SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2005 COMMISSION FILE NUMBER 1-9334
BALDWIN TECHNOLOGY COMPANY, INC.
(Exact name of registrant as specified in its charter)
---------------------
DELAWARE 13-3258160
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2 TRAP FALLS ROAD, SUITE 402 06484
SHELTON, CONNECTICUT (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 203-402-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange
on Which Registered
CLASS A COMMON STOCK AMERICAN STOCK EXCHANGE
PAR VALUE $.01
Securities registered pursuant to Section 12(g) of the Act: None
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 Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Aggregate market value of the registrant's common stock held by
non-affiliates of the registrant, based upon the closing price of a share of the
registrant's common stock on December 31, 2004 as reported by the American Stock
Exchange on that date was $40,652,586.
Number of shares of Common Stock outstanding at June 30, 2005:
Class A Common Stock............... 12,945,147
Class B Common Stock............... 1,965,419
----------
Total............................ 14,910,566
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 are incorporated by reference into Part III of
this Form 10-K from the Baldwin Technology Company, Inc. Proxy Statement for the
2005 Annual Meeting of Stockholders. (A definitive proxy statement will be filed
with the Securities and Exchange Commission within 120 days after the close of
the fiscal year covered by this Form 10-K.)
TABLE OF CONTENTS
PAGE
----
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
Item 5. Market for the Registrant's Common Stock, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.................................................. 7
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 20
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 55
Item 9A. Controls and Procedures..................................... 55
Item 9B. Other Information........................................... 55
Item 10. Directors and Executive Officers of the Registrant.......... 55
Item 11. Executive Compensation...................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 55
Item 13. Certain Relationships and Related Transactions.............. 55
Item 14. Principal Accountant Fees and Services...................... 56
Item 15. Exhibits and Financial Statement Schedules.................. 56
CAUTIONARY STATEMENT -- This Annual Report on Form 10-K may contain
"forward-looking" statements as that term is defined in the Private Securities
Litigation Reform Act of 1995 or by the Securities and Exchange Commission
("SEC") in its rules, regulations and releases. Baldwin Technology Company, Inc.
(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 from estimates
contained in the Company's forward-looking statements are set forth in Exhibit
99 to this Annual Report on Form 10-K for the year ended June 30, 2005.
PART I
ITEM 1. BUSINESS
Baldwin Technology Company, Inc. ("Baldwin" or the "Company") is a leading
global manufacturer of accessories and controls for the printing and publishing
industry. The Company offers its customers a broad range of products designed to
enhance the quality, productivity and cost-efficiency of the print manufacturing
process while addressing environmental concerns and safety issues. Baldwin's
products include cleaning systems, fluid management and ink control systems, web
press protection systems and drying systems.
The Company sells its products both to printing press manufacturers who
incorporate the Company's products into their own printing press systems for
sale to printers and publishers, as well as to printers and publishers to
upgrade the quality and capability of their existing and new printing presses.
The Company has product development and manufacturing facilities, and sales and
service operations, in strategic markets worldwide.
INDUSTRY OVERVIEW
The Company defines its business as that of providing accessories and
controls for the printing and publishing industry. The Company believes that as
an independent company it produces one of the most complete lines of accessories
and controls products for this diverse industry.
The Company's products are used by printers engaged in all commercial
printing processes including lithography, flexography and digital printing. The
largest share of its business is in offset (lithographic) printing. Offset
printing is the largest segment of the domestic and international printing
market and is used primarily for general commercial printing as well as printing
books, magazines, business forms, catalogs, greeting cards, packaging and
newspapers. The Company's products are designed to improve the printing process
in terms of quality, the environment, safety, productivity and reduction of
waste.
While offset printing represents a significant segment of the U.S. printing
industry, it is also the dominant technology in the international printing
market. The Company believes that the future growth of its international markets
will be attributable in part to the increased use of offset printing. The
Company has established operations in strategic geographic locations to take
advantage of growth opportunities in these markets. Baldwin's worldwide
operations enable it to closely monitor market and new product developments in
different printing markets and to introduce new products, or adapt existing
ones, to meet the printing equipment requirements of specific local markets
throughout the world.
PRINCIPAL PRODUCTS
The Company manufactures and sells many different products to printers and
printing press manufacturers. Thus its product development efforts are focused
on the needs of those printers and the printing press manufacturers. Typically,
it takes a new product several years after its introduction to make a
significant contribution to the Company's net sales. As a product progresses
through its life cycle, the percentage of sales to printing press manufacturers
generally increases as the product's acceptance by the printing industry
increases and printers begin to specify certain of the Company's products as
part of their accessory and controls equipment package selected when ordering
new printing presses. Historically, the Company's products have had a long life
cycle as the Company continually upgrades and refines its product lines to meet
customer needs and changes in printing
1
press technology. The Company's principal products generally range in unit price
from under $100 to approximately $50,000. Baldwin's principal products are
described below:
CLEANING SYSTEMS. The Company's Cleaning Systems products clean the
cylinders of an offset press and include the Press Washer, Automatic Blanket
Cleaner, Newspaper Blanket Cleaner, Chill Roll Cleaner, Digital Plate Cleaner
and Guide Roll Cleaner, all of which reduce paper waste, volatile organic
compound ("VOC") emissions and press downtime, as well as improve productivity,
print quality and safety of operation for the press operator. In the fiscal
years ended June 30, 2005, 2004 and 2003, net sales of Cleaning Systems
represented approximately 55.0%, 52.6% and 54.9% of the Company's net sales,
respectively.
FLUID MANAGEMENT SYSTEMS. The Company's Fluid Management Systems control
the supply, temperature, cleanliness, chemical composition and certain other
characteristics of the fluids used in the lithographic printing process. Among
the most important of these products are the Company's Refrigerated Circulators
and Spray Dampening Systems. In the fiscal years ended June 30, 2005, 2004 and
2003, net sales of Fluid Management Systems represented approximately 23.2%,
23.2% and 21.0% of the Company's net sales, respectively.
OTHER ACCESSORY AND CONTROL PRODUCTS. The Company's Web Press Protection
Systems (web severers and web catchers), designed in response to the increasing
number of web leads used in printing today's colorful newspapers as well as to
the growing demand for high speed commercial web presses, provide an auto-arming
electronic package offering high quality press protection in the event of a web
break. The Company's Ink Control Systems regulate many aspects of the ink feed
system on a printing press. These products include Ink Agitators, Ink Mixers and
Ink Level Systems which reduce ink and paper waste. Other products include
Ultraviolet and Infrared Dryers and Gluing Systems. In the fiscal years ended
June 30, 2005, 2004 and 2003, net sales of Other Accessory and Control Products
represented approximately 21.8%, 24.2% and 24.1% of the Company's net sales,
respectively.
WORLDWIDE OPERATIONS
The Company believes that it is one of the few manufacturers of accessories
and controls for the printing and publishing industry which has complete product
development, manufacturing and marketing capabilities in the Americas, Europe
and Asia. The Company, as an international business, is subject to various
changing competitive economic, political, legal and social conditions. The
Company currently has subsidiaries in 11 countries, and its results of
operations may be adversely or positively affected by currency fluctuations. The
results of the operations and financial position of the Company's subsidiaries
outside of the United States are reported in the relevant foreign currencies and
then translated into U.S. dollars at the applicable exchange rates for inclusion
in the Company's consolidated financial statements. The exchange rates between
the currencies and the U.S. dollar may fluctuate substantially. Because the
Company generates a significant percentage of its revenues and operating
expenses in currencies other than the U.S. dollar, fluctuations in the value of
the U.S. dollar against other currencies may have a material effect on the
Company's operating income. The Company's results and financial condition are
particularly affected by changes in the value of the U.S. dollar in relation to
the euro, Japanese yen and Swedish krona. Since the Company's foreign
subsidiaries primarily manufacture, incur expenses and earn revenue in the local
countries in which they reside, the impact from cross currency fluctuations is
somewhat mitigated.
2
The following table sets forth the percentages of the Company's net sales
attributable to its geographic regions for the fiscal years ended June 30, 2005,
2004 and 2003:
YEARS ENDED JUNE 30,
---------------------
2005 2004 2003
----- ----- -----
Americas.................................................. 14.0% 16.0% 20.3%
Europe.................................................... 47.0% 45.5% 41.8%
Asia...................................................... 39.0% 38.5% 37.9%
----- ----- -----
Total.......................................... 100.0% 100.0% 100.0%
===== ===== =====
In the Americas, the Company operates in North, Central and South America
through its U.S. subsidiaries and a sales office in Brazil. In Europe, the
Company operates through its subsidiaries in Germany, Sweden, France, England
and the Netherlands. In Asia, the Company operates through its subsidiaries in
India, Japan, China and Australia. All of the Company's subsidiaries are wholly
owned except for two subsidiaries, one in which the Company holds a 90%
interest, and another in which the Company holds an 80% interest.
ACQUISITION STRATEGY
An element of the Company's growth strategy is an intention to make
strategic acquisitions of companies and product lines in related business areas.
In such case, the Company's acquisition strategy would involve: (i) acquiring
entities that will strengthen the Company's position in the field of accessories
and controls and related consumables for the printing and publishing industry
and whose products can be sold through the Company's existing distribution
network; (ii) entering new end-user market segments and extending existing
markets; and (iii) acquiring companies which contribute new products to the
Company and which can benefit from the Company's manufacturing and marketing
expertise and financial support. Subsequent to an acquisition, the Company's
strategy would be to integrate the processes and controls of the acquired
companies with those currently existing in the Company's structure with a view
towards enhancing sales, productivity and operating results.
MARKETING, SALES AND SUPPORT
MARKETING AND SALES. While the Company markets its products in most
countries throughout the world, the product mix and distribution channels vary
from country to country. The Company has approximately 73 employees devoted to
marketing and sales activities in its three principal worldwide markets and more
than 150 dealers, distributors and representatives worldwide. The Company
markets its products throughout the world through these direct sales
representatives, distributors and dealer networks to printing press
manufacturers ("OEMs"), newspaper publishers, and commercial printers. For the
fiscal year ended June 30, 2005, approximately 54% of the Company's net sales
were to OEMs and approximately 46% were directly to printers.
SUPPORT. The Company is committed to after-sales service and support of
its products throughout the world. Baldwin employs approximately 77 service
technicians, who are complemented by product engineers, to provide field service
for the Company's products on a global basis.
BACKLOG. Backlog represents unfilled product orders which Baldwin has
received from its customers under valid contracts or purchase orders. The
Company's backlog was $48,114,000 as of June 30, 2005, $44,923,000 as of June
30, 2004 and $49,709,000 as of June 30, 2003.
CUSTOMERS. For the fiscal year ended June 30, 2005, one customer accounted
for more than 10% of the Company's net sales. Koenig and Bauer
Aktiengesellschaft ("KBA") accounted for approximately 17% of the Company's net
sales. The ten largest customers of Baldwin (including KBA)
3
accounted for approximately 53%, 52% and 46%, respectively, of the Company's net
sales for the fiscal years ended June 30, 2005, 2004 and 2003. Sales of
Baldwin's products are not considered seasonal.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company believes its research, development and engineering efforts have
been an important factor in establishing and maintaining its leadership position
in the field of accessories and controls for the printing and publishing
industry. The Company has won six Intertech Awards from the Graphic Arts
Technical Foundation. The Intertech Award was established in 1978 to recognize
technologies that are predicted to have a major impact on the graphic
communications industry, but are not yet in widespread use in the marketplace.
Baldwin has devoted substantial efforts to adapt its products to almost all
models and sizes of printing presses in use worldwide.
The Company has product development functions at several of its locations.
While the Company believes that this approach to research and development has
helped the Company to react quickly to meet the needs of its customers,
coordination of the Company's product development activities required more
centralization, which was accomplished with the Company's restructuring efforts.
The restructured organization focuses attention on opportunities within the
respective markets, while avoiding duplicative efforts within the Company.
Baldwin employs approximately 104 persons whose primary function is new
product development, application engineering or modification of existing
products. The Company's total expenditures for research, development and
engineering for the fiscal years ended June 30, 2005, 2004 and 2003 were
$15,920,000, $13,618,000 and $16,148,000, respectively, representing
approximately 9.0%, 9.0% and 12.0% of the Company's net sales in each fiscal
year, respectively.
PATENTS
The Company owns a number of patents and patent applications relating to a
substantial number of Baldwin's products, and patented products represent a
significant portion of the Company's net sales for all periods presented. The
Company's patents expire at different times during the next twenty years;
however, one significant group of patents, which provided the Company's royalty
income, expired in February 2005. The expiration of patents in the near future
is not expected to have a material adverse effect on the Company's net sales;
however, royalty income and cash flows are expected to be negatively impacted by
the expiration of the afore-mentioned group of patents. The Company has also
relied upon and intends to continue to rely upon unpatented proprietary
technology, including the proprietary engineering required to adapt its products
to a wide range of models and sizes of printing presses. The Company believes
its rights under, and interests in, its patents and patent applications, as well
as its proprietary technology, are sufficient for its business as currently
conducted.
MANUFACTURING
The Company conducts its manufacturing operations through a number of
operating subsidiaries. In North America, the Company has a manufacturing
facility in Kansas. In Europe, the Company has subsidiaries with manufacturing
and assembly facilities in Germany and Sweden. In Asia, Baldwin has
manufacturing and assembly facilities in India and Japan.
In general, raw materials required by the Company can be obtained from
various sources in the quantities desired. The Company has no long-term supply
contracts and does not consider itself dependent on any individual supplier.
4
The nature of the Company's operations is such that there is little, if
any, negative effect upon the environment, and the Company has not experienced
any serious problems in complying with environmental protection laws and
regulations.
COMPETITION
Within the diverse market for accessories and controls for the printing and
publishing industry, the Company produces and markets what it believes to be the
most complete line of accessories and controls. Numerous companies, including
vertically integrated printing press manufacturers, manufacture and sell
products which compete with one or more of the Company's products. These
printing press manufacturers generally have larger staffs and greater financial
resources than the Company.
The Company competes by offering customers a broad technologically advanced
product line, coupled with a well-known reputation for the reliability of its
products and its commitment to service and after-sale support. The Company's
ability to compete effectively in the future will depend upon the continued
reliability of its products, after-sale support, its ability to keep its market
position with new proprietary technology and its ability to develop new products
which meet the demands of the printing and publishing industry.
EMPLOYEES
At June 30, 2005, the Company employed 509 persons (plus 25 temporary and
part-time employees); of which 195 are production employees, 73 are marketing,
sales and customer service employees, 181 are research, development, engineering
and technical service employees and 60 are management and administrative
employees. In Europe, some employees are represented by various unions under
contracts with indefinite terms: in Sweden, approximately 20 of the Company's 80
employees are represented by either Ledarna (SALF), Metall, or Svenska
Industritjanstemanna Forbundet unions; in Germany, approximately 40 of the
Company's 192 employees are represented by the IG Metall (Metalworker's Union).
The Company considers relations with its employees and with its unions to be
good.
ITEM 2. PROPERTIES
The Company owns and leases various manufacturing and office facilities
aggregating approximately 304,000 square feet at June 30, 2005. The table below
presents the locations and ownership of these facilities:
SQUARE SQUARE TOTAL
FEET FEET SQUARE
OWNED LEASED FEET
------ ------- -------
North America........................................ 0 84,000 84,000
Germany.............................................. 0 102,000 102,000
Sweden............................................... 13,000 40,000 53,000
England.............................................. 0 2,000 2,000
Japan................................................ 0 42,000 42,000
All other, foreign................................... 0 21,000 21,000
------ ------- -------
Total square feet owned and leased................. 13,000 291,000 304,000
====== ======= =======
The Company believes that its facilities are adequate to carry on its
business as currently conducted.
5
ITEM 3. LEGAL PROCEEDINGS
Baldwin is involved in various legal proceedings from time to time,
including actions with respect to commercial, intellectual property, and
employment matters. The Company believes that it has meritorious defenses
against the claims currently asserted against it and intends to defend them
vigorously. However, the outcome of litigation is inherently uncertain, and the
Company cannot be sure that it will prevail in any of the cases currently in
litigation. The Company believes that the ultimate outcome of any such cases
will not have a material adverse effect on its results of operations, financial
position or cash flows; however, there can be no assurances that an adverse
determination would not have a material adverse effect on the Company.
In addition to the aforementioned matters, the Company filed suit in the
Regional Court in Dusseldorf, Germany claiming damages of approximately $41
million as a result of a patent infringement. A successful outcome in this case
would have a materially favorable effect on results of operations, financial
position and cash flow.
Information regarding legal proceedings is included in the Notes to
Consolidated Financial Statements (see Note 17) and is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders since November 9,
2004.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF CLASS A COMMON STOCK
The Company's Class A Common Stock is traded on the American Stock Exchange
("AMEX") under the symbol "BLD". The following chart sets forth, for the
calendar year periods indicated, the range of closing prices for the Company's
Class A Common Stock on the consolidated market, as reported by the AMEX.
HIGH LOW
----- -----
2003 (CALENDAR YEAR)
----------------------
First Quarter............................................... $0.65 $0.29
Second Quarter.............................................. $0.71 $0.18
Third Quarter............................................... $0.79 $0.41
Fourth Quarter.............................................. $3.01 $0.80
2004 (CALENDAR YEAR)
----------------------
First Quarter............................................... $3.18 $2.30
Second Quarter.............................................. $4.00 $2.88
Third Quarter............................................... $3.80 $2.75
Fourth Quarter.............................................. $3.50 $2.88
2005 (CALENDAR YEAR)
----------------------
First Quarter............................................... $3.15 $2.40
Second Quarter.............................................. $3.19 $2.22
Third Quarter (through September 16, 2005).................. $4.75 $3.07
CLASS B COMMON STOCK
The Company's Class B Common Stock has no established public trading
market.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of August 30, 2005, the number of record holders (excluding those listed
under a nominee name) of the Company's Class A and Class B Common Stock totaled
279 and 26, respectively. The Company believes, however, that there are
approximately 1,500 beneficial owners of its Class A Common Stock.
DIVIDENDS
Declarations of dividends depend upon the earnings and financial position
of the Company and are within the discretion of the Company's Board of
Directors. However, the Company's debt agreement prohibits the payment of
dividends. No dividend in cash or property shall be declared or paid on shares
of the Company's Class B Common Stock unless simultaneously therewith there is
declared or paid, as the case may be, a dividend in cash or property on shares
of Class A Common Stock of at least 105% of the dividend on shares of Class B
Common Stock (see Note 11 to the Consolidated Financial Statements).
7
PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS
There has been no activity under the Company's stock repurchase program for
the fiscal year ended June 30, 2005.
