ITEM 1. BUSINESS
Baldwin Technology Company, Inc. ("Baldwin" or the "Company") is the leading international manufacturer of material handling, accessory and control equipment for the printing industry. The Company offers its customers a broad range of products designed to enhance the quality of printed products and increase the productivity and cost-efficiency of the print manufacturing process while addressing the environmental concerns and safety issues involved in the printing process. Baldwin's products include cleaning systems, fountain solution and ink control systems, web control and press protection systems, drying systems, web and material handling systems and newspaper inserter equipment.
The Company sells its products both to printers to upgrade the quality and capability of existing and new printing presses and to printing press manufacturers who incorporate the Company's products with their own equipment for sale to printers. The Company has product development and manufacturing facilities, as well as sales and service operations, in all major markets worldwide.
INDUSTRY OVERVIEW
Baldwin operates in a highly fragmented market. The Company defines its business as that of providing material handling, accessory and control equipment for the printing industry. The Company believes that it produces the most complete line of material handling, accessory and control equipment for the printing industry.
The Company's products are used by printers engaged in all 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 printing market and is used primarily for 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 both the quality of the finished product as well as its cost efficiency.
Offset printing represents a significant segment of the U.S. commercial printing industry, and is becoming dominant in the international printing market. The Company believes that the future growth of its international markets will be attributable in large 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 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 more than 200 different products to printers and printing press manufacturers. The Company's product development is focused on the needs of the printer. Typically, it takes a new product several years after its introduction to make a significant contribution to the Company's net sales. Initially, after the introduction of a new product, the Company's marketing efforts usually focus on printers. With the exception of the Company's Baldwin Kansa product line, 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 industry increases and printers begin to specify certain of the Company's products as part of their accessory or material handling equipment package selected when ordering new presses. The Company's Baldwin Kansa product line is
primarily marketed to newspaper printers. 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 press technology. The Company's products help printers address increasingly demanding requirements for print quality and environmental and safety issues, as well as enhance productivity and reduce materials waste. The Company's sales have historically increased about equally through both internal product development and acquisitions of product lines and companies.
The Company's products range in unit price from under $100 to approximately $500,000. Baldwin's principal products by business group are described below:
GRAPHIC PRODUCTS AND CONTROLS GROUP
CLEANING SYSTEMS. The Company's oldest Cleaning Systems product is the Press Washer which cleans the ink train of an offset press. Additional Cleaning Systems products include the Automatic Blanket Cleaner, Newspaper Blanket Cleaner, Chill Roll Cleaner and Guide Roll Cleaner, which all 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, 1999, 1998 and 1997, net sales of Cleaning Systems represented approximately 30.2%, 29.1% and 29.7% of the Company's net sales, respectively.
FOUNTAIN SOLUTION CONTROL SYSTEMS. The Company's Fountain Solution Control Systems control the supply, temperature, cleanliness, chemical composition and certain other characteristics of the water used in the offset 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, 1999, 1998 and 1997, net sales of Fountain Solution Control Systems represented approximately 16.5%, 14.5% and 14.1% of the Company's net sales, respectively.
WEB CONTROL AND PRESS PROTECTION SYSTEMS. The Company's Web Control Systems improve print quality by precisely controlling the flow of paper through a web offset press which reduces waste and increases press productivity. The Company's Press Protection Systems, designed in response to the increasing number of web leads used in printing today's colorful newspapers, provide an auto-arming electronic package offering high quality press protection in the event of a web break.
OTHER ACCESSORY AND CONTROL EQUIPMENT. The Company's Ink Control Systems control and 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 and allow for the use of recyclable ink containers. Other products include Ultra-Violet and Infra-Red Dryers and Gluing Systems. In the fiscal years ended June 30, 1999, 1998 and 1997, net sales of Other Accessory and Control Equipment represented approximately 11.6%, 14.9% and 14.0% of the Company's net sales, respectively.
MATERIAL HANDLING GROUP
WEB HANDLING SYSTEMS. The Company's Web Handling Systems unwind, rewind and splice paper and other materials supplied to presses in webs and also control the tension and position of web materials. This equipment eliminates unnecessary press stoppages and allows an efficient work flow. In the fiscal years ended June 30, 1999, 1998 and 1997, net sales of Web Handling Systems represented approximately 23.5%, 21.3% and 13.0% of the Company's net sales, respectively.
MATERIAL HANDLING/STACKING SYSTEMS. The Company's Material Handling/Stacking Systems automate the handling of the printed product. The efficient counting, stacking, packing and compressing of printed materials helps to increase press utilization and productivity, reduce and control waste and decrease pressroom labor requirements.
NEWSPAPER INSERTER EQUIPMENT AND MAILING MACHINE SYSTEMS. The Company's Newspaper Inserter Equipment collates and inserts sections and advertising material into newspapers. Rising newsprint costs in the printing industry have increased pressure on printers to reduce other costs, particularly labor costs. When manual processes are replaced by newspaper inserters, payback periods as low as six months have been realized by some purchasers of this equipment. The Company's Mailing Machine Systems fold, label and prepare newspapers for mailing.
PRE-PRESS GROUP
The Company disposed of its pre-press business on June 30, 1997 (see Note -- 3 Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations"). In the fiscal year ended June 30, 1997, net sales of the pre-press group represented approximately 10.0% of the Company's net sales.
PRINT ON-DEMAND GROUP
The Company entered the short-run, print on-demand market in January of 1997 with the formation of a business venture of which the Company now owns 100%. The venture, now named Baldwin Document Finishing Systems, Inc., markets and distributes finishing equipment for the digital printing market. The Company's strategy is focused on providing highly efficient finishing systems to this rapidly growing market. Results of operations for the Print on-Demand Group were not material for all periods presented.
WORLDWIDE OPERATIONS
The Company believes that it is the only manufacturer of material handling and accessory and control equipment for the printing industry which has complete product development, manufacturing and marketing capabilities in the Americas, Europe and Asia Pacific.
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, 1999, 1998 and 1997:
In the Americas, the Company operates in North, Central and South America through its U.S. subsidiaries. In Europe, the Company operates through its subsidiaries in Germany, Sweden, France, England and the Netherlands. In Asia Pacific, the Company operates through its subsidiaries in Japan, Hong Kong, China and Australia. All of the Company's subsidiaries are wholly owned except for one subsidiary in which the Company holds a 90% interest.
For additional information relating to the Company's segments and operations in its three geographic regions, see Note 5 -- Notes to Consolidated Financial Statements.
ACQUISITION STRATEGY
An element of the Company's growth strategy is to make strategic acquisitions of companies and product lines in related business areas. The Company's acquisition strategy involves: (i) acquiring new
material handling, accessory, control and print on-demand products which can be sold through the Company's own 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 typically supports the existing management of the acquired entity and participates actively with that management in implementing operational strategies with a view to enhancing the entity's sales, productivity and operating results.
MARKETING, SALES AND SUPPORT
MARKETING. The Company markets its products in almost all developed countries throughout the world. Although Baldwin markets similar lines of products in many of these countries, its product mix and distribution channels vary from country to country. The Company has approximately 107 employees devoted to marketing and sales activities in its three principal markets and approximately 70 dealers worldwide. The Company markets its products to printing press manufacturers ("OEM's") and to printers. For the fiscal year ended June 30, 1999 approximately 45% of the Company's net sales were to printing press manufacturers and approximately 55% were directly to printers.
In the Americas and Europe, the Company markets its products both through direct sales representatives and an extensive dealer network. In Asia Pacific, the Company markets its products through direct sales representatives in Japan, Hong Kong, China and Australia and through dealers throughout the rest of Asia.
SUPPORT. The Company is committed to after-sales service and support of its products throughout the world. Baldwin employs approximately 125 service technicians, who are complemented by product engineers, to provide field service for the Company's products on a global basis.
