-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P9II2W8Iy50j7gmGG/N7n+KbaCIauBjUNE4sncceMWLgIxTy8SiJmWtiyIM4jfkQ nijusYhtSWb+Rv759oYrJw== 0000950123-04-001907.txt : 20040217 0000950123-04-001907.hdr.sgml : 20040216 20040217113828 ACCESSION NUMBER: 0000950123-04-001907 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BALDWIN TECHNOLOGY CO INC CENTRAL INDEX KEY: 0000805792 STANDARD INDUSTRIAL CLASSIFICATION: PRINTING TRADES MACHINERY & EQUIPMENT [3555] IRS NUMBER: 133258160 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09334 FILM NUMBER: 04605234 BUSINESS ADDRESS: STREET 1: 12 COMMERCE DRIVE CITY: SHELTON STATE: CT ZIP: 06484 BUSINESS PHONE: 2034021000 MAIL ADDRESS: STREET 1: 12 COMMERCE DRIVE CITY: SHELTON STATE: CT ZIP: 06484 10-Q 1 y94222e10vq.txt BALDWIN TECHNOLOGY COMPANY, INC. Form 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. [Mark one] [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For quarter ended December 31, 2003 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to ___________ Commission file number 1-9334 BALDWIN TECHNOLOGY COMPANY, INC. -------------------------------- (Exact name of registrant as specified in its charter) Delaware 12-3258160 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Twelve Commerce Drive, Shelton, Connecticut 06484 -------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 203-402-1000 ---------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at January 31, 2004 - --------------------- ------------------------------- Class A Common Stock $0.01 par value 12,832,647 Class B Common Stock $0.01 par value 2,181,883
BALDWIN TECHNOLOGY COMPANY, INC. INDEX
Page ---- Part I Financial Information Item 1 Financial Statements Consolidated Balance Sheets at December 31, 2003 (unaudited) and June 30, 2003 1-2 Consolidated Statements of Income for the three and six months ended December 31, 2003 (unaudited) and 2002 (unaudited) 3 Consolidated Statements of Changes in Shareholders' Equity for the six months ended December 31, 2003 (unaudited) 4 Consolidated Statements of Cash Flows for the six months ended December 31, 2003 (unaudited) and 2002 (unaudited) 5-6 Notes to Consolidated Financial Statements (unaudited) 7-17 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 18-27 Item 3 Quantitative and Qualitative Disclosures About Market Risk 27 Item 4 Controls and Procedures 27 Part II Other Information Item 6 Exhibits and Reports on Form 8-K 28 Signatures 29
BALDWIN TECHNOLOGY COMPANY, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
December 31, 2003 June 30, 2003 ----------------- ------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 12,678 $ 6,950 Accounts receivable trade, net of allowance for doubtful accounts of $2,370 ($2,286 at June 30, 2003) 22,357 22,102 Notes receivable, trade 12,650 10,336 Inventories, net 25,404 22,769 Deferred taxes 580 532 Prepaid expenses and other 8,573 4,611 --------- -------- Total Current Assets 82,242 67,300 --------- -------- MARKETABLE SECURITIES: Cost $580 ($505 at June 30, 2003) 541 407 --------- -------- PROPERTY, PLANT AND EQUIPMENT, at cost: Land and buildings 1,023 914 Machinery and equipment 3,466 2,896 Furniture and fixtures 3,864 3,461 Leasehold improvements 473 474 Capital leases 282 255 --------- -------- 9,108 8,000 Less: Accumulated depreciation and amortization (4,204) (2,978) --------- -------- Net Property, Plant and Equipment 4,904 5,022 --------- -------- PATENTS, TRADEMARKS AND ENGINEERING DRAWINGS, at cost, less accumulated amortization of $4,056 ($3,824 at June 30, 2003) 2,224 2,137 GOODWILL, less accumulated amortization of $3,569 (3,227 at June 30, 2003) 11,250 10,227 DEFERRED TAXES 7,612 7,453 OTHER ASSETS 4,240 4,287 --------- -------- TOTAL ASSETS $ 113,013 $ 96,833 ========= ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 1 BALDWIN TECHNOLOGY COMPANY, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, 2003 June 30, 2003 ----------------- ------------- (Unaudited) CURRENT LIABILITIES: Loans payable $ 2,794 $ 3,301 Current portion of long-term debt 20,911 16,247 Accounts payable, trade 12,677 12,249 Notes payable, trade 11,218 8,168 Accrued salaries, commissions, bonus and profit-sharing 5,238 4,196 Customer deposits 4,412 3,175 Accrued and withheld taxes 1,990 2,102 Income taxes payable 2,332 1,975 Other accounts payable and accrued liabilities 11,740 11,823 --------- --------- Total current liabilities 73,312 63,236 --------- --------- LONG TERM LIABILITIES: Long-term debt 2,367 521 Other long-term liabilities 7,111 6,795 --------- --------- Total long-term liabilities 9,478 7,316 --------- --------- Total liabilities 82,790 70,552 --------- --------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Class A Common Stock, $.01 par, 45,000,000 shares authorized, 16,462,849 shares issued (16,458,849 shares at June 30, 2003) 165 165 Class B Common Stock, $.01 par, 4,500,000 shares authorized, 2,181,883 shares issued (2,185,883 shares at June 30, 2003) 21 21 Capital contributed in excess of par value 56,986 56,986 Retained Deficit (17,750) (19,653) Accumulated other comprehensive income 3,450 1,411 Less: Treasury stock, at cost: Class A - 3,630,202 shares (12,199) (12,199) Note receivable from a former executive for common stock issuance (450) (450) --------- --------- Total shareholders' equity 30,223 26,281 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 113,013 $ 96,833 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. 2 BALDWIN TECHNOLOGY COMPANY, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
For the three months For the six months ended December 31, ended December 31, ---------------------- ---------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Net Sales $ 39,443 $ 35,288 $ 73,954 $ 68,092 Cost of goods sold 26,646 23,806 50,388 47,422 -------- -------- -------- -------- Gross Profit 12,797 11,482 23,566 20,670 -------- -------- -------- -------- Operating Expenses: General and administrative 4,670 3,105 8,311 7,657 Selling 3,305 2,953 5,978 5,888 Engineering and development 3,315 4,417 6,558 8,508 Restructuring charges 43 50 425 3,337 -------- -------- -------- -------- 11,333 10,525 21,272 25,390 -------- -------- -------- -------- Operating income (loss) 1,464 957 2,294 (4,720) -------- -------- -------- -------- Other (income) expense: Interest expense 1,418 600 2,355 1,318 Interest income (30) (65) (56) (141) Royalty income, net (900) (529) (1,551) (1,158) Other (income) expense, net (1,038) 76 (1,630) 432 -------- -------- -------- -------- (550) 82 (882) 451 -------- -------- -------- -------- Income (loss) from continuing operations before income taxes 2,014 875 3,176 (5,171) Provision for income taxes 790 363 1,273 622 -------- -------- -------- -------- Income (loss) from continuing operations 1,224 512 1,903 (5,793) Discontinued operations (Note 10): Loss from operations of discontinued component (less applicable income taxes of $0) 0 (65) 0 (253) Gain on sale of discontinued component (less applicable income taxes of $0) 0 543 0 543 -------- -------- -------- -------- Net income (loss) $ 1,224 $ 990 $ 1,903 $ (5,503) ======== ======== ======== ======== Net income (loss) per share - basic and diluted Continuing operations $ 0.08 $ 0.03 $ 0.13 $ (0.39) Discontinued operations - loss from operations 0.00 0.00 0.00 (0.02) Discontinued operations - gain on sale 0.00 0.04 0.00 0.04 -------- -------- -------- -------- $ 0.08 $ 0.07 $ 0.13 $ (0.37) ======== ======== ======== ======== Weighted average shares outstanding: Basic 15,015 15,015 15,015 15,015 ======== ======== ======== ======== Diluted 15,245 15,015 15,130 15,015 ======== ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 3 BALDWIN TECHNOLOGY COMPANY, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARES) (UNAUDITED)
Class A Class B Capital Accumulated Common Stock Common Stock Contributed Other ------------------ ----------------- In Excess Retained Comprehensive Shares Amount Shares Amount of Par Deficit Income (loss) ---------- ------ --------- ------ ----------- --------- ------------- Balance at June 30, 2003 16,458,849 $165 2,185,883 $21 $56,986 $ (19,653) $ 1,411 Net income for the six months ended December 31, 2003 1,903 Translation adjustment 2,031 Unrealized gain on available-for-sale securities, net of tax 34 Unrealized loss on forward ontracts, net of tax (26) Conversion of B shares into A shares 4,000 0 (4,000) 0 Comprehensive Income ---------- ---- --------- --- ------- --------- ------- Balance at December 31, 2003 16,462,849 $165 2,181,883 $21 $56,986 $ (17,750) $ 3,450 ========== ==== ========= === ======= ========= =======
Note receivable from a former Treasury Stock executive for ----------------------- Common Stock Comprehensive Shares Amount Issuance Income (loss) ---------- ---------- ------------- ------------- Balance at June 30, 2003 (3,630,202) $(12,199) $(450) Net income for the six months ended December 31, 2003 $ 1,903 Translation adjustment 2,031 Unrealized gain on available-for-sale securities, net of tax 34 Unrealized loss on forward ontracts, net of tax (26) ------- Conversion of B shares into A shares Comprehensive Income $ 3,942 ======= ---------- -------- ----- Balance at December 31, 2003 (3,630,202) $(12,199) $(450) ========== ======== =====
The accompanying notes to consolidated financial statements are an integral part of these statements. 4 BALDWIN TECHNOLOGY COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
For the six months ended December 31, ------------------------ 2003 2002 --------- --------- Cash flows from operating activities: Net income (loss) $ 1,903 $ (5,503) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 913 966 Accrued retirement pay 197 307 Provision for losses on accounts receivable 29 154 Gain from disposition of business 0 (543) Restructuring charges 425 3,337 Deferred income taxes 23 (456) Changes in assets and liabilities, net of businesses sold: Accounts and notes receivable 662 3,593 Inventories (817) 542 Prepaid expenses and other (848) 1,683 Other assets 213 929 Customer deposits 686 (491) Accrued compensation 694 (494) Payments against restructuring charges (997) (1,677) Accounts and notes payable, trade 1,500 1,252 Income taxes payable 211 234 Accrued and withheld taxes (287) (194) Other accounts payable and accrued liabilities (739) (2,159) Interest payable 74 16 --------- --------- Net cash provided by operating activities 3,842 1,496 --------- --------- Cash flows from investing activities: Proceeds from disposition of businesses, net 0 3,736 Additions of property, plant and equipment (203) (413) Additions of patents and trademarks (269) (153) --------- --------- Net cash (used) provided by investing activities (472) 3,170 --------- --------- Cash flows from financing activities: Long-term and short-term debt borrowings 22,271 147 Long-term and short-term debt repayments (18,874) (4,021) Principal payments under capital lease obligations (64) (3) Payment of debt financing costs (2,457) (471) Other long-term liabilities (9) 14 --------- --------- Net cash provided (used) by financing activities 867 (4,334) --------- --------- Effects of exchange rate changes 1,491 148 --------- --------- Net increase in cash and cash equivalents 5,728 480 Cash and cash equivalents at beginning of period 6,950 5,106 --------- --------- Cash and cash equivalents at end of period $ 12,678 $ 5,586 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. 5 BALDWIN TECHNOLOGY COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