ITEM 6. SELECTED FINANCIAL DATA
The Company's statement of operations and balance sheet data as it relates
to the fiscal years ended June 30, 2005, 2004 and 2003 have been derived from
the Company's audited financial statements (including the Consolidated Balance
Sheets of the Company at June 30, 2005 and 2004 and the related Consolidated
Statements of Operations of the Company for the fiscal years ended June 30,
2005, 2004 and 2003 appearing elsewhere herein). Certain transactions have
affected comparability, specifically, the Company's disposal of assets of
certain businesses. During the fiscal year ended June 30, 2002, the goodwill
associated with Baldwin Kansa subsidiary ("BKA") exceeded the assessment of its
fair value made by the Company, and the Company recorded a goodwill impairment
charge of $5,434,000 in the fiscal year ended June 30, 2002. In September 2001,
the Company sold substantially all of the assets of its Roll Handling Group
("RHG") and its Print On-Demand ("POD") business. The Company recorded
impairment charges related to the RHG and the POD businesses of $14,831,000 and
$687,000, respectively, in the fiscal year ended June 30, 2001. In September
2000, the Company disposed of substantially all of the assets of its Baldwin
Stobb Division ("BSD"), and recorded a loss on the sale of $831,000 in the
fiscal year ended June 30, 2001. The revenues and corresponding expenses
attributable to these divested operations are included in the consolidated
financial statement only for the periods that the businesses were owned by the
Company. Effective July 1, 2001, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets." As a result, the Company no longer amortizes goodwill. Goodwill
amortization expense amounted to $973,000 for the fiscal year ended June 30,
2001. The following information should be read in conjunction with the
aforementioned financial statements and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
YEARS ENDED JUNE 30,
--------------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales....................... $173,185 $158,110 $134,208 $140,091 $173,308
Cost of goods sold.............. 115,948 108,074 93,788 98,814 123,546
-------- -------- -------- -------- --------
Gross profit.................... 57,237 50,036 40,420 41,277 49,762
Selling, general and
administrative expenses....... 32,289 29,711 26,953 30,627 37,337
Research, development and
engineering expenses.......... 15,920 13,618 16,148 15,451 17,135
Provision for loss on the
disposition of pre-press
operations.................... -- -- (45) (86) (472)
Restructuring charges........... (338) 448 3,605 621 2,277
Settlement and impairment
charges....................... -- -- 1,250 -- 15,518
-------- -------- -------- -------- --------
Operating income (loss)......... 9,366 6,259 (7,491) (5,336) (22,033)
Interest expense................ 2,412 4,985 2,411 1,792 2,014
Interest (income)............... (105) (119) (281) (288) (288)
Royalty (income), net........... (1,749) (3,361) (3,034) (4,252) (3,899)
Other expense (income), net..... 89 (559) 2,251 1,037 (940)
-------- -------- -------- -------- --------
8
YEARS ENDED JUNE 30,
--------------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income (loss) from continuing
operations before income
taxes......................... 8,719 5,313 (8,838) (3,625) (18,920)
(Benefit) provision for income
taxes......................... 3,684 (1,673) 2,578 6,684 698
-------- -------- -------- -------- --------
Income (loss) from continuing
operations.................... 5,035 6,986 (11,416) (10,309) (19,618)
Discontinued operations:
(Loss) income from operations... -- -- (253) (241) 1,446
Impairment charges............ -- -- -- (5,434) --
Gain on sale.................. -- -- 543 -- --
-------- -------- -------- -------- --------
Net income (loss)............... $ 5,035 $ 6,986 $(11,126) $(15,984) $(18,172)
======== ======== ======== ======== ========
Income (loss) per share from
continuing operations:
Basic income (loss) per share... $ 0.34 $ 0.47 $ (0.76) $ (0.69) $ (1.33)
======== ======== ======== ======== ========
Diluted income (loss) per
share......................... $ 0.33 $ 0.46 $ (0.76) $ (0.69) $ (1.33)
======== ======== ======== ======== ========
Income (loss) per share from
discontinued operations:
Basic income (loss) per share... $ 0.00 $ 0.00 $ 0.02 $ (0.38) $ 0.10
======== ======== ======== ======== ========
Diluted income (loss) per
share......................... $ 0.00 $ 0.00 $ 0.02 $ (0.38) $ 0.10
======== ======== ======== ======== ========
Weighted average number of
shares:
Basic......................... 14,899 15,001 15,015 14,915 14,787
======== ======== ======== ======== ========
Diluted....................... 15,305 15,286 15,015 14,915 14,787
======== ======== ======== ======== ========
JUNE 30,
-------------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- ------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital.................. $ 25,499 $ 8,374 $ 4,064 $ 22,319 $ 22,409
Total assets..................... $109,351 $115,271 $96,833 $108,488 $133,890
Short-term debt.................. $ 3,738 $ 23,280 $19,548 $ 10,788 $ 14,060
Long-term debt................... $ 12,223 $ 1,794 $ 521 $ 11,873 $ 8,428
Total debt....................... $ 15,961 $ 25,074 $20,069 $ 22,661 $ 22,488
Shareholders' equity............. $ 39,231 $ 34,467 $26,281 $ 33,754 $ 45,460
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. 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").
The Company does not consider its business to be seasonal. During the
fiscal year ended June 30, 2005, sales during the first half of the year were
impacted by a slow to gradual industry upturn which began during the second half
of the fiscal year ended June 30, 2004. This upturn, coupled with successful
sales and marketing initiatives, increased second half sales. The decline in net
sales in the second half of the fiscal year ended June 30, 2003 was primarily
due to the global printing and
9
publishing industry economic slowdown. The decline in net sales in the second
half of the fiscal year ended June 30, 2002 was primarily due to the global
printing and publishing industry economic slowdown following the events of
September 11, 2001, and the disposition of the RHG.
FIRST SIX SECOND SIX
FISCAL YEAR MONTHS MONTHS
----------- ----------- -----------
2005.................................................... $81,229,000 $91,956,000
2004.................................................... $73,954,000 $84,156,000
2003.................................................... $68,092,000 $66,116,000
2002.................................................... $71,692,000 $68,399,000
2001.................................................... $85,595,000 $87,713,000
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the following
statements and certain other statements contained herein are based on current
expectations. Similarly, the press releases issued by the Company and other
public statements made by the Company from time to time may contain language
that is forward-looking. These forward-looking statements may be identified by
the use of forward-looking words or phrases such as "forecast," "believe,"
"expect," "intend," "anticipate," "should," "plan," "estimate," and "potential,"
among others. 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 are set forth in Exhibit 99 to this Annual Report on Form
10-K for the fiscal year ended June 30, 2005.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Baldwin's discussion and analysis of its financial condition and results of
operations are based on the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires Baldwin to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. Baldwin continually evaluates its estimates,
including those related to product returns, bad debts, inventories, investments,
asset impairments, intangible assets, income taxes, warranty obligations,
restructuring, pensions and other post-retirement benefits, contingencies and
litigation. Baldwin bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
The following critical accounting policies affect the more significant
judgments and estimates used in the preparation of the Company's consolidated
financial statements. Baldwin maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. If the financial condition of Baldwin's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances could be required. Baldwin provides for the estimated cost of product
warranties at the time revenue is recognized. While Baldwin engages in extensive
product quality programs and processes, including actively monitoring and
evaluating the quality of its component suppliers, Baldwin's warranty obligation
is affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure.
10
Should actual product failure rates, material usage or service delivery costs
differ from Baldwin's estimates, revisions to the estimated warranty liability
would be required. Baldwin writes down its inventory for estimated obsolescence
or unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.
Baldwin records a valuation allowance to reduce its net deferred tax assets to
the amount that is more likely than not to be realized. Baldwin has considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance. In the event Baldwin were to
determine that it would be able to realize its deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax asset
valuation allowance would increase income in the period such determination is
made. Likewise, should Baldwin determine that it would not be able to realize
all or part of its net deferred tax asset in the future, an adjustment to the
deferred tax asset valuation allowance would be recorded through a charge to
income in the period such determination is made. Deferred tax assets and
liabilities are determined using enacted tax rates for temporary differences
between book and tax bases of assets and liabilities, as well as the effects of
net operating losses carried forward in certain tax jurisdictions in which the
Company operates that may be utilized to offset future taxable income and
similar tax credits carried forward that may be utilized to reduce future taxes
payable. The Company records valuation allowances on deferred tax assets when
appropriate to reflect the expected future tax benefits to be realized. In
determining the appropriate valuation allowances, certain judgments are made by
management relating to recoverability of deferred tax assets, use of tax loss
and tax credit carryforwards, levels of expected future taxable income and
available tax planning strategies. The assumptions in making these judgments are
updated periodically by management based on current business conditions that
affect the Company and overall economic conditions. These management judgments
are therefore subject to change based on factors that include, but are not
limited to (1) changes in the profitability of the Company's subsidiaries as
well as for the Company as a whole, (2) the ability of the Company to
successfully execute its tax planning strategies, and (3) the accuracy of the
Company's estimate of the potential effect that changes in tax legislation, in
the jurisdictions where the Company operates, may have on the Company's future
taxable profits. Failure by the Company to achieve forecasted taxable income or
to execute its tax planning strategies may affect the ultimate realization of
certain deferred tax assets. Factors that may affect the Company's ability to
achieve sufficient forecasted taxable income or successfully execute its tax
planning strategies include, but are not limited to, increased competition,
general economic conditions, a decline in sales or earnings, loss of market
share, delays in product availability or changes in tax legislation. In
addition, Baldwin recognizes reserves for contingencies when it becomes probable
that such a contingency exists.
Effective July 1, 2001, Baldwin adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). Accordingly, Baldwin no
longer amortizes goodwill but instead tests goodwill for impairment at the
reporting unit level, at least annually, by determining the fair value of the
reporting unit based on a discounted cash flow model, and comparing it with its
book value. If, during the annual impairment review, the book value of the
reporting unit exceeds its fair value, the implied fair value of the reporting
unit's goodwill is compared with the carrying amount of the unit's goodwill. If
the carrying amount exceeds the implied fair value, goodwill is written down to
its implied fair value. SFAS 142 requires management to estimate the fair value
of each reporting unit, as well as the fair value of the assets and liabilities
of each reporting unit, other than goodwill. The implied fair value of goodwill
is determined as the difference between the fair value of a reporting unit,
taken as a whole, and the fair value of the assets and liabilities of such
reporting unit.
11
Other long-lived assets are reviewed for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Events which could trigger an impairment review include, among
others, a decrease in the market value of an asset, the asset's inability to
generate income from operations and positive cash flow in future periods, a
decision to change the manner in which an asset is used, a physical change to
the asset or a change in business climate. Baldwin calculates estimated future
undiscounted cash flows, before interest and taxes, of the related operation and
compares it to the carrying value of the asset in determining whether impairment
potentially exists. If a potential impairment exists, a calculation is performed
to determine the fair value of the long-lived asset. This calculation is based
upon a valuation model and discount rate commensurate with the risks involved.
Third party appraised values may also be used in determining whether impairment
potentially exits. Future adverse changes in market conditions or poor operating
results of a related reporting unit may require the Company to record an
impairment charge in the future.
The impairment review process requires management to make significant
estimates and judgments regarding the future cash flows expected to result from
the use and, if applicable, the eventual disposition of the respective assets.
The key variables that management must estimate in determining these expected
future cash flows include sales volumes, sales prices, sales growth, production
and operating costs, capital expenditures, working capital requirements, market
conditions and other economic factors. Significant management judgment is
involved in estimating these variables, and such estimates are inherently
uncertain; however, the assumptions used are reasonable and consistent with the
Company's internal planning. Management periodically evaluates and updates the
estimates based on conditions that influence these variables.
The assumptions and conditions for determining impairments of property,
plant and equipment, goodwill and other intangible assets reflect management's
best assumptions and estimates, but these items involve inherent uncertainties
as described above, many of which are not under management's control. As a
result, the accounting for such items could result in different estimates or
amounts if management used different assumptions or if different conditions
occur in future accounting periods.
RESULTS OF OPERATIONS
The following table sets forth certain of the items (expressed as a
percentage of net sales) included in the Selected Financial Data and should be
read in connection with the Consolidated Financial Statements of the Company,
including the notes thereto, presented elsewhere in this report.
YEARS ENDED JUNE 30,
-----------------------
2005 2004 2003
----- ----- -----
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of goods sold..................................... 67.0 68.4 69.9
----- ----- -----
Gross profit........................................... 33.0 31.6 30.1
Selling, general and administrative expenses........... 18.6 18.9 20.1
Research, development and engineering expenses......... 9.2 8.6 12.0
Restructuring, impairment and settlement charges....... 0.0 0.0 3.6
----- ----- -----
12
YEARS ENDED JUNE 30,
-----------------------
2005 2004 2003
----- ----- -----
Operating income (loss)................................ 5.4 4.0 (5.6)
Interest expense....................................... (1.4) (3.2) (1.8)
Interest income........................................ 0.0 0.0 0.2
Other income, net...................................... 1.0 2.5 0.6
----- ----- -----
Income (loss) from continuing operations before income
taxes................................................ 5.0 3.4 (6.6)
Provision (benefit) for income taxes................... 2.1 (1.0) 1.9
----- ----- -----
Income (loss) from continuing operations............... 2.9 4.4 (8.5)
Discontinued operations:
Income (loss) from operations........................ 0.0 0.0 (0.2)
Gain on sale......................................... 0.0 0.0 0.4
----- ----- -----
Net income (loss)...................................... 2.9% 4.4% (8.3)%
===== ===== =====
FISCAL YEAR ENDED JUNE 30, 2005 VERSUS FISCAL YEAR ENDED JUNE 30, 2004
CONSOLIDATED RESULTS
NET SALES. Net sales of $173,185,000 for the fiscal year ended June 30,
2005 reflect an increase of $15,075,000 or 10% versus the fiscal year ended June
30, 2004. Currency rate fluctuations increased net sales for the current period
by $7,628,000. Excluding the effects of currency translation, net sales
increased $7,446,000 or 5%.
The net sales increase primarily reflects increased demand in Europe and
Asia. In Europe, sales (excluding the effects of currency translation) increased
approximately $4,100,000, particularly in Germany and the markets serviced by
Sweden. Improving global market conditions in Americas, Europe, and Asia led to
an increased demand from press manufacturers for the Company's cleaning and
spray dampening systems in the commercial and newspaper marketplace. While
downward pricing pressures continue, particularly in the OEM customer base,
improving market conditions coupled with OEM outsourcing and some increase in
market share led to the improved sales.
In Asia, sales increased approximately $3,800,000 (excluding the effects of
currency translations). In Japan, increased OEM export production, mainly to
China, increased demand for the Company's commercial cleaning and water systems.
In addition, the Company's Australian subsidiary began shipments of a
significant newspaper cleaning system order during the fourth quarter of 2005.
In the Americas, particularly the U.S., sales remained relatively flat year
over year due in part to the internal shift of sales to certain European and
Japanese manufactured press equipment with products supplied by the Company's
European and Japanese subsidiaries.
GROSS PROFIT. Gross profit of $57,237,000 for the fiscal year ended June
30, 2005 reflects an increase of $7,201,000 or 14% versus the fiscal year ended
June 30, 2004. Excluding the favorable foreign currency translation effect of
$2,764,000, gross profit increased $4,437,000 or 9%. Gross margins improved to
33% from 32% primarily on the strength of the improvement in sales volume,
coupled with better control over material and labor costs. In addition, gross
margins during the fourth quarter were favorably impacted approximately 1% due
to customer cost reimbursement for an order which was substantially modified.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses of $32,289,000 for the fiscal year ended June 30, 2005
reflect an increase of $2,578,000 or 9%.
13
Excluding the effects of foreign currency translation of $1,192,000, SG&A
expenses increased $1,386,000 or 5%. G&A expenses of $18,384,000 for the fiscal
year ended June 30, 2005 increased $1,107,000 or 6% versus the fiscal year ended
June 30, 2004. Excluding the effects of currency translation of $563,000, G&A
expenses increased $544,000 or 3%. This increase relates primarily to increased
compensation costs commensurate with improved business performance coupled with
higher consulting costs associated with the implementation of compliance with
the requirements of the Sarbanes-Oxley Act.
Selling expenses of $13,905,000 for the fiscal year ended June 30, 2005
increased $1,471,000 or 12%. Excluding the effects of currency translation of
$629,000, selling expenses increased $842,000. The increase in selling expenses
reflects the increased business level associated with the higher-level sales
activity and reflects an increase in commissions, and higher salaries, benefits
and other employee related travel costs.
ENGINEERING AND DEVELOPMENT EXPENSES. Engineering and Development expenses
of $15,920,000 for the year ended June 30, 2005 reflect an increase of
$2,302,000 or 17% versus the fiscal year ended June 30, 2004. Excluding foreign
currency translation effects, engineering and development expenses increased
$1,527,000 or 11%. The increase relates primarily to increased personnel and
travel related expenses particularly in Germany, due to planned investments in
product development, and research and development projects, increased customer
demand and higher business activity levels.
RESTRUCTURING AND OTHER CHARGES. The Company released to income
restructuring reserves of $338,000 for the year ended June 30, 2005 as compared
to a charge of $448,000 for the fiscal year ended June 30, 2004. The release of
restructuring reserves relate to facility lease costs avoided by relocation of
the Company's corporate office. The $448,000 in fiscal year 2004 represented
additional employment reductions in the United States and the United Kingdom
associated with the August 2002 restructuring plan.
INTEREST AND OTHER. Interest expense of $2,412,000 for the fiscal year
ended June 30, 2005 decreased $2,573,000 versus the period ended June 30, 2004.
Lower average debt levels and lower interest rates as a result of the amended
credit agreement with Maple Trade GmbH, entered into in September 2004, coupled
with lower amortization of deferred financing costs during the period primarily
account for the decrease. Additionally, currency rate fluctuations increased
interest expense $173,000 in the current period. Interest income remained
virtually flat year over year on a currency adjusted basis while royalty income
declined $1,612,000. The decline in royalty income relates to the expiration of
a group of patents, which provided the royalty income stream, in February 2005.
Other income and expense, net, amounted to expense of $89,000 for the
period ended June 30, 2005 and primarily reflects a write-off of fixed assets.
In 2004, the income of $559,000 primarily reflected foreign currency transaction
and fair value exchange gains of $1,194,000 and $203,000, respectively.
Partially offsetting these gains in 2004 were financial, legal and accounting
fees amounting to $833,000 related to the termination of a proposed transaction
with regard to the planned sale of the Company.
INCOME TAXES. The Company recorded an income tax provision of $3,684,000
for the fiscal year ended June 30, 2005. The effective tax rate of 42.2% for
fiscal year ended June 30, 2005 reflects strong foreign income, taxed at rates
higher than the U.S. statutory rate. Additionally, no benefit was recognized for
losses incurred in certain countries as the realization of such benefits was not
more likely than not. For the fiscal year ended June 30, 2004, the Company
recorded a tax benefit of $1,673,000 primarily as a result of the reversal of
its valuation allowance for net deferred tax assets associated with its German
subsidiary.
14
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations
before taxes for the fiscal year ended June 30, 2005 of $8,719,000 compares to
income from continuing operations of $5,313,000 in fiscal year ended June 30,
2004. For the current fiscal year, currency rate fluctuations increased income
from continuing operations $645,000. Increased revenue, gross margin improvement
and lower interest expense partially offset by higher operating expenses and
lower royalty income primarily accounts for the increase.