BACKLOG. The Company's backlog was $57,491,000 as of June 30, 1999, $87,381,000 as of June 30, 1998 and $72,727,000 as of June 30, 1997. Included in the June 30, 1998 and 1997 backlog was $3,459,000 and $830,000, respectively, of backlog relating to the Company's former in-line finishing operations, which were disposed of in November 1998. Backlog represents unfilled product orders which Baldwin has received from its customers under valid contracts or purchase orders.
CUSTOMERS. The Company has a diverse customer base. For the current fiscal year ended June 30, 1999, one customer, Goss Graphic Systems, Inc. ("Goss") accounted for approximately 11% of the Company's net sales (see "Liquidity and Capital Resources" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 13 of the Notes to Consolidated Financial Statements for a further discussion of Goss). For the fiscal years ended June 30, 1998 and 1997, no customer accounted for 10% or more of the Company's net sales. The ten largest customers of Baldwin (including Goss) accounted for approximately 46% of the Company's net sales for the fiscal year ended June 30, 1999. Sales of Baldwin's products are not seasonal. However, sales have traditionally been greater in the second six months of its fiscal year than in the first six months of its fiscal year (see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations"). The only recent exception to this trend has been in the current year which was primarily due to lower sales to Goss and a lower level of activity in the Japanese market during the second six months of the current fiscal year.
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 material handling,
accessory and control equipment for the printing 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 facilities at each of its manufacturing locations. The Company believes that this decentralized approach to research and development helps the Company to react quickly to meet the needs of its customers. Coordination of the Company's product development activities is accomplished within each of the major product groups of Graphic Products and Controls for accessories and controls, and Material Handling for roll and material handling equipment. The organization by product/market groups ensures focused attention on opportunities within their respective markets, while avoiding duplicative efforts within the Company.
Baldwin employs approximately 172 persons whose primary function is new product development or modification of existing products. The Company's total expenditures for research, development and engineering for the fiscal years ended June 30, 1999, 1998 and 1997 were $19,408,000, $18,514,000 and $21,425,000, respectively, representing approximately 8% of the Company's net sales in each year. Included in the 1997 amount was $2,156,000, attributable to the Company's former pre-press operations.
PATENTS
The Company owns or licenses a number of patents and patent applications relating to a substantial number of Baldwin's products. These products represented a substantial portion of the Company's net sales for the fiscal year ended June 30, 1999. The Company's patents expire at different times during the next twenty years; however, the expiration of patents in the near future is not expected to have a material adverse effect on the Company's sales. 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 subsidiaries with manufacturing facilities located on the East Coast, in the Midwest and on the West Coast of the United States.
In Europe, the Company has subsidiaries with manufacturing and assembly facilities in Germany and Sweden. These facilities manufacture and assemble complete lines of products that are in demand by printers worldwide and by printing press manufacturers in Europe for shipment throughout the world. In Asia, Baldwin has manufacturing and assembly facilities in Japan and China.
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.
The nature of most operations of the Company 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 highly fragmented printing press accessory industry, the Company produces and markets what it believes to be the most complete line of material handling and accessory and control equipment. 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 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, ability to keep its market position as its patents expire and its ability to develop new products which meet the demands of the printing industry.
EMPLOYEES
The Company employs approximately 1,057 persons, 498 of whom are production employees and approximately 124 of whom are management and administrative employees. Of the Company's 192 employees in its Baldwin Graphic Products Division in the United States, 47 are represented by the International Association of Machinists and Aerospace Workers under a contract which expires on November 9, 1999. In Europe, employees are represented by various unions under contracts with indefinite terms. In Sweden, 11, 49, and 44 of the Company's 152 employees are represented by Ledarna (SALF), Lundsorganisationen, Metall and Tjanstemannene Central Organisation, and Svenska Industritjanstemanna Forbundet, respectively. In Germany, approximately 45 of the Company's 239 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.
ITEM 2. PROPERTIES
The Company owns and leases various manufacturing and office facilities of approximately 672,000 square feet at June 30, 1999. The table below presents the locations and ownership of these facilities:
The Company believes that its facilities are adequate to carry on its business as currently conducted.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending to which either the Company is a party or to which any of its property is subject, which would have a material adverse effect on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders since November 12, 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) 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 periods indicated, the range of closing prices for the Class A Common Stock on the AMEX, as reported by the AMEX.
(b) Class B Common Stock
The Company's Class B Common Stock has no established public trading market.
(c) Approximate Number of Equity Security Holders
As of August 31, 1999, the approximate number of record holders (excluding those listed under a nominee name) of the Company's Class A and Class B Common Stock totaled 376 and 27, respectively. The Company believes, however, that there are in excess of 2,000 beneficial owners of its Class A Common Stock.
(d) 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. No dividend in cash or property can be declared or paid on shares of 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 10 -- Notes to Consolidated Financial Statements). See Note 8 -- Notes to Consolidated Financial Statements and "Liquidity and Capital Resources" within "Management's Discussion and Analysis of Financial Condition and Results of Operations" for restrictions on dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The Company's income statement and balance sheet data as they relate to the years ended June 30, 1999, 1998, 1997, 1996 and 1995, have been derived from the Company's audited financial statements (including the Consolidated Balance Sheet of the Company at June 30, 1999 and 1998 and the related Consolidated Statement of Income of the Company for the years ended June 30, 1999, 1998 and 1997 appearing elsewhere herein). 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".
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL. The Company does not consider its business to be seasonal; however, except for the current year, its sales have traditionally been greater in the second six months of its fiscal year than in the first six months of its fiscal year. The following schedule shows the Company's net sales for such six month periods over the last five fiscal years to reflect the comparison.
The terms "net acquisitions" and "net dispositions" as they are used throughout Management's Discussion and Analysis of Financial Condition and Results of Operations relate to the formation of Baldwin Document Finishing Systems, Inc., in January, 1997, and the acquisition of a 90% interest in a distributor in Europe in October, 1998, as well as dispositions of the Company's former pre-press operations in June, 1997, and former in-line finishing division in November, 1998. For the fiscal year ended June 30, 1999, the first six months net sales include net dispositions sales of $1,863,000 and the second six months include net acquisitions sales of $804,000. For the fiscal year ended June 30, 1998, the first six months net sales include net acquisitions sales of $747,000 and the second six months include net acquisitions sales of $581,000. For the fiscal year ended June 30, 1997, the first six months net sales include net dispositions sales of $6,626,000 and the second six months include net dispositions sales of $13,825,000.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the following statements and certain other statements contained herein are based on current expectations. 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 Report on Form 10-K for the fiscal year ended June 30, 1999.
SEGMENT DISCUSSIONS
Effective June 30, 1999, the Company implemented the new segment disclosures required by the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related Information" (See Note 5 -- Notes to Consolidated Financial Statements). This statement addresses presentations and disclosure matters and therefore had no impact on the Company's financial position or results of operations.
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.
FISCAL YEAR ENDED JUNE 30, 1999 VERSUS FISCAL YEAR ENDED JUNE 30, 1998
CONSOLIDATED RESULTS
NET SALES. Net sales for the fiscal year ended June 30, 1999 increased by $1,363,000, or 0.6%, to $232,771,000 from $231,408,000 for the fiscal year ended June 30, 1998. Currency rate fluctuations attributable to the Company's overseas operations increased net sales for the current period by $1,071,000. Changes in both product volume and mix were primarily responsible for the remainder of the change. In terms of local currency, sales generally increased in Europe and decreased in Asia. Sales increased by 24.6% in Sweden, by 20.5% in France and by 8.2% in the United Kingdom. Sales decreased by 13.8% in Japan, by 0.6% in Germany and by 0.4% in the Americas.