For the six months ended December 31, ------------------ 2003 2002 ------ ------- Cash paid during the period for: Interest $2,429 $1,334 Income taxes $1,007 $1,133
The accompanying notes to consolidated financial statements are an integral part of these statements. 6 BALDWIN TECHNOLOGY COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION: Baldwin Technology Company, Inc. and its subsidiaries ("Baldwin" or the "Company") are engaged primarily in the development, manufacture and sale of accessories and controls for the printing industry. The Company has experienced operating losses and debt covenant violations over the past three fiscal years. As more fully discussed in these notes to the consolidated financial statements, the Company has embarked on restructuring plans (see Note 9) and undertaken other actions aimed at improving the Company's competitiveness, operating results and cash flow. These actions have included the sale of certain non-core operating units (see Note 10), the consolidation of manufacturing facilities and headcount reductions. As a result of these actions, combined with a new credit agreement (see Note 3), management believes that the Company's cash flows from operations, along with available bank lines of credit and alternative sources of borrowings, if necessary, are sufficient to finance its working capital and other capital requirements over the term of the current financing agreement, which matures on August 15, 2004. Management further believes that additional actions can be taken to reduce operating expenses and that assets can be sold to meet liquidity needs, if necessary. The accompanying unaudited consolidated financial statements include the accounts of Baldwin and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in compliance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements reflect all adjustments, which are in the opinion of management, necessary to present a fair statement of the results for the interim periods. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's latest Annual Report on Form 10-K for the fiscal year ended June 30, 2003. Operating results for the three and six months ended December 31, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2004. All significant intercompany transactions have been eliminated in consolidation. NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS: In December 2003, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104 ("SAB 104") "Revenue Recognition", which supercedes Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements". SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21 "Accounting for Revenue Arrangements with Multiple Deliverables." While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. SAB 104 is not expected to have a material impact on the Company's revenue recognition. In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity." SFAS 150 modifies the 7 accounting for certain financial instruments that, under previous guidance, issuers could account for as equity and requires that those instruments be classified as liabilities (or assets in certain circumstances) in statements of financial position. SFAS 150 affects the issuer's accounting for certain types of freestanding financial instruments and also requires disclosure about alternative ways of settling the instruments and the capital structure of entities -- all of whose shares are mandatorily redeemable. SFAS 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective as of July 1, 2003 for the Company. SFAS 150 is not expected to have a material impact on the Company's current capital structure, but may in the future should the Company enter into transactions with certain types of freestanding financial instruments. RECLASSIFICATIONS: Certain prior year items have been reclassified to conform to the current period's presentation. NOTE 3 - REVOLVING CREDIT FACILITY: On August 18, 2003, the Company entered into a $20,000,000 Credit Agreement (the "Credit Agreement") with Maple Bank GmbH ("Maple" or "Lender"), which if not terminated by the Lender on August 15, 2004 or by the Company at any time by payment in full, shall terminate in its entirety on August 15, 2005. The credit facility is collateralized by substantially all of the accounts and notes receivable of the Company and a portion of the Company's inventory up to a maximum amount of $5,000,000. Borrowings under the credit facility are subject to a borrowing base and bear interest at a rate equal to the three-month Eurodollar rate (as defined in the Credit Agreement) plus (i) 10% for loans denominated in U.S. Dollars or (ii) 11.5% for loans denominated in Euros. The Credit Agreement provides that the interest rate will be reduced by 0.50% or whole increments thereof for each whole increment of Disclosed EBITDA (as defined in the Credit Agreement) that equals or exceeds $1,250,000 for any fiscal quarter commencing with the quarter ending December 31, 2003. In no event however, may the interest rate be less than 10.5% per annum. As a result of the Company exceeding the Disclosed EBITDA for the quarter ended December 31, 2003, the interest rate was reduced beginning January 1, 2004 by 0.68% for loans denominated in U.S Dollars and 1.5% for loans denominated in Euros. The initial borrowings under the credit facility amounted to $18,874,000, of which the Company utilized $16,243,000 to retire its previously existing debt and associated interest with Fleet National Bank and Wachovia Bank National Association and the remainder of the borrowings was utilized for closing costs and working capital purposes. The closing costs are being amortized and included in interest expense through August 15, 2004. The Credit Agreement does not require the Company to meet any financial covenants, except for a limitation on annual capital expenditures and a prohibition against additional credit facilities; however, it contains a material adverse effect clause, which provides that Maple would not be obligated to fund any loan, convert or continue any loan as a LIBOR loan or issue any new letters of credit in the event of a material adverse effect. Management does not anticipate that such an event will occur; however, there can be no assurance that such an event will not occur. Although there can be no guarantee, management is exploring additional financing alternatives and believes that the Company's debt can be refinanced on a long-term basis. Prior to this refinancing with Maple, and on October 31, 2000, the Company entered into a $35,000,000 revolving credit facility (the "Credit Facility") with Fleet National Bank and First Union National Bank (collectively the "Banks"), which had an original scheduled maturity date of October 31, 2003. The Credit Facility consisted of a $25,000,000 revolving credit line (the "Revolver") and a $10,000,000 credit line to be utilized for acquisitions, (the "Acquisition Line"). On January 28, 2002, the Credit Facility was amended (the "Amended Credit Facility"), to among other things, remove the Acquisition Line, reduce the Revolver to $21,000,000 (subject 8 to a borrowing base), and change the maturity date to October 1, 2002. In addition, $4,000,000 of the existing Revolver was converted into a term loan (the "Term Loan"), which matured on June 28, 2002, resulting in available borrowings under the Revolver from July 1, 2002 to October 1, 2002 of $17,000,000. The Amended Credit Facility required the Company to satisfy certain financial covenants including minimum operating income covenants. The Revolver had associated commitment fees, which were calculated quarterly, at a rate of one-half of one percent per annum of the unused portion of the Revolver. The Company had experienced operating and net losses, and debt covenant violations over the past three fiscal years. During the quarters ended March 31, 2002 and June 30, 2002, the Company did not meet its minimum operating income covenants contained in the Amended Credit Facility, and further the Company did not make the required $4,000,000 principal payment on the Term Loan on June 28, 2002. The Banks granted a forbearance of the collection of the indebtedness until October 1, 2002 and on October 30, 2002, the Company and the Banks entered into an amendment to further amend and extend the Amended Credit Facility and waive the covenant violations and Term Loan default (the "Extended Credit Facility"). The Extended Credit Facility, totaling $20,900,000, consisted of a $17,000,000 revolving credit line (the "Extended Revolver") and a $3,900,000 term loan each due July 1, 2003 (the "Extended Term Loan"). The Extended Credit Facility required the Company to utilize the net proceeds of $3,736,000 from the sale of certain assets of its wholly-owned subsidiary Baldwin Kansa Corporation ("BKA") (see Note 10) plus $464,000 from the Company's cash flows to reduce outstanding borrowings under the Extended Revolver by $4,200,000 before October 30, 2002, of which $2,700,000 permanently reduced the Extended Revolver and $1,036,000 became available for future borrowings, subject to a borrowing base calculation. Additionally, beginning in December 2002 and extending through June 2003, the Company was required to permanently reduce the Extended Revolver by making monthly principal payments of $125,000. The Company was also required to permanently reduce the Extended Revolver by $5,000,000 on December 30, 2002 and by $5,000,000 on March 30, 2003, but only if the Company generated non-operating alternative sources of financing. As the Company did not generate any alternative sources of financing after entering into the Extended Credit Facility on October 30, 