NET INCOME. The Company's net income amounted to $5,035,000 for the fiscal
year ended June 30, 2005 and reflects the improved income from operations. Net
income of $6,986,000 for the fiscal year ended June 30, 2004 reflected improving
income from operations coupled with the income tax benefit associated with the
reversal of the German valuation allowance.
FISCAL YEAR ENDED JUNE 30, 2004 VERSUS FISCAL YEAR ENDED JUNE 30, 2003
CONSOLIDATED RESULTS
NET SALES. Net sales of $158,110,000 for the fiscal year ended June 30,
2004 reflect an increase of $23,902,000 or 18% versus the fiscal year ended June
30, 2003. Currency rate fluctuations increased net sales for the current period
by $13,392,000. Excluding the effects of currency translation, net sales
increased $10,510,000 or 8%.
The net sales increase reflects increased demand in Europe and Asia,
partially offset by declines in the Americas, primarily in the U.S. In Europe,
sales increased approximately $7,000,000, particularly in Germany and Sweden,
where demand for the Company's cleaning and spray dampening systems improved in
both newspaper and commercial markets. While downward pricing pressures
continue, particularly in the OEM customer base, demand and improving market
conditions led to the improved sales. In Asia, particularly Japan, sales
increased approximately $5,000,000. Despite continued pricing pressures,
increased demand for cleaning systems, in both commercial and newspaper markets,
spray dampening systems in the newspaper market and commercial water systems led
to the increased sales.
In the Americas, particularly the U.S., sales declined by approximately
$2,000,000. Weaker North American markets and an internal shift to supply
products for certain European manufactured presses from the Company's foreign
subsidiaries, led to a decline in the amount of revenue recorded by the
Company's U.S. subsidiary, in both the newspaper and commercial markets.
GROSS PROFIT. Gross profit of $50,036,000 for the fiscal year ended June
30, 2004 reflects an increase of $9,616,000 or 24% versus the fiscal year ended
June 30, 2003. Excluding the favorable foreign currency translation effect of
$4,490,000, gross profit increased $5,126,000 or 13%. Gross margin improved to
32% from 30% primarily on the strength of the improvement in sales volume,
coupled with better control over material and labor costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses of $29,711,000 for the fiscal year ended June 30, 2004
reflect an increase of $2,758,000 or 10%. Excluding the effects of foreign
currency translation of $2,157,000, SG&A expenses increased $601,000 or 2%. G&A
expenses of $17,277,000 for the fiscal year ended June 30, 2004 increased
$2,107,000 or 14% versus the fiscal year ended June 30, 2003. Excluding the
effects of currency translation of $1,053,000, G&A expenses increased $1,054,000
or 7%. This increase relates primarily to increased incentive compensation costs
which are commensurate with improved business performance. Excluding the
increased incentive compensation costs, G&A remained virtually flat for the
period ended June 30, 2004 versus the period ended June 30, 2003.
15
Selling expenses of $12,434,000 for the fiscal year ended June 30, 2004
increased $651,000 or 6%. Excluding the effects of currency translation of
$1,104,000, selling expenses declined $453,000. The decline in selling expenses
reflects lower customer support costs in the U.S. as a result of staffing level
decreases coupled with lower outside contractor costs and higher project
management costs which are included in cost of sales, in Sweden. Partially
offsetting these declines was an increase in marketing costs, primarily
associated with trade show advertising and higher salaries, benefits and other
employee related costs in Europe.
ENGINEERING AND DEVELOPMENT EXPENSES. Engineering and Development expenses
of $13,618,000 for the year ended June 30, 2004 reflect a decrease of $2,530,000
or 16% versus the fiscal year ended June 30, 2003. Excluding foreign currency
translation effects, engineering and development expenses declined $3,895,000 or
24%. The decrease relates primarily to lower project costs and reductions in
engineering costs attributed to reduced personnel costs associated with planned
restructuring in the U.S. and in Sweden where lower research and development
expenses were replaced by project management costs which are included in cost of
sales.
RESTRUCTURING AND OTHER CHARGES. The Company recorded restructuring
charges of $448,000 for the year ended June 30, 2004. These charges primarily
relate to additional employment reductions in the U.S. and the U.K. associated
with the August 2002 Plan. In 2003, restructuring and other charges consisted
primarily of restructuring charges of $3,603,000 and a settlement charge of
$1,250,000 associated with a customer dispute related to a business unit that
was divested in 2000, which is to be settled primarily for product in lieu of
cash. The restructuring charges included $220,000 associated with the Company's
March 2000 restructuring plan, which was expensed as incurred and $3,385,000
associated with the Company's August 2002 Plan. The August 2002 Plan consists of
$2,840,000 in additional employee severance and benefit costs, $437,000 in lease
termination costs, $20,000 in asset write-offs and $88,000 in incremental costs
associated with the restructuring plan.
INTEREST AND OTHER. Interest expense of $4,985,000 for the fiscal year
ended June 30, 2004 increased $2,574,000 versus the period ended June 30, 2003.
Higher average debt levels and interest rates as a result of the credit
agreement with Maple Trade GmbH, entered into on August 18, 2003, coupled with
higher amortization of deferred financing costs during the period primarily
account for the increase. Additionally, currency rate fluctuations increased
interest expense $613,000 in the current period. Interest income and royalty
income remained virtually flat year over year on a currency adjusted basis.
Other income and expense, net, amounted to income of $559,000 for the
period ended June 30, 2004 and primarily reflects foreign currency transaction
and fair value exchange gains of $1,194,000 and $203,000, respectively.
Partially offsetting those gains were financial, legal and accounting fees
amounting to $833,000 related to the termination of a proposed transaction with
regard to the planned sale of the Company.
In 2003, other income and expense, net, amounted to expense of $2,251,000.
This amount includes ($879,000) of foreign currency transaction losses,
($446,000) of write-off of deferred costs associated with several alternative
financing arrangements which no longer qualified as deferrable once the Maple
Bank GmbH Credit Agreement became the definitive agreement and ($928,000) of
expenses incurred in pursuit of financial and strategic alternatives related to
the Company's pursuit of alternative capital arrangements. Included in the
($928,000) were, ($564,000) related to a breakage fee payable to a private
equity firm once the Company concluded it would not require a capital
transaction (investment) with the entity; ($215,000) of expenses related to
certain due diligence procedures by the
16
Company on a potential strategic buyer; and ($139,000) and ($10,000) for
financial and legal advisor fees incurred in connection with these alternatives,
respectively.
INCOME TAXES. The Company recorded an income tax benefit of $1,673,000 for
the fiscal year ended June 30, 2004. During the fourth quarter, the Company
reversed its valuation allowance for net deferred tax assets associated with its
German subsidiary (approximately $4,700,000) which resulted in the recording of
a net tax benefit of $3,623,000 for the quarter ended June 30, 2004 and
$1,673,000 for the year ended June 30, 2004. The reversal of the Germany
subsidiary deferred tax valuation allowance was based upon the subsidiary's
operating performance and management's expectation that the subsidiary will
generate sufficient taxable income in future periods to realize the tax benefits
associated with its net operating loss carryforwards. Partially offsetting this
benefit were foreign income taxed at rates higher than the U.S. statutory rate
and a recent change in German tax law which limits the use of previously
recorded net operating losses to offset current taxable income.
INCOME/LOSS FROM CONTINUING OPERATIONS. Income from continuing operations
before taxes for the fiscal year ended June 30, 2004 of $5,313,000 compares to a
loss from continuing operations of $8,838,000 in the fiscal year ended June
2003. Increased revenue, gross margin improvement and lower restructuring and
settlement charges primarily account for the increase.
NET INCOME/LOSS. The Company's net income amounted to $6,986,000 for the
year ended June 30, 2004 and reflects the improved income from operations
coupled with the income tax benefit associated with the reversal of the German
valuation allowance. Net loss of $11,126,000 in 2003 primarily reflects the loss
from continuing operations.
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.
LIQUIDITY AND CAPITAL RESOURCES
The increase in cash and cash equivalents in fiscal years 2005 and 2004,
respectively, of $3,435,000 and $5,058,000, respectively, resulted from cash
flows provided by or used in the Company's operating, investing and financing
activities.
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Cash flow from operating activities:
Net cash from operations before restructuring........ $14,726 $ 5,792 $ 6,449
Cash used for restructuring payments................. (627) (1,416) (3,721)
------- ------- -------
Net cash provided by operating activities............ $14,099 $ 4,376 $ 2,728
======= ======= =======
The Company's continued focus on profitability and asset management coupled
with lower restructuring payments generated cash flows from operations of
$14,099,000 in 2005 versus $4,376,000 in 2004. Higher revenues and improved
profitability led to higher cash receipts from sales
17
in 2005. Improved working capital management additionally led to a decline in
days sales outstanding (51 in 2005; 54 in 2004) and an increase in inventory
turns (5.3 times in 2005; 4.6 times in 2004).
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Cash flow from investing activities:
Additions to property, patents, trademarks and
drawings............................................ $(1,317) $(1,022) $(1,370)
Proceeds from disposition of assets................... 299 0 3,736
------- ------- -------
Net cash (used in) provided by investing activities... $(1,018) $(1,022) $ 2,366
======= ======= =======
In 2005, cash used for additions amounted to $1,317,000 in 2005 versus
$1,022,000 in 2004 and $1,370,000 in 2003. The decrease in 2004 primarily
relates to lower property additions pursuant to the capital expenditures
limitations contained in the Maple Credit Agreement. Proceeds from the sale of
BKA in 2003 were primarily used to reduce outstanding bank debt.
2005 2004 2003
------- -------- -------
(IN THOUSANDS)
Cash flow from financing activities:
Long and short term debt borrowings.................. $ 0 $ 23,159 $ 4,434
Long and short term debt repayments.................. (9,213) (19,896) (7,453)
Payment of debt financing costs...................... (259) (2,533) (785)
Other................................................ (2) (31) 483
------- -------- -------
Net cash (used in) provided by financing
activities......................................... $(9,474) $ 699 $(3,321)
======= ======== =======
The Company's primary source of external financing is the Credit Agreement
and its amendments (the "Credit Agreement") with Maple Bank GmbH ("Maple" or
"Lender").
During the fiscal year ended June 30, 2005 the Credit Agreement with Maple
was amended to increase the size of the credit facility to $28,000,000 from the
$20,000,000 level in place during the fiscal year ended June 30, 2004. In
addition, the amendment reduced the interest rates for the fiscal year ended
June 30, 2005. Borrowings under the credit facility are subject to a borrowing
base and bear interest at a rate equal to the three-month Eurodollar rate (as
defined in the Credit Agreement) plus: (i) 5.125% for loans denominated in U.S.
dollars (10% during the fiscal year ended June 30, 2004) and (ii) 5.525% for
loans denominated in Euros (11.5% during the fiscal year ended June 30, 2004).
The interest rate will be reduced by 0.50% or whole increments thereof for each
whole increment of disclosed EBITDA (as defined in the Credit Agreement) that
equals or exceeds $1,250,000 for any fiscal quarter commencing with the quarter
ending December 31, 2003. In no event, however, during the fiscal year ended
June 30, 2005, may the interest rate be less than 7.5% (10.5% for the fiscal
year ended June 30, 2004) for dollar-based borrowings and 7.625% (10.5% for the
fiscal year ended June 30, 2004) for Euro based borrowings.
The credit facility is collateralized by substantially all of the accounts
and notes receivable of the Company and a portion of the Company's inventory up
to a maximum amount of $10,000,000. The Credit Agreement does not require the
Company to meet any financial covenants, except for a limitation on annual
capital expenditures, for which the Company received a waiver for the fiscal
year ended June 30, 2004; however, it contains a material adverse effect clause,
which provides that Maple would not be obligated to fund any loan, convert or
continue any loan as a LIBOR loan or issue any new letters of credit in the
event of a material adverse effect. Management does not anticipate that such an
event will occur; however, there can be no assurance that such an event will not
occur. In addition,
18
the Credit Agreement granted to the Lender an option to acquire a maximum of
$5,000,000 of equity securities (as defined in the Agreement) should the Company
choose to issue any such equity securities.
The initial borrowings under the credit facility during the fiscal year
ended June 30, 2004, amounted to $18,874,000, of which the Company utilized
$16,243,000 to retire its previously existing debt, associated interest, closing
costs and working capital purposes. During the fiscal year ended June 30, 2005,
strong cash flow from operations enabled the Company to reduce the amount
outstanding under the Credit Agreement with Maple by approximately $8,100,000
included in total long and short term repayments of $9,213,000.
Effective July 1, 2005, the Company further amended the Credit Agreement
with Maple Bank. This additional amendment reduced interest rates approximately
175 basis points and lowered annual commitment fees. At current debt levels, the
Company believes that the amendment will generate approximately $400,000 of
annual interest expense savings.
The Company maintains relationships with both foreign and domestic banks,
which combined have extended credit facilities totaling $33,359,000 at June 30,
2005, including amounts available under the Maple Credit Agreement. As of June
30, 2005, the Company had $17,311,000 outstanding under these credit facilities
including $12,853,000 (including Letters of Credit) under the Maple Credit
Agreement and Term Loan.
The Company believes that its cash flow from operations, along with the
available bank lines of credit and alternative sources of borrowing are
sufficient to finance its working capital and other capital requirements over
the term of the current financing with Maple.
At June 30, 2005 and 2004, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, the Company is not
exposed to any financing, liquidity, market or credit risk that could arise if
the Company had engaged in such relationships.
The following summarizes the Company's contractual obligations at June 30,
2005 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,
----------------------------------------------------------------
2011 AND
TOTAL 2006 2007 2008 2009 2010 THEREAFTER
------- ------ ------ ------ ------- ---- ----------
Contractual obligations:
Loans payable............. $ 2,705 $2,705 $ 0 $ 0 $ 0 $ 0 $ 0
Capital lease
obligations............. 165 87 38 24 15 1 0
Long-term debt............ 13,256 1,033 576 115 11,532 0 0
Non-cancelable operating
lease obligations....... 10,964 3,828 2,531 1,589 1,226 420 1,370
Interest expense(1)....... 3,619 1,194 1,109 1,094 222 0 0
------- ------ ------ ------ ------- ---- ------
Total contractual cash
obligations............. $30,709 $8,847 $4,254 $2,822 $12,995 $421 $1,370
======= ====== ====== ====== ======= ==== ======
---------------------------
(1) The anticipated future interest payments are based on the Company's current
indebtedness and interest rates at June 30, 2005, with consideration given
to debt reduction as the result of expected payments.
19
NEW ACCOUNTING STANDARDS
See Note 2 to the Consolidated Financial Statements for information
concerning new accounting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company operates internationally and is exposed to certain market risks
arising from transactions that in the normal course of business include
fluctuations in interest rates and currency exchange rates. While the Company
occasionally uses derivative financial instruments in order to manage or reduce
these risks, typically currency futures contracts and interest rate swap
agreements, the Company does not enter into derivative or other financial
instruments for trading or speculative purposes.
INTEREST RATE AND DEBT SENSITIVITY
As of June 30, 2005, the Company had debt totaling $15,961,000 most of
which bears interest at floating rates.
The Company performed a sensitivity analysis as of June 30, 2005, assuming
a hypothetical one percentage point increase in interest rates. Holding other
variables constant (such as foreign exchange rates and debt levels), a
one-percentage point increase in interest rates would affect the Company's pre-
tax income by approximately $160,000. However, actual increases or decreases in
earnings in the future could differ materially from this analysis based on the
timing and amount of both interest rate changes and amounts borrowed by the
Company.
CURRENCY EXCHANGE RATE SENSITIVITY
The Company derived approximately 86% of its revenues from countries
outside of the United States for the fiscal year ended June 30, 2005. Results
were and continue to be affected by fluctuations in foreign currency exchange
rates. The Company's policy is to hedge the impact of currency rate
fluctuations, which could have a material impact on the Company's financial
results. The Company utilizes foreign currency exchange forward contracts to
hedge certain of these exposures. The Company also maintains certain levels of
cash denominated in various currencies, which acts as a natural overall hedge.
The Company performed a sensitivity analysis as of June 30, 2005 assuming a
hypothetical 10% adverse change in foreign currency exchange rates. Holding all
other variables constant, the analysis indicated that such a market movement
would affect the Company's pre-tax income by approximately $1,000,000. However,
actual gains and losses in the future could differ materially from this analysis
based on the timing and amount of both foreign currency exchange rate movements
and the Company's actual exposures and hedges.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm..... 22
Consolidated Balance Sheets at June 30, 2005 and June 30,
2004...................................................... 23
Consolidated Statements of Operations for the years ended
June 30, 2005, June 30, 2004 and June 30, 2003............ 25
Consolidated Statements of Changes in Shareholders' Equity
for the years ended June 30, 2005, June 30, 2004 and June
30, 2003.................................................. 26
Consolidated Statements of Cash Flows for the years ended
June 30, 2005, June 30, 2004 and June 30, 2003............ 27
Notes to Consolidated Financial Statements.................. 28
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
BALDWIN TECHNOLOGY COMPANY, INC.