GROSS PROFIT. Gross profit for the fiscal year ended June 30, 1999 was $73,991,000 (31.8% of net sales), compared to $76,257,000 (32.9% of net sales) for the fiscal year ended June 30, 1998, a decrease of $2,266,000 or 3.0%. Gross profit increased by $123,000 on fluctuations in currency rates and decreased by $801,000 due to net dispositions. Gross profit was lower as a percentage of sales when
compared to the prior year due primarily to the effects of increased sales of lower margin material handling equipment, mainly in the Americas, and lower sales levels in Japan, and increased implementation costs for Year-2000 compliant information systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $42,510,000 (18.3% of net sales) for the fiscal year ended June 30, 1999, compared to $43,357,000 (18.7% of net sales) for the prior year, a decrease of $847,000. Currency rate fluctuations increased the current year's expenses by $151,000 and net dispositions reduced expenses by $369,000. General and administrative expenses decreased primarily as a result of reductions in personnel due to the Company's consolidation of facilities and restructuring efforts and reduced incentive and deferred compensation expenses as a result of the lower profitability of the Company. These reductions more than offset increases in consulting and subcontract costs as well as general insurance costs and costs associated with the Company's Year-2000 system implementation effort. Selling expense decreased $310,000 as a result of lower staffing levels and volume related decreases in sales commissions and related travel expenses, which have more than offset increased trade show and advertising expenses.
Other operating expenses increased by $4,164,000 over the same period of the prior year. Fluctuations in currency rates increased these expenses by $105,000 and the additional provision for loss on the disposition of the pre-press operations added $2,400,000, while the restructuring charge in the fourth quarter added $870,000 to these expenses. The remaining increase in these expenses relates to increased engineering project costs.
INTEREST AND OTHER. Interest expense for the fiscal year ended June 30, 1999 decreased by $491,000 to $2,301,000, compared to $2,792,000 for the fiscal year ended June 30, 1998. Currency rate fluctuations increased interest expense by $35,000 in the current period. The remainder of the decrease was due primarily to reductions in the amount of long-term, fixed-rate indebtedness outstanding during the current period which was replaced by short term borrowings. Such short term borrowings carried a lower interest rate. Interest income was $453,000 and $521,000 for the fiscal years ended June 30, 1999 and June 30, 1998, respectively. Currency rate fluctuations increased interest income by $12,000 in the current period. Other income was $3,184,000 and $2,427,000 for the fiscal years ended June 30, 1999 and June 30, 1998, respectively, and includes foreign currency transaction (losses) gains of $(176,000) and $111,000 for the current and prior period, respectively. The remaining net increase in other income is primarily due to increased royalty income. Currency rate fluctuations increased other income by $67,000 for the current period.
INCOME TAXES. The Company's effective tax rate for the fiscal year ended June 30, 1999 was 44.5%, compared to 38.0% for the fiscal year ended June 30, 1998. This increase is primarily the result of the $2,400,000 special charge related to the disposition of the former pre-press operations for which no tax benefit was recorded. Otherwise, the Company's effective tax rate would have been 36.0%. Currency rate fluctuations decreased the provision for income taxes by $37,000 during the current period. The remaining decrease in the current period's effective tax rate, excluding the effect of the special charges, is primarily due to increased income in tax jurisdictions for which there are tax loss carryforwards available.
NET INCOME. Net income for the fiscal year ended June 30, 1999 was $5,625,000 as compared to $9,016,000 for the fiscal year ended June 30, 1998, or $.33 basic and $.33 diluted, and $.53 basic and $.52 diluted per share, respectively. For the current period, currency rate fluctuations and net dispositions decreased net income by $66,000 and $24,000, respectively. The provision for loss on the disposition of pre-press operations of $2,400,000 and the after-tax impact of $557,000 for restructuring charges reduced net income per share by $.18 basic and $.17 diluted in the current year.
SEGMENT RESULTS
GRAPHIC PRODUCTS AND CONTROLS GROUP
Net sales for the fiscal year ended June 30, 1999 increased by $792,000, or 0.5%, to $153,128,000 from $152,336,000 for the fiscal year ended June 30, 1998. Currency rate fluctuations attributable to the Company's overseas operations increased net sales for the current period by $1,398,000 and acquisitions added $1,184,000, otherwise, net sales would have decreased by $1,790,000 in the current period. This decrease is primarily the result of reduced sales levels in Japan of cleaning systems, which was partially offset by increased sales in Sweden of spray dampening systems.
Operating income amounted to $14,219,000 (9.3% of net sales) for the fiscal year ended June 30, 1999, as compared to $15,544,000 (10.2% of net sales) for the prior year, a decrease of $1,325,000. Currency rate fluctuations decreased the current year's operating income by $8,000 and acquisitions added $255,000, otherwise operating income would have decreased by $1,572,000. This decrease is primarily the result of the overall decrease in sales levels discussed above as well as a restructuring charge of $845,000 in the fourth quarter of the current period.
MATERIAL HANDLING GROUP
Net sales for the fiscal year ended June 30, 1999 decreased by $1,818,000, or 2.2%, to $79,453,000 from $81,271,000 for the fiscal year ended June 30, 1998. Currency rate fluctuations attributable to the Company's overseas operations decreased net sales for the current period by $617,000, otherwise net sales would have decreased by $1,201,000. This decrease is primarily the result of the disposition of the Company's former in-line finishing division during the current year, which was partially offset by increased sales of roll handling systems.
Operating income amounted to $4,640,000 (5.8% of net sales) for the fiscal year ended June 30, 1999, as compared to $7,121,000 (8.8% of net sales) for the prior year, a decrease of $2,481,000. Currency rate fluctuations decreased the current year's operating profit by $83,000 and net dispositions accounted for a decrease of $179,000. The remaining decrease is primarily the result of lower gross margins associated with the Company's roll handling systems.
FISCAL YEAR ENDED JUNE 30, 1998 VERSUS FISCAL YEAR ENDED JUNE 30, 1997
The following is management's discussion and analysis of certain significant factors which have affected the Company's financial position and consolidated financial statements.
The Company's disposition of its former pre-press operations on June 30, 1997 results in significant distortions when comparing operating performance of the current and prior year periods. The following condensed Consolidated Statement of Income of the Company sets forth the actual 1998 and 1997 results together with 1997 proforma results which reflect the removal of the Company's former pre-press operations and the provision for loss on the disposal of those operations. The proforma 1997 amounts will be used in the following discussion of the year ended June 30, 1998 actual results as compared to the prior year.
CONSOLIDATED RESULTS
NET SALES. Net sales for the fiscal year ended June 30, 1998 increased by $15,589,000, or 7.2%, to $231,408,000 from $215,819,000 for the fiscal year ended June 30, 1997. Currency rate fluctuations attributable to the Company's overseas operations decreased net sales for the current period by $12,588,000 and acquisitions added $747,000 to net sales. Product volume changes were primarily responsible for the remainder of the change. In terms of local currency and after excluding the impact of acquisitions and divestitures, sales generally increased in Europe. Sales increased in Germany by 3.9% and were up 10.3% in Sweden and 12.9% in the United Kingdom. In Asia, local currency sales increased by 9.9% in Japan. In the Americas, net sales increased by 19.1%.
GROSS PROFIT. Gross profit for the fiscal year ended June 30, 1998 was $76,257,000 (32.9% of net sales), as compared to $71,095,000 (32.9% of net sales) for the fiscal year ended June 30, 1997, an increase of $5,162,000, or 7.3%. Gross profit decreased by $4,084,000 on fluctuations in currency rates and increased by $351,000 due to acquisitions with the remainder of the change due to volume, product mix and other factors. Gross profit rates were lower in the Americas, primarily due to higher sales of lower margin material handling systems. Gross profit rates were also lower in Asia reflecting the difficult economic conditions in that market. Gross margin rates were higher in Europe, primarily the result of the Company's continuing cost reduction and cost control efforts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $43,357,000 (18.7% of net sales) for the fiscal year ended June 30, 1998, as compared to $41,693,000 (19.3% of net sales) for the prior fiscal year, an increase of $1,664,000. Currency rate fluctuations decreased the current year's expenses by $2,000,000 and acquisitions added $615,000. General and administrative expenses increased primarily due to increased consulting fees associated with certain strategic initiatives undertaken during the fiscal year ended June 30, 1998 and incentive compensation expenses. These increases were partially offset by reduced charges for severance and cost savings achieved through the consolidation of facilities and reduced staff. Selling expense increases of
$1,875,000 were due to volume related increases in sales commissions, offset by lower trade show and advertising expenses and reduced staffing levels.
