- ---------
Total Current Assets 71,991 78,160
--------- ---------
MARKETABLE SECURITIES:
Cost $494 ($475 at June 30, 2002) 353 430
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land and buildings 833 2,669
Machinery and equipment 2,851 5,526
Furniture and fixtures 3,652 3,716
Leasehold improvements 465 458
Capital leases 84 428
--------- ---------
7,885 12,797
Less: Accumulated depreciation and amortization (2,899) (6,453)
--------- ---------
Net Property, Plant and Equipment 4,986 6,344
--------- ---------
PATENTS AND TRADEMARKS at cost, less accumulated
amortization of $3,550 ($3,432 at June 30, 2002) 2,021 2,061
GOODWILL, net 9,917 9,618
DEFERRED TAXES 6,760 6,277
OTHER ASSETS 4,854 6,025
--------- ---------
TOTAL ASSETS $ 100,882 $ 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
December 31, June 30,
2002 2002
------------ ---------
(Unaudited)
CURRENT LIABILITIES:
Loans payable $ 5,815 $ 5,372
Current portion of long-term debt 12,780 5,416
Accounts payable, trade 12,155 12,816
Notes payable, trade 9,910 7,837
Accrued salaries, commissions, bonus and
profit-sharing 3,246 3,432
Customer deposits 4,219 4,765
Accrued and withheld taxes 1,540 1,719
Income taxes payable 1,527 1,297
Other accounts payable and accrued liabilities 12,802 13,187
--------- ---------
Total current liabilities 63,994 55,841
--------- ---------
LONG TERM LIABILITIES:
Long-term debt 520 11,873
Other long-term liabilities 6,586 7,447
--------- ---------
Total long-term liabilities 7,106 19,320
--------- ---------
Total liabilities 71,100 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 (14,030) (8,527)
Accumulated other comprehensive loss (711) (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 29,782 33,754
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 100,882 $ 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 For the six months
ended December 31, ended December 31,
------------------ ------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $ 35,288 $ 34,217 $ 68,092 $ 71,692
Cost of goods sold 23,806 23,149 47,422 49,802
-------- -------- -------- --------
Gross Profit 11,482 11,068 20,670 21,890
-------- -------- -------- --------
Operating Expenses:
General and administrative 3,105 3,639 7,657 8,980
Selling 2,953 3,171 5,888 6,850
Engineering and development 4,417 3,627 8,508 7,483
Provision for loss on the disposition of
pre-press operations 0 (86) 0 (86)
Restructuring charges 50 496 3,337 506
-------- -------- -------- --------
10,525 10,847 25,390 23,733
-------- -------- -------- --------
Operating income (loss) 957 221 (4,720) (1,843)
-------- -------- -------- --------
Other (income) expense:
Interest expense 600 450 1,318 860
Interest income (65) (108) (141) (147)
Royalty income, net (529) (777) (1,158) (2,016)
Other (income) expense, net 76 442 432 386
-------- -------- -------- --------
82 7 451 (917)
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes 875 214 (5,171) (926)
Provision (benefit) for income taxes 363 137 622 (196)
-------- -------- -------- --------
Income (loss) from continuing operations 512 77 (5,793) (730)
Discontinued operations (Note 10):
(Loss) income from operations of discontinued
component (less applicable income taxes of $0) (65) 82 (253) (227)
Gain on sale of discontinued component
(less applicable income taxes of $0) 543 0 543 0
-------- -------- -------- --------
Net income (loss) $ 990 $ 159 $ (5,503) $ (957)
======== ======== ======== ========
Net income (loss) per share - basic and diluted
Continuing operations $ 0.03 $ 0.00 $ (0.39) $ (0.05)
Discontinued operations - income (loss) from
operations 0.00 0.01 (0.02) (0.01)
Discontinued operations - gain on sale 0.04 0.00 0.04 0.00
-------- -------- -------- --------
$ 0.07 $ 0.01 $ (0.37) $ (0.06)
======== ======== ======== ========
Weighted average shares outstanding:
Basic and diluted 15,015 14,953 15,015 14,816
======== ======== ======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES) (UNAUDITED)
Class A Class B Capital
Common Stock Common Stock Contributed
------------ ------------ In Excess Retained
Shares Amount Shares Amount of Par Deficit
------ ------ ------ ------ ------ -------
Balance at
June 30, 2002 16,458,849 $165 2,185,883 $21 $56,986 $ (8,527)
Net loss for the six
months ended
December 31, 2002 (5,503)
Translation adjustment
Unrealized loss on
available-for-sale
securities, net of
tax
Unrealized gain on
forward contracts,
net of tax
Comprehensive loss
Note receivable
from a former
executive
---------- ---- --------- --- ------- ---------
Balance at
December 31, 2002 16,458,849 $165 2,185,883 $21 $56,986 $ (14,030)
========== ==== ========= === ======= =========
Note
Receivable
Accumulated from a Former
Other Treasury Stock Executive for
Comprehensive -------------- Common Stock Comprehensive
Loss Shares Amount Issuance Loss
---- ------ ------ -------- ----
Balance at
June 30, 2002 $ (2,017) (3,630,202) $(12,199) $ (675)
Net loss for the six
months ended
December 31, 2002 $ (5,503)
Translation adjustment 1,344 1,344
Unrealized loss on
available-for-sale
securities, net of