In our opinion, the consolidated Financial Statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Baldwin Technology Company, Inc. and its subsidiaries at June 30,
2005 and 2004, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 2005 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Stamford, Connecticut
September 28, 2005
22
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
JUNE 30, JUNE 30,
2005 2004
-------- --------
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 15,443 $ 12,008
Accounts receivable trade, net of allowance for
doubtful accounts of $1,962 ($2,155 at June 30,
2004)............................................... 27,160 24,765
Notes receivable, trade................................ 8,090 12,960
Inventories............................................ 22,755 24,998
Deferred taxes......................................... 416 473
Prepaid expenses and other............................. 3,132 5,448
-------- --------
Total current assets.......................... 76,996 80,652
-------- --------
MARKETABLE SECURITIES:
(Cost $610 at June 30, 2005 and $586 at June 30,
2004)............................................... 678 640
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land and buildings..................................... 936 977
Machinery and equipment................................ 2,082 3,314
Furniture and fixtures................................. 3,796 4,149
Capital leases......................................... 391 371
-------- --------
7,205 8,811
Less: Accumulated depreciation........................... (3,790) (4,271)
-------- --------
Net property, plant and equipment........................ 3,415 4,540
-------- --------
PATENTS, TRADEMARKS AND ENGINEERING DRAWINGS, at cost,
less accumulated amortization of $4,559 ($4,224 at June
30, 2004).............................................. 2,561 2,259
GOODWILL, less accumulated amortization of $3,456 ($3,516
at June 30, 2004)...................................... 10,922 11,104
DEFERRED TAXES........................................... 10,623 12,151
OTHER ASSETS............................................. 4,156 3,925
-------- --------
TOTAL ASSETS.................................. $109,351 $115,271
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
23
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
JUNE 30, JUNE 30,
2005 2004
-------- --------
CURRENT LIABILITIES:
Loans payable.......................................... $ 2,705 $ 2,757
Current portion of long-term debt...................... 1,033 20,523
Accounts payable, trade................................ 14,789 11,615
Notes payable, trade................................... 9,278 10,840
Accrued salaries, commissions, bonus and
profit-sharing...................................... 7,641 6,808
Customer deposits...................................... 3,320 2,785
Accrued and withheld taxes............................. 2,041 2,184
Income taxes payable................................... 1,204 3,079
Other accounts payable and accrued liabilities......... 9,486 11,687
-------- --------
Total current liabilities..................... 51,497 72,278
-------- --------
LONG-TERM LIABILITIES:
Long-term debt......................................... 12,223 1,794
Other long-term liabilities............................ 6,400 6,732
-------- --------
Total long-term liabilities................... 18,623 8,526
-------- --------
Total liabilities............................. 70,120 80,804
-------- --------
SHAREHOLDERS' EQUITY:
Class A Common Stock, $.01 par, 45,000,000 shares
authorized, 16,575,349 shares issued at June 30,
2005 and 16,529,348 shares issued at June 30,
2004................................................ 166 166
Class B Common Stock, $.01 par, 4,500,000 shares
authorized, 2,137,883 shares issued at June 30, 2004
and 2,137,883 shares issued at June 30, 2005........ 21 21
Capital contributed in excess of par value............. 57,065 57,017
Accumulated deficit.................................... (7,632) (12,667)
Accumulated other comprehensive income................. 2,332 2,651
Less: Treasury stock, at cost:
Class A -- 3,630,202 shares (3,630,202 at June 30,
2004) Class B -- 172,464 shares (172,464 shares at
June 30, 2004)...................................... (12,721) (12,721)
-------- --------
Total shareholders' equity.................... 39,231 34,467
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $109,351 $115,271
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
24
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED JUNE 30,
--------------------------------
2005 2004 2003
-------- -------- --------
Net sales.......................................... $173,185 $158,110 $134,208
Cost of goods sold................................. 115,948 108,074 93,788
-------- -------- --------
Gross profit....................................... 57,237 50,036 40,420
-------- -------- --------
Operating expenses:
General and administrative....................... 18,384 17,277 15,170
Selling.......................................... 13,905 12,434 11,783
Engineering and development...................... 15,920 13,618 16,148
Provision for loss on the disposition of
pre-press operations.......................... -- -- (45)
Restructuring charges............................ (338) 448 3,605
Settlement charges............................... -- -- 1,250
-------- -------- --------
47,871 43,777 47,911
-------- -------- --------
Operating income (loss)............................ 9,366 6,259 (7,491)
-------- -------- --------
Other (income) expense:
Interest expense................................. 2,412 4,985 2,411
Interest (income)................................ (105) (119) (281)
Royalty (income), net............................ (1,749) (3,361) (3,034)
Other expense (income), net...................... 89 (559) 2,251
-------- -------- --------
647 946 1,347
-------- -------- --------
Income (loss) from continuing operations before
income taxes..................................... 8,719 5,313 (8,838)
-------- -------- --------
(Benefit) provision for income taxes:
Domestic......................................... (55) (485) 500
Foreign.......................................... 3,739 (1,188) 2,078
-------- -------- --------
Total income tax provision (benefit).... 3,684 (1,673) 2,578
-------- -------- --------
Income (loss) from continuing operations........... 5,035 6,986 (11,416)
Discontinued operations:
(Loss) from operations (net of applicable income
taxes of $0).................................. -- -- (253)
Gain on sale (net of applicable income taxes of
$0)........................................... -- -- 543
-------- -------- --------
Net Income (loss).................................. $ 5,035 $ 6,986 $(11,126)
======== ======== ========
Net Income (loss) income per share
Continuing operations -- basic................... $ 0.34 $ 0.47 $ (0.76)
Continuing operations -- diluted................. $ 0.33 $ 0.46 $ (0.76)
Discontinued operations -- (loss) income from
operations.................................... $ 0.00 $ 0.00 $ (0.02)
Discontinued operations -- gain on sale.......... $ 0.00 $ 0.00 $ 0.04
-------- -------- --------
Net Income (loss) per share -- basic............... $ 0.34 $ 0.47 $ (0.74)
======== ======== ========
Net Income (loss) per share -- diluted............. $ 0.33 $ 0.46 $ (0.74)
======== ======== ========
Weighted average shares outstanding:
Basic............................................ 14,899 15,001 15,015
======== ======== ========
Diluted.......................................... 15,305 15,286 15,015
======== ======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
25
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
CLASS A CLASS B ACCUMULATED
COMMON STOCK COMMON STOCK CAPITAL IN OTHER TREASURY STOCK
------------------- ------------------ EXCESS OF RETAINED COMPREHENSIVE ---------------------
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS LOSS SHARES AMOUNT
---------- ------ --------- ------ ---------- -------- ------------- ---------- --------
Balance at June 30,
2002................... 16,458,849 165 2,185,883 21 56,986 (8,527) (2,017) (3,630,202) (12,199)
Year ended June 30, 2003:
Net loss for the
Year................. (11,126)
Translation
Adjustment........... 3,431
Unrealized loss on
available-for sale
securities, net of
tax.................. (31)
Unrealized gain on
forward contracts.... 28
Comprehensive loss.....
Reduction in note
receivable in
exchange for an equal
reduction in deferred
compensation payments
to be made by the
Company..............
---------- ---- --------- --- ------- -------- ------- ---------- --------
Balance at June 30,
2003................... 16,458,849 $165 2,185,883 $21 $56,986 $(19,653) $ 1,411 (3,630,202) $(12,199)
---------- ---- --------- --- ------- -------- ------- ---------- --------
Year ended June 30, 2004:
Net Income for the
year................. 6,986
Translation
Adjustment........... 1,253
Unrealized gain on
available-for sale
securities, net of
tax.................. 88
Unrealized loss on
forward contracts.... (1)
Shares issued under Stock
Option Plan............ 22,499 1 31
Shares Converted Class B
to Class A............. 48,000 -- (48,000) --
Additional minimum
pension liability.... (100)
Comprehensive income...
Reduction in note
receivable through
exchanged shares..... (172,464) (522)
---------- ---- --------- --- ------- -------- ------- ---------- --------
Balance at June 30,
2004................... 16,529,348 $166 2,137,833 $21 $57,017 $(12,667) $ 2,651 (3,802,666) $(12,721)
========== ==== ========= === ======= ======== ======= ========== ========
Year ended June 30, 2005:
Net Income for the
year................. 5,035
Translation
Adjustment........... (318)
Unrealized gain on
available-for sale
securities, net of
tax.................. 9
Unrealized loss on
forward contracts.... (30)
Shares issued under Stock
Option Plan............ 46,001 48
Reduction of minimum
pension liability.... 20
Comprehensive income...
---------- ---- --------- --- ------- -------- ------- ---------- --------
Balance at June 30,
2005:.................. 16,575,349 $166 2,137,833 $21 $57,065 $ (7,632) $ 2,332 (3,802,666) $(12,721)
========== ==== ========= === ======= ======== ======= ========== ========
NOTE RECEIVABLE
FROM KEY
EXECUTIVE FOR
COMMON STOCK COMPREHENSIVE
ISSUANCE INCOME (LOSS)
--------------- -------------
Balance at June 30,
2002................... (675)
Year ended June 30, 2003:
Net loss for the
Year................. $(11,126)
Translation
Adjustment........... 3,431
Unrealized loss on
available-for sale
securities, net of
tax.................. (31)
Unrealized gain on
forward contracts.... 28
--------
Comprehensive loss..... $ (7,698)
========
Reduction in note
receivable in
exchange for an equal
reduction in deferred
compensation payments
to be made by the
Company.............. 225
-----
Balance at June 30,
2003................... $(450)
-----
Year ended June 30, 2004:
Net Income for the
year................. $ 6,986
Translation
Adjustment........... 1,253
Unrealized gain on
available-for sale
securities, net of
tax.................. 88
Unrealized loss on
forward contracts.... (1)
Shares issued under Stock
Option Plan............
Shares Converted Class B
to Class A.............
Additional minimum
pension liability.... (100)
Comprehensive income... $ 8,226
========
Reduction in note
receivable through
exchanged shares..... 450
-----
Balance at June 30,
2004................... $ 0
=====
Year ended June 30, 2005:
Net Income for the
year................. $ 5,035
Translation
Adjustment........... (318)
Unrealized gain on
available-for sale
securities, net of
tax.................. 9
Unrealized loss on
forward contracts.... (30)
Shares issued under Stock
Option Plan............
Reduction of minimum
pension liability.... 20
Comprehensive income... $ 4,716
----- ========
Balance at June 30,
2005:.................. $ 0
=====
The accompanying notes to consolidated financial statements
are an integral part of these statements.
26
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED JUNE 30,
-----------------------------
2005 2004 2003
------- -------- --------
Cash flows from operating activities:
Net income (loss)........................................ $ 5,035 $ 6,986 $(11,126)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization......................... 1,625 1,763 1,931
Accrued retirement pay................................ 119 238 776
Deferred taxes........................................ 1,524 (4,678) (774)
Provision for losses on accounts receivable........... 99 109 657
Write-off of fixed assets............................. 108 -- --
Restructuring charges................................. (338) 448 3,605
(Gain) loss from disposition of business.............. -- -- (543)
Write-off of deferred debt financing costs............ -- -- 446
Settlement charge..................................... -- -- 1,250
Changes in assets and liabilities, net of effects from
dispositions:
Accounts and notes receivable...................... 2,010 (2,599) 8,586
Inventories........................................ 1,990 (938) 1,932
Prepaid expenses and other......................... 2,580 1,834 2,221
Other assets....................................... (331) 233 1,327
Customer deposits.................................. 561 (590) (1,699)
Accrued compensation............................... 928 2,147 (103)
Payments of restructuring charges.................. (627) (1,416) (3,721)
Accounts and notes payable, trade.................. 2,218 457 (280)
Income taxes payable............................... (1,849) 902 765
Accrued and withheld taxes......................... (143) 82 175
Other accounts payable and accrued liabilities..... (1,277) (669) (2,431)
Interest payable................................... (133) 67 (266)
------- -------- --------
Net cash provided (used) by operating activities........... 14,099 4,376 2,728
------- -------- --------
Cash flows from investing activities:
Proceeds from the disposition of assets.................. 299 -- 3,736
Additions of property.................................... (640) (532) (866)
Additions of patents, trademarks and drawings............ (677) (490) (504)
------- -------- --------
Net cash (used in) provided by investing activities........ (1,018) (1,022) 2,366
------- -------- --------
Cash flows from financing activities:
Long-term and short-term debt borrowings................. -- 23,159 4,434
Long-term and short-term debt repayments................. (9,213) (19,896) (7,453)
Promissory note in connection with strategic financing
alternatives.......................................... -- -- 412
Principal payments under capital lease obligations....... (93) (97) (49)
Payment of debt financing costs.......................... (259) (2,533) (785)
Other long-term liabilities.............................. 45 32 120
Proceeds of stock option exercise........................ 46 34 --
------- -------- --------
Net cash (used) provided by financing activities........... (9,474) 699 (3,321)
------- -------- --------
Effect of exchange rate changes............................ (172) 1,005 498
------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 3,435 5,058 2,271
Cash and cash equivalents at beginning of year............. 12,008 6,950 4,679
------- -------- --------
Cash and cash equivalents at end of year................... $15,443 $ 12,008 $ 6,950
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................. $ 2,545 $ 5,052 $ 2,145
Income taxes............................................. $ 3,581 $ 1,552 $ 1,941
The accompanying notes to consolidated financial statements
are an integral part of these statements.
27
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION OF BUSINESS:
Baldwin Technology Company, Inc. and its subsidiaries ("Baldwin" or the
"Company") are engaged primarily in the development, manufacture and sale of
accessories and controls for the printing and publishing industry. The Company
manages its business as one reportable business segment built around its core
competency in accessories and controls.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following are the significant accounting policies followed by the
Company:
CONSOLIDATION. The consolidated financial statements include the accounts
of Baldwin, its wholly owned subsidiaries, one 90% owned subsidiary and another
80% owned subsidiary. All significant intercompany transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
instruments (cash and short-term securities) with original maturities of three
months or less to be cash equivalents.
ACCOUNTS RECEIVABLE, NOTES RECEIVABLE/PAYABLE. Accounts receivable are
recorded at their net realizable value after deducting an allowance for doubtful
accounts. Such deductions reflect either specific cases or estimates based on
historical incurred losses. Notes receivable, trade reflect promissory notes
issued by customers of the Company's Japanese subsidiary. Notes payable trade,
reflect obligations of the Company's Japanese subsidiaries to suppliers.
TRANSLATION OF FOREIGN CURRENCIES. All assets and liabilities of foreign
subsidiaries are translated into dollars at the fiscal year-end (current)
exchange rates and components of revenue and expense are translated at average
rates for the fiscal year. The resulting translation adjustments are included in
shareholders' equity. Gains and losses on foreign currency exchange transactions
are reflected in the statement of operations. Net transaction gains and losses
credited or charged to "Other expense (income), net" for the fiscal years ended
June 30, 2005, 2004 and 2003 were $90,000, ($1,194,000) and $879,000,
respectively.
HEDGING. The Company operates internationally and is exposed to certain
market risks arising from transactions that in the normal course of business
include fluctuations in interest rates and currency exchange rates. While the
Company occasionally uses derivative financial instruments in order to manage or
reduce these risks, typically currency futures contracts and interest rate swap
agreements, the Company does not enter into derivative or other financial
instruments for trading or speculative purposes. The Company's policy is to
hedge the impact of currency rate fluctuations, which could have a material
impact on the Company's financial results. The Company utilizes foreign currency
exchange forward contracts to hedge these exposures.
Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction.
If a derivative is designated as a fair value hedge, the changes in the
fair value of the derivative and the underlying hedged item attributable to the
hedged risk are recognized in earnings. If the derivative is designated as a
cash flow hedge, the effective portions of changes in fair value of the
derivative are recorded in Other Comprehensive Income ("OCI") and are recognized
in the statement
28
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of operations when the underlying hedged item affects earnings. Ineffectiveness
related to cash flow hedges is recognized in earnings and is included in "Other
expense (income), net".
CONCENTRATION OF CREDIT RISK. Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of
trade accounts and notes receivable. The Company controls this risk through
credit approvals, customer limits and monitoring procedures. For the fiscal year
ended June 30, 2005, one customer accounted for more than 10% of the Company's
net sales. Koenig and Bauer Aktiengesellschaft ("KBA") accounted for
approximately 17% of the Company's net sales. The Company's ten largest
customers accounted for approximately 53%, 52% and 46% of the Company's net
sales for each of the fiscal years ended June 30, 2005, 2004 and 2003,
respectively.
MARKETABLE SECURITIES. The Company classifies all of its marketable
securities as available-for-sale securities. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses net of income taxes,
reported as a component of other comprehensive income (loss) included within
shareholders' equity. Cost is determined using the average cost method.
INVENTORIES. Inventories are stated at the lower of cost or market. Cost
is determined on the last-in, first-out (LIFO) method for domestic inventories
and the first-in, first-out (FIFO) method for foreign inventories. If the FIFO
method had been used for all inventories, the total stated amount for
inventories would have been $672,000 and $549,000 greater as of June 30, 2005
and 2004, respectively.
PROPERTY, PLANT AND EQUIPMENT. The Company depreciates its assets over
their estimated useful lives. The estimated useful lives range from 27 to 30
years for buildings, 7 to 10 years for machinery and equipment, 3 to 7 years for
furniture and fixtures, the life of the lease for leasehold improvements and 5
to 7 years for capital leases. Plant and equipment are carried at historical
cost and are depreciated using primarily the straight-line method. Repair and
maintenance expenditures are expensed as incurred. Depreciation expense amounted
to $1,165,000, $1,231,000 and $1,288,000 for the fiscal years ended June 30,
2005, 2004 and 2003, respectively.
LONG-LIVED ASSETS. Whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, the Company
evaluates the basis of its long-lived assets based on expectations of
undiscounted cash flows related to those assets. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", the Company believes that no impairment of
its long-lived assets exists at June 30, 2005.
STOCK BASED COMPENSATION. On January 1, 2003, the Company adopted the
disclosure provisions of Financial Accounting Standards Board ("FASB") Statement
No. 148, "Accounting for Stock-Based Compensation -- transition and disclosure"
("SFAS 148"), which amended certain provisions of SFAS 123 to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation,
effective as of the beginning of the fiscal year. Baldwin continues to apply the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB 25") in accounting for stock-based compensation. In
accordance with APB 25, compensation costs for stock options is recognized in
income based on the excess, if any, of the quoted market price over the exercise
29
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
price of the stock on the date of grant. The exercise price for all stock option
grants equals the fair market value on the date of grant; therefore, no
compensation expense is recorded.
GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill is tested for impairment at
the reporting unit level at least annually, by determining the fair value
utilizing discounted cash flows of the reporting unit and comparing the fair
value with its recorded book value. A reporting unit is the lowest level of an
entity that is a business and can be distinguished from other activities,
operations, and assets of the entity. If, during the annual impairment review,
the book value of the reporting unit exceeds the fair value, the implied fair
value of the reporting unit's goodwill is compared with the carrying amount of
the unit's goodwill. If the carrying amount exceeds the implied fair value,
goodwill is written down to its implied fair value. SFAS No. 142 requires
management to estimate the fair value of each reporting unit, as well as the
fair value of the assets and liabilities of each reporting unit, other than
goodwill. The implied fair value of goodwill is determined as the difference
between the fair value of a reporting unit, taken as a whole, and the fair value
of the assets and liabilities of such reporting unit. As required by SFAS No.
142, the Company conducted an initial impairment assessment as of the July 1,
2001 date of adoption and determined that no impairment existed. The Company
performed its annual impairment assessment by utilizing a discounted cash flow
model and determined that no impairment existed as of June 30, 2005.
Other intangible assets include patents, trademarks and engineering
drawings, which are amortized on a straight-line basis over the estimated useful
lives of the related assets, generally 15 to 20 years. Amortization expense
amounted to $460,000, $532,000 and $643,000 for the fiscal years ended June 30,
2005, 2004 and 2003, respectively.
INCOME TAXES. Deferred taxes are determined under the asset and liability
approach. Deferred tax assets and liabilities are recognized on differences
between the book and tax basis of assets and liabilities using presently enacted
tax rates. Further, deferred tax assets are recognized for the expected benefits
of available net operating loss carryforwards, capital loss carryforwards and
foreign tax credit carryforwards. A valuation allowance is recorded to reduce a
deferred tax asset to an amount, which the Company expects to realize in the
future. The Company continually reviews the adequacy of the valuation allowance
and recognizes these benefits only as reassessment indicates that it is more
likely than not that these benefits will be realized. In addition, the Company
continuously evaluates its tax contingencies and recognizes a liability when it
believes that it is probable that a liability exists.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS. The Company's financial
instruments consist of cash, short-term securities, accounts receivable, notes
receivable, marketable securities, capital lease obligations, accounts payable,
notes payable, other short and long-term borrowings, and derivative financial
instruments. The current carrying amount of these instruments approximates fair
market value.
WARRANTY. The Company's standard contractual warranty provisions are to
repair or replace, at the Company's option, a 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
and is included in "Cost of goods sold". In addition, should the Company become
aware of a specific potential warranty claim, a specific charge is recorded and
accounted for separately from the percent of revenue discussed above. The
Company has accrued estimated future warranty and customer support
30
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
obligations of $2,840,000 and $2,714,000 at June 30, 2005 and 2004,
respectively, which are included in "Other accounts payable and accrued
liabilities" (see Note 18).