2002, the Company was not required to make, and did not make, the $5,000,000 payment on December 30, 2002 or the $5,000,000 payment on March 30, 2003. Additionally, at September 30, 2002 and March 31, 2003, the Company was not in compliance with its debt covenants, and received waivers for the non-compliance. At June 30, 2003, the Company had outstanding borrowings of $16,112,000 under the Extended Revolver and Extended Term Loan and this entire outstanding balance, which was classified as current as of June 30, 2003, was entirely repaid from the proceeds of the refinancing with Maple on August 18, 2003. In December 2003, the Company, through its Japanese subsidiary, obtained a YEN 300,000,000 term loan (approximately $2,794,000), which matures in December 2006 (the "Japanese Term Loan"). The Japanese Term Loan is subject to semi-annual principal payments of YEN 50,000,000 and bears interest at TIBOR plus 0.75%. The Company has received a waiver from Maple in connection with this loan, received the proceeds in December 2003, and is currently considering alternative uses of these funds. The Company maintains relationships with both foreign and domestic banks, which combined have extended credit facilities to the Company totaling $27,516,000, including $20,000,000 available under the Credit Agreement. As of December 31, 2003, the Company had $26,072,000 outstanding under these credit facilities including $19,835,000 under the Credit Agreement. Total debt levels as reported on the balance sheet at December 31, 2003 are $2,607,000 higher than they would have been if June 30, 2003 exchange rates had been used. NOTE 4 - NET INCOME (LOSS) PER SHARE: 9 Basic net income (loss) per share includes no dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution of securities that could share in the earnings of an entity. The weighted average shares outstanding used to compute diluted net income (loss) per share include 115,000 and 230,000 additional shares, respectively for the three and six months ended December 31, 2003 and zero additional shares for the three and six months ended December 31, 2002, which represent potentially dilutive securities. Outstanding options to purchase 1,589,000 and 931,000 shares of the Company's common stock for the six months ended December 31, 2003 and 2002 respectively, are not included in the above calculation to compute diluted net income (loss) per share as they have an anti-dilutive effect. NOTE 5 - OTHER COMPREHENSIVE INCOME (LOSS): Accumulated Other Comprehensive Income (Loss) ("AOCI") is comprised of various items, which affect equity that result from recognized transactions and other economic events other than transactions with owners in their capacity as owners. AOCI is included in stockholders' equity in the consolidated balance sheets and consists of cumulative translation adjustments, unrealized gains and losses on available-for-sale securities and unrealized gains and losses on derivative instruments. AOCI consists of the following:
December 31, 2003 June 30, 2003 ----------------- ------------- (Unaudited) Cumulative translation adjustments $ 3,503,000 $ 1,472,000 Unrealized loss on investments, net of deferred taxes of $16,000 ($41,000 at June 30, 2003) (23,000) (57,000) Unrealized loss on derivatives, net of deferred taxes of $15,000 ($2,000 at June 30, 2003) (30,000) (4,000) ----------- ----------- $ 3,450,000 $ 1,411,000 =========== ===========
NOTE 6 - INVENTORIES: Inventories consist of the following:
December 31, 2003 June 30, 2003 ----------------- ---------------- (Unaudited) Raw materials $ 12,236,000 $ 11,006,000 In process 6,353,000 5,669,000 Finished goods 6,815,000 6,094,000 --------------- ---------------- $ 25,404,000 $ 22,769,000 =============== ================
Foreign currency translation effects increased inventories by $1,819,000 from June 30, 2003 to December 31, 2003. NOTE 7 - DERIVATIVES: On April 27, 2001, the Company entered into an interest rate swap agreement (the "Swap") with Fleet National Bank. The effect of this agreement was to convert $15,000,000 of the Company's variable rate debt into fixed rate debt with an interest rate of 4.98% with the maturity the same as the then existing credit facility. Included in interest expense was $48,000 and $196,000, respectively, for the three and six months ended December 31, 2003 and $126,000 and $249,000, respectively for the three and six months ended December 31, 2002 associated with this Swap, which expired on October 30, 2003. 10 As a result of entering into the Extended Credit Facility on October 30, 2002, as defined in Note 3, which changed various provisions of the Amended Credit Agreement, also defined in Note 3, including the maturity date, the Swap no longer qualified as an effective cash flow hedge. Therefore, adjustments to the fair value of the Swap subsequent to October 30, 2002 were recorded in earnings through its maturity date of October 30, 2003. The adjustments to the fair value of this portion of the Swap resulted in a gain (loss) for the three and six months ended December 31, 2003 of $48,000 and $196,000, respectively and $91,000 and ($65,000), respectively for the three and six months ended December 31, 2002, which was recorded in "Other income and expense" in the accompanying consolidated statement of income. During the six months ended December 31, 2003, the Company also had currency futures contracts that qualified as cash flow hedges; accordingly, the gain or loss on these cash flow hedges was recorded in AOCI and will be recognized when the hedged items affect earnings. Except for the Swap, hedge ineffectiveness had no material impact on earnings for the six months ended December 31, 2003 and 2002. Unrealized net gains (losses) included in AOCI are as follows:
December 31, 2003 December 31, 2002 ----------------- ----------------- Balance at beginning of period $ (4,000) $ (32,000) Additional gains (losses), net (49,000) 28,000 Amounts reclassified to earnings, net 23,000 (10,000) ------------- --------------- Balance at end of period $ (30,000) $ (14,000) ============= ===============
The unrealized net loss of $30,000 at December 31, 2003 is comprised of net losses on currency futures contracts, which expired at various times through January 28, 2004, and were reclassified to earnings during that period. NOTE 8 -- GOODWILL AND OTHER INTANGIBLE ASSETS: The changes in the carrying amount of goodwill for the six months ended December 31, 2003 are as follows:
Accessories and Controls ----------------------------------------- Gross Carrying Accumulated Net Amount Amortization Book Value ------------ ------------ ------------ Balance as of July 1, 2003 $ 13,454,000 $3,227,000 $ 10,227,000 Effects of currency translation 1,365,000 342,000 1,023,000 ------------ ---------- ------------ Balance as of December 31, 2003 $ 14,819,000 $3,569,000 $ 11,250,000 ============ ========== ============
Intangible assets subject to amortization are comprised of the following:
As of December 31, 2003 As of June 30, 2003 ----------------------------- ----------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Intangible Assets: Amount Amortization Amount Amortization - ---------------------- ------------- -------------- ------------- ------------- Patents and trademarks $ 6,280,000 $ 4,056,000 $ 5,961,000 $ 3,824,000 Other 855,000 604,000 781,000 481,000 ------------- -------------- ------------- ------------- Total $ 7,135,000 $ 4,660,000 $ 6,742,000 $ 4,305,000 ============= ============== ============= =============
Amortization expense associated with these intangible assets was $110,000 and $274,000, respectively, for the three and six months ended December 31, 2003 and $206,000 11 and $397,000, respectively for the three and six months ended December 31, 2002. The other category is included in "Other assets" on the accompanying consolidated balance sheets. NOTE 9 -- RESTRUCTURING CHARGES AND RELATED RESERVES: During March 2000, the Company initiated a restructuring plan (the "March 2000 Plan") that included the consolidation of production into certain facilities, and reduction in total employment, primarily in the United States. The March 2000 Plan was expanded during the fourth quarter of the fiscal year ended June 30, 2001. The Company recorded restructuring charges in the amounts of zero and $23,000, respectively for the three and six months ended December 31, 2003 and $9,000 and $55,000, respectively for the three and six months ended December 31, 2002 related to the March 2000 Plan. These charges relate primarily to additional exit costs, which were expensed as incurred. The March 2000 Plan reduced the Company's worldwide cost base and strengthened its competitive position as a leading global supplier of auxiliary equipment to the printing and publishing industry. Prior to initiating the March 2000 Plan, the Company was managed in a decentralized manner through geographically dispersed autonomous business units. Given that many of the Company's significant customers had reorganized on a global basis, management realigned the Company to support its global customer base. Rather than have separate sales, product development and production activities at each decentralized business unit, the March 2000 Plan included centralizing control of these activities. The following table details the components of the restructuring charges and the remaining reserve balances as of December 31, 2003 and June 30, 2003 related to the March 2000 Plan. Activity related to the March 2000 Plan in the six months ended December 31, 2003 was as follows:
Remaining Additional Payments Remaining Reserve Restructuring Against Reserve June 30, 2003 Charges Reserve December 31, 2003 ------------- ------------- -------- ----------------- (in thousands) Severance.......................... $ 55 $ 0 $ (55) $ 0 Facility lease termination costs... 1,396 23 (401) 1,018 Other costs........................ 0 0 0 0 ------ ---- ----- ------ Total program...................... $1,451 $ 23 $(456) $1,018 ====== ==== ===== ======