Other operating expenses decreased by $755,000 over the same period of the prior year. Fluctuations in currency rates decreased these expenses by $1,080,000 and acquisitions increased these expenses by $25,000. The remaining increase in these expenses relates to increased engineering personnel and project costs.
INTEREST AND OTHER. Interest expense for the fiscal year ended June 30, 1998 was $2,792,000, as compared to $3,320,000 for the fiscal year ended June 30, 1997. Currency rate fluctuations decreased interest expense by $327,000. The remainder of the decrease was due primarily to a decrease in the amount of outstanding working capital related indebtedness used by the Company's European operations and a reduction in long-term debt. Interest income was $521,000 and $357,000 for the fiscal years ended June 30, 1998 and June 30, 1997, respectively. Currency rate fluctuations decreased interest income by $108,000. Other income was $2,427,000 and $1,414,000 for the fiscal years ended June 30, 1998 and June 30, 1997, respectively, and includes foreign currency transaction gains (losses) of $111,000 and $(182,000) for the current and prior period, respectively. The remaining net increase in other income is primarily due to increased royalty income offset by currency rate fluctuations which decreased other income by $51,000 for the current period.
INCOME TAXES. The Company's effective tax rate for the fiscal year ended June 30, 1998 was 38.0% versus the effective rate of 35.1% for the fiscal year ended June 30, 1997. Currency rate fluctuations decreased the provision for income taxes by $254,000 during the current period. The effective rate for the prior fiscal year included a benefit of $854,000 due to the favorable settlement of certain tax matters in Germany.
NET INCOME. The net income for the fiscal year ended June 30, 1998 was $9,016,000 versus net income for the fiscal year ended June 30, 1997 of $5,692,000. For the current period, currency rate fluctuations and acquisitions decreased net income by $415,000 and $426,000, respectively.
SEGMENT RESULTS
GRAPHIC PRODUCTS AND CONTROLS GROUP
Net sales for the fiscal year ended June 30, 1998 decreased by $2,214,000, or 1.4%, to $152,336,000 from $154,550,000 for the fiscal year ended June 30, 1997. Currency rate fluctuations attributable to the Company's overseas operations reduced net sales for the current period by $12,860,000, otherwise net sales would have increased by $10,646,000 or 6.9%. Product volume changes were primarily responsible for the remainder of the change, the result of increased sales of cleaning systems in both Sweden and Japan.
Operating income amounted to $15,554,000 (10.2% of net sales) for the fiscal year ended June 30, 1998, as compared to $13,194,000 (8.5% of net sales) for the prior fiscal year, an increase of $2,360,000. Currency rate fluctuations decreased the current year's operating income by $142,000, otherwise operating profit would have increased by $2,502,000. This increase in operating income is primarily attributable to reduced engineering costs in 1998 as a result of a reorganization in the Company's German operation during 1997.
MATERIAL HANDLING GROUP
Net sales for the fiscal year ended June 30, 1998 increased by $17,539,000, or 27.5%, to $81,271,000 from $63,732,000 for the fiscal year ended June 30, 1997. Currency rate fluctuations attributable to the Company's overseas operations decreased net sales for the current period by $1,326,000, otherwise net sales would have increased by $18,865,000. This increase is primarily the result of increased sales of roll handling systems.
Operating income amounted to $7,121,000 (8.8% of net sales) for the fiscal year ended June 30, 1998, as compared to $5,686,000 (8.9% of net sales) for the prior fiscal year, an increase of $1,435,000. Currency rate fluctuations decreased the current year's operating profit by $142,000, otherwise operating profit would have increased by $1,577,000, primarily as a result of the increased sales of roll handling systems.
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 Company's long-term debt includes $12,500,000 of 8.17% senior notes (the "Senior Notes") due October 29, 2000. The Company also maintains a $25,000,000 Revolving Credit Agreement (the "Revolver") with Bank of America, N.A., formerly NationsBank of North Carolina, as Agent, which matures on December 31, 2000.
The Senior Notes and the Revolver require the Company to maintain certain financial covenants and have certain restrictions regarding the payment of dividends, limiting them throughout the terms of the Senior Notes and the Revolver to $1,000,000 plus 50% of the Company's net income after January 1, 1997. In addition, the Company was required to pledge certain of the shares of its domestic subsidiaries as collateral for both the Senior Notes and the Revolver.
Both the Senior Notes and the Revolver require the Company to maintain a ratio of current assets to current liabilities (as those terms are defined in the agreements) of not less than 1.40 to 1.00. At June 30, 1999, this ratio was 1.65 to 1.00. In addition, the Revolver requires the Company to maintain a specified fixed charges ratio (as defined in the agreement). During the fourth quarter ended June 30, 1999, the Company did not meet this covenant and received a waiver for such period.
The Company's working capital decreased by $912,000 or 3.0% from $30,066,000 at June 30, 1998, to $29,154,000 at June 30, 1999. Foreign currency rate fluctuations accounted for an increase of $557,000, while net dispositions and treasury stock repurchases accounted for a decrease of $1,167,000 and $3,800,000 respectively. Working capital was further decreased by reductions in inventories, accounts and notes receivable, particularly due to the lower sales volumes in the last six months of the current fiscal year, and reduced cash and equivalents. Offsetting these items were reductions in accounts and notes payable, customer deposits, and accrued expenses and other current liabilities resulting primarily from reduced compensation and profit sharing costs.
The Company utilized $3,055,000 for investing activities for the fiscal year ended June 30, 1999, and generated $3,526,000 from investing activities for the fiscal year ended June 30, 1998. This negative differential of $6,581,000 resulted primarily from the collection of the receivable associated with the sale of the former pre-press operations in the prior period. The net cash used by financing activities was $5,190,000 for the fiscal year ended June 30, 1999 as compared to $6,656,000 for the fiscal year ended June 30, 1998. The difference was primarily caused by larger debt reductions on the Company's long-term debt in the prior period which was largely offset by purchases of treasury stock in the current period.
The Company maintains relationships with foreign and domestic banks which have extended credit facilities to the Company totaling $36,039,000, including amounts available under the Revolver. As of June 30, 1999, the Company had outstanding $13,058,000 under these lines of credit, of which $9,165,000 is classified as long-term debt. Total debt levels as reported on the balance sheet at June 30, 1999 are $27,000 higher than they would have been if June 30, 1998 exchange rates had been used.
Net capital expenditures made to meet the normal business needs of the Company for the fiscal years ended June 30, 1999 and June 30, 1998, including commitments for capital lease payments, were $2,854,000 and $2,399,000, respectively.
At June 30, 1999 the Company's balance sheet included approximately $6,091,000 of trade receivables related to one large OEM customer, Goss Graphic Systems, Inc. ("Goss"). Offsetting these receivables is approximately $1,229,000 in advance payments (customer deposits) received from this customer. Due to a slow-down in payments early in 1999, the Company notified Goss that future shipments of the Company's equipment and systems required payment in full prior to shipment. At June 30, 1999, 26% of the Company's total trade receivables from this customer were more than 90 days overdue. On July 30, 1999, Goss filed for bankruptcy protection under a prearranged Chapter 11 proceeding in the U.S. Bankruptcy Court. Goss' European and Asian subsidiaries are not included in this proceeding, and furthermore, the Company generally continues to receive timely payments from the foreign subsidiaries of Goss. Goss' bankruptcy plan as filed, anticipates that payments to trade creditors will be made in three equal payments commencing three months following Goss' emergence from bankruptcy with no reduction in the amounts to be received by the trade creditors. As of June 30, 1999, the Company has not established any additional allowance for doubtful accounts regarding the receivables from Goss. The Company has however, classified one-third of its domestic receivable balance from Goss, or $1,717,000, as long term which is included in "Other assets" at June 30, 1999.