REVENUE RECOGNITION. The Company's products are sold with terms and
conditions, which vary depending on particular cultural and business
environments in which the Company operates globally. The standard policy of the
Company is to recognize revenue in accordance with accounting principles
generally accepted in the United States of America. The Company's standard
payment terms for equipment include a deposit to be received with the customer
order, progress payments until equipment is shipped and a portion of the balance
due within a set number of days following shipment. Freight terms are FOB
shipping dock with risk of loss passing to the purchaser at the time of
shipment. Installation services are provided to the customer on an as needed
basis and are contracted for separately. If non-standard terms are negotiated,
the impact of the terms of shipment and contractual installation requirements
are determined on an individual contract basis. In the case of non-standard
terms, revenue is not recognized until, at a minimum, title and risk of loss
have passed to the customer, and the customer is obligated to pay. If a loss
should occur in transit, the Company is not responsible for, and does not
administer insurance claims unless the terms are FOB destination. The customer
is not contractually eligible for any refund of the purchase price, or right of
return of the contracted product, except if the product fails to meet published
product specifications and the Company fails to perform its obligations under
product warranty terms. When installation services are a contractual element,
and included in the purchase price of the product, the revenue associated with
installing the product is generally inconsequential to the total revenue stream.
The Company recognizes revenue for the total sales price and accrues the cost of
installing the product based on the Company's historical installation costs. The
terms of sale are generally on a purchase order basis and as such do not contain
formal product acceptance clauses. On certain large orders, usually in the
newspaper equipment market, a separately negotiated contract is used to
establish the terms of sale. In such cases, the Company recognizes revenue only
after all acceptance criteria, if any, have been satisfied.
The Company uses distributors to assist in the sales function. In these
cases, the Company does not recognize revenue until title for the equipment and
risk of loss has passed to the ultimate customer, who then becomes obligated to
pay with no right of return. Otherwise, the equipment is reported as a part of
the Company's inventory on consignment and no revenue is reported.
RESEARCH AND DEVELOPMENT AND ENGINEERING. Research, development and
engineering costs are expensed as incurred.
EARNINGS (LOSS) PER SHARE. Basic earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is similar to basic earnings per
share except that it reflects the potential dilution that could occur if
dilutive securities, such as stock options, were exercised or converted into
common shares or resulted in the issuance of common shares that then shared in
the earnings of the Company.
COMPREHENSIVE INCOME (LOSS). As shown in the Statement of Changes in
Shareholders' Equity, comprehensive income (loss) is a measure of net income
(loss) and all other changes in equity of the Company that result from
recognized transactions and other events of the period other than transactions
with shareholders.
31
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The most significant
assumptions and estimates relate to the determination of accrued expenses
including warranty, accounts receivable and inventory valuations, useful lives
of assets and deferred tax asset valuations. Actual results could differ from
those estimates.
ROYALTY INCOME. The Company owns a number of patents and patent
applications relating to Baldwin's products, some of which provide royalty
income to the Company. Patented products represent a significant portion of the
Company's net sales for all periods presented. The Company's patents expire at
different times during the next twenty years; however, one group of patents,
which provided for the Company's royalty income, expired in February 2005. The
expiration of patents in the near future in general, is not expected to have a
material adverse effect on the Company's net sales; however, royalty income and
cash flows are expected to be negatively impacted upon the expiration of the
aforementioned group of patents. The Company has also relied upon and intends to
continue to rely upon unpatented proprietary technology, including the
proprietary engineering required to adapt its products to a wide range of models
and sizes of printing presses. The Company believes its rights under, and
interests in, its patents and patent applications, as well as its proprietary
technology, are sufficient for its business as currently conducted.
RECENTLY ISSUED ACCOUNTING STANDARDS. In December 2004, the Financial
Accounting Standards Board (FASB) published Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), (SFAS 123(R)) "Share Based Payment".
SFAS 123(R) establishes standards for the accounting for transactions in which
an entity exchanges its equity instruments for goods or services. The statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in shared-based payment transactions. SFAS 123(R) eliminates
the ability to account for share-based compensation transactions using APB
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees", and
generally requires that such transactions be accounted for using a
fair-value-based method. The Company currently accounts for its stock option
plans under the recognition and measurement principals of APB 25. As all
previously issued stock option awards granted under the plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant, no compensation costs related to stock option grants are currently
reflected in net income. SFAS 123(R) is effective as of the annual reporting
period that begins after June 15, 2005, therefore, the effective date for the
Company is July 1, 2005. SFAS 123(R) applies to all awards granted after the
required effective date and to awards modified, repurchased, or cancelled after
that date and as a consequence future employee stock option grants and other
stock based compensation plans will be recorded as expense over the vesting
period of the award based on their fair values at the date the stock based
compensation is granted. The effect of initially applying SFAS 123(R) is to be
recognized as of the required effective date using a modified prospective
method. Under the modified prospective method the Company will recognize
stock-based compensation expense from July 1, 2005 as if the fair value based
accounting method had been used to account for all outstanding unvested employee
awards granted, modified or settled in prior years. The ultimate impact on
future years results of operation and financial position will depend upon the
level of stock based compensation granted in future years. The Company estimates
the additional compensation expense associated with its current outstanding
awards should approximate $165,000 after tax for the fiscal year ending June 30,
2006. The Securities
32
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and Exchange Commission's (SEC) recent adoption of a new rule that amends the
compliance dates for SFAS 123(R) does not affect the Company's implementation
date.
On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was
signed into law. Some of the key relief provisions of the new Act include a
temporary incentive for U.S. multinationals to repatriate foreign earnings, a
new domestic manufacturing deduction, and international tax reforms designed to
improve the global competitiveness of U.S. multinationals. Some of the key
revenue-raising provisions of the Act include repeal of a U.S. export tax
incentive known as the "extraterritorial income exclusion" (ETI), new tax
shelter penalties, restrictions on deferred compensation, and numerous other
provisions aimed at specific transactions. The Company is currently evaluating
the impact of the new law, among other means, for possible repatriation of cash
in the future.
Additionally, the FASB issued SFAS No. 151 related to inventory costs and
SFAS No. 153 related to exchanges of non-monetary assets. Adoption of these
amendments to Accounting Research Bulletin No. 43 and Accounting Principles
Board Opinion No. 29 are not expected to have a material effect on the Company's
results of operations and financial position.
NOTE 3 -- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Accumulated Other Comprehensive Income (Loss) ("OCI") 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. Accumulated other comprehensive income (loss) consists of the following:
JUNE 30, JUNE 30,
2005 2004
---------- ----------
Cumulative translation adjustment........................ $2,407,000 $2,725,000
Unrealized gain (loss) on investments, net of tax........ 40,000 31,000
Minimum pension liability, net of tax.................... (80,000) (100,000)
Unrealized loss on forward contracts..................... (35,000) (5,000)
---------- ----------
$2,332,000 $2,651,000
========== ==========
NOTE 4 -- EARNINGS PER SHARE:
The following represents a reconciliation from basic earnings per share to
diluted earnings per share. Options to purchase 865,500, 350,000 and 1,284,000
shares of common stock were outstanding
33
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
at June 30, 2005, June 30, 2004 and June 30, 2003 but were not included in the
computation of diluted earnings per share because the effect would be
antidilutive.
FOR THE YEARS ENDED JUNE 30,
------------------------------
2005 2004 2003
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
DETERMINATION OF SHARES:
Average common shares outstanding................. 14,899 15,001 15,015
Assumed conversion of dilutive stock options and
awards......................................... 406 285 0
------- ------- -------
Diluted average common shares outstanding......... 15,305 15,286 15,015
======= ======= =======
CONTINUING OPERATIONS:
Basic earnings (loss) per common share............ $ 0.34 $ 0.47 $ (0.76)
Diluted earnings (loss) per common share.......... $ 0.33 $ 0.46 $ (0.76)
DISCONTINUED OPERATIONS:
Basic earnings (loss) per common
share -- operations............................ $ 0.00 $ 0.00 $ (0.02)
Basic earnings per common share -- gain on sale... $ 0.00 $ 0.00 $ 0.04
TOTAL:
Basic earnings (loss) per common share............ $ 0.34 $ 0.47 $ (0.74)
Diluted earnings (loss) per common share.......... $ 0.33 $ 0.46 $ (0.74)
NOTE 5 -- RESTRUCTURING CHARGES AND RELATED RESERVES:
During March 2000, the Company initiated a restructuring plan (the "March
2000 Plan") that included the consolidation of production facilities, and
reduction in total employment, primarily in the United States. At June 30, 2005,
the March 2000 Plan has been completed.
Activity related to the March 2000 Plan in the fiscal year ended June 30,
2005 was as follows:
REMAINING PAYMENTS CHARGES REMAINING
RESERVE RESERVE AGAINST RESERVE AGAINST RESERVE
JUNE 30, 2004 RELEASE RESERVE RECHARACTERIZATION RESERVE JUNE 30, 2005
------------- --------- --------- ------------------ -------- -------------
Facility lease
termination
costs.............. $792,000 $(338,000) $(286,000) $(108,000) $(60,000) $0
-------- --------- --------- --------- -------- --
Total program........ $792,000 $(338,000) $(286,000) $(108,000) $(60,000) $0
======== ========= ========= ========= ======== ==
The recharacterization of facility lease termination costs relates to the
assumption of the pre-existing lease obligation by the lessor of the Company's
new office space. The value of this incentive has been recharacterized as a
deferred credit and will be amortized on a straight line basis over the life of
the new lease. The reserve release relates to previously accrued expenses which
will not be incurred due to the relocation of the Company's corporate offices.
Charges against reserve relate to write-off of leasehold improvements associated
with the Company's former corporate offices.
34
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Activity related to the March 2000 Plan in the fiscal year ended June 30,
2004 was as follows:
REMAINING ADDITIONAL PAYMENTS REMAINING
RESERVE RESTRUCTURING AGAINST RESERVE
JUNE 30, 2003 CHARGES RESERVES JUNE 30, 2004
------------- ------------- --------- -------------
Severance.................. $ 55,000 $ 19,000 $ (74,000) $ 0
Facility lease termination
costs.................... 1,396,000 4,000 (608,000) 792,000
---------- -------- --------- --------
Total program.............. $1,451,000 $ 23,000 $(682,000) $792,000
========== ======== ========= ========
In response to weak market conditions, in August 2002, the Company
announced additional restructuring activities (the "August 2002 Plan"). At June
30, 2005 the August 2002 Plan has been completed.
Activity related to the August 2002 Plan in the fiscal year ended June 30,
2005 was as follows:
REMAINING PAYMENTS REMAINING
RESERVE AGAINST RESERVE
JUNE 30, 2004 RESERVE JUNE 30, 2005
---------------- --------- ----------------
Severance................................ $151,000 $(151,000) $ 0
Facility lease termination costs......... 158,000 (158,000) 0
Other costs.............................. 32,000 (32,000) 0
-------- --------- -----
Total program............................ $341,000 $(341,000) $ 0
======== ========= =====
In August 2003, the Company expanded the August 2002 Plan and announced
additional employment reductions. In addition, the Company closed its office in
Dunstable, England. The additional costs associated with the expansion of the
August 2002 Plan amounted to approximately $645,000, comprised of $488,000 in
severance costs, $149,000 in lease termination costs and $8,000 in other costs.
Activity related to the August 2002 Plan in the fiscal year ended June 30,
2004 was as follows:
REMAINING ADDITIONAL PAYMENTS REMAINING
RESERVE RESTRUCTURING RESERVE AGAINST RESERVE
JUNE 30, 2003 CHARGES REVERSAL RESERVE JUNE 30, 2004
------------- ------------- ---------- --------- -------------
Severance............ $258,000 $488,000 $ 0 $(595,000) $151,000
Facility lease
termination
costs.............. 345,000 149,000 *(220,000) (116,000) 158,000
Other costs.......... 47,000 8,000 0 (23,000) 32,000
-------- -------- ---------- --------- --------
Total program........ $650,000 $645,000 $ (220,000) $(734,000) $341,000
======== ======== ========== ========= ========
35
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
---------------------
* the reversal relates to final settlement of facility lease termination costs
NOTE 6 -- BUSINESS SEGMENT INFORMATION:
FOR THE YEARS ENDED JUNE 30,
------------------------------
2005 2004 2003
-------- -------- --------
GEOGRAPHIC INFORMATION: (IN THOUSANDS)
Sales by major country:
United States............................................. $ 24,562 $ 25,080 $ 27,209
Japan..................................................... 61,061 56,997 48,011
Germany................................................... 50,382 42,944 32,866
Sweden.................................................... 15,708 14,030 9,265
All other -- foreign...................................... 21,472 19,059 16,857
-------- -------- --------
Total sales by major country..................... $173,185 $158,110 $134,208
======== ======== ========
AT JUNE 30,
------------------------
2005 2004 2003
LONG-LIVED ASSETS BY MAJOR COUNTRY: ------ ------ ------
United States............................................. $ 761 $1,575 $1,795
Japan..................................................... 297 429 447
Germany................................................... 680 1,066 1,224
Sweden.................................................... 1,769 2,061 2,167
All other -- foreign...................................... 189 204 226
------ ------ ------
Total long-lived assets by major country......... $3,696 $5,335 $5,859
====== ====== ======
Long-lived assets primarily includes the net book value of "Property, plant
and equipment" and other tangible assets.
NOTE 7 -- INVENTORIES:
Inventories, net of reserve, consist of the following:
JUNE 30, 2005
--------------------------------------
DOMESTIC FOREIGN TOTAL
---------- ----------- -----------
Raw materials.............................. $3,997,000 $ 7,456,000 $11,453,000
In process................................. 16,000 4,393,000 4,409,000
Finished goods............................. 1,919,000 4,974,000 6,893,000
---------- ----------- -----------
$5,932,000 $16,823,000 $22,755,000
========== =========== ===========
JUNE 30, 2004
--------------------------------------
DOMESTIC FOREIGN TOTAL
---------- ----------- -----------
Raw materials.............................. $3,865,000 $ 8,444,000 $12,309,000
In process................................. 13,000 4,117,000 4,130,000
Finished goods............................. 2,666,000 5,893,000 8,559,000
---------- ----------- -----------
$6,544,000 $18,454,000 $24,998,000
========== =========== ===========
36
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Foreign inventories decreased by $253,000 (increased by $1,291,000 in 2004)
due to currency translation rates.
NOTE 8 -- LOANS PAYABLE:
RATE AMOUNT
--------------- ----------
LOANS PAYABLE AT JUNE 30, 2005:
Foreign subsidiaries................................. 3.16% (average) $2,705,000
==========
LOANS PAYABLE AT JUNE 30, 2004:
Foreign subsidiaries................................. 3.03% (average) $2,757,000
==========
The maximum amount of loans payable outstanding during the year ended June
30, 2005 was $2,929,000 ($3,566,000 in 2004). Average interest rates are
weighted by month and reflect the monthly amount of short-term borrowing in use
and the respective rates of interest thereon. The majority of the loans are
uncollateralized, however, certain of these loans are collateralized by the
current assets associated with the foreign subsidiaries where the loans are
drawn.
NOTE 9 -- LONG-TERM DEBT:
JUNE 30, 2005 JUNE 30, 2004
------------------------ ------------------------
CURRENT LONG-TERM CURRENT LONG-TERM
---------- ----------- ----------- ----------
Revolving Credit Facility due October
1, 2008, interest rate 5.525% plus
three-month Eurodollar rate (2.153%
at June 30)(a)....................... $ -- $11,504,000 $ -- $ --
Revolving Credit Facility due August
15, 2005, interest rate 10.00% plus
three-month Eurodollar rate(a)....... -- -- 18,497,000 --
Revolving Credit Facility due August
15, 2005, interest rate 11.50% plus
three-month Eurodollar rate(a)....... -- -- 970,000 --
Term Loan payable by foreign subsidiary
due December 8, 2006, interest rate
1.5%(b).............................. 902,000 450,000 919,000 1,379,000
Note payable by foreign subsidiary
through 2008, interest rate
5.95%(c)............................. 115,000 259,000 120,000 389,000
Notes payable by foreign subsidiary
through February 2007, interest rates
ranging from 4.58% to 4.67%.......... 16,000 10,000 17,000 26,000
---------- ----------- ----------- ----------
$1,033,000 $12,223,000 $20,523,000 $1,794,000
========== =========== =========== ==========
---------------------
(a) The Company's primary source of external financing is the Credit Agreement
and its amendments (the "Credit Agreement") with Maple Bank GmbH ("Maple" or
"Lender").
During the fiscal year ended June 30, 2005 the Credit Agreement with Maple
was amended to increase the size of the credit facility to $28,000,000 from the
$20,000,000 level in place during fiscal year ended June 30, 2004. In addition,
the amendment reduced the interest rates for the fiscal year ended June 30,
2005. Borrowings under the credit facility are subject to a borrowing base and
bear interest at a rate equal to the three-month Eurodollar rate (as defined in
the Credit Agreement) plus: (i) 5.125% for loans denominated in U.S. dollars
(10% during fiscal year ended June 30, 2004) and
37
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ii) 5.525% for loans denominated in Euros (11.5% during fiscal year ended June
30, 2004). The interest rate will be reduced by 0.50% or whole increments
thereof for each whole increment of disclosed EBITDA (as defined in the Credit
Agreement) that equals or exceeds $1,250,000 for any fiscal quarter commencing
with the quarter ending December 31, 2003. In no event, however, during the
fiscal year ended June 30, 2005, may the interest rate be less than 7.5% (10.5%
for fiscal year ended June 30,2004) for dollar-based borrowings and 7.625%
(10.5% for the fiscal year ended June 30, 2004) for Euro based borrowings.
The credit facility is collateralized by substantially all of the accounts
and notes receivable of the Company and a portion of the Company's inventory up
to a maximum amount of $10,000,000. The Credit Agreement does not require the
Company to meet any financial covenants, except for a limitation on annual
capital expenditures, for which the Company received a waiver for the fiscal
year ended June 30, 2004, however, it contains a material adverse effect clause,
which provides that Maple would not be obligated to fund any loan, convert or
continue any loan as a LIBOR loan or issue any new letters of credit in the
event of a material adverse effect. Management does not anticipate that such an
event will occur; however, there can be no assurance that such an event will not
occur. In addition, the Credit Agreement granted to the lender an option to
acquire a maximum of $5,000,000 of equity securities (as defined in the
agreement) should the Company choose to issue any such equity securities.
(b) In December 2003, the Company, through its Japanese subsidiary, obtained a
YEN 300,000,000 term loan (approximately $2,298,000), which matures in
December 2006 (the "Japanese Term Loan"). The Japanese Term Loan is subject
to semi-annual principal payments of YEN 50,000,000 and bears interest at
the Tokyo Inter Bank Offered Rate ("TIBOR") plus 0.75%. The Company received
a waiver from Maple in connection with this loan, and received the proceeds
in December 2003.