tax (56) (56)
Unrealized gain on
forward contracts,
net of tax 18 18
---------
Comprehensive loss $ (4,197)
=========
Note receivable
from a former
executive 225
--------- ---------- -------- ----------
Balance at
December 31, 2002 $ (711) (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 six months
ended December 31,
------------------
2002 2001
---- ----
Cash flows from operating activities:
Net loss $(5,503) $ (957)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 966 1,124
Accrued retirement pay 307 224
Provision for losses on accounts receivable 154 728
(Gain) loss from disposition of businesses (543) 8
Restructuring charges 3,337 506
Deferred income taxes (456) (67)
Write-off of deferred debt financing costs 255
Changes in assets and liabilities, net of businesses sold:
Accounts and notes receivable 3,593 3,277
Inventories 542 (4,874)
Prepaid expenses and other 1,683 (1,692)
Other assets 929 602
Customer deposits (491) 1,418
Accrued compensation (494) (1,653)
Payments against restructuring charges (1,677) (1,582)
Accounts and notes payable, trade 1,252 1,700
Income taxes payable 234 (2,106)
Accrued and withheld taxes (194) 41
Other accounts payable and accrued liabilities (2,159) 585
Interest payable 16 (135)
------- -------
Net cash provided (used) by operating activities 1,496 (2,598)
------- -------
Cash flows from investing activities:
Proceeds from disposition of businesses, net 3,736 6,828
Additions of property (413) (599)
Additions of patents and trademarks (153) (310)
------- -------
Net cash provided by investing activities 3,170 5,919
------- -------
Cash flows from financing activities:
Long-term and short-term debt borrowings 147 7,786
Long-term and short-term debt repayments (4,021) (9,477)
Principal payments under capital lease obligations (3) (17)
Payment of debt financing costs (471) (100)
Other long-term liabilities 14 (141)
Purchases of treasury stock 0 (39)
------- -------
Net cash used by financing activities (4,334) (1,988)
------- -------
Effects of exchange rate changes 148 (71)
------- -------
Net increase in cash and cash equivalents 480 1,262
Cash and cash equivalents at beginning of period 5,106 6,590
------- -------
Cash and cash equivalents at end of period $ 5,586 $ 7,852
======= =======
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 six months
ended December 31,
------------------
2002 2001
---- ----
Cash paid during the period for:
Interest $ 1,334 $ 1,061
Income taxes $ 1,133 $ 2,075
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. 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
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 loans
become payable on demand.
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 six months ended December 31, 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 - 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" ("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
7
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 will be incorporated into the Company's interim
consolidated financial statements beginning with the quarter ending 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 are effective for interim and annual financial statements
for periods ending after December 15, 2002. The initial recognition and initial
measurement provisions are not expected to have a material impact on the
operations or cash flows of the Company. See Note 15 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 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. At December 31, 2002, the
Company had outstanding borrowings of
8
$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 $12,689,000 due under the Extended Revolver and Extended Term Loan
has been classified as current as of December 31, 2002 (of which $250,000 was
paid through February 13, 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 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. While the Company did meet the above minimum
operating covenant of $945,000 for the quarter ended December 31, 2002, 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 covenants will be met. 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
$21,303,000, including amounts available under the Extended Revolver and the
Extended Term Loan. As of December 31, 2002, the Company had $18,504,000
outstanding under these credit facilities including $12,689,000 under the
Extended Revolver and the Extended Term Loan. Total debt levels as reported on
the balance sheet at December 31, 2002 are $328,000 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 outstanding used to
compute diluted net income (loss) per share include zero additional shares for
each of the three and six months ended December 31, 2002 and 2001, which
represent potentially dilutive securities. Outstanding options to purchase
1,589,000 and 1,606,000 shares of the Company's common stock for the three and
six months ended December 31, 2002 and 2001, respectively, are not included in
the above calculation to compute diluted net income (loss) per share as they
have an anti-dilutive effect.