Facility lease termination costs will be paid through April 2006. As of December 31, 2003, $443,000 is included in "Other accounts payable and accrued liabilities" and $575,000 is included in "Other long-term liabilities." In August 2002, in response to weak market conditions, the Company announced additional restructuring activities (the "August 2002 Plan"), which reduced total worldwide employment by approximately 160. Accordingly, the Company recorded an initial restructuring charge of $3,241,000 in August 2002 and additional restructuring charges of $144,000 during the balance of the fiscal year ended June 30, 2003 related to the August 2002 Plan. In August 2003, the Company expanded the August 2002 Plan and announced additional employment reductions of 15 in the United States and 8 in the United Kingdom. In addition, the Company closed its Dunstable, England office and is currently running its two separate United Kingdom business operations from its Poole, England location in an effort to reduce or eliminate certain costs as part of its global restructuring efforts. The Company recorded restructuring charges of $43,000 and $401,000, respectively for the three and six months ended December 31, 2003 related to the August 2002 Plan. The following table details the components of the restructuring charges and the remaining reserve balances as of December 31, 2003 and June 30, 2003 related to the August 2002 Plan. Activity related to the August 2002 Plan in the six months ended December 31, 2003 was as follows: 12
Remaining Additional Payments Remaining Reserve Restructuring Against Reserve June 30, 2003 Charges Reserve December 31, 2003 ------------- --------------- -------- ----------------- (in thousands) Severance........................... $ 258 $ 220 $ (476) $ 2 Facility lease termination costs.... 345 173 (43) 475 Other costs......................... 47 8 (23) 32 -------- -------- -------- -------- Total program....................... $ 650 $ 401 $ (542) $ 509 ======== ======== ======== ========
Severance and other costs will be paid through February 2004, and lease termination costs will be paid through October 2006, the end of the lease terms. As of December 31, 2003, $282,000 is included in "Other accounts payable and accrued liabilities" and $227,000 is included in "Other long-term liabilities." NOTE 10 - SALE OF BUSINESSES: During the first quarter of the fiscal year ended June 30, 2003, the Company committed to a plan to dispose of substantially all of the assets of BKA; the transaction closed on October 10, 2002. Under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS 144") BKA qualified as a component and therefore the results of BKA's operations are required to be reported as discontinued operations in the accompanying consolidated statements of income. Accordingly, BKA's results for each of the three and six months ended December 31, 2002 have been aggregated and reported as a single amount in each respective period. BKA's net sales were $141,000 and $978,000, respectively for the three and six months ended December 31, 2002. The consideration received for the transaction, after certain post-closing adjustments, was approximately $3,736,000 and resulted in a gain on the sale of discontinued operations of approximately $543,000 (net of $80,000 in transaction costs), which was recognized in the second quarter of the fiscal year ending June 30, 2003. NOTE 11 - BUSINESS SEGMENT INFORMATION: Operating segments are defined as material components of an enterprise about which separate information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and assess performance. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003. An operating segment's financial performance is primarily evaluated based on operating profit. The tables below present information about reported segments for the three and six months ended December 31, 2003 and 2002 (in thousands).
Three months ended Six months ended December 31, December 31, ----------------------- ----------------------- (Unaudited) (Unaudited) ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net Sales: Accessories and Controls $ 39,443 $ 35,288 $ 73,954 $ 68,092 ---------- ---------- ---------- ---------- Total Net Sales $ 39,443 $ 35,288 $ 73,954 $ 68,092 ========== ========== ========== ==========
Foreign currency translation effects increased net sales by $4,342,000 and $6,411,000, respectively for the three and six months ended December 31, 2003. 13
Three months ended Six months ended December 31, December 31, ---------------------- ---------------------- (Unaudited) (Unaudited) ---------------------- ---------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Operating income (loss): Accessories and Controls $ 3,601 $ 1,658 $ 6,105 $ (346) Corporate (2,137) (701) (3,811) (4,374) -------- -------- -------- -------- Total operating income (loss) 1,464 957 2,294 (4,720) Interest expense, net (1,388) (535) (2,299) (1,177) Royalty income, net 900 529 1,551 1,158 Other income (expense), net 1,038 (76) 1,630 (432) -------- -------- -------- -------- Income (loss) from continuing operations before income taxes $ 2,014 $ 875 $ 3,176 $ (5,171) ======== ======== ======== ========
Included in operating income (loss) are restructuring charges of $43,000 and $422,000, respectively for the three and six months ended December 31, 2003 and $50,000 and $2,662,000, respectively for the three and six months ended December 31, 2002 related to accessories and controls and zero and $3,000, respectively for the three and six months ended December 31, 2003 and $146,000 and $146,000, respectively for the three and six months ended December 31, 2002 related to corporate.
December 31, June 30, 2003 2003 ----------- -------- (Unaudited) Identifiable assets: Accessories and Controls $ 98,914 $ 85,555 Corporate 14,099 11,269 Divested operations 0 9 ----------- -------- Total identifiable assets $ 113,013 $ 96,833 =========== ========
NOTE 12 - COMMON STOCK: Except with respect to the election or removal of Directors, and certain other matters with respect to which Delaware law requires each class to vote as a separate class, the holders of the Company's Class A Common Stock ("Class A") and Class B Common Stock ("Class B") vote as a single class on all matters, with each share of Class A having one vote per share and each share of Class B having ten votes per share. With respect to the election of Directors, the holders of Class A, voting as a separate class, are entitled to elect 25% of the total number of Directors (or the nearest higher whole number) constituting the entire Board of Directors. The holders of Class B, voting as a separate class, are entitled to elect the remaining Directors, so long as the number of outstanding shares of Class B is equal to at least 12.5% of the number of outstanding shares of both classes of Common Stock as of the record date of the Company's Annual Meeting. If the number of outstanding shares of Class B is less than 12.5% of the total number of outstanding shares of both classes of Common Stock as of the record date of the Company's Annual Meeting, the remaining directors are elected by the holders of both classes of Common Stock voting together as a single class, with the holders of Class A having one vote per share and the holders of Class B having ten votes per share. As of December 31, 2003, the number of outstanding shares of Class B constituted approximately 14.5% (14.6% as of June 30, 2003) of the total number of outstanding shares of both classes of Common Stock. Class A has no conversion rights; however, Class B is convertible into Class A on a one- 14 for-one basis. During the three months ended December 31, 2003, 4,000 shares of Class B were converted into 4,000 shares of Class A. In addition, no dividend in cash or property may be declared or paid on shares of Class B without a dividend being declared or paid on shares of Class A of at least 105% of the dividend declared or paid on shares of Class B. In November 1999, the Company initiated a stock repurchase program. Under this new program, the Company is authorized to utilize up to $5,000,000 to repurchase shares of Class A and Class B. As of December 31, 2003, 818,300 shares of Class A and 25,000 shares of Class B had been repurchased for $1,784,000, of which $1,721,000 was used to purchase Class A and $63,000 was used to purchase Class B under this program. There was no activity under this repurchase program during the three and six months ended December 31, 2003. NOTE 13 - STOCK OPTIONS: On January 1, 2003, the Company adopted the disclosure provisions of Financial Accounting Standards Board ("FASB") Statement No. 148, "Accounting for Stock-Based Compensation - transition and disclosure" ("SFAS 148"), which amended FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, effective as of the beginning of the fiscal year. Baldwin continues to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") in accounting for stock-based compensation. In accordance with APB No. 25, compensation costs for stock options is recognized in income based on the excess, if any, of the quoted market price over the exercise price of the stock on the date of grant. The exercise price for all stock option grants equals the fair market value on the date of grant, therefore no compensation expense is recorded. The pro forma net income (loss) and income (loss) per share information have been determined for employee stock plans under the fair value method using the Black-Scholes option-pricing model at the date of grant. The following table illustrates the effect on net income (loss) and income (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 for the three and six months ended December 31, 2003 and 2002 (in thousands):
Three months ended Six months ended December 31, December 31, -------------------- -------------------- (Unaudited) (Unaudited) -------------------- -------------------- 2003 2002 2003 2002 ------- ------- ------- ------- Net income (loss), as reported $ 1,224 $ 990 $ 1,903 $(5,503) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (25) (41) (51) (81) ------- ------- ------- ------- Pro forma net income (loss) $ 1,199 $ 949 $ 1,852 $(5,584) ======= ======= ======= ======= Income (loss) per share: Basic and diluted - as reported $ 0.08 $ 0.07 $ 0.13 $ (0.37) ======= ======= ======= ======= Basic and diluted - pro forma $ 0.08 $ 0.06 $ 0.12 $ (0.37) ======= ======= ======= =======