(c) Note is collateralized by buildings as outlined in the indenture relating to
this note.
The Company maintains relationships with both foreign and domestic banks,
which combined have extended credit facilities to the Company totaling
$33,359,000, including amounts available under the Maple Revolver. As of June
30, 2005, the Company had $17,311,000 outstanding under these credit facilities
including $12,853,000 (including Letters of Credit) under the Maple Revolver and
Term Loan.
Maturities of long-term debt in each fiscal year ending after June 30, 2005
are as follows:
FISCAL YEAR ENDING JUNE 30,
---------------------------
2006........................................................ $ 1,033,000
2007........................................................ 576,000
2008........................................................ 115,000
2009........................................................ 11,532,000
2010........................................................ --
2011 and thereafter......................................... --
-----------
$13,256,000
===========
38
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- TAXES ON INCOME:
Income (loss) before income taxes and the (benefit) provision for income
taxes are comprised of:
FOR THE YEARS ENDED JUNE 30,
--------------------------------------
2005 2004 2003
---------- ----------- -----------
Income (loss) before income taxes:
Domestic................................. $1,383,000 $ 749,000 $(9,079,000)
Foreign.................................. 7,336,000 4,564,000 241,000
---------- ----------- -----------
$8,719,000 $ 5,313,000 $(8,838,000)
========== =========== ===========
(Benefit) provision for income taxes:
Currently payable:
Domestic................................. $ (55,000) $ 19,000 $ 1,096,000
Foreign.................................. 2,434,000 2,593,000 1,591,000
---------- ----------- -----------
2,379,000 2,612,000 2,687,000
---------- ----------- -----------
Deferred:
Domestic................................. -- -- --
Foreign.................................. 1,305,000 (4,285,000) (109,000)
---------- ----------- -----------
1,305,000 (4,285,000) (109,000)
---------- ----------- -----------
Total income (benefit) tax
provision....................... $3,684,000 $(1,673,000) $ 2,578,000
========== =========== ===========
Deferred income taxes are provided on temporary differences between the
financial reporting basis and tax basis of the Company's assets and liabilities.
The principal temporary differences which give rise to deferred tax assets and
liabilities at June 30, 2005 and 2004 are as follows:
JUNE 30, JUNE 30,
2005 2004
------------- -------------
DEFERRED TAX ASSETS (LIABILITIES):
Foreign tax credit carryforwards..................... $ 2,476,000 $ 2,476,000
Foreign net operating loss carryforwards............. 17,112,000 17,885,000
Domestic net operating loss carryforwards............ 5,606,000 9,292,000
Capital loss carryforwards........................... 308,000 366,000
Inventories.......................................... 1,776,000 1,803,000
Pension/deferred compensation........................ 2,401,000 2,158,000
Restructuring........................................ -- 421,000
Other, deferred tax assets, individually less than
5%................................................. 2,087,000 2,832,000
Other deferred tax liabilities, individually less
than 5%............................................ (432,000) (2,375,000)
------------ ------------
Net Deferred Tax Asset............................... 31,334,000 34,858,000
Valuation Allowance.................................. (20,295,000) (22,234,000)
------------ ------------
Total Net Deferred Tax Assets............. $ 11,039,000 $ 12,624,000
============ ============
39
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At June 30, 2005, net operating loss carryforwards of $60,792,000 and
$15,573,000, respectively, may be available to reduce future foreign and
domestic taxable income. The majority of the Company's foreign net operating
loss ("NOL") carry-forwards have an indefinite carry-forward period, while the
domestic NOLs begin to expire in June 2022. In addition, as of June 30, 2005,
the Company has capital loss carry-forwards available in the amount of $960,000,
of which $487,000 is domestic and expires in fiscal 2006. The remainder is
available in England and has an indefinite carry-forward period.
The Company establishes valuation allowances in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." The change in the
valuation allowance for the period ended June 30, 2005 reflects utilization of
net operating losses and other balance sheet changes for deferred tax assets and
liabilities, primarily in the U.S., which carry a full valuation allowance. In
fiscal year ended June 30, 2004, the valuation allowance decreased primarily due
to the reversal of valuation allowance associated with the Company's German
subsidiary. The reversal was based on the subsidiary's historical operating
performance and expectation that the subsidiary will generate sufficient taxable
income in future periods to realize tax benefits associated with its net
operating loss carryforwards.
The Company has not had to provide for income taxes on $23,057,000 of
cumulative undistributed earnings of subsidiaries outside the United States
because of the Company's intention to indefinitely reinvest those earnings.
The Company is subject to ongoing tax examinations and assessments in
various jurisdictions. Accordingly, the Company provides for additional tax
expense based upon the probable outcomes of such matters. In addition, when
applicable, the Company adjusts the previously recorded tax expense to reflect
examination results.
The reconciliation of the computed "expected" (benefit) provision
(determined by applying the United States Federal statutory income tax rate of
34% to (loss) income before income taxes) to the actual tax provision is as
follows:
FOR THE YEARS ENDED JUNE 30,
---------------------------------------
2005 2004 2003
----------- ----------- -----------
Computed "expected" tax benefit............ $ 2,964,000 $ 1,807,000 $(2,906,000)
Permanent differences...................... 3,162,000 2,190,000 (500,000)
State income taxes, net of federal income
tax benefit.............................. -- -- (312,000)
Foreign withholding tax.................... -- 332,000 393,000
Foreign income taxed at rates other than
the U.S. statutory rate.................. 467,000 100,000 965,000
Change in deferred tax asset valuation
allowance, net of changes in other
reserves................................. (2,949,000) (8,463,000) 4,911,000
Expiration of foreign tax credits and
capital loss carryforwards............... -- 2,395,000 --
Other reconciling items.................... 40,000 (34,000) 27,000
----------- ----------- -----------
Total income tax provision...... $ 3,684,000 $(1,673,000) $ 2,578,000
=========== =========== ===========
40
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- COMMON STOCK:
Except with respect to the election or removal of Directors, and certain
other matters with respect to which Delaware law requires each class to vote as
a separate class, the holders of the Company's Class A Common Stock ("Class A")
and Class B Common Stock ("Class B") vote as a single class on all matters, with
each share of Class A having one vote per share and each share of Class B having
ten votes per share.
With respect to the election of Directors, the holders of Class A, voting
as a separate class, are entitled to elect 25% of the total number of Directors
(or the nearest higher whole number) constituting the entire Board of Directors.
The holders of Class B, voting as a separate class, are entitled to elect the
remaining Directors, so long as the number of outstanding shares of Class B is
equal to at least 12.5% of the number of outstanding shares of both classes of
Common Stock as of the record date of the Company's Annual Meeting. If the
number of outstanding shares of Class B is less than 12.5% of the total number
of outstanding shares of both classes of Common Stock as of the record date of
the Company's Annual Meeting, the remaining directors are elected by the holders
of both classes of Common Stock voting together as a single class, with the
holders of Class A having one vote per share and the holders of Class B having
ten votes per share. As of June 30, 2005, the number of outstanding shares of
Class B constituted approximately 13.2% of the total number of outstanding
shares of both classes of Common Stock.
Class A has no conversion rights; however, Class B is convertible into
Class A on a one-for-one basis. In addition, no dividend in cash or property may
be declared or paid on shares of Class B without a dividend being declared or
paid on shares of Class A of at least 105% of the dividend declared or paid on
shares of Class B.
In November 1999, the Company initiated a stock repurchase program. Under
the program, the Company is authorized to utilize up to $5,000,000 to repurchase
Class A. As of June 30, 2005, 818,300 shares of Class A and 25,000 shares of
Class B had been repurchased for $1,784,000, of which $1,721,000 was used to
purchase Class A and $63,000 was used to purchase Class B under this program.
There was no activity under this repurchase program during the fiscal year ended
June 30, 2005.
NOTE 12 -- STOCK OPTIONS:
The 1986 Stock Option Plan, as amended and restated (the "1986 Plan"),
allowed for the granting, at fair market value on the date of grant, of
incentive stock options, non-qualified stock options, and tandem Stock
Appreciation Rights ("SARS") for up to a total of 2,220,000 and 590,000 shares
of Class A and Class B, respectively. Options to purchase shares of Class B were
granted at a price per share of no less than 125% of the fair market value of a
share of Class A on the date of grant. All options became exercisable in three
equal annual installments commencing on the second anniversary of the date of
grant. Unexercised options terminate no later than ten years from the date of
grant and canceled shares became available for future grants. The 1986 Plan was
terminated on October 14, 1996 provided, however, that outstanding options under
the 1986 Plan will continue to be subject to the terms thereof.
The 1990 Directors' Stock Option Plan (the "1990 Plan") provided for the
granting, at fair market value on the date of grant, of non-qualified stock
options to purchase up to a total of 100,000 shares of Class A and Class B to
members of the Company's Board of Directors who are not
41
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
employees ("Eligible Directors") of the Company or any of its subsidiaries.
Grants were made on the third business day subsequent to each Annual Meeting of
Stockholders, including the 1990 meeting, to each Eligible Director for 1,000
shares of Class A and Class B in proportion to the number of shares of each such
class then outstanding. Options to purchase shares of Class B were granted at a
price per share of no less than 125% of the fair market value of a share of
Class A on the date of grant. Restrictions under the 1990 Plan were similar to
those under the 1986 Plan except with regard to the exercise date, which was
twelve months after the date of grant, and termination of options, which is
generally nine months after termination of service as a director. The 1990 Plan
was terminated on November 12, 1998 in connection with the approval of the 1998
Non-Employee Directors' Stock Option Plan (the "1998 Plan"), provided however,
that outstanding options under the 1990 Plan will continue to be subject to the
terms thereof.
The 1996 Stock Option Plan (the "1996 Plan") allows for the granting, at
fair market value on the date of grant, of incentive stock options,
non-qualified stock options, and tandem SARS for up to a total of 875,000 and
125,000 shares of Class A and Class B, respectively. Options to purchase shares
of Class B are granted at a price per share of no less than 125% of the fair
market value of a share of Class A on the date of grant. Restrictions under the
1996 Plan are similar to those under the 1986 Plan with regard to the exercise
and termination of options. Canceled shares become available for future grants.
The 1998 Non-Employee Directors' Stock Option Plan (the "1998 Plan")
provides for the issuance of options to purchase up to an aggregate of 250,000
shares of Class A to each Eligible Director. Under the 1998 Plan, each year,
each Eligible Director receives a grant of options to purchase 3,000 shares of
Class A. The options are granted at the fair market value on the date of grant,
and vest one-third per year on each succeeding anniversary of the date of grant.
Unexercised options terminate no later than ten years from the date of grant and
canceled shares become available for future grants. The 1998 Plan was terminated
on November 21, 2002 provided, however, that outstanding options under the 1998
Plan will continue to be subject to the terms thereof.
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
Class B under the 1996 Plan after the date of the next annual meeting of the
Company's stockholders, (c) provide that Eligible Directors shall be eligible to
receive Options under the 1996 Plan with terms similar to those they had
received under the 1998 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 Eligible Director, of an Option to
42
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
purchase 5,000 shares of Class A of the Company at an exercise price per share
equal to 100% of the fair market value of a share of Class A on the date such
Option is granted.
THE 1986 PLAN THE 1990 PLAN
-------------------------------------------------- -----------------------------------------------
WEIGHTED WEIGHTED
AVERAGE PRICE AVERAGE PRICE
OPTION PRICE ------------- OPTION PRICE -------------
CLASS A CLASS B RANGE A B CLASS A CLASS B RANGE A B
--------- -------- ------------ ----- ----- ------- ------- ------------ ----- -----
Outstanding at June 30,
2002...................... 560,500 155,000 $3.00-$6.72 $4.32 $6.52 18,761 2,356 $2.56-$6.88 $4.61 $5.72
--------- -------- ----------- ----- ----- ------- ------- ----------- ----- -----
Granted....................
Canceled................... (147,500) $3.00-$5.63 $5.00 (6,237) (880) $2.56-$6.88 $4.58 $5.71
Exercised..................
--------- -------- ----------- ----- ----- ------- ------- ----------- ----- -----
Outstanding at June 30,
2003...................... 413,000 155,000 $3.00-$6.72 $4.07 $6.52 12,524 1,476 $2.56-$6.88 $4.59 $5.73
--------- -------- ----------- ----- ----- ------- ------- ----------- ----- -----
Granted....................
Canceled................... (210,000) $3.88-$3.94 $3.88 (1,778) (222) $4.88-$6.09 $4.88 $6.09
Exercised..................
--------- -------- ----------- ----- ----- ------- ------- ----------- ----- -----
Outstanding at June 30,
2004...................... 203,000 155,000 $3.00-$6.72 $4.28 $6.52 10,476 1,254 $2.56-$6.88 $4.55 $5.67
--------- -------- ----------- ----- ----- ------- ------- ----------- ----- -----
Granted....................
Canceled................... (20,000) (50,000) $4.88-$6.09 $4.88 $6.09 (2,691) (309) $5.00-$6.25 $5.00 $6.25
Exercised..................
Outstanding at June 30,
2005...................... 183,000 105,000 $3.00-$6.72 $4.21 $6.72 8,055 945 $2.56-$6.88 $4.40 $5.48
========= ======== =========== ===== ===== ======= ======= =========== ===== =====
Exercisable at June 30,
2005...................... 183,000 105,000 $3.00-$6.72 $4.21 $6.72 8,055 945 $2.56-$6.88 $4.40 $5.48
========= ======== =========== ===== ===== ======= ======= =========== ===== =====
Available for future option
grants at June 30, 2005... 0 0 0 0
========= ======== ======= =======
THE 1996 PLAN THE 1998 PLAN
-------------------------------------------------- -----------------------------------------------
WEIGHTED WEIGHTED
AVERAGE PRICE AVERAGE PRICE
OPTION PRICE ------------- OPTION PRICE -------------
CLASS A CLASS B RANGE A B CLASS A CLASS B RANGE A B
--------- -------- ------------ ----- ----- ------- ------- ------------ ----- -----
Outstanding at June 30,
2002...................... 717,500 0 $1.05-$5.50 $2.09 $0.00 60,000 0 $1.13-$5.50 $2.60 $0.00
--------- -------- ----------- ----- ----- ------- ------- ----------- ----- -----
Granted.................... 179,500 $0.58-$0.82 $0.79 0
Canceled................... (242,500) $1.05-$5.50 $1.96 (12,000) $1.50-$5.50 $2.75
Exercised.................. 0
--------- -------- ----------- ----- ----- ------- ------- ----------- ----- -----
Outstanding at June 30,
2003...................... 654,000 0 $0.58-$5.50 $1.78 $0.00 48,000 0 $1.13-$5.50 $2.56 $0.00
--------- -------- ----------- ----- ----- ------- ------- ----------- ----- -----
Granted.................... 360,000 $1.90-$1.93 $1.93
Canceled................... (40,000) $1.05-$1.93 $1.59 (6,000) $1.50-$5.50 $3.75
Exercised.................. (22,499) $1.05-$3.00 $1.48
--------- -------- ----------- ----- ----- ------- ------- ----------- ----- -----
Outstanding at June 30,
2004...................... 951,501 0 $0.58-$5.50 $1.86 $0.00 42,000 0 $1.13-$5.50 $2.39 $0.00
========= ======== =========== ===== ===== ======= ======= =========== ===== =====
Granted.................... 390,000 $3.25-$3.41 $3.40
Canceled................... (22,833) $0.58-$3.41 $2.05
Exercised.................. (43,001) $0.58-$1.05 $0.99 (3,000) $1.13
Outstanding at June 30,
2005...................... 1,275,667 0 $0.58-$5.50 $2.36 $0.00 39,000 0 $1.13-$5.50 $2.48 $0.00
========= ======== =========== ===== ===== ======= ======= =========== ===== =====
Exercisable at June 30,
2005...................... 373,499 0 $3.00-$5.50 $2.36 $0.00 39,000 0 $1.50-$5.50 $2.48 $0.00
========= ======== =========== ===== ===== ======= ======= =========== ===== =====
Available for future option
grants at June 30, 2005... 533,833 0 0 0
========= ======== ======= =======
43
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information regarding stock options
outstanding and exercisable at June 30, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------- ----------------------
WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF NUMBER OF AVERAGE AVERAGE OF AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES OPTIONS CONTRACTUAL LIFE PRICE OPTIONS PRICE
-------------- ----------- ---------------- -------- ----------- --------
$0.58 - $3.75 1,334,667 6.3 years $2.23 439,778 $1.98
$3.88 - $5.63 171,373 1.5 years $5.44 171,373 $5.44
$5.88 - $6.88 105,627 0.1 years $6.72 105,627 $6.72
The Company adopted SFAS No. 123, "Accounting for Stock Based Compensation"
("SFAS 123"), on July 1, 1996, electing the disclosure only provisions of that
statement. Accordingly, no charge for compensation has been recorded for stock
based employee awards. In accordance with SFAS 123, the fair value method of
accounting has not been applied to options granted prior to July 1, 1995. Due to
the vesting schedule of options granted under each of the stock option plans, as
well as the exclusion of the fair value of options granted prior to July 1,
1995, the fair value of compensation cost calculated to disclose pro forma
financial information may not be representative of that to be expected in future
years. The fair value method of calculating the value of each option granted
subsequent to June 30, 1995 was estimated as of the option grant date using the
Black-Scholes option pricing model. The following weighted average assumptions
were used to calculate the estimated fair value of the options by the pricing
model for the fiscal years ended June 30, 2005, 2004 and 2003: the forfeiture
rates and dividend yields were 0% (none) and the expected lives were five years
for each of the fiscal years ended June 30, 2005, 2004 and 2003, the weighted
average risk free interest rates were 3.47% for 2005, 3.29% for 2004 and 3.26%
for 2003, and the average volatility was 101.62% for 2005, 143.30% for 2004 and
66.12% for 2003.
On January 1, 2003, the Company adopted the disclosure provisions of
Financial Accounting Standards Board ("FASB") Statement No. 148, "Accounting for
Stock-Based Compensation -- transition and disclosure" ("SFAS 148"), which
amended certain provisions of SFAS 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation, effective as of the
beginning of the fiscal year. Baldwin continues to apply the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25") in accounting for stock-based compensation. In accordance
with APB 25, compensation costs for stock options is recognized in income based
on the excess, if any, of the quoted market price over the exercise price of the
stock on the date of grant. The exercise price for all stock option grants
equals the fair market value on the date of grant, therefore no compensation
expense is recorded.
The pro forma net income/loss and income/loss per share information have
been determined for employee stock plans under the fair value method using the
Black-Scholes option-pricing model at the date of grant. The following table
illustrates the effect on net income/loss and income/loss per share if
44
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company had applied the fair value recognition provisions of SFAS 123 for
the years ended June 30, 2005, 2004 and 2003 (in thousands):
FOR THE YEARS ENDED JUNE 30,
--------------------------------------
2005 2004 2003
---------- ---------- ------------
Net income (loss) as reported................ $5,035,000 $6,986,000 $(11,126,000)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects........................ $ (54,000) $ (103,000) $ (162,000)
Pro forma net income (loss).................. $4,981,000 $6,883,000 $(11,288,000)
Income (loss) per share as
reported -- basic.......................... $ 0.34 $ 0.47 $ (0.74)
Income (loss) per share as
reported -- diluted........................ $ 0.33 $ 0.46 $ (0.74)
Pro forma income (loss) per share -- basic... $ 0.33 $ 0.46 $ (0.75)
Proforma income (loss) per
share -- diluted........................... $ 0.33 $ 0.45 $ (0.75)
NOTE 13 -- SUPPLEMENTAL COMPENSATION:
In the U.S., the Company maintains the Baldwin Technology Profit Sharing
and Savings Plan. The Company matches up to 5% of eligible compensation and the
participants' interest in the Company's contribution vest immediately.