9
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:
December 31, 2002 June 30, 2002
----------------- -------------
(Unaudited)
Cumulative translation adjustments $ (615,000) $ (1,959,000)
Unrealized loss on investments,
net of deferred taxes of $59,000
($19,000 at June 30, 2002) (82,000) (26,000)
Unrealized loss on derivatives,
net of deferred taxes of $7,000
($10,000 at June 30, 2002) (14,000) (32,000)
------------ ------------
$ (711,000) $ (2,017,000)
============ ============
NOTE 6 - INVENTORIES:
Inventories consist of the following:
December 31, 2002 June 30, 2002
----------------- -------------
(Unaudited)
Raw materials $ 11,058,000 $ 12,690,000
In process 7,304,000 6,081,000
Finished goods 4,933,000 6,157,000
------------ ------------
$ 23,295,000 $ 24,928,000
============ ============
Foreign currency translation effects increased inventories by $772,000
from June 30, 2002 to December 31, 2002.
NOTE 7 - DERIVATIVES:
During the six months ended December 31, 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 was $126,000 and $249,000, respectively,
for the three and six months ended December 31, 2002 and $102,000 and $151,000,
respectively, for the three and six months ended December 31, 2001 associated
with this Swap.
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 are 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 December 31, 2002 resulted in a gain (loss) for the three and six months
ended December 31, 2002 of $91,000 and $(65,000), respectively, which was
recorded in "Other income and expense" in the accompanying consolidated
statement of income.
10
Except for the Swap, hedge ineffectiveness had no material impact on
earnings for the three and six months ended December 31, 2002 and 2001.
Unrealized net gains (losses) included in AOCI are as follows:
December 31, 2002 December 31, 2001
----------------- -----------------
Balance at beginning of period $ (32,000) $(299,000)
Additional gains (losses), net 28,000 (453,000)
Amounts reclassified to earnings, net (10,000) 522,000
--------- ---------
Balance at end of period $ (14,000) $(230,000)
========= =========
The unrealized net loss of $14,000 at December 31, 2002 is comprised of
net losses on currency futures contracts, which expire at various times through
March 20, 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 six months ended
December 31, 2002 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 351 52 299
--------- --------- ---------
Balance as of December 31, 2002 $ 13,111 $ 3,194 $ 9,917
========= ========= =========
Intangible assets subject to amortization are comprised of the following:
As of December 31, 2002 As of June 30, 2002
----------------------- -------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Intangible Assets: Amount Amortization Amount Amortization
------------------ ------ ------------ ------ ------------
Patents and trademarks $5,571,000 $3,550,000 $5,493,000 $3,432,000
Other 925,000 688,000 1,021,000 746,000
---------- ---------- ---------- ----------
Total $6,496,000 $4,238,000 $6,514,000 $4,178,000
========== ========== ========== ==========
Amortization expense associated with these intangible assets was $206,000
and $397,000, respectively, for the three and six months ended December 31, 2002
and $160,000 and $364,000, respectively, for the three and six months ended
December 31, 2001. The other category is included in "Other assets" on the
accompanying consolidated balance sheets.
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 $55,000 and $506,000 for the six months ended December 31, 2002 and 2001,
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
11
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 six months ended December 31, 2002 under the March 2000
Plan was as follows:
Remaining Additional Charges Remaining
Reserve Restructuring Against Reserve
June 30, 2002 Charges Reserve December 31, 2002
------------- ------- ------- -----------------
(in thousands)
Severance................................................. $ 557 $ 15 $ (175) $ 397
Facility lease termination costs.......................... 1,678 33 (409) 1,302
Other costs............................................... 0 7 (7) 0
--------- ------ ------- ------
Total program............................................. $ 2,235 $ 55 $ (591) $1,699
========= ====== ======== ======
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 December 31, 2002, $843,000 is included in "Other accounts
payable and accrued liabilities" and $856,000 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 six months ended December
31, 2002. 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 $41,000 recorded during the six months ended December 31,
2002 related primarily to product transfer costs, which are being expensed as
incurred.