NOTE 14 - RELATED PARTIES: 15 On October 25, 2002, John T. Heald, Jr. resigned as President, Chief Executive Officer and a Director of the Company. Mr. Heald was employed by the Company from March 21, 2001 to November 21, 2002. In accordance with Mr. Heald's employment agreement, the Company sold 375,000 shares of Class B to Mr. Heald in October 2001 at $1.80 per share in exchange for a recourse demand promissory note in the amount of $675,000. The promissory note bears interest, payable annually, at a rate of 5% per annum. Of the 375,000 shares issued, 189,117 shares were treasury shares and the balance of 185,883 shares were newly issued shares. The promissory note is collateralized by the shares, pursuant to a loan and pledge agreement between Mr. Heald and the Company dated October 17, 2001. If at any time, Mr. Heald sells any of these shares, he is to pay the Company $1.80 times the number of shares sold within five days of receipt of the funds from such sale. In November 2002, the Company amended the loan and pledge agreement, and the promissory note, to evidence a reduction of the outstanding principal due from Mr. Heald on the loan by $225,000 in exchange for a reduction in deferred compensation payments to be made by the Company to Mr. Heald. The Company agreed not to demand payment of the promissory note for a period of two years following Mr. Heald's termination. The reduction represented the then present value of Mr. Heald's deferred compensation benefit that had accrued to Mr. Heald. The balance of the loan, including interest, was $512,000 and $501,000 at December 31, 2003 and June 30, 2003, respectively. In accordance with the terms of the employment agreement between the Company and Gerald A. Nathe, Chairman, President and Chief Executive Officer of the Company, the Company loaned Mr. Nathe $1,817,000 to enable Mr. Nathe to purchase 315,144 shares of Class B from a non-employee shareholder in November 1993 in exchange for a recourse demand promissory note for said amount. The note bore interest, payable on the anniversary dates of the loan, at LIBOR rates plus 1.25%, reset on the first day of each succeeding January, April, July and October. The note, was collateralized by the shares pursuant to a loan and pledge agreement between Mr. Nathe and the Company dated November 30, 1993, as amended and restated on November 25, 1997. Upon termination of Mr. Nathe's employment, the Company has agreed not to demand payment for a period of six months following termination, or twelve months following termination if Mr. Nathe's employment terminates by reason of death. Notwithstanding the foregoing, if at any time Mr. Nathe sells any of these shares, he is to pay the Company $5.77 times the number of shares sold within five days of receipt of the funds from such sale. In February, 2002, the Company amended Mr. Nathe's employment agreement and the loan and pledge agreement, and, following repayment by Mr. Nathe of a portion of the principal on the loan, Mr. Nathe issued a substitute recourse demand promissory note for $1,500,000, the outstanding principal balance on the date thereof, with interest payable annually at an annual rate of 5%. In August, 2002, the Company amended Mr. Nathe's employment agreement, the loan and pledge agreement, and the promissory note, to evidence reduction of the outstanding principal and interest due from Mr. Nathe on the loan by $750,000 in exchange for an equal reduction in deferred compensation payments to be made by the Company to Mr. Nathe. The reduction represented the then present value of a portion of Mr. Nathe's deferred compensation benefit that had accrued to Mr. Nathe. Mr. Nathe was responsible for his personal taxes on this exchange. The balance of the loan, including interest, was $854,000 and $836,000 at December 31, 2003 and June 30, 2003, respectively. NOTE 15 - CUSTOMERS: During the three and six months ended December 31, 2003, one customer accounted for more than 10% of the Company's net sales. Koenig and Bauer Aktiengesellschaft ("KBA") accounted for approximately 16% of the Company's net sales for each of the three and six months ended December 31, 2003 and approximately 11% of the Company's net sales for each of the three and six months ended December 31,2002. Mitsubishi accounted for less than 10% of the Company's net sales for each of the three and six months ended December 31, 2003 and 16 approximately 11% of the Company's net sales for each of the three and six months ended December 31, 2002. NOTE: 16 - WARRANTY COSTS: The Company's standard contractual warranty provisions are to repair or replace, at the Company's option, product that is proven to be defective. The Company estimates its warranty costs as a percentage of revenues on a product by product basis, based on actual historical experience within the Company. Hence, the Company accrues estimated warranty costs at the time of sale. In addition, should the Company become aware of a specific potential warranty claim, a specific charge is recorded and accounted for separate from the percent of revenue discussed above.
Warranty Amount --------------- Warranty reserve at June 30, 2003 $ 1,665,000 Additional warranty expense accruals 1,990,000 Payments against reserve (1,807,000) Effects of currency rate fluctuations 172,000 ------------ Warranty reserve at December 31, 2003 $ 2,020,000 ============
NOTE 17 - LEGAL PROCEEDINGS AND SETTLEMENTS: On November 14, 2002, the Dusseldorf Higher Regional Court ("DHRC") announced its judgment in favor of Baldwin in a patent infringement dispute against its competitor, technotrans AG ("Technotrans"). Subsequent to November 14, 2002, Technotrans filed an appeal of the DHRC ruling with the German Supreme Court in Karlsruhe. Technotrans has also filed to invalidate the Company's patent with the German Patent Court in Munich. No amounts have been recorded in the consolidated financial statements with regard to the potential contingent gain from the DHRC judgment. In August, 2001, R.R. Donnelley & Sons (RRD), a customer of the Company and a licensor to Baldwin Stobb, formerly a division of the Company, filed a complaint against the Company and Systems Technology Inc. (STI), the entity that acquired substantially all the assets of Baldwin Stobb in September 2000, alleging among other things, breach of a license agreement. In March 2002, RRD amended its complaint alleging additional causes of action. In early March 2003, RRD withdrew some of its claims and moved to again amend its complaint to include additional allegations and request specific performance; in late March 2003, RRD moved to file a corrected second amended complaint, alleging new causes of action and increased damages. The parties reached a settlement in June 2003, under which the Company agreed to provide product, in lieu of cash, ("Credits") to RRD for the Company's share of the settlement, over the course of the next two years, limited to $250,000 per quarter. The Company recognized a charge to earnings, which is included in the loss from continuing operations, during the fourth quarter of the fiscal quarter and year ended June 30, 2003, in the amount of $1,250,000 representing the fair market value of said product. During the six months ended December 31, 2003, RRD utilized Credits of $209,000 resulting in a remaining balance of $1,041,000 at December 31, 2003. NOTE 18 - PROPOSED SALE OF THE COMPANY: On December 12, 2003, the Company entered into a non-binding Letter of Intent ("LOI") whereby technotrans AG would acquire, through a one-step merger, all outstanding shares of Class A and Class B for a price of $2.50 per share in cash. 17 NOTE 19 - SUBSEQUENT EVENT: On January 29, 2004 the Company terminated the LOI with technotrans AG. 18 BALDWIN TECHNOLOGY COMPANY, INC. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain factors, which have affected the consolidated financial statements of Baldwin Technology Company, Inc. ("Baldwin" or the "Company"). During the first quarter of the fiscal year ending June 30, 2003, the Company committed to a plan to dispose of certain assets of its wholly-owned subsidiary, Baldwin Kansa Corporation ("BKA"); the transaction closed on October 10, 2002. The consideration received for the transaction, after certain post-closing adjustments, was approximately $3,736,000, which resulted in the recognition of a gain on the sale of discontinued operations of approximately $543,000 in the second quarter of the fiscal year ending June 30, 2003. During the fourth quarter of the fiscal year ended June 30, 2002, the Company recorded an impairment charge of $5,434,000 related to the goodwill associated with this business as the recorded value of this goodwill exceeded the assessment of its fair value made by the Company. For a further discussion, see Note 10 to the consolidated financial statements. The effects of this transaction on the consolidated financial statements are discussed below where significant. FORWARD-LOOKING STATEMENTS Except for the historical information contained herein, the following statements and certain other statements contained herein are based on current expectations. Such statements are forward-looking statements that involve a number of risks and uncertainties. The Company cautions investors that any such forward-looking statements made by the Company are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements. Some of the factors that could cause actual results to differ materially include, but are not limited to the following: (i) the ability to obtain, maintain and defend challenges against valid patent protection on certain technology, primarily as it relates to the Company's cleaning systems, (ii) material changes in foreign currency exchange rates versus the U.S. Dollar, (iii) changes in the mix of products and services comprising revenues, (iv) a decline in the rate of growth of the installed base of printing press units and the timing of new press orders, (v) general economic conditions, either domestically or in foreign locations, (vi) the ultimate realization of certain trade receivables and the status of ongoing business levels with the Company's large OEM customers, (vii) competitive market influences and (viii) the ability to successfully implement the Company's restructuring initiatives. Additional factors are set forth in Exhibit 99 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003 which should be read in conjunction herewith. CRITICAL ACCOUNTING POLICIES AND ESTIMATES For further information regarding the Company's critical accounting policies, please refer to the Management's Discussion and Analysis section of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003. SIX MONTHS ENDED DECEMBER 31, 2003 VS. SIX MONTHS ENDED DECEMBER 31, 2002 CONSOLIDATED RESULTS 19 Net sales for the six months ended December 31, 2003 increased by $5,862,000, or 8.6%, to $73,954,000 from $68,092,000 for the six months ended December 31, 2002. Currency rate fluctuations attributable to the Company's overseas operations increased net sales by $6,411,000 in the current period, otherwise, net sales would have decreased by $549,000. This decrease was primarily due to timing of shipments. Gross profit for the six months ended December 31, 2003 