Participant contributions are made on a weekly basis, while the Company's
matching contributions are made on a quarterly basis. Employer contributions
charged to income were $131,000, $23,000 and $272,000 respectively for the
fiscal years ended June 2005, 2004 and 2003.
The assets of the plan are invested primarily in mutual funds, money market
funds, and Class A Common Stock of the Company, which constitutes approximately
4% of the total assets of the Plan at June 30, 2005.
Certain subsidiaries and divisions within Europe maintain pension plans.
The assets of the following plans are invested primarily in insurance contracts,
government securities, and guaranteed investment contracts. Amounts expensed
under these plans were as follows:
FOR THE YEARS ENDED JUNE 30,
------------------------------
2005 2004 2003
-------- -------- --------
Baldwin Germany GmbH............................... $266,000 $241,000 $174,000
Baldwin IVT AB..................................... 151,000 141,000 109,000
Baldwin Jimek AB................................... 64,000 67,000 210,000
Baldwin UK Ltd. ................................... 61,000 61,000 68,000
Baldwin Globaltec Ltd. ............................ 9,000 7,000 6,000
-------- -------- --------
Total expense........................... $551,000 $517,000 $567,000
======== ======== ========
The amount of expense relating to the European pension plans is determined
based upon, among other things, the age, salary and years of service of
employees covered by the plans. The Company's German, English and Swedish
subsidiaries make annual contributions to the plans equal to the amounts accrued
for pension expense.
45
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In Germany, there is currently one pension plan covering three former
employees, and the Company's Japanese subsidiary maintains a retirement plan
covering all employees. These defined benefit plans provide for benefits, at
maturity age, in lump sum payments on retirement or death or as a disability
pension in case of disability, and is partially funded by insurance contracts.
The following tables set forth the components of net periodic benefit
costs, the funded status and key actuarial assumptions, and reconciliations of
projected benefit obligations and fair values of plan assets of the defined
benefit plans:
FOR THE YEARS ENDED JUNE 30,
------------------------------
2005 2004 2003
-------- -------- --------
Service Cost -- benefits earned during the year.... $261,000 $265,000 $216,000
Interest on projected benefit obligation........... 63,000 58,000 61,000
Annual return on plan assets....................... (1,000) (2,000) (6,000)
Amortization of transition obligation.............. 14,000 12,000 11,000
Amortization of net actuarial (gain)............... (10,000) (32,000) (59,000)
-------- -------- --------
Net periodic pension expense............ $327,000 $301,000 $223,000
======== ======== ========
FOR THE YEARS ENDED JUNE 30,
------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
Funded status (plan assets
less than plan
obligations)................ $ (1,380,000) $ (1,658,000) $ (1,477,000)
Unrecognized net loss (gain)
from past experience
different from changes in
assumptions................. 116,000 109,000 2,000
Unrecognized transition
obligation.................. 9,000 21,000 35,000
Additional minimum pension
liability................... (123,000) (100,000) --
-------------- -------------- --------------
Accrued benefit
cost in other
accounts payable
and accrued
liabilities..... $ (1,378,000) $ (1,628,000) $ (1,440,000)
============== ============== ==============
WEIGHTED AVERAGE ACTUARIAL
ASSUMPTIONS:
Discount rate................. 1.75% - 7.50% 1.75% - 7.50% 1.75% - 7.50%
Rate of increase in
compensation levels......... 0.00% - 3.00% 0.00% - 3.00% 0.00% - 3.00%
Expected rate of return on
plan assets................. 1.00% - 7.00% 1.00% - 7.00% 1.00% - 7.00%
46
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30,
------------------------------------
2005 2004 2003
---------- ---------- ----------
Projected benefit obligation -- Beginning of
year....................................... $2,447,000 $2,195,000 $1,998,000
Service Cost -- benefits earned during the
year....................................... 250,000 270,000 227,000
Interest on projected benefit obligation..... 62,000 58,000 63,000
Actuarial (gain) loss........................ 2,000 (12,000) 116,000
Benefits paid................................ (273,000) (272,000) (251,000)
Foreign currency rate changes................ (34,000) 208,000 42,000
---------- ---------- ----------
Projected benefit obligation --End
of year........................ $2,454,000 $2,447,000 $2,195,000
========== ========== ==========
FOR THE YEARS ENDED JUNE 30,
--------------------------------
2005 2004 2003
---------- -------- --------
Fair value of plan assets -- Beginning of
year.......................................... $ 789,000 $718,000 $716,000
Actual return on plan assets.................... (1,000) (1,000) 4,000
Contributions to the Plan....................... 360,000 275,000 242,000
Benefits paid................................... (60,000) (273,000) (251,000)
Foreign currency rate changes................... (14,000) 70,000 7,000
---------- -------- --------
Fair value of plan assets -- End of
year.............................. $1,074,000 $789,000 $718,000
========== ======== ========
For funded plans with Accumulated Benefit Obligation ("ABO") in excess of
the fair value of plan assets, SFAS No. 87 requires that the Company record on
its consolidated balance sheets a minimum pension liability amount such that the
Company's net pension liability is at least equal to the amount of the
under-funded ABO. Net pension liability is the excess of pension liabilities
over prepaid pension assets, on the Company's balance sheet. When recording a
minimum pension liability, SFAS No. 87 requires the Company to record a
corresponding intangible asset equal to the amount of any unrecognized prior
service cost, with the remainder, if any, charged to other comprehensive income
in shareholders' equity. Therefore, the recording of this additional minimum
pension liability has no impact on the Company's income from operations. At June
30, 2005, the Company's Japanese subsidiary, with an ABO of approximately
$2,305,000, required an additional minimal liability recognition of $123,000.
Undiscounted benefit amounts expected to be paid for each of the next five
successive fiscal years and for the aggregate next five years thereafter:
2006........................................................ $ 124,000
2007........................................................ $ 151,000
2008........................................................ $ 338,000
2009........................................................ $ 557,000
2010........................................................ $ 199,000
aggregate for 2011 through 2014............................. $1,109,000
The amount expected to be contributed by the Company to its defined benefit
pension plans during 2005 is $450,000.
The Company also has a non-qualified Supplemental Executive Retirement Plan
(SERP). The SERP, which is unfunded, provides pension benefits to eligible
executives, based on average earnings,
47
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
years of service and age at retirement. The total cost of this plan for the
years ended June 30, 2005, 2004 and 2003 was $482,000, $307,000 and $454,000,
respectively. At June 30, 2005 and 2004 the benefit obligation in other accounts
payable and accrued liabilities was $2,934,000 and $2,547,000, respectively.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES:
Future minimum annual lease payments under capital leases are as follows at
June 30, 2005:
FISCAL YEARS ENDING JUNE 30, AMOUNT
---------------------------- --------
2006........................................................ $ 95,000
2007........................................................ 43,000
2008........................................................ 25,000
2009........................................................ 16,000
2010........................................................ --
2011 and thereafter......................................... --
--------
Total minimum lease payments................................ 179,000
Amount representing interest................................ (14,000)
--------
Present value of minimum lease payments.......... $165,000
========
At June 30, 2005, $78,000 ($153,000 at June 30, 2004) was included in
"Other long-term liabilities" representing the long-term portion of the present
value of minimum lease payments, and $87,000, ($103,000 at June 30, 2004) was
included in "Other accounts payable and accrued liabilities" representing the
current portion of the present value of minimum lease payments.
During the fiscal year ended June 30, 2003, the Company entered into an
agreement with a strategic advisor to provide consultation services to the
Company as it explored various financing and strategic alternatives. The
agreement, which provided for a monthly fee to the advisor and a success fee or
termination fee, was terminated during fiscal 2004. For the fiscal year ended
June 30, 2004 and 2003, the Company expensed, in "Other expense (income), net",
approximately $570,000 and $500,000, respectively, associated with these
services.
During the fiscal year ended June 30, 2003, the Company entered into an
agreement with a second strategic advisor to provide consultation services. The
agreement was terminated in June 2003, and the unpaid portion of the contingent
transaction fee was converted into a promissory note payable in the amount of
$412,500, which bore interest at a rate of 20% per annum. The promissory note
was paid in full during 2004. For the fiscal year ended June 30, 2003, the
Company expensed, in "Other expense (income), net", approximately $564,000
(including the principal amount related to the promissory note) associated with
these services.
Rental expense on operating leases amounted to approximately $4,524,000,
$4,675,000 and $4,201,000 for the years ended June 30, 2005, 2004 and 2003,
respectively. Aggregate future annual
48
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
rentals under noncancellable operating leases for periods of more than one year
at June 30, 2005 are as follows:
FISCAL YEARS ENDING JUNE 30, AMOUNT
---------------------------- ----------
2006........................................................ $3,828,000
2007........................................................ $2,531,000
2008........................................................ $1,589,000
2009........................................................ $1,226,000
2010........................................................ $ 420,000
2011........................................................ $ --
From time to time, in the ordinary course of business, the Company is
subject to legal proceedings. While it is impossible to determine the ultimate
outcome of such matters, it is management's opinion that the resolution of any
pending issues will not have a material adverse effect on the consolidated
financial position, cash flows or results of operations of the Company.
NOTE 15 -- RELATED PARTIES:
In accordance with the terms of the employment agreement between the
Company and Gerald A. Nathe, Chairman, then 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 an interest-bearing recourse demand promissory
note for said amount. 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.
In February, 2002, the Company amended Mr. Nathe's employment agreement and
the loan and pledge agreement, and, following repayment by Mr. Nathe of a
portion of the principal on the loan, Mr. Nathe issued a substitute recourse
demand promissory note for $1,500,000, the outstanding principal balance on the
date thereof, with interest payable annually at an annual rate of 5%. In August,
2002, the Company amended Mr. Nathe's employment agreement, the loan and pledge
agreement, and the promissory note, to evidence reduction of the outstanding
principal and interest due from Mr. Nathe on the loan by $750,000 in exchange
for an equal reduction in deferred compensation payments to be made by the
Company to Mr. Nathe. The reduction represented the then present value of a
portion of Mr. Nathe's deferred compensation benefit that had accrued to Mr.
Nathe. Mr. Nathe was responsible for his personal taxes on this exchange. At
June 30, 2005, the balance of the loan, including interest was $788,000.
The maximum amount of the loan outstanding including interest during the
fiscal years ended June 30, 2005 and 2004 was $876,000 and $873,000,
respectively.
On February 10, 1997, Wendell M. Smith resigned as Chairman of the Company.
The Company has made deferred compensation payments to Mr. Smith in the amount
of $103,000 for each of the fiscal years ended June 30, 2005, 2004 and 2003. In
addition, the Company entered into a consulting agreement with Polestar Limited
("Polestar"), a corporation controlled by Mr. Smith, which provides for payments
to Polestar of $90,000 per year for consulting services through 2014.
Samuel B. Fortenbaugh III, a Director of the Company since 1987, rendered
legal services to the Company since September 2002. During the fiscal year ended
June 30, 2005, the Company paid
49
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$54,000 ($111,000 for the year ended June 30, 2004) to Mr. Fortenbaugh for legal
services rendered. Prior to September 2002, Mr. Fortenbaugh was a partner of the
law firm of Morgan Lewis & Bockius LLP, which firm has rendered legal services
to the Company since 1980.
NOTE 16 -- GOODWILL AND OTHER INTANGIBLE ASSETS:
As discussed in Note 2, the Company adopted SFAS 142 effective July 1, 2001
and as a result ceased amortization of goodwill.
The changes in the carrying amount of goodwill for each of the fiscal years
ended June 30, 2005 and 2004 are as follows:
Activity in the fiscal year ended June 30, 2005 was as follows:
GROSS ACCUMULATED NET
CARRYING AMOUNT AMORTIZATION BOOK VALUE
--------------- ------------ -----------
Balance as of June 30, 2004.......... $14,620,000 $3,516,000 $11,104,000
Effects of currency translation...... (242,000) (60,000) (182,000)
----------- ---------- -----------
Balance as of June 30, 2005.......... $14,378,000 $3,456,000 $10,922,000
=========== ========== ===========
Activity in the fiscal year ended June 30, 2004 was as follows:
GROSS ACCUMULATED NET
CARRYING AMOUNT AMORTIZATION BOOK VALUE
--------------- ------------ -----------
Balance as of June 30, 2003.......... $13,454,000 $3,227,000 $10,227,000
Effects of currency translation...... 1,166,000 289,000 877,000
----------- ---------- -----------
Balance as of June 30, 2004.......... $14,620,000 $3,516,000 $11,104,000
=========== ========== ===========
Intangible assets subject to amortization at June 30, 2005 are comprised of
the following:
AS OF JUNE 30, 2005 AS OF JUNE 30, 2004
------------------------------ ------------------------------
AMORTIZED INTANGIBLE GROSS ACCUMULATED GROSS ACCUMULATED
ASSETS: CARRYING AMOUNT AMORTIZATION CARRYING AMOUNT AMORTIZATION
-------------------- --------------- ------------ --------------- ------------
Patents and
Trademarks.......... $7,120,000 $4,559,000 $6,483,000 $4,224,000
Other................. 937,000 746,000 923,000 668,000
---------- ---------- ---------- ----------
Total................. $8,057,000 $5,305,000 $7,406,000 $4,892,000
========== ========== ========== ==========
The weighted average life for intangible assets at June 30, 2005 was 13.8
years and amortization expense for the fiscal year ended June 30, 2005 was
$460,000, $532,000 for fiscal year ended June 30, 2004 and $618,000 for fiscal
year ended June 30, 2003.
50
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Estimated amortization expense for each of the five succeeding fiscal years
is as follows:
FISCAL YEARS ENDING JUNE 30, AMOUNT
---------------------------- --------
2006........................................................ $410,000
2007........................................................ $343,000
2008........................................................ $287,000
2009........................................................ $255,000
2010........................................................ $239,000
NOTE 17 -- LEGAL PROCEEDINGS AND SETTLEMENTS:
On November 14, 2002, the Dusseldorf Higher Regional Court ("DHRC")
announced its judgment in favor of Baldwin in a patent infringement dispute
against its competitor, technotrans AG ("Technotrans"). Technotrans filed an
appeal of the DHRC ruling with the German Supreme Court in Karlsruhe.
Technotrans also filed to revoke the Company's patent with the Federal Patent
Court in Munich, Germany. On July 21, 2004, the German Federal Patent Court
upheld the validity of the Company's patent. Technotrans has also appealed that
judgment to the German Supreme Court in Karlsruhe. That court has not yet
reached a decision on either of those appeals. No amounts have been recorded in
the consolidated financial statements with regard to the potential contingent
gain from the DHRC judgment. On May 18, 2005, Baldwin Germany GmbH of Augsburg,
Germany, a subsidiary of Baldwin Technology Company, Inc. filed suit in the
Regional Court of Dusseldorf, Germany against Technotrans, claiming damages of
32,672,592 Euro (approximately $41,000,000) as a result of the patent
infringement.
On September 3, 2003, Gus A. Paloian, as the Chapter 7 Trustee of the
Bankruptcy Estate of GGSI Liquidation, Inc., (formerly Goss Graphics Systems,
Inc.) filed a complaint in Federal Bankruptcy Court against Enkel Corporation, a
subsidiary of the Company which prior to the sale of substantially all of its
assets in September 2001, had operations in Illinois. The complaint seeks to
avoid and recover transfers made to or for the benefit of, and to disallow
claims, if any, filed by Enkel Corporation, claiming the return of an aggregate
amount of $929,421.75 as "Transfers" made during a "Preference Period" on or
within ninety (90) days before GGSI filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code on September 10, 2001. The Company believes
the claims made by the Trustee are without merit. In June 2004, the Company and
its counsel met with the Trustee and its counsel in an unsuccessful attempt to
resolve the matter. In August 2005, the Company filed an Answer to the complaint
asserting several defenses in support of its position.
NOTE 18 -- 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, reported in "other accounts
payable and accrued liabilities", at the time of sale. In addition, should the
Company become aware of a
51
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 2003........................... $ 1,665,000
Additional warranty expense accruals........................ 4,749,000
Payments against reserve.................................... (3,822,000)
Effects of currency rate fluctuations....................... 122,000
-----------
Warranty reserve at June 30, 2004........................... $ 2,714,000
Additional warranty expense accruals........................ 4,711,000
Payments against reserve.................................... (4,514,000)
Effects of currency rate fluctuations....................... (71,000)
-----------
Warranty reserve at June 30, 2005........................... $ 2,840,000
===========
NOTE 19 -- SUBSEQUENT EVENTS:
Effective July 1, 2005, the Company entered into a Second Amendment to
Credit Agreement among Baldwin Europe Consolidated B.V., as borrower, Baldwin
Technology Company, Inc., as Parent, Guarantor and Borrower Representative,
Baldwin Americas Corporation, Baldwin Europe Consolidated Inc., Baldwin Asia
Pacific Corporation, Baldwin Graphic Systems, Inc., Baldwin Germany GmbH,
Baldwin U.K. Holding Limited, Baldwin (U.K.) Ltd., Acrotec UK Ltd., Baldwin
Globaltec Ltd., Baldwin Sweden Holding AB, Baldwin IVT AB, Baldwin Jimek AB,
Japan-Baldwin Ltd., as Guarantors, and Maple Bank GmbH, as Lender. Terms and
conditions of the Second Amendment reduced the interest rate by approximately
175 basis points and lowered annual commitment fees.
52
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for the fiscal years ended June 30,
2005 and 2004 are as follows (in thousands, except per share data):
QUARTER
----------------------------------------
FISCAL YEAR ENDED JUNE 30, 2005 FIRST SECOND THIRD FOURTH
------------------------------- ------- ------- ------- -------
Net sales............................... $39,997 $41,232 $43,673 $48,283
Cost of goods sold.................... 27,906 28,525 29,232 30,285
------- ------- ------- -------
Gross Profit(4)....................... 12,091 12,707 14,441 17,998
Operating expenses.................... 10,691 11,446 12,345 13,727
Restructuring charges(3).............. -- -- (338) --
Interest expense, net(1).............. 929 541 436 401
Other (income) expense, net(2).......... (767) (626) (375) 108
------- ------- ------- -------
Income from operations before income
taxes................................. 1,238 1,346 2,373 3,762
Provision for income taxes.............. 519 558 864 1,743
------- ------- ------- -------
Net income.............................. $ 719 $ 788 $ 1,509 $ 2,019
======= ======= ======= =======
Net income per share:
Net income per share -- basic......... $ 0.05 $ 0.05 $ 0.10 $ 0.14
Net income per share -- diluted....... $ 0.05 $ 0.05 $ 0.10 $ 0.13
------- ------- ------- -------
Weighted average shares outstanding:
Basic................................. 14,873 14,901 14,911 14,911
======= ======= ======= =======
Diluted............................... 15,351 15,319 15,274 15,278
======= ======= ======= =======
---------------------
(1) Interest expense reflects the amended credit facility with Maple (September
2004) and lower overall debt levels.