Activity in the six months ended December 31, 2002 under the August 2002
Plan was as follows:
Additional Charges Remaining
Initial Restructuring Against Reserve
Reserve Charges Reserve December 31, 2002
------- ------- ------- -----------------
(in thousands)
Severance................................................. $ 2,757 $ 0 $(1,012) $1,745
Facility lease termination costs.......................... 437 0 (34) 403
Other costs............................................... 47 41 (41) 47
--------- ------ -------- ------
Total program............................................. $ 3,241 $ 41 $(1,087) $2,195
========= ====== ======== ======
Severance and other costs will be paid through September 2003, and
facility lease termination costs will be paid through December 2004. As of
December 31, 2002, $2,017,000 is included in "Other accounts payable and accrued
liabilities" and $178,000 is included in "Other long-term liabilities."
12
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 six months ended December 31, 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 net sales
were $141,000 and $978,000, respectively for the three and six months ended
December 31, 2002 and $1,958,000 and $3,022,000, respectively, for the three and
six months ended December 31, 2001. 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 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
and six months ended December 31, 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. (In thousands)
Three months ended Six months ended
December 31, December 31,
------------ ------------
(Unaudited) (Unaudited)
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales:
Accessories and Controls $ 35,288 $ 34,217 $ 68,092 $ 66,901
Divested operations 0 0 0 4,791
------------- ------------- ------------- -------------
Total Net Sales $ 35,288 $ 34,217 $ 68,092 $ 71,692
============= ============= ============= =============
Foreign currency translation effects increased net sales by $3,136,000 ($0
related to the divested operations) for the six months ended December 31, 2002.
Three months ended Six months ended
December 31, December 31,
------------ ------------
(Unaudited) (Unaudited)
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Operating income (loss):
Accessories and Controls $ 1,658 $ 1,848 $ (346) $ 3,226
Corporate (701) (1,793) (4,374) (4,315)
Divested operations 0 166 0 (754)
------- ------- ------- -------
Total operating income (loss) 957 221 (4,720) (1,843)
Interest expense, net (535) (342) (1,177) (713)
Royalty income, net 529 777 1,158 2,016
Other income (expense), net (76) (442) (432) (386)
------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes $ 875 $ 214 $(5,171) $ (926)
======= ======= ======= =======
Included in operating income (loss) are restructuring charges of $50,000
and $2,662,000, respectively, for the three and six months ended December 31,
2002 and $350,000
14
and $360,000, respectively, for the three and six months ended December 31, 2001
related to accessories and controls and zero and $675,000, respectively, for the
three and six months ended December 31, 2002 and $146,000 and $146,000,
respectively, for the three and six months ended December 31, 2001 related to
corporate.
December 31, June 30,
2002 2002
---- ----
(Unaudited)
Identifiable assets:
Accessories and Controls $ 95,735 $ 94,079
Corporate 5,113 14,443
Divested operations 34 393
-------- --------
Total identifiable assets $100,882 $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 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 - 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
15
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 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 deferred compensation benefit that accrued to Mr.
Heald. The balance of the loan, including interest, was $489,000 and $699,000 at
December 31, 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 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 $817,000 and $1,544,000 at December 31,
2002 and June 30, 2002, respectively.
NOTE 14 - CUSTOMERS:
During the current period, two customers each accounted for more than 10%
of the Company's net sales. Koenig and Bauer Aktiengesellschaft ("KBA")
accounted for approximately 10.6% and 11.0%, respectively, and Mitsubishi
accounted for approximately 10.2% and 10.6%, respectively, of the Company's net
sales for the three and six months ended December 31, 2002.
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.
16
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 December 31, 2002, the Company's consolidated balance sheet included
approximately $1,039,000 of trade receivables from Goss, of which approximately
$318,000 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 six months ended
December 31, 2002 and 2001, respectively.
NOTE: 15 - 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 2,366,000
Payments against reserve (1,755,000)
Settled obligation (a) (691,000)
Effects of currency rate fluctuations 71,000
-----------
Warranty reserve at December 31, 2002 $ 1,507,000
===========
(a) Amount was reclassified to accounts payable and will be paid over a
two-month period beginning February 2003.