was $23,566,000 (31.9% of net sales) as compared to $20,670,000 (30.4% of net sales) for the six months ended December 31, 2002, an increase of $2,896,000 or 14.0%. Currency rate fluctuations increased gross profit by $2,266,000 in the current period. Excluding the effects of currency rate fluctuation, gross profit would have increased by $630,000. Gross profit as a percentage of net sales increased primarily due to a favorable mix of products, improved capacity utilization and reduced service costs, resulting primarily from the Company's restructuring efforts. In addition, gross profit in the prior year period was unfavorably impacted by higher warranty costs associated with two customer installations in Japan. Selling, general and administrative expenses amounted to $14,289,000 (19.3% of net sales) for the six months ended December 31, 2003 as compared to $13,545,000 (19.9% of net sales) for the same period in the prior fiscal year, an increase of $744,000 or 5.5%. Currency rate fluctuations increased these expenses by $1,064,000 in the current period. Otherwise, selling, general and administrative expenses would have decreased by $320,000. Selling expenses decreased by $475,000, which primarily relates to decreased compensation and travel costs associated with reduced employment levels, and to decreased trade show and advertising costs in the current year period. General and administrative expenses increased by $155,000 primarily due to incentive compensation accruals associated with the Company's improved performance, coupled with an increase in certain consulting and insurance costs, offset by reduced travel and other employee related costs primarily as a result of the Company's restructuring efforts and to decreased subcontracting costs in the current year period. Engineering and development expenses decreased by $1,950,000 over the same period in the prior fiscal year. Currency rate fluctuations increased these expenses by $647,000 in the current period. Excluding the effects of currency rate fluctuations, engineering and development expenses would have decreased by $2,597,000 in the current period. This decrease relates primarily to decreased employee compensation and related costs primarily as a result of the Company's restructuring efforts and to decreased research and development project and subcontracting costs. As a percentage of net sales, engineering and development expenses decreased 3.6% to 8.9% for the six months ended December 31, 2003 compared to 12.5% for the same period in the prior fiscal year. The Company recorded restructuring charges of $425,000 for the six months ended December 31, 2003 compared to $3,337,000 for the same period in the prior fiscal year. The restructuring charge in the current fiscal year period of $425,000 primarily represents additional employment reductions in the United States and the United Kingdom announced in August 2003 associated with the restructuring activities initiated in August 2002 (the "August 2002 Plan"). The restructuring charge in the prior fiscal year period of $3,337,000 relates primarily to the initial restructuring charge of $3,241,000 and $41,000 of additional costs expensed as incurred associated with the August 2002 Plan and $55,000 of additional costs associated with the restructuring plan announced in March 2000 (the "March 2000 Plan"), which were expensed as incurred. Interest expense for the six months ended December 31, 2003 was $2,355,000 as compared to $1,318,000 for the six months ended December 31, 2002. Currency rate fluctuations increased interest expense by $310,000 in the current period. Otherwise, interest expense would have increased by $727,000. This increase was primarily due to both higher interest rates in effect for the six months ended December 31, 2003 as a result of the new 20 credit agreement with Maple Bank GmbH ("Maple"), which was entered into on August 18, 2003 and higher deferred debt financing cost amortization during the period associated with Maple. Interest income amounted to $56,000 and $141,000 for the six months ended December 31, 2003 and 2002, respectively. This decrease in interest income is primarily due to decreased funds available for investment. Currency rate fluctuations increased interest income by $28,000 in the current period. Net royalty income for the six months ended December 31, 2003 was $1,551,000 as compared to $1,158,000 for the six months ended December 31, 2002. Other income (expense), net amounted to income of $1,630,000 for the six months ended December 31, 2003 compared to expense of $432,000 for the six months ended December 31, 2002. Other income (expense), net includes net foreign currency transaction gains of $1,610,000 and $183,000 for the six months ended December 31, 2003 and 2002, respectively. The increase is primarily attributable to currency fluctuations associated with the Maple loan. Included in other income and expense for the six months ended December 31, 2003 and 2002 are gains of $1,000 and losses of $91,000, respectively, resulting from the ineffective portions of derivative financial instruments which qualify as cash flow hedge gains of $197,000 and $26,000 related to an interest rate swap which ceased to qualify as a hedge. Also included in other income and expense in the prior fiscal year period is an additional loss of $211,000 as a result of finalizing certain adjustments with the buyer of the Roll Handling Group ("RHG"), which closed in September 2001. The Company recorded an income tax provision of $1,273,000 for the six months ended December 31, 2003 as compared to $622,000 for the six months ended December 31, 2002. The effective tax rate of 40.1% for the six months ended December 31, 2003 is primarily due to greater taxable income in higher tax jurisdictions and in which tax loss carryforwards are not available. The effective tax rate for the six months ended December 31, 2002 differs from the statutory rate as no benefit was recognized for losses incurred in certain countries as the realization of such benefits was not more likely than not. Currency rate fluctuations increased the provision for income taxes by $74,000 in the current period. Loss from operations of discontinued operations for the six months ended December 31, 2002 was $253,000 and is related to the sale of the BKA operation, which was completed in October 2002. A gain on the sale of BKA of $543,000 was recorded during the six months ended December 31, 2002. The Company's net income amounted to $1,903,000 for the six months ended December 31, 2003, compared to a net loss of $5,503,000 for the six months ended December 31, 2002. Currency rate fluctuations increased net income by $414,000 in the current period. Net income per share amounted to $0.13 basic and diluted for the six months ended December 31, 2003, as compared to net loss per share of $0.37 basic and diluted for the six months ended December 31, 2002. SEGMENT RESULTS ACCESSORIES AND CONTROLS GROUP Net sales for the six months ended December 31, 2003 increased by $5,862,000, or 8.6%, to $73,954,000 from $68,092,000 for the six months ended December 31, 2002. Currency rate fluctuations attributable to the Company's overseas operations increased net sales for the current period by $6,411,000; otherwise, net sales would have decreased by $549,000 in the current period. 21 Operating income amounted to $2,294,000 (3.1% of net sales) for the six months ended December 31, 2003, as compared to an operating loss of $4,720,000 (6.9% of net sales) for the same period in the prior fiscal year, an increase of $7,014,000. Currency rate fluctuations increased the current fiscal year's operating income by $632,000. Otherwise, operating income would have increased by $6,382,000 in the current period. This increase is primarily the result of the effects of the Company's previous restructuring efforts, and to decreased restructuring charges and consulting costs in the current fiscal year period. Operating income for the six months ended December 31, 2003 and 2002, includes restructuring charges of $422,000 and $2,662,000, respectively, associated with both the March 2000 Plan and the August 2002 Plan. THREE MONTHS ENDED DECEMBER 31, 2003 VS. THREE MONTHS ENDED DECEMBER 31, 2002 CONSOLIDATED RESULTS Net sales for the three months ended December 31, 2003 increased by $4,155,000, or 11.8%, to $39,443,000 from $35,288,000 for the three months ended December 31, 2002. Currency rate fluctuations attributable to the Company's overseas operations increased net sales by $4,342,000 in the current period, otherwise, net sales would have decreased by $187,000. This decrease was primarily due to timing of shipments. Gross profit for the three months ended December 31, 2003 was $12,797,000 (32.4% of net sales) as compared to $11,482,000 (32.5% of net sales) for the three months ended December 31, 2002, an increase of $1,315,000 or 11.5%. Currency rate fluctuations increased gross profit by $1,515,000 in the current period. Excluding the effects of currency rate fluctuation, gross profit would have decreased by $200,000. Gross profit as a percentage of net sales remained relatively constant over the same period in the prior year. Selling, general and administrative expenses amounted to $7,975,000 (20.2% of net sales) for the three months ended December 31, 2003 as compared to $6,058,000 (17.2% of net sales) for the same period in the prior fiscal year, an increase of $1,917,000 or 31.6%. Currency rate fluctuations increased these expenses by $709,000 in the current period. Otherwise, selling, general and administrative expenses would have increased by $1,208,000. Selling expenses decreased by $31,000, which primarily relates to decreased compensation and travel costs associated with reduced employment levels, and to decreased trade show and advertising costs in the current year period. General and administrative expenses increased by $1,239,000 primarily due to incentive compensation accruals associated with the Company's improved performance, coupled with an increase in certain consulting and insurance costs. Engineering and development expenses decreased by $1,102,000 over the same period in the prior fiscal year. Currency rate fluctuations increased these expenses by $409,000 in the current period. Excluding the effects of currency rate fluctuations, engineering and development expenses would have decreased by $1,511,000 in the current period. This decrease relates primarily to decreased employee compensation and related costs primarily as a result of the Company's restructuring efforts and to decreased research and development project and subcontracting costs. As a percentage of net sales, engineering and development expenses decreased 4.1% to 8.4% for the three months ended December 31, 2003 compared to 12.5% for the same period in the prior fiscal year. The Company recorded restructuring charges of $43,000 for the three months ended December 31, 2003 compared to $50,000 for the same period in the prior fiscal year. These restructuring charges represent additional costs associated with both the March 2000 Plan and August 2002 Plan, which were expensed as incurred. 