(2) Other (income) expenses reflects reduced royalty income from patents which
expired in February 2005.
(3) Reversal of restructuring charges relates to previously accrued expenses,
which will not be incurred due to relocation of the Company's corporate
offices during the third quarter.
(4) Fourth quarter gross margin was favorably impacted 1% due to customer cost
reimbursement for an order which was substantially modified.
QUARTER
----------------------------------------------
FISCAL YEAR ENDED JUNE 30, 2004 FIRST(5) SECOND(6) THIRD(7) FOURTH(8)
------------------------------- -------- --------- -------- ---------
Net sales............................ $34,511 $39,443 $42,770 $41,386
Cost of goods sold................. 23,742 26,646 29,389 28,297
------- ------- ------- -------
Gross Profit....................... 10,769 12,797 13,381 13,089
Operating expenses................. 9,557 11,290 11,219 1,286
Restructuring charges.............. 382 43 -- --
Interest expense, net.............. 937 1,418 1,383 1,247
Other (income), net.................. (1,269) (1,968) (603) (199)
------- ------- ------- -------
Income from continuing operations
before income taxes................ 1,162 2,014 1,382 755
Provision (benefit) for income
taxes.............................. 483 790 677 (3,623)
------- ------- ------- -------
53
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
QUARTER
----------------------------------------------
FISCAL YEAR ENDED JUNE 30, 2004 FIRST(5) SECOND(6) THIRD(7) FOURTH(8)
------------------------------- -------- --------- -------- ---------
Income from continuing operations.... 679 1,224 705 4,378
Net income........................... $ 679 $ 1,224 $ 705 $ 4,378
======= ======= ======= =======
Net income per share:
Net income per share -- basic...... $ 0.05 $ 0.08 $ 0.05 $ 0.29
Net income per share -- diluted.... $ 0.05 $ 0.08 $ 0.05 $ 0.28
------- ------- ------- -------
Weighted average shares outstanding:
Basic.............................. 15,015 15,015 15,015 14,961
======= ======= ======= =======
Diluted............................ 15,035 15,245 15,429 15,457
======= ======= ======= =======
---------------------
(5) The first quarter of fiscal year 2004 Other (income), net includes a net
foreign currency transaction gain of $518,000 associated with the Maple GmbH
loan.
(6) The second quarter of fiscal year 2004 Other (income), net includes net
foreign currency transaction gains of $1,092,000 associated with the
currency fluctuations associated with the Maple GmbH loan.
(7) The third quarter of fiscal year 2004 Other expense, net includes $542,000
of expenses associated with the termination of the proposed sale of the
Company.
(8) The tax benefit recorded in the fourth quarter of fiscal year 2004 reflects
the reversal of a valuation allowance associated with the Company's German
subsidiary.
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Form 8-K filed within 24 months prior to the date of the
most recent financial statements reporting a change of accountants and/or
reporting a disagreement on any matter of accounting principle or financial
statement disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure
that the information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
these disclosure controls and procedures as of the end of our fiscal year June
30, 2005, the period covered by this report. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures are effective. No changes
were made to the Company's internal control over financial reporting during the
year ended June 30, 2005, that have materially affected, or are reasonably
likely to materially effect, the Company's internal controls over financial
reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") will require the
Company to include an internal control report from management in its annual
report for the fiscal year ending June 30, 2008 (assumes the Company maintains
non-accelerated filer status) and in subsequent annual reports thereafter. The
internal control report must include the following: (1) a statement of
management's responsibility for establishing and maintaining adequate internal
control over financial reporting, (2) a statement identifying the framework used
by management to conduct the required evaluation of the effectiveness of the
Company's internal control over financial reporting, (3) management's assessment
of the effectiveness of the Company's internal control over financial reporting
as of June 30, 2007 (assumes continuation of current non-accelerated filer
status), including a statement as to whether or not internal control over
financial reporting is effective, and (4) a statement that the Company's
independent registered public accounting firm has issued an attestation report
on management's assessment of internal control over financial reporting.
Management acknowledges its responsibility for establishing and maintaining
internal controls over financial reporting and seeks to continually improve
those controls. In addition, in order to achieve compliance with Section 404 of
the Act within the required timeframe, the Company has initiated a process to
document and evaluate its internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEMS 10, 11, 12 AND 13
Information required under these items is contained in the Company's 2005
Proxy Statement, which will be filed with the Securities and Exchange Commission
within 120 days after the close of the Company's fiscal year end; accordingly,
this information is therefore incorporated herein by reference.
55
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning fees billed by PricewaterhouseCoopers LLP, Baldwin's
independent registered public accounting firm, during the fiscal years ended
June 30, 2005 and 2004 is incorporated herein by reference to Baldwin's Proxy
Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial statements required by Item 15 are listed in the index
included in Item 8 of Part II. (a)(2) The following is a list of financial
statement schedules filed as part of this Report:
PAGE
----
Report of Independent Registered Public Accounting Firm on 61
Financial Statement Schedule..............................
Schedule II -- Valuation and Qualifying Accounts............ 62
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(a)(3) The following is a list of all exhibits filed as part of this
Report:
INDEX TO EXHIBITS
3.1 Restated Certificate of Incorporation of the Company as
filed with the Secretary of State of the State of Delaware
on November 4, 1986. Filed as Exhibit 3.1 to the Company's
registration statement (No. 33-10028) on Form S-1 and
incorporated herein by reference.
3.2 Certificate of Amendment of the Certificate of Incorporation
of the Company as filed with the Secretary of State of the
State of Delaware on November 21, 1988. Filed as Exhibit 3.2
to the Company's Registration Statement (No. 33-26121) on
Form S-1 and incorporated herein by reference.
3.3 Certificate of Amendment of the Certificate of Incorporation
of the Company as filed with the Secretary of State of the
State of Delaware on November 20, 1990. Filed as Exhibit 3.3
to the Company's Report on Form 10-K for the fiscal year
ended June 30, 1991 and incorporated herein by reference.
3.4 By-Laws of the Company. Filed as Exhibit 3.2 to the
Company's Registration Statement (No. 33-10028) on Form S-1
and incorporated herein by reference.
10.1* Baldwin Technology Company, Inc. Amended and Restated 1986
Stock Option Plan. Filed as Exhibit 10.2 to the Company's
Registration Statement (No. 33-31163) on Form S-1 and
incorporated herein by reference.
10.2* Amendment to the Baldwin Technology Company, Inc. amended
and Restated 1986 Stock Option Plan. Filed as Exhibit 10.2
to the Company's Report on Form 10-K for the fiscal year
ended June 30, 1991 and incorporated herein by reference.
10.3* Baldwin Technology Company, Inc. 1990 Directors' Stock
Option Plan. Filed as Exhibit 10.3 to the Company's Report
on Form 10-K for the fiscal year ended June 30, 1991 and
incorporated herein by reference.
56
10.4* Baldwin Technology Company, Inc. 1996 Stock Option Plan. Filed as Exhibit A to the Baldwin Technology
Company, Inc. 1996 Proxy Statement and incorporated by reference to the Company's Report on Form 10-K
for the fiscal year ended June 30, 1996 and incorporated herein by reference.
10.7 Agreement effective as of July 1, 1990 between Baldwin Technology Corporation, Baldwin Graphic Systems,
Inc. and Harold W. Gegenheimer, as guaranteed by Baldwin Technology Company, Inc. Filed as Exhibit 10.6
to the Company's Report on Form 10-K for the fiscal year ended June 30, 1991 and incorporated herein by
reference.
10.8 Amendment to Agreement between Harold W. Gegenheimer, Baldwin Technology Corporation, Baldwin Graphic
Systems, Inc, and Baldwin Technology Company, Inc. effective as of November 22, 2004 (filed herewith).
10.11 Baldwin Technology Company, Inc. Dividend Reinvestment Plan. Filed as Exhibit 10.49 to the Company's
Report on Form 10-K for the fiscal year ended June 30, 1991 and incorporated herein by reference.
10.27* Baldwin Technology Company, Inc. 1998 Non-Employee Directors' Stock Option Plan. Filed as Exhibit A to
the Baldwin Technology Company, Inc. 1998 Proxy Statement and incorporated herein by reference.
10.41* Employment Agreement dated and effective as of March 19, 2001 between Baldwin Technology Company, Inc.
and Gerald A. Nathe. Filed as Exhibit 10.41 to the Company's report on Form 10-Q for the quarter ended
March 31, 2001 and incorporated herein by reference.
10.44* Employment Agreement dated June 8, 2001 and effective as of June 18, 2001 between Baldwin Technology
Company, Inc. and Vijay C. Tharani. Filed as Exhibit 10.44 to the Company's Report on Form 10-K for the
fiscal year ended June 30, 2001 and incorporated herein by reference.
10.49* Employment Agreement dated September 19, 2001 and effective as of November 1, 2001 between Baldwin
Technology Company, Inc. and Karl S. Puehringer. Filed as Exhibit 10.49 to the Company's Report on Form
10-Q for the quarter ended December 31, 2001 and incorporated herein by reference.
10.50* Amendment to Employment Agreement dated February 26, 2002 and effective November 14, 2001 between
Baldwin Technology Company, Inc. and Gerald A. Nathe. Filed as Exhibit 10.50 to the Company's Report on
Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference.
10.53* Baldwin Technology Profit Sharing and Savings Plan as amended. Filed as Exhibit 10.53 to the Company's
Report on Form 10-K for the year ended June 30, 2003.
10.54* Baldwin Technology Management Incentive Compensation Plan. Filed as Exhibit 10.54 to the Company's
Report on Form 10-K for the year ended June 30, 2002.
10.59* Amendment to Employment Agreement dated and effective May 12, 2003 between Baldwin Technology Company,
Inc. and Karl S. Puehringer. Filed as Exhibit 10.60 to the Company's Report on Form 10-Q for the quarter
ended March 30, 2003.
10.60* Employment Agreement dated February 14, 2003 and effective January 1, 2003 between Baldwin Technology
Company, Inc. and Shaun J. Kilfoyle. Filed as Exhibit 10.61 to the Company's Report on Form 10-Q for the
quarter ended March 30, 2003.
10.61* Amendment to Employment Agreement dated and effective August 13, 2002 between Baldwin Technology
Company, Inc. and Gerald A. Nathe. Filed as Exhibit 10.61 to the Company's Report on Form 10-K for the
year ended June 30, 2004.
57
10.62* Amendment to Employment Agreement dated July 11, 2003 and
effective July 1, 2003 between Baldwin Technology Company,
Inc. and Gerald A. Nathe. Filed as Exhibit 10.62 to the
Company's Report on Form 10-K for the year ended June 30,
2004.
10.63 Credit Agreement among Baldwin Europe Consolidated, B.V., as
Borrower, and Baldwin Technology Company, Inc., as Parent,
Guarantor and Borrower Representative, and Baldwin Americas
Corporation, Baldwin Europe Consolidated Inc., Baldwin Asia
Pacific Corporation, Baldwin Graphic Systems, Inc., Baldwin
Germany GmbH, Baldwin U.K. Holding Limited, Baldwin (U.K)
Ltd., Acrotec UK Ltd., Baldwin Globaltec Ltd., Baldwin
Sweden Holding AB, Baldwin IVT AB, Baldwin Jimek AB,
Japan-Baldwin Ltd., as Guarantors, and Maple Bank GmbH, as
Lender, dated as of July 25, 2003. Filed as Exhibit 10.64 to
the Company's Current Report on Form 8-K dated August 18,
2003.
10.64* Amendment to Employment Agreement dated and effective
November 11, 2003 between Baldwin Technology Company, Inc.
and Vijay C. Tharani. Filed as Exhibit 10.64 to the
Company's Report on Form 10-Q for the quarter ended
September 30, 2003.
10.66 Strategic Advisory Services Agreement dated October 19, 2003
and effective January 1, 2004 between Baldwin Technology
Company, Inc. and Akira Hara. Filed as Exhibit 10.66 to the
Company's Report on Form 10-Q for the quarter ended December
31, 2003.
10.67* Amendment to the Employment Agreement dated and effective
February 10, 2004 between Karl Puehringer and the Company.
Filed as Exhibit 10.67 to the Company's Report on Form 10-Q
for the quarter ended March 31, 2004.
10.68* Employment Agreement dated and effective September 1, 2004
between Baldwin Technology Company, Inc. and Shaun J.
Kilfoyle filed as Exhibit 10.68 to the Company's Report on
Form 10-K for the year ended June 30, 2004.
10.69 First Amendment to Credit Agreement among Baldwin Europe
Consolidated B.V., as Borrower, Baldwin Technology Company,
Inc., as Parent, Guarantor and Borrower Representative,
Baldwin Americas Corporation, Baldwin Europe Consolidated
Inc., Baldwin Asia Pacific Corporation, Baldwin Graphic
Systems, Inc., Baldwin Germany GmbH, Baldwin U.K. Holding
Limited, Baldwin (U.K.) Ltd., Acrotec UK Ltd., Baldwin
Globaltec Ltd., Baldwin Sweden Holding AB, Baldwin IVT AB,
Baldwin Jimek AB, Japan-Baldwin Ltd., as Guarantors, and
Maple Bank GmbH, as Lender, dated as of September 9, 2004.
Filed as Exhibit 10.69 to the Company's Current Report on
Form 8-K dated September 20, 2004.
10.70* Employment Agreement between Baldwin Technology Company,
Inc. and Karl S. Puehringer, dated as of August 17, 2005,
filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K dated August 17, 2005.
10.71* Amendment to Employment Agreement between Baldwin Technology
Company, Inc. and Gerald A. Nathe, dated August 17, 2005,
filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K dated August 17, 2005.
10.72 Second Amendment and Waiver to Credit Agreement among
Baldwin Europe Consolidated B.V., as Borrower, Baldwin
Technology Company, Inc., as Parent, Guarantor and Borrower
Representative, Baldwin Americas Corporation, Baldwin Europe
Consolidated Inc., Baldwin Asia Pacific Corporation, Baldwin
Graphic Systems, Inc., Baldwin Germany GmbH, Baldwin U.K.
Holding Limited, Baldwin (U.K.) Ltd., Acrotec UK Ltd.,
Baldwin Globaltec Ltd., Baldwin Sweden Holding AB, Baldwin
IVT AB, Baldwin Jimek AB, Japan-Baldwin Ltd., as Guarantors,
and Maple Bank GmbH, as Lender, dated as of July 1, 2005,
filed as Exhibit 10.72 to the Company's Current Report on
Form 8-K dated September 9, 2005.
21. List of Subsidiaries of Registrant (filed herewith).
23. Consent of PricewaterhouseCoopers LLP (filed herewith).
58
28. Post-effective Amendment to the Company's previously filed
Form S-8's, Nos. 33-20611 and 33-30455. Filed as Exhibit 28
to the Company's Report on Form 10-K for the fiscal year
ended June 30, 1991 and incorporated herein by reference.
31.01 Certification of the Principal Executive Officer pursuant to
Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
31.02 Certification of the Principal Financial Officer pursuant to
Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
32.01 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350 (filed herewith).
32.02 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350 (filed herewith).
99. Company statement regarding the Private Securities
Litigation Reform Act of 1995, "Safe Harbor for
Forward-Looking Statements" (filed herewith).
---------------------
* Management contract or compensatory plan or arrangement.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
--------------------------------------
(REGISTRANT)
By: /s/ GERALD A. NATHE
------------------------------------
GERALD A. NATHE
(CHAIRMAN OF THE BOARD)
Dated: September 28, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GERALD A. NATHE Chairman of the Board September 28, 2005
--------------------------------------------------- and Chief Executive
GERALD A. NATHE Officer
/s/ KARL S. PUEHRINGER President and Chief September 28, 2005
--------------------------------------------------- Operating Officer
KARL S. PUEHRINGER
/s/ VIJAY C. THARANI Vice President, Chief September 28, 2005
--------------------------------------------------- Financial Officer and
VIJAY C. THARANI Treasurer
/s/ LEON RICHARDS Controller and Chief September 28, 2005
--------------------------------------------------- Accounting Officer
LEON RICHARDS
/s/ ROLF BERGSTROM Director September 28, 2005
---------------------------------------------------
ROLF BERGSTROM
/s/ AKIRA HARA Director September 28, 2005
---------------------------------------------------
AKIRA HARA
/s/ JUDITH A. MULHOLLAND Director September 28, 2005
---------------------------------------------------
JUDITH A. MULHOLLAND
/s/ SAMUEL B. FORTENBAUGH III Director September 28, 2005
---------------------------------------------------
SAMUEL B. FORTENBAUGH III
/s/ MARK T. BECKER Director September 28, 2005
---------------------------------------------------
MARK T. BECKER
/s/ RALPH R. WHITNEY, JR. Director September 28, 2005
---------------------------------------------------
RALPH R. WHITNEY, JR.
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
BALDWIN TECHNOLOGY COMPANY, INC.
Our audits of the consolidated financial statements of Baldwin Technology
Company, Inc. referred to in our report dated September 28, 2005 appearing in
the 2005 Annual Report to Shareholders of Baldwin Technology Company, Inc.
(which report and consolidated financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Stamford, Connecticut
September 28, 2005
61
SCHEDULE II
BALDWIN TECHNOLOGY COMPANY, INC
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTION OF PERIOD
---------- ---------- --------- ---------
Year ended June 30, 2005
Allowance for doubtful accounts (deducted
from accounts receivable)................ $2,155 $ 99 $ 292 $1,962
Allowance for obsolete inventories (deducted
from inventories)........................ $3,450 $506 $ 78 $3,878
Year ended June 30, 2004
Allowance for doubtful accounts (deducted
from accounts receivable)................ $2,286 $109 $ 240 $2,155
Allowance for obsolete inventories (deducted
from inventories)........................ $4,069 $631 $1,250(3) $3,450
Year ended June 30, 2003
Allowance for doubtful accounts (deducted
from accounts receivable)................ $1,994 $674 $ 382(1) $2,286
Allowance for obsolete inventories (deducted
from inventories)........................ $3,290 $779(2) -- $4,069
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(1) The decrease in the allowance for doubtful accounts for the fiscal year
ended June 30, 2003 resulted from write-offs of $632,000, (including
$137,000 from the purchaser of the Print On Demand business and accounts
receivable of $239,000 from Goss Graphic Systems, Inc.) partially offset by
currency fluctuations of $250,000.
(2) The increase in the allowance for obsolete inventories for the fiscal year
ended June 30, 2003 resulted primarily from additional charges of $475,000
and currency fluctuations of $304,000.
(3) The reduction in allowance for obsolete inventory for the fiscal year ended
June 30, 2004 reflects a disposition of previously reserved inventory
related to Baldwin Enkel of $1,235,000.
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