Of the Company's $57,491,000 in backlog at June 30, 1999, approximately $11,822,000 represented orders from Goss which were supported by an inventory balance of approximately $4,794,000. For the fiscal year ended June 30, 1999, this customer represented approximately 11% of the Company's total net sales.
The Company believes its cash flow from operations and available bank lines of credit are sufficient to finance its working capital and other capital requirements for the near and long-term future.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the limitations of programming code in existing computer systems whereby the computer systems may not properly recognize date sensitive information as the year 2000 approaches. The inability to properly recognize dates and related potential date sensitive problems are referred to as the Year-2000 situation.
The Year-2000 situation could potentially have an adverse impact on the Company's internal information systems infrastructure, Company products which either contain or utilize digital devices and the internal information systems of suppliers to the Company.
The Company has completed a study, utilizing external consultants, to evaluate the Company's internal information systems infrastructure as it relates to the Year-2000 situation and it has identified processes which require updating to operate properly subsequent to the year 1999. The Company has undertaken projects to update and replace all known non-compliant internal information systems and processes to ensure that the Year-2000 situation will not have a detrimental impact on the internal operations of the Company. The cost to update and replace these systems is expected to be approximately $2,400,000 consisting of the cost of purchasing and installing hardware and software, including certain systems, whose scheduled replacement has been accelerated due to the Year-2000 situation. The majority of such costs were incurred during fiscal 1999. The cost of Year-2000 compliance is not projected to have a significant negative impact on the Company's financial results in subsequent fiscal years.
A review is ongoing for those products of the Company that utilize microprocessors in the operation of the products which could be adversely affected by the Year-2000 date change. At the
present time, the Company has not identified any products where Year-2000 non-compliance would have a detrimental impact on the operation of the products. The Company has and continues to survey its suppliers and service providers to determine potential exposure from external, non-compliant sources. No material exposures have been identified, to date, from external sources. As a precaution however, the Company is seeking additional vendors to protect the Company from a potential inability of a particular vendor to supply material to the Company.
STATE OF READINESS. As of August 31, 1999, the Company had either completed or scheduled the implementation of the required updates on all known non-compliant internal information systems. The Company's products do not rely on date sensitive information in order to operate, and therefore, such information is not considered critical to the performance of such products. The date sensitive information utilized by the Company's products is for informational purposes which does not reduce the effectiveness of such products.
The Company will continue to test the affected information systems, and such testing is expected to be virtually 100% complete by October 31, 1999.
CONTINGENCY PLANNING. The Company is continually addressing its Year-2000 exposures. Should an unforeseeable Year-2000 situation arise that poses a severe threat to the Company however, the Company expects to be able to revert to PC and manual backup internal processes until the situation can be resolved. The Company maintains service and engineering personnel who would be available to remediate those unforeseen Year-2000 non-compliance situations related to a product of the Company which would require immediate resolution. The Company does not utilize single source providers or vendors and therefore, may change to other providers and vendors in the case of Year-2000 non-compliance.
EURO CONVERSION
Effective January 1, 1999, the "euro" has become the new common currency for 11 European countries (including Germany and France where the Company has operations). Other member states (including the United Kingdom and Sweden where the Company also has operations) may join in future years. Beginning January 1, 1999, transactions in the euro became possible, with the national currencies continuing to circulate until January 1, 2002, when the euro will become the functional currency for these 11 countries. During the transition period from January 1, 1999 to January 1, 2002, payments can be made using either the euro or the national currencies at fixed exchange rates.
Beginning January 1, 1999, the Company began conducting business with customers in both the euro and the respective national currency. Systems and processes that are initially impacted by this dual currency requirement are customer billing and receivables, payroll and cash management activities, including cash collections and disbursements. To accomplish compliance, the Company is making the necessary systems and process changes and is also working with its financial institutions on various cash management issues. The Company currently expects to have new systems and processes in place by July, 2000 to accommodate the recording of all business transactions in the euro for the affected countries.
Management currently believes that the costs associated with implementing and completing the euro conversion, as well as business and market implications, if any, associated with the euro conversion, will not be material to its results of operations or financial condition in any year or in the aggregate. The competitive impact of increased cross-border price transparency, however, is uncertain, both with respect to products sold by the Company, as well as products and services purchased by the Company.
The Company's ongoing efforts with regard to the Year-2000 compliance and euro conversion, and those of its significant customers and suppliers, including financial institutions may, at some time in the future, reveal as yet unidentified or not fully understood issues that may not be addressable in a timely fashion, or that may cause unexpected competitive or market effects, all contrary to the
foregoing statements. These issues, if not resolved favorably, could have a material adverse effect on the Company's results of operations or financial condition in any year.
ITEM 7A.
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 uses derivative financial instruments in order to manage or reduce these risks, typically currency futures contracts, 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, 1999, the Company had debt totaling $26,805,000, most of which bears interest at floating rates. The Company did not have any interest rate swaps in effect at June 30, 1999. Interest rate swaps act as a hedge of the underlying debt instruments to effectively change the characteristics of the interest rate without actually changing the debt instruments.
The Company performed a sensitivity analysis as of June 30, 1999, assuming a hypothetical one percentage point increase in interest rates. Holding other variables constant (such as foreign exchange rates, swaps and debt levels), a one percentage point increase in interest rates would not have a material effect on the Company's results of operations. 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 56% of its revenues from countries outside of the United States for the fiscal year ended June 30, 1999. 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 these exposures. The Company also maintains certain levels of cash denominated in various currencies which acts as a natural overall hedge. Open foreign currency exchange forward contracts were not material at June 30, 1999.
The Company performed a sensitivity analysis as of June 30, 1999 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 not have a material adverse effect on the Company's results of operations. 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.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of BALDWIN TECHNOLOGY COMPANY, INC.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Baldwin Technology Company, Inc. and its subsidiaries at June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards which 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 the opinion expressed above.
PricewaterhouseCoopers LLP
Stamford, Connecticut August 6, 1999
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
ASSETS
The accompanying notes to consolidated financial statements are an integral part of these statements.
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
The accompanying notes to consolidated financial statements are an integral part of these statements.
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes to consolidated financial statements are an integral part of these statements.
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARES)
The accompanying notes to consolidated financial statements are an integral part of these statements.
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes to consolidated financial statements are an integral part of these statements.
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
FISCAL YEAR ENDED JUNE 30, 1999.
The Company did not enter into any capital lease agreements for the year ended June 30, 1999.
FISCAL YEAR ENDED JUNE 30, 1998.
The Company entered into capital lease agreements of $78,000 for the year ended June 30, 1998.
FISCAL YEAR ENDED JUNE 30, 1997.
The Company reclassified $6,250,000 of its 8.17% Senior Notes to "Current portion of long-term debt" from "Long-term debt" as the first scheduled installment became current.
All previously capitalized patent costs that had been recorded in "Other assets" have been realized as royalties.
The Company entered into capital lease agreements of $62,000 for the year ended June 30, 1997.
DISCLOSURE OF ACCOUNTING POLICY:
For purposes of the statement of cash flows, the Company considers all highly liquid instruments (cash and short-term securities) with original maturities of three months or less to be cash equivalents.
The accompanying notes to consolidated financial statements are an integral part of these statements.
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 material handling, accessory and control equipment for the printing industry.
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 and its 90% owned subsidiary (Globaltec Limited). All significant intercompany transactions have been eliminated in consolidation.
TRANSLATION OF FOREIGN CURRENCIES. All assets and liabilities of foreign subsidiaries are translated into dollars at year-end (current) exchange rates and components of revenue and expense are translated at average rates for the year. The resulting translation adjustments are included in shareholders' equity. Gains and losses on foreign currency exchange transactions are reflected in the statement of income. Net transaction gains (losses) credited or charged to income for the years ended June 30, 1999, 1998 and 1997 were $(176,000), $111,000 and $(182,000), 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 uses derivative financial instruments in order to manage or reduce these risks, typically currency futures contracts, 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.