22 Interest expense for the three months ended December 31, 2003 was $1,418,000 as compared to $600,000 for the three months ended December 31, 2002. Currency rate fluctuations increased interest expense by $217,000 in the current period. Otherwise, interest expense would have increased by $601,000. This increase was primarily due to both higher interest rates in effect for the three months ended December 31, 2003 as a result of the new credit agreement with Maple Bank GmbH ("Maple"), which was entered into on August 18, 2003 and higher deferred debt financing cost amortization during the period associated with Maple. Interest income amounted to $30,000 and $65,000 for the three months ended December 31, 2003 and 2002, respectively. This decrease in interest income is primarily due to decreased funds available for investment. Currency rate fluctuations increased interest income by $23,000 in the current period. Net royalty income for the three months ended December 31, 2003 was $900,000 as compared to $529,000 for the three months ended December 31, 2002. The increase in royalty income in the current period is primarily due to a decline in the number of units sold by one of the Company's licensees in the prior year period. Other income (expense), net amounted to income of $1,038,000 for the three months ended December 31, 2003 compared to expense of $76,000 for the three months ended December 31, 2002. Other income (expense), net includes net foreign currency transaction gains of $1,092,000 and losses of $185,000 for the three months ended December 31, 2003 and 2002, respectively. The increase is primarily attributable to currency fluctuations associated with the Maple loan. Included in other income and expense for the three months ended December 31, 2003 and 2002 are losses of $2,000 and zero, respectively, resulting from the ineffective portions of derivative financial instruments which qualify as cash flow hedges and gains of $48,000 and $91,000 related to an interest rate swap which ceased to qualify as a hedge. The Company recorded an income tax provision of $790,000 for the three months ended December 31, 2003 as compared to $363,000 for the three months ended December 31, 2002. The effective tax rate of 39.2% for the three months ended December 31, 2003 is primarily due to greater taxable income in higher tax jurisdictions and in which tax loss carryforwards are not available. The effective tax rate for the three months ended December 31, 2002 differs from the statutory rate as no benefit was recognized for losses incurred in certain countries as the realization of such benefits was not more likely than not. Currency rate fluctuations increased the provision for income taxes by $65,000 in the current period. Loss from operations of discontinued operations for the three months ended December 31, 2002 was $65,000 and is related to the sale of the BKA operation, which was completed in October 2002. A gain on the sale of BKA of $543,000 was recorded during the three months ended December 31, 2002. The Company's net income amounted to $1,224,000 for the three months ended December 31, 2003, compared to $990,000 for the three months ended December 31, 2002. Currency rate fluctuations increased net income by $274,000 in the current period. Net income per share amounted to $0.08 basic and diluted for the three months ended December 31, 2003, as compared to $0.07 basic and diluted for the three months ended December 31, 2002. SEGMENT RESULTS ACCESSORIES AND CONTROLS GROUP 23 Net sales for the three months ended December 31, 2003 increased by $4,155,000, or 11.8%, to $39,443,000 from $35,288,000 for the three months ended December 31, 2002. Currency rate fluctuations attributable to the Company's overseas operations increased net sales for the current period by $4,342,000; otherwise, net sales would have decreased by $187,000 in the current period. Operating income amounted to $1,464,000 (3.7% of net sales) for the three months ended December 31, 2003, as compared to $957,000 (2.7% of net sales) for the same period in the prior fiscal year, an increase of $507,000. Currency rate fluctuations increased the current fiscal year's operating income by $447,000. Otherwise, operating income would have increased by $60,000 in the current period. This increase is primarily the result of the effects of the Company's previous restructuring efforts, and to decreased restructuring charges and consulting costs in the current fiscal year period. Operating income for the three months ended December 31, 2003 and 2002, includes restructuring charges of $43,000 and $50,000, respectively, associated with both the March 2000 Plan and the August 2002 Plan. LIQUIDITY AND CAPITAL RESOURCES AT DECEMBER 31, 2003 LIQUIDITY AND WORKING CAPITAL On August 18, 2003, the Company entered into a $20,000,000 Credit Agreement (the "Credit Agreement") with Maple Bank GmbH ("Maple" or "Lender"), which if not terminated by the Lender on August 15, 2004 or by the Company at any time by payment in full, shall terminate in its entirety on August 15, 2005. The credit facility is collateralized by substantially all of the accounts and notes receivable of the Company and a portion of the Company's inventory up to a maximum amount of $5,000,000. Borrowings under the credit facility are subject to a borrowing base and bear interest at a rate equal to the three-month Eurodollar rate (as defined in the Credit Agreement) plus (i) 10% for loans denominated in U.S. Dollars or (ii) 11.5% for loans denominated in Euros. The Credit Agreement provided that the interest rate will be reduced by 0.50% or whole increments thereof for each whole increment of Disclosed EBITDA (as defined in the Credit Agreement) that equals or exceeds $1,250,000 for any fiscal quarter commencing with the quarter ending December 31, 2003. In no event however, may the interest rate be less than 10.5% per annum. As a result of the Company exceeding the Disclosed EBITDA for the quarter ended December 31, 2003, the interest rate was reduced beginning January 1, 2004 by 0.68% for loans denominated in U.S Dollars and 1.5% for loans denominated in Euros. The initial borrowings under the credit facility amounted to $18,874,000, of which the Company utilized $16,243,000 to retire its previously existing debt and associated interest with Fleet National Bank and Wachovia Bank National Association and the remainder of the borrowings was utilized for closing costs and working capital purposes. The closing costs are being amortized and included in interest expense through August 15, 2004. The Credit Agreement does not require the Company to meet any financial covenants, except for the limitation on annual capital expenditures and a prohibition against additional credit facilities; however, it contains a material adverse effect clause, which provides that Maple would not be obligated to fund any loan, convert or continue any loan as a LIBOR loan or issue any new letters of credit in the event of a material adverse effect. Management does not anticipate that such an event will occur; however, there can be no assurance that such an event will not occur. Although there can be no guarantee, management is exploring additional financing alternatives and believes that the Company's debt can be refinanced on a long-term basis. Prior to this refinancing with Maple, and on October 31, 2000, the Company entered into a $35,000,000 revolving credit facility (the "Credit Facility") with Fleet National Bank and First Union National Bank (collectively the "Banks"), which had an original scheduled maturity date of October 31, 2003. The Credit Facility consisted of a $25,000,000 revolving credit line (the "Revolver") and a $10,000,000 credit line to be utilized for acquisitions, (the "Acquisition Line"). 24 On January 28, 2002, the Credit Facility was amended (the "Amended Credit Facility"), to among other things, remove the Acquisition Line, reduce the Revolver to $21,000,000 (subject to a borrowing base), and change the maturity date to October 1, 2002. In addition, $4,000,000 of the existing Revolver was converted into a term loan (the "Term Loan"), which matured on June 28, 2002, resulting in available borrowings under the Revolver from July 1, 2002 to October 1, 2002 of $17,000,000. The Amended Credit Facility required the Company to maintain certain financial covenants including minimum operating income covenants. The Revolver had associated commitment fees, which were calculated quarterly, at a rate of one-half of one percent per annum of the unused portion of the Revolver. The Company had experienced operating and net losses, and debt covenant violations over the past three fiscal years. During the quarters ended March 31, 2002 and June 30, 2002, the Company did not meet its minimum operating income covenants contained in the Amended Credit Facility, and further the Company did not make the required $4,000,000 principal payment on the Term Loan on June 28, 2002. The Banks granted a forbearance of the collection of the indebtedness until October 1, 2002 and on October 30, 2002, the Company and the Banks entered into an amendment to further amend and extend the Amended Credit Facility and waive the covenant violations and Term Loan default (the "Extended Credit Facility"). The Extended Credit Facility, totaling $20,900,000, consisted of a $17,000,000 revolving credit line (the "Extended Revolver") and a $3,900,000 term loan each due July 1, 2003 (the "Extended Term Loan"). The Extended Credit Facility required the Company to utilize the net proceeds of $3,736,000 from the sale of certain assets of its wholly-owned subsidiary Baldwin Kansa Corporation ("BKA") (see Note 10 to the consolidated financial statements) plus $464,000 from the Company's cash flows to reduce outstanding borrowings under the Extended Revolver by $4,200,000 before October 30, 2002, of which $2,700,000 permanently reduced the Extended Revolver and $1,036,000 became available for future borrowings, subject