NOTE 16 - LEGAL PROCEEDINGS:
On November 14, 2002, the Dusseldorf Higher Regional Court announced its
judgment in favor of Baldwin in the patent infringement dispute against its
competitor, technotrans AG ("Technotrans"). The Company is in the process of
determining the amount of compensation to which it is entitled. Technotrans has
filed documents indicating its objection to the ruling and has requested an
extension of time within which to file an appeal. No amounts have been recorded
in the consolidated financial statements with regard to this contingent gain.
NOTE 17 - SUBSEQUENT EVENT:
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,
alleging, among other things, that Baldwin failed to implement an increase in
royalties beginning in 1999 to its licensees, thus increasing the amount of
royalties allegedly due and payable to EPIC. In January 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 a license
agreement on a prospective basis, which is to be paid by the Company over the
next five months. The consolidated financial statements at December 31, 2002
include an accrual for this settlement amount.
17
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 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 fiscal year ended June 30, 2002
which should be read in conjunction herewith.
18
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 six months ended December 31, 2002 and the
corresponding amounts for the prior periods ended December 31, 2001 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.
SIX MONTHS ENDED DECEMBER 31, 2002 VS. SIX MONTHS ENDED DECEMBER 31, 2001
CONSOLIDATED RESULTS
Net sales for the six months ended December 31, 2002 decreased by
$3,600,000, or 5.0%, to $68,092,000 from $71,692,000 for the six months ended
December 31, 2001. Currency rate fluctuations attributable to the Company's
overseas operations increased net sales by $3,136,000 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
$1,945,000.
Gross profit for the six months ended December 31, 2002 was $20,670,000
(30.4% of net sales) as compared to $21,890,000 (30.5% of net sales) for the six
months ended December 31, 2001, a decrease of $1,220,000 or 5.6%. Currency rate
fluctuations attributable to the Company's overseas operations increased gross
profit by $1,106,000 in the current period, 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 $1,278,000. Gross profit as a percentage of net sales decreased
slightly primarily due to additional warranty costs associated with two
customers in the current period.
Selling, general and administrative expenses amounted to $13,545,000
(19.9% of net sales) for the six months ended December 31, 2002 as compared to
$15,830,000 (22.1% of net sales) for the same period in the prior fiscal year, a
decrease of $2,285,000 or 14.4%. Currency rate fluctuations increased these
expenses by $474,000 in the current period while the previously noted
divestitures of the RHG and the POD businesses decreased selling, general and
administrative expenses by $1,143,000. 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 $1,616,000. Selling
expenses decreased by $817,000, which primarily relates to decreased travel and
advertising costs, and to decreased compensation and commission expenses
associated with reduced sales, partially offset by increased subcontracting
costs. General and administrative expenses decreased by $799,000 primarily due
to decreased compensation costs primarily as a result of the Company's
restructuring efforts and to decreased depreciation expense. The prior year
period included a
19
$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 $1,025,000 over the same
period in the prior fiscal year. Currency rate fluctuations increased these
expenses by $557,000 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 business, engineering and development
expenses would have increased by $1,127,000 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 2.1% to 12.5% for the six
months ended December 31, 2002 compared to 10.4% for the same period in the
prior fiscal year.
The Company recorded a restructuring charge of $3,337,000 for the six
months ended December 31, 2002. This restructuring charge is comprised of
$3,282,000 related to the restructuring plan initiated in August 2002 (the
"August 2002 Plan") and $55,000 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 $41,000 recorded during the
six months ended December 31, 2002, 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 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 $4,700,000 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 six months ended December 31, 2002 was $1,318,000
as compared to $860,000 for the six months ended December 31, 2001. Currency
rate fluctuations increased interest expense by $55,000 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 $443,000. This increase was primarily
due to both higher interest rates in effect for the six months ended December
31, 2002, 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 $141,000 and $147,000 for the six months ended
December 31, 2002 and 2001, respectively. Currency rate fluctuations decreased
interest income by $10,000 in the current period.
Net royalty income for the six months ended December 31, 2002 was
$1,158,000 as compared to $2,016,000 for the six months ended December 31, 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 an expense of $432,000 for the six
months ended December 31, 2002 compared to $386,000 for the six months ended
December 31, 2001. Other income (expense), net includes net foreign currency
transaction losses of $183,000 and $55,000 for the six months ended December 31,
2002 and 2001, respectively, of which losses of $91,000 and $38,000,
respectively, resulted from the ineffective portions of derivative financial
20
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 income and
expense in the prior year period also included a $170,000 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
six months ended December 31, 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. Currency rate fluctuations decreased other expenses by $8,000 in
the current fiscal year period.