CONCENTRATION OF CREDIT RISK. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. The Company controls this risk through credit approvals, customer limits and monitoring procedures. The Company can, however, limit the amount of support provided to its customer in the event of customer non-payment. The Company's ten largest customers accounted for approximately 46% (including the Company's largest customer who accounted for approximately 11%) of the Company's net sales for the fiscal year ended June 30, 1999.
MARKETABLE SECURITIES. The Company classifies all of its marketable securities as available-for-sales 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 stockholders' equity.
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 $911,000 and $754,000 greater as of June 30, 1999 and 1998, respectively.
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PLANT AND EQUIPMENT. The Company depreciates its assets over their estimated useful lives. Plant and equipment are depreciated using primarily the straight-line method. Repair and maintenance expenditures are expensed as incurred. Depreciation expense amounted to $1,893,000, $2,263,000 and $2,077,000 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
PATENT, TRADEMARKS AND ENGINEERING DRAWINGS. The cost of patents, trademarks and engineering drawings are being amortized on a straight-line basis over the estimated useful lives of the related assets. Amortization expense amounted to $774,000, $761,000 and $783,000 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
GOODWILL. Goodwill represents the excess of purchase price over the fair market value of net assets acquired and is being amortized over 40 years on a straight-line basis. Goodwill is measured for possible impairment, as of each balance sheet date, based upon undiscounted future cash flows from the related operations. Should such undiscounted future cash flows be less than the carrying value, a charge to operations for the shortfall would be recorded. Goodwill increased $175,000 in fiscal 1999 (decreased $1,509,000 in fiscal 1998) due to the impact of foreign exchange fluctuations. Amortization expense amounted to $995,000, $961,000 and $1,461,000 for the fiscal years ended June 30, 1999, 1998 and 1997, 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.
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 and other short and long term borrowings. The current carrying amount of these instruments approximates fair market value.
DEFERRED LOAN ORIGINATION COSTS. At June 30, 1999, these costs were $1,252,000 less $1,127,000 of accumulated amortization ($1,641,000 less $1,397,000 of accumulated amortization at June 30, 1998) and were included in "Other assets".
WARRANTY AND CUSTOMER SUPPORT. Estimated future warranty and customer support obligations related to certain products are provided by charges to operations in the period in which the related revenue is recognized. The Company has accrued estimated future warranty and customer support obligations of $4,545,000 and $4,495,000 at June 30, 1999 and 1998 respectively, which is included in "Other accounts payable and accrued liabilities".
NET INCOME (LOSS) PER SHARE. Basic earnings per share includes no dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share. The weighted average shares outstanding used to compute diluted income (loss) per share includes 347,000, 335,000 and 0 (none) shares, for the years ended June 30, 1999, 1998 and 1997, respectively, which represent potentially dilutive securities. These include primarily outstanding options to purchase the Company's common stock.
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
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company that result from recognized transactions and other events of the period other than transactions with shareholders.
BUSINESS SEGMENT INFORMATION. The Company has adopted Statement of Financial Accounting Standard No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related Information", for the period ended June 30, 1999, and has restated the prior periods presented to conform to the new standard. FAS 131 requires that business segment financial information be reported in the financial statements utilizing the management approach. The management approach is defined as the manner in which management organizes the segments within the enterprise for making operating decisions and assessing performance.
USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates.
NEWLY ISSUED ACCOUNTING STANDARDS. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). The effective date of FAS 133 has been delayed, and is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (July 1, 2000 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of FAS 133 will not have a significant effect on the Company's results of operations or its financial position.
RECLASSIFICATIONS. The Company has reclassified $1,501,000 from "Other accounts payable and accrued liabilities" to "Other long-term liabilities" at June 30, 1998, to conform to the current year's presentation, which represents the long-term portion of certain deferred compensation arrangements.
NOTE 3 -- PROVISION FOR LOSS ON THE DISPOSITION OF PRE-PRESS OPERATIONS:
In June 1997, the Company sold all of the outstanding shares of its former pre-press operations to Kaber Imaging, Inc. (the "Purchaser"). The Company recorded a loss on this disposition in the amount of $42,407,000 in the fiscal year ended June 30, 1997. As a result of the original purchase of the former pre-press operations by the Company in July 1990, the Company guaranteed certain unfunded pension liabilities. In conjunction with the sale of the pre-press operation in June 1997, the Purchaser contractually agreed to have the Company removed from these guarantee obligations and further, to reimburse the Company for any claims brought against the Company regarding these pension liabilities. As a result of the Purchaser's and the former pre-press operations' bankruptcy filings in February 1999, the Company became required to fulfill its guarantee obligation with respect to these pension liabilities. Accordingly, the Company has recorded a charge to earnings in the current period in the amount of $2,400,000, the estimated amount of these obligations. As of June 30, 1999, the Company has paid $1,540,000, and the remaining balance of $860,000, is included as a current liability in "Other accounts payable and accrued liabilities".
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RESTRUCTURING CHARGE AND RESERVES:
A restructuring reserve was charged against earnings for the year ended June 30, 1999 in the amount of $870,000. The reserve was established in order to accrue the costs associated with planned workforce reductions at the Company's German and Japanese operations, and certain costs associated with a scheduled plant closing in the Americas. As of June 30, 1999, $144,000 has been charged against this reserve and the balance of $726,000 is included in "Other accounts payable and accrued liabilities".
NOTE 5 -- BUSINESS SEGMENT INFORMATION:
Effective June 30, 1999, the Company adopted FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires the Company to redefine its operating segments using a management approach and to restate all prior years' segment information on the same basis. Operating segments are defined as material components of an enterprise about which separate information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and assess performance.
The Company has two reportable operating segments, the Graphic Products and Controls Group ("GPC"), and the Material Handling Group ("MHG"). The GPC segment includes products such as cleaning systems, water systems and other equipment designed to enhance the quality of printed material and improve productivity. The MHG segment includes products which handle the materials supplied to the press, and automates the handling of the finished printed material. The all other category is comprised of the Print On-Demand Group which operates in the short-run digital printing market.
The accounting policies of the operating segments are the same as those described in Note 2. An operating segment's performance is primarily evaluated based on operating profit. Sales are determined based on the country in which the subsidiary is legally domiciled. Long-lived assets are principally comprised of net property, plant and equipment; patents and trademarks; goodwill; and certain other assets.
The tables below present information about reported segments for the years ended June 30, 1999, 1998 and 1997 (in thousands):
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------- (a) Operating income (loss) has been reduced by the following special charges:
(b) Other income (expense) is comprised of the following items:
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INVENTORIES:
Inventories consist of the following:
Foreign inventories decreased $123,000 (decreased $1,513,000 in 1998) due to translation rates in effect at June 30, 1999 when compared to rates at June 30, 1998.
NOTE 7 -- LOANS PAYABLE:
The maximum amount of loans payable outstanding during the year ended June 30, 1999 was $6,624,000 ($8,297,000 in 1998). Average rates are weighted by month and reflect the monthly amount of short-term borrowing in use and the respective rates of interest thereon. Loans payable increased by $259,000 (decreased by $551,000 in 1998), due to translation rates in effect at June 30, 1999 when compared to rates at June 30, 1998.
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- LONG-TERM DEBT:
Notes payable, denominated in currencies other than the U.S. dollar, decreased by $232,000 (decreased by $189,000 in 1998), due to translation rates in effect at June 30, 1999 when compared to rates at June 30, 1998. The foreign note due through 2008, with an interest rate of 5.00%, is collateralized by buildings as outlined in the indenture relating thereto. Approximately $265,000 of the loans included above are collateralized by assets of foreign subsidiaries of the Company. The notes payable through October, 2000 (the "Senior Notes") and the note payable December, 2000 (the "Revolver", a $25,000,000 credit facility) are collateralized by a pledge of the capital stock of the Company's domestic subsidiaries. The Senior Notes and the Revolver require the Company to maintain certain financial covenants and have certain restrictions regarding the payments of dividends, limiting them to $1,000,000 plus 50% of the Company's net income after January 1, 1997.
Both the Senior Notes and the Revolver require the Company to maintain a ratio of current assets to current liabilities (as these terms are defined in the agreements) of not less than 1.40 to 1.00. At June 30, 1999, this ratio was 1.65 to 1.00. In addition, the Revolver requires the Company to maintain a specified fixed charges ratio (as defined in the agreement). During the fourth quarter ended June 30, 1999, the Company did not meet this covenant and received a waiver for such period.
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Maturities of long-term debt in each fiscal year ending after June 30, 1999 are as follows:
At June 30, 1999, the Company had available lines of credit of $36,039,000 upon which $13,058,000 had been drawn and of which $9,165,000 is included in long-term debt. Only the Revolver has associated commitment fees. The commitment fees, which are calculated quarterly, range from one-quarter to one-half of one percent per annum of the unused portion of the Revolver. Commitment fees for the years ended June 30, 1999, 1998 and 1997 were $41,000, $71,000 and $61,000, respectively.
NOTE 9 -- TAXES ON INCOME:
Income (loss) from operations before taxes and the provision (benefit) for income taxes are comprised of:
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999 and 1998 are as follows:
At June 30, 1999, net operating loss carryforwards of $66,933,000 are available to reduce future foreign taxable income. The Company also has capital loss carryforwards in the amount of $10,292,000 ($9,674,000 of which is domestic and expires in fiscal year 2002 and 2003 and the remainder in England having an indefinite carryforward period) available at June 30, 1999. The Company also has $1,408,000 in domestic net operating loss carryforwards subject to separate return limitation year rules ("SRLY"). Total net deferred tax assets of $8,837,000 and $8,794,000 are included in "Other assets" as of June 30, 1999 and 1998, respectively
The Company has not had to provide for income taxes on $12,256,000 of cumulative undistributed earnings of subsidiaries outside the United States because of the Company's intention to reinvest those earnings. In the event that earnings were remitted, the tax effect on the results of operations after considering available tax credits would not be significant.
The total income tax expense allocated to operations exceeded the computed "expected" (benefit) tax (determined by applying the United States Federal statutory income tax rate of 34% to
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(loss) income from operations before taxes) by $1,067,000, $582,000 and $14,760,000 for the years ended June 30, 1999, 1998 and 1997, respectively. The reasons for the difference are as follows:
NOTE 10 -- COMMON STOCK:
The holders of the Company's Class A Common Stock, voting as a separate class, are entitled to elect 25% of the members of the Board of Directors. Holders of Class B Common Stock, voting as a separate class, are entitled to elect the remaining Directors, so long as the number of outstanding shares of Class B Common Stock 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 Common Stock 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 Annual Meeting, the holders of Class A Common Stock, voting as a separate class, continue to elect a number of Directors equal to 25% of the total number of Directors constituting the entire Board of Directors and the remaining directors are elected by the holders of both classes of Common Stock, with the holders of Class A Common Stock having one vote per share and the holders of Class B Common Stock having ten votes per share. As of June 30, 1999, the number of outstanding shares of Class B Common Stock constituted 11.2% (10.7% in 1998) of the total number of outstanding shares of both classes of Common Stock.
The Class A Common Stock has no conversion rights, however, Class B Common Stock is convertible into Class A Common Stock on a one-for-one basis. In addition, no dividend in cash or property may be declared or paid on shares of Class B Common Stock without a dividend being declared or paid on shares of Class A Common Stock of at least 105% of that on the Class B Common Stock.
In November of 1998, the Company's stock repurchase program was increased from $10,000,000 to $15,000,000 of Class A Common Stock and 500,000 shares of Class B Common Stock. As of June 30, 1999, 2,670,256 shares of Class A Common Stock (1,819,556 at June 30, 1998) and 164,117 shares of Class B Common Stock (164,117 at June 30, 1998) had been repurchased for $12,528,000, of which $11,407,000 represents Class A Common Stock, ($8,756,000 at June 30, 1998 of which $7,635,000 represents Class A Common Stock) under this program.
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- 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 Common Stock, respectively. Options to purchase shares of the Company's Class B Common Stock were granted at a price per share of no less than 125% of the fair market value of a share of Class A Common Stock on the date of grant. All options become 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 become available for future grants. On October 14, 1996 the 1986 Plan terminated.
The 1990 Directors' Stock Option Plan (the "1990 Plan") provides for the granting, at fair market value on the date of grant, of up to 100,000 shares of the Company's Class A and Class B Common Stock as non-qualified stock options to members of the Company's Board of Directors who are not employees ("Eligible Directors") of the Company or any of its subsidiaries. Grants are 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 Common Stock in proportion to the number of shares of each such class then outstanding. Options to purchase shares of the Company's Class B Common Stock are granted at a price per share of no less than 125% of the fair market value of a share of Class A Common Stock on the date of grant. Restrictions under the 1990 Plan are similar to those under the 1986 Plan except with regard to the exercise date, which is 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 Directors' Stock Option Plan (the "1990 Plan") was terminated on November 12, 1998 in connection with the approval of 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 stock appreciation rights. Grants from the 1996 Plan are limited to a maximum outstanding total of 875,000 and 125,000 shares of Class A and Class B Common Stock, respectively, at all times. Options to purchase shares of the Company's Class B Common Stock are granted at a price per share of no less than 125% of the fair market value of a share of Class A Common Stock 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 the Company's Class A Common Stock to non-employee Directors of the Company. Under the 1998 Plan, each year, each eligible Director receives a grant of options to purchase 3,000 shares of the Company's Class A Common Stock. 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.
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information regarding stock options outstanding and exercisable at June 30, 1999:
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (FAS 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 FAS 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 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. Significant assumptions were used to calculate the estimated fair value of the options by the pricing model for the years ended June 30, 1999, 1998 and 1997. The assumptions were that the forfeiture rates and dividend yields were 0% (none) and the expected average lives were five years for each year, the weighted average risk free rates were 5.21% for 1999 and 6.22% for 1998 and 6.29% for 1997, and the average volatility was 41.44% for 1999, 42.23% for 1998 and 41.31% for 1997. If the Company had recorded compensation cost based upon the fair values as calculated above, the effect on net income (loss) and earnings (loss) per share would have been the pro forma amounts indicated below:
NOTE 12 -- SUPPLEMENTAL COMPENSATION:
Subsidiaries within the Americas maintain profit sharing, savings and retirement plans. Amounts expensed under these plans were as follows:
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company contributions to each of the above plans, except the Misomex of North America, Inc. plan, are discretionary and are subject to approval by their respective Boards of Directors.
Certain subsidiaries and divisions within Europe maintain pension plans. Amounts expensed under these plans were as follows:
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 within the plans. The Company's German, English, Swedish and Dutch subsidiaries make annual contributions to the plans equal to the amounts accrued for pension expense.
In Germany, at Baldwin Grafotec GmbH, there is currently one additional pension plan covering 1 employee and 2 former employees. This defined benefit plan provides 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.
Effective June 30, 1999, the Company adopted Financial Accounting Standards Board Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", ("FAS 132"), which requires the Company to disclose more detailed information than previously disclosed, and to reconcile beginning and ending balances of projected benefit obligations and fair values of plan assets. This statement addresses disclosure only. It does not address measurement or recognition, and therefore had no impact on the Company's financial position or results of operations. Accordingly, all prior periods presented have been restated.
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There are two retirement plans within Asia Pacific. The Company's Japanese subsidiary maintains non-contributory retirement plans covering all employees, excluding directors, and a separate plan for its directors. Amounts expensed under these programs are determined based on participants' salary and length of service. The programs are fully accrued and partially funded through insurance contracts. Expenses relating to these programs were $512,000, $498,000 and $623,000 for the years ended June 30, 1999, 1998 and 1997, respectively.