The Company recorded income tax expense of $622,000 for the six months
ended December 31, 2002 as compared to an income tax benefit of $196,000 for the
six months ended December 31, 2001. The effective tax rate for the six months
ended December 31, 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 $31,000 in the current period.
Loss from operations of discontinued operations for the six months ended
December 31, 2002 was $253,000 as compared to $227,000 for the six months ended
December 31, 2001. The increase in the loss is primarily the result of reduced
revenues and gross profit margins offset by decreased operating expenses in the
current period, as a result of the sale of the entity being completed on October
10, 2002. A gain on the sale of $543,000 was recorded in the current period.
The Company's net loss amounted to $5,503,000 for the six months ended
December 31, 2002, compared to $957,000 for the six months ended December 31,
2001. Currency rate fluctuations decreased the net loss by $7,000 in the current
period. Net loss per share amounted to $0.37 basic and diluted for the six
months ended December 31, 2002, as compared to $0.06 basic and diluted for the
six months ended December 31, 2001.
SEGMENT RESULTS
ACCESSORIES AND CONTROLS GROUP
Net sales for the six months ended December 31, 2002 increased by
$1,191,000, or 1.8%, to $68,092,000 from $66,901,000 for the six months ended
December 31, 2001. Currency rate fluctuations attributable to the Company's
overseas operations increased net sales for the current period by $3,136,000;
otherwise, net sales would have decreased by $1,945,000 in the current period.
Operating loss amounted to $346,000 (0.5% of net sales) for the six months
ended December 31, 2002, as compared to operating income of $3,226,000 (4.8% of
net sales) for the same period in the prior fiscal year, a decrease of
$3,572,000. Currency rate fluctuations increased the current fiscal year's
operating income by $57,000. Otherwise, operating income would have decreased by
$3,629,000 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 six
months ended December 31, 2002 and 2001, includes restructuring charges of
$2,662,000 and $360,000, respectively, associated with both the March 2000 Plan
and the August 2002 Plan.
21
THREE MONTHS ENDED DECEMBER 31, 2002 VS. THREE MONTHS ENDED DECEMBER 31, 2001
CONSOLIDATED RESULTS
Net sales for the three months ended December 31, 2002 increased by
$1,071,000, or 3.1%, to $35,288,000 from $34,217,000 for the three months ended
December 31, 2001. Currency rate fluctuations attributable to the Company's
overseas operations increased net sales by $1,619,000 in the current period,
otherwise, net sales would have decreased by $548,000.
Gross profit for the three months ended December 31, 2002 was $11,482,000
(32.5% of net sales) as compared to $11,068,000 (32.3% of net sales) for the
three months ended December 31, 2001, an increase of $414,000 or 3.7%. Currency
rate fluctuations increased gross profit by $559,000 in the current period,
while the previously noted divestitures of the RHG and POD businesses decreased
gross profit by $281,000. Excluding the effects of currency rate fluctuation and
the previously noted divestitures of the RHG and the POD business, gross profit
would have increased by $136,000.
Selling, general and administrative expenses amounted to $6,058,000 (17.2%
of net sales) for the three months ended December 31, 2002 as compared to
$6,810,000 (19.9% of net sales) for the same period in the prior fiscal year, a
decrease of $752,000 or 11.0%. Currency rate fluctuations increased these
expenses by $256,000 in the current period, while the previously noted
divestures of the RHG and the POD businesses decreased these expenses by
$32,000. Otherwise, selling, general and administrative expenses would have
decreased by $976,000. Selling expenses decreased by $378,000, which primarily
relates to decreased advertising and travel costs, and to decreased compensation
and commission expenses associated with reduced sales. General and
administrative expenses decreased by $598,000 primarily due to reduced
compensation costs primarily as a result of the Company's restructuring efforts
and to decreased depreciation expense in the current year period. These
decreases were partially offset by a reversal of approximately $300,000 of
previous accruals associated with the Company's profit-sharing contribution, and
to a $195,000 partial recovery of a previously recorded bad debt of a major OEM
customer in the prior year period.
Engineering and development expenses increased by $790,000 over the same
period in the prior fiscal year. Currency rate fluctuations increased these
expenses by $318,000 in the current period, while the previously noted
divestitures of the RHG and POD businesses decreased these expenses by $83,000.