Officers and key employees of the Company participate in various incentive compensation plans. Amounts expensed under such plans were $710,000, $2,853,000 and $1,740,000 for the years ended June 30, 1999, 1998 and 1997, respectively.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES:
Future minimum annual lease payments under capital leases, which consist of buildings, and machinery and equipment with accumulated depreciation amounting to $3,352,000 at June 30, 1999 and $5,144,000 at June 30, 1998, together with the present value of the minimum lease payments are as follows at June 30, 1999:
At June 30, 1999, $27,000 ($322,000 at June 30, 1998) is included in "Other long-term liabilities" representing the long-term portion of the present value of minimum lease payments.
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rental expense amounted to approximately $4,565,000, $4,640,000 and $5,603,000 for the years ended June 30, 1999, 1998 and 1997, respectively. Aggregate future annual rentals under noncancellable leases for periods of more than one year at June 30, 1999 are as follows:
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 financial position or results of operations of the Company.
The Company has one customer that accounted for over 10% of net sales for the year ended June 30, 1999. On July 30, 1999, this customer, Goss Graphic Systems, Inc. ("Goss"), which accounted for approximately 11% of net sales for the fiscal year ended June 30, 1999, filed for bankruptcy protection under a prearranged Chapter 11 reorganization proceeding in the U.S. Bankruptcy Court. Goss' European and Asian subsidiaries are not included in this proceeding, and furthermore, the Company generally continues to receive timely payments from the foreign subsidiaries of Goss. Goss' bankruptcy plan as filed, anticipates that payments to trade creditors will be made in three equal payments commencing three months following Goss' emergence from bankruptcy with no reduction in the amounts to be received by the trade creditors. As of June 30, 1999, the Company has not established any additional allowance for doubtful accounts regarding the receivables from Goss. The Company has however, classified one-third of its domestic receivable balance from Goss, or $1,717,000, as long term which is included in "Other assets" at June 30, 1999.
At June 30, 1999 the Company's balance sheet includes approximately $6,091,000 of trade receivables from Goss, of which 26% are more than 90 days overdue. Offsetting these receivables is approximately $1,229,000 in advance payments (customer deposits) received from this customer. The Company also has order backlog of $11,822,000 and inventory on hand of $4,794,000 related to Goss at June 30, 1999. Such inventory may however be modified for sale to other customers. Should Goss not be able to successfully emerge from bankruptcy and the Company does not replace such business with new orders, the Company's financial results may be negatively affected in the future.
NOTE 14 -- RELATED PARTIES:
On November 30, 1993, the Company entered into a loan and pledge agreement and promissory note with Gerald A. Nathe, President and Director of the Company, which was amended and restated on November 25, 1997. On March 11, 1994, the Company entered into a loan and pledge agreement and promissory note with William J. Lauricella, Chief Financial Officer and Treasurer of the Company. The loans were made in order to enable the Company's officers to purchase shares of the Company's Class B Common Stock from non-employee shareholders. Mr. Nathe was loaned $1,817,000 to
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
purchase 315,144 shares of the Company's Class B Common Stock and Mr. Lauricella was loaned $164,000 to purchase 25,000 shares of the Company's Class B Common Stock. All of the shares purchased have been pledged as collateral for the demand promissory notes and each of the notes are interest bearing, with interest payable on the anniversary dates at LIBOR rates plus 1.25% reset on the first day of each succeeding January, April, July and October.
The maximum amounts of the notes outstanding, including interest, during the year ended June 30, 1999 were $1,605,000 and $176,000 for Mr. Nathe and Mr. Lauricella, respectively. At June 30, 1999, the balances of the notes receivable, including interest, were $1,556,000 and $167,000 for Mr. Nathe and Mr. Lauricella, respectively.
The maximum amount of the notes outstanding, including interest, during the year ended June 30, 1998 were $1,606,000 and $199,000 for Mr. Nathe and Mr. Lauricella, respectively. At June 30, 1998, the balances of the notes receivable, including interest, were $1,562,000 and $168,000 for Mr. Nathe and Mr. Lauricella, respectively.
The Company employs the firm of Morgan, Lewis & Bockius LLP as its legal counsel. Samuel B. Fortenbaugh III, a Director of the Company, is a partner in the firm. During the fiscal years ended June 30, 1999, 1998, and 1997, the Company incurred legal fees of approximately $279,000, $306,000 and $200,000 respectively, payable to Morgan, Lewis & Bockius LLP.
On July 1, 1990, Baldwin Technology Corporation and Baldwin Graphic Systems, Inc., two subsidiaries of Baldwin Americas Corporation, entered into an agreement with Harold W. Gegenheimer, Chairman Emeritus, guaranteed by the Company, to replace various prior agreements including royalty and employment agreements, retirement plans and bonus arrangements. The agreement guarantees a compensation amount of $200,000 per year to Mr. Gegenheimer. Simultaneously, a separate agreement was entered into by the Company and Mr. Gegenheimer whereby the Company was released from certain prior agreements, as noted above, and agreed to pay a minimum guaranteed amount of compensation of $200,000 per year to Mr. Gegenheimer, not to exceed $350,000 per year, based on one and one-half percent (1.5%) of the Company's annual net after tax profits. The amount expensed under these two agreements was $400,000 for each of the years ended June 30, 1999, 1998 and 1997.
On February 10, 1997, Wendell M. Smith resigned as Chairman of the Company. Pursuant to his employment agreement, the Company made compensation payments in fiscal 1997 to Mr. Smith in the amount of $890,000. In addition, the Company has made deferred compensation payments to Mr. Smith in the amounts of $103,000, $103,000 and $34,000 for the years ended June 30, 1999, 1998 and 1997, respectively. During fiscal 1997, certain consulting agreements between the Company and Polestar Limited ("Polestar"), a corporation controlled by Mr. Smith, were canceled and renegotiated into a new agreement providing for payments to Polestar of $60,000 per year for consulting services. The maximum duration of the new agreement is 17 years.
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for the fiscal years ended June 30, 1999 and 1998 are as follows (in thousands, except per share data):
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 -- SUBSEQUENT EVENTS:
On August 10, 1999 the Board of Directors granted non-qualified options to purchase 57,500 shares of the Company's Class A Common Stock to certain executives and key personnel under the Company's 1996 Stock Option Plan at an exercise price of $3.19 per share, the fair market value on the date of grant.
On August 10, 1999 the Board of Directors terminated the stock repurchase program, under which, the Company spent $13,015,000 to repurchase 2,821,656 shares of Class A and 164,117 shares of Class B since the inception of the program.
ITEM 9.
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.
PART III
ITEMS 10, 11, 12 AND 13.
Information required under these items is contained in the Company's 1999 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.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial statements required by Item 14 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:
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
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the last quarter of the period covered by this report.
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, PRESIDENT AND CHIEF EXECUTIVE OFFICER)
Dated: September 24, 1999
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.
REPORT OF INDEPENDENT ACCOUNTANTS 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 August 6, 1999 appearing in this Annual Report to Shareholders of Baldwin Technology Company, Inc. (which report and consolidated financial statements are included in the Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(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 August 6, 1999
SCHEDULE II
BALDWIN TECHNOLOGY COMPANY, INC
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
- --------------- (1) The decrease in the allowance for doubtful accounts for the year ended June 30, 1999 resulted from $113,000 of recoveries which was partially offset by currency fluctuations of $105,000. The decrease in the allowance for doubtful accounts for the year ended June 30, 1998 resulted from $476,000 of recoveries and currency fluctuations of $219,000. The decrease in the allowance for doubtful accounts for the year ended June 30, 1997 resulted from $413,000 of recoveries, $228,000 of allowances as part of the pre-press disposition and currency fluctuations of $185,000. (2) The decrease in the amount of the valuation allowance is primarily the result of a partial reversal of the reserve related to foreign net operating loss carryforwards. See Note 9 -- Notes to Consolidated Financial Statements. (3) The increase in the amount of the valuation allowance is primarily the result of increased foreign net operating loss carryforwards. See Note 9 -- Notes to Consolidated Financial Statements. (4) The increase in the amount of the valuation allowance is primarily the result of increased foreign tax credits and capital loss carryforwards. See Note 9 -- Notes to Consolidated Financial Statements.
EXHIBIT INDEX