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 $555,000 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 1.9% to 12.5% for the three
months ended December 31, 2002 compared to 10.6% for the same period in the
prior fiscal year.
The Company recorded a restructuring charge of $50,000 for the three
months ended December 31, 2002. This restructuring charge represents $9,000 in
additional exit costs, which were related to the March 2000 Plan and $41,000 in
product transfer costs related to the August 2002 Plan as these costs are
expensed as incurred.
Interest expense for the three months ended December 31, 2002 was $600,000
as compared to $450,000 for the three months ended December 31, 2001. Currency
rate fluctuations increased interest expense by $32,000 in the current period.
Otherwise, interest expense would have increased by $118,000. This increase was
primarily due to both higher interest rates in effect for the three months ended
December 31, 2002 as a result of the October 30, 2002 credit facility amendment
and deferred debt financing cost amortization
22
during the period. Interest income amounted to $65,000 and $108,000 for the
three months ended December 31, 2002 and 2001, respectively. This decrease in
interest income is primarily due to decreased funds available for investment.
Currency rate fluctuations increased interest income by $5,000 in the current
period.
Net royalty income for the three months ended December 31, 2002 was
$529,000 as compared to $777,000 for the three months ended December 31, 2001.
The decrease in royalty income is primarily due to a decrease in the number of
units sold in the current period by one of the Company's licensees.
Other income (expense), net amounted to expense of $76,000 for the three
months ended December 31, 2002 compared to $442,000 for the three months ended
December 31, 2001. Other income (expense), net includes net foreign currency
transaction losses of $185,000 and $5,000 for the three months ended December
31, 2002 and 2001, respectively. Currency rate fluctuations decreased other
expenses by $16,000 in the current fiscal year period. Other income and expense
in the prior year period also included a $170,000 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 December 31, 2002 includes a $91,000 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 income tax expense of $363,000 for the three months
ended December 31, 2002 as compared to $137,000 for the three months ended
December 31, 2001. The effective tax rate for the three months ended December
31, 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 $17,000 in the current period.
Loss from operations of discontinued operations for the three months ended
December 31, 2002 was $65,000 as compared to $82,000 for the three months ended
December 31, 2001. The increase in the loss is primarily the result of reduced
revenues and operating margins, offset by decreased operating expenses in the
current period. A gain on sale of $543,000 was recorded during the current
period.
The Company's net income amounted to $990,000 for the three months ended
December 31, 2002, compared to $159,000 for the three months ended December 31,
2001. Currency rate fluctuations decreased the net income by $55,000 in the
current period. Net income per share amounted to $0.07 basic and diluted for the
three months ended December 31, 2002, as compared to net income per share of
$0.01 basic and diluted for the three months ended December 31, 2001.
SEGMENT RESULTS
ACCESSORIES AND CONTROLS GROUP
Net sales for the three months ended December 31, 2002 increased by
$1,071,000, or 3.1%, to $35,288,000 from $34,217,000 for the three months ended
December 31, 2001. Currency rate fluctuations attributable to the Company's
overseas operations increased net sales for the current period by $1,619,000;
otherwise, net sales would have decreased by $548,000 in the current period.
Operating income amounted to $1,658,000 (4.7% of net sales) for the three
months ended December 31, 2002, as compared to $1,848,000 (5.4% of net sales)
for the same period in the prior fiscal year, a decrease of $190,000. Currency
rate fluctuations decreased the
23
current fiscal year's operating income by $48,000. Otherwise, operating income
would have decreased by $142,000 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, and increased engineering
and development project costs in the current fiscal year period. Operating
income for the three months ended December 31, 2002 and 2001, includes
restructuring charges of $50,000 and zero, respectively, associated with both
the March 2000 Plan and the August 2002 Plan.
LIQUIDITY AND CAPITAL RESOURCES AT DECEMBER 31, 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. 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 (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 $12,689,000 due under
the Extended Revolver and Extended Term Loan has been classified as current as
of December 31, 2002 (of which $250,000 was paid through February 13, 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
24
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.
While the Company did meet the above minimum operating income covenant of
$945,000 for the quarter ended December 31, 2002, 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. 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. 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 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 loans become payable
on demand.
The Company maintains relationships with both foreign and domestic banks,
which combined have extended credit facilities to the Company totaling
$21,303,000, including amounts available under the Extended Revolver and the
Extended Term Loan. As of December 31, 2002, the Company had $18,504,000
outstanding under these lines of credit including $12,689,000 under the Extended
Revolver and the Extended Term Loan. Total debt levels as reported on the
balance sheet at December 31, 2002 are $328,000 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 $126,000 and
$249,000 to interest expense for the three and six months ended December 31,
2002, respectively, and $102,000 and $151,000 to interest expense for the three
and six months ended December 31, 2001, respectively.
The Company's working capital decreased by $14,322,000 or 64.2% from
$22,319,000 at June 30, 2002, to $7,997,000 at December 31, 2002. Foreign
currency rate fluctuations accounted for an increase of $719,000. 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 impacts
of the sale of BKA and the portion of long-term debt being reclassified as
short-term, working capital would have decreased by $1,320,000 from June 30,
2002 to December 31, 2002.
The Company generated $3,170,000 and $5,919,000 from investing activities
for the six months ended December 31, 2002 and 2001, 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 business 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 six months ended December 31, 2002 and 2001
were $566,000 and $909,000, respectively.
Net cash used by financing activities was $4,334,000 for the six months
ended December 31, 2002 as compared to $1,988,000 for the six months ended
December 31, 2001. 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.
25
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 December 31, 2002, the Company's consolidated balance
sheet included approximately $1,039,000 of trade receivables from Goss, of which
approximately $318,000 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 six months ended
December 31, 2002 and 2001, 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 $55,000 and $506,000 for the six months
ended December 31, 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. 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 December 31, 2002,
$843,000 of these restructuring costs are included in "Other accounts payable
and accrued liabilities" and $856,000 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 six months ended December
31, 2002. As of December 31, 2002, $2,017,000 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 $41,000 recorded during the six months
ended December 31, 2002 related primarily to product transfer costs, which are
being expensed as incurred. The August 2002 Plan is expected to reduce operating
costs by approximately $4,700,000 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 $1,745,000 will be paid through
September 2003 and remaining facility lease termination costs of approximately
$403,000 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
26
and alternative sources of borrowing are sufficient to finance its working
capital and other capital requirements for the near and long-term future.
At December 31, 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 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 December
31, 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
December
31, 2002 2003* 2004 2005 2006 2007 2008
-------- ----- ---- ---- ---- ---- ----
and
thereafter
----------
Contractual Obligations:
Loans payable $ 5,815 $ 5,815 $ 0 $ 0 $ 0 $ 0 $ 0
Capital lease obligations 97 24 23 24 21 5 0
Long-term debt 13,300 809 12,051 104 104 104 128
Non-cancelable operating lease obligations 15,863 2,291 4,168 3,619 2,782 1,469 1,534
------- ------- ------- ------- ------- ------- -------
Total contractual cash obligations $35,075 $ 8,939 $16,242 $ 3,747 $ 2,907 $ 1,578 $ 1,662
======= ======= ======= ======= ======= ======= =======
*Includes only the remaining six 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2 to the consolidated financial statements for information
concerning recently issued accounting standards.
27
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 six months ended December 31, 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.
28
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on November 21, 2002.
(b) A brief description of matters voted upon and the results of the
voting follows:
Proposal 1 - To amend the Company's 1996 Stock Option Plan to (a) increase
the total number of shares of Class A Common Stock that may be subject to
outstanding options determined immediately after the grant of any option
to purchase Class A Common Stock, from 875,000 shares to 1,875,000 shares;
(b) prohibit the granting of any options to purchase any shares of Class B
Common Stock under the Plan; (c) provide that Non-Employee Directors be
eligible to receive options under the Plan; and (d) make certain technical
and clarifying amendments to the Plan.
Class A & B For Against Abstain Non-Vote
----------- --- ------- ------- --------
19,877,504 2,486,694 1,070,032 6,520
Proposal 2 - To elect two Class III Directors to serve for three-year
terms or until their respective successors are elected and qualify.
SCHEDULE OF VOTES CAST FOR EACH DIRECTOR
Total Vote for Total Vote Withheld
Each Director From Each Director
------------- ------------------
Class B
Akira Hara 14,489,840 1,370,800
Ralph R. Whitney, Jr. 11,510,520 4,350,120
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.59 Amended and Restated Loan and Pledge Agreement dated and
effective November 21, 2002 between Baldwin Technology
Company, Inc. and John T. Heald, Jr. (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 October 10, 2002, relating to items 5 and 7.
29
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: February 13, 2003
30
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: February 13, 2003
31
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: February 13, 2003
32