to a borrowing base calculation. Additionally, beginning in December 2002 and extending through June 2003, the Company was required to permanently reduce the Extended Revolver by making monthly principal payments of $125,000. The Company was also required to permanently reduce the Extended Revolver by $5,000,000 on December 30, 2002 and by $5,000,000 on March 30, 2003, but only if the Company generated non-operating alternative sources of financing. As the Company did not generate any alternative sources of financing after entering into the Extended Credit Facility on October 30, 2002, the Company was not required to make, and did not make, the $5,000,000 payment on December 30, 2002 or the $5,000,000 payment on March 30, 2003. Additionally, at September 30, 2002 and March 31, 2003, the Company was not in compliance with its debt covenants, and received waivers for the non-compliance. At June 30, 2003, the Company had outstanding borrowings of $16,112,000 under the Extended Revolver and Extended Term Loan and this entire outstanding balance, which was classified as current as of June 30, 2003, was entirely repaid from the proceeds of the refinancing with Maple on August 18, 2003. In December 2003, the Company, through its Japanese subsidiary, obtained a YEN 300,000,000 term loan (approximately $2,794,000), which matures in December 2006 (the "Japanese Term Loan"). The Japanese Term Loan is subject to semi-annual principal payments of YEN 50,000,000 and bears interest at TIBOR plus 0.75%. The Company has received the proceeds of this loan in December 2003, and is currently considering alternative uses of these funds. The Company maintains relationships with both foreign and domestic banks, which combined have extended credit facilities to the Company totaling $27,516,000, including $20,000,000 available under the Credit Agreement. As of December 31, 2003, the Company had $26,072,000 outstanding under these credit facilities including $19,835,000 under the Credit Agreement. Total debt levels as reported on the balance sheet at December 31, 2003 are $2,607,000 higher than they would have been if June 30, 2003 exchange rates had been used. 25 On April 27, 2001, the Company entered into an interest rate swap agreement (the "Swap") with Fleet National Bank. The effect of this agreement was to convert $15,000,000 of the Company's variable rate debt into fixed rate debt with an interest rate of 4.98% with the maturity the same as the then existing credit facility. The effect of this interest rate Swap added $48,000 and $196,000, respectively to interest expense for the three and six months ended December 31, 2003 and $126,000 and $249,000, respectively to interest expense for the three and six months ended December 31, 2002 associated with this Swap, which expired on October 30, 2003. The Company's working capital increased by $4,866,000 or 119.7%, from $4,064,000 at June 30, 2003, to $8,930,000 at December 31, 2003. Foreign currency rate fluctuations accounted for an increase of $658,000; otherwise, working capital would have increased by $4,208,000. Working capital increased primarily due to increased levels of cash, primarily in Japan, associated with the additional credit facility under the Japanese Term Loan and additional deferred financing costs associated with the Maple loan. Working capital decreased primarily by the additional debt resulting from Maple and increased notes payable, primarily in Japan. The Company utilized $472,000 and $566,000 for investing activities for the six months ended December 31, 2003 and 2002, respectively, primarily for additions to property, plant and equipment, and patents and trademarks. Net cash provided (used) by financing activities was $876,000 for the six months ended December 31, 2003 as compared to ($4,334,000) for the six months ended December 31, 2002. The difference was primarily due to higher net debt borrowings in the current fiscal year period primarily from Maple, partially offset by the additional closing costs associated with obtaining the Maple loan. During March 2000, the Company initiated a restructuring plan (the "March 2000 Plan") that included the consolidation of production into certain facilities, and reduction in total employment, primarily in the United States. The March 2000 Plan was expanded during the fourth quarter of the fiscal year ended June 30, 2001. The Company recorded restructuring charges in the amounts of zero and $23,000 for the three and six months ended December 31, 2003 and 2002, respectively, related to the March 2000 Plan. These charges relate primarily to additional exit costs, which were expensed as incurred. The March 2000 Plan reduced the Company's worldwide cost base and strengthened its competitive position as a leading global supplier of auxiliary equipment to the printing and publishing industry. Prior to initiating the March 2000 Plan, the Company was managed in a decentralized manner through geographically dispersed autonomous business units. Given that many of the Company's significant customers had reorganized on a global basis, management realigned the Company to support its global customer base. Rather than have separate sales, product development and production activities at each decentralized business unit, the March 2000 Plan included centralizing control of these activities. Facility lease termination costs will be paid through April 2006. As of December 31, 2003, $443,000 is included in "Other accounts payable and accrued liabilities" and $575,000 is included in "Other long-term liabilities." In response to weak market conditions, in August 2002, the Company announced additional restructuring activities (the "August 2002 Plan"), which reduced total worldwide employment by approximately 160. Accordingly, the Company recorded an initial restructuring charge of $3,241,000 in August 2002 and additional restructuring charges of $144,000 during the balance of the fiscal year ended June 30, 2003 related to the August 2002 Plan. In August 2003, the Company expanded the August 2002 Plan and announced additional employment reductions of 15 in the United States and 8 in the United Kingdom. In addition, the Company closed its office in Dunstable, England and is currently running its two separate United Kingdom business operations from its Poole, England location in an effort to reduce or eliminate certain costs as part of its global restructuring efforts. The Company recorded restructuring charges of 26 $43,000 and $401,000, respectively for the three and six months ended December 31, 2003 associated with the August 2002 Plan. The August 2002 Plan is expected to reduce operating costs by approximately $6,900,000 annually. Severance and other costs will be paid through March 2004, and lease termination costs will be paid through October 2006, the end of the lease terms. As of December 31, 2003, $282,000 is included in "Other accounts payable and accrued liabilities" and $227,000 is included in "Other long-term liabilities." During the Company's fiscal year ended June 30, 2002, the German Tax Authority changed its position regarding the taxability of certain intercompany dividends. As a result, several companies, including Baldwin, were assessed additional tax on dividends paid from 1994 through 1996. At this point in time, the proposed assessment would result in a tax charge of approximately $2,570,000 and the elimination of previously reserved tax assets. However, based on precedent, the Company believes it will prevail in this matter and there will be no material financial impact as a result of the German Tax Authority's change in position. It is expected that the German Tax Authority will assess the Company during the third or fourth quarter of the fiscal year ended June 30, 2004. Under German tax law, an assessment is payable at the time it is assessed, however, a Company is permitted to request a deferral of the payment from the German Tax Authority through various alternatives. Management believes a deferral will be granted, however no assurances can be given that such deferral will be granted. The Company believes that its cash flows from operations, along with the available bank lines of credit and alternative sources of borrowings, if necessary are sufficient to finance its working capital and other capital requirements through the term of the Credit Agreement with Maple. At December 31, 2003 and June 30, 2003, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance entities, special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships. The following summarizes the Company's contractual obligations at December 31, 2003 and the effect such obligations are expected to have on its liquidity and cash flow in future periods (in thousands):
Fiscal Years ending June 30, Total at 2009 December and 31, 2003 2004* 2005 2006 2007 2008 thereafter -------- ------- ------- ------- ------- ------- ---------- Contractual Obligations: Loans payable $ 2,794 $ 2,794 $ 0 $ 0 $ 0 $ 0 $ 0 Capital lease obligations 223 38 91 67 25 2 0 Long-term debt 23,278 548 20,917 1,067 590 125 31 Non-cancelable operating lease obligations 13,459 2,248 4,114 3,343 1,784 990 980 -------- ------- ------- ------- ------- ------- ------- Total contractual cash obligations $ 39,754 $ 5,628 $25,122 $ 4,477 $ 2,399 $ 1,117 $ 1,011 ======== ======= ======= ======= ======= ======= =======
*Includes only the remaining six months of the fiscal year ending June 30, 2004. 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 27 containment programs and improved operating efficiencies to offset the otherwise negative impact of inflation on its operations. RECENTLY ISSUED ACCOUNTING STANDARDS See Note 2 to the consolidated financial statements for information concerning recently issued accounting standards. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK: A discussion of market risk exposures is included in Part II Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003. There have been no material changes during the six months ended December 31, 2003. ITEM 4: CONTROLS AND PROCEDURES: The Chief Executive Officer and Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this Report on Form 10-Q, that the Company's controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed by it under the Securities and Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer of the Company, as appropriate, to allow timely decisions regarding required disclosure. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation. 28 PART II: OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.65 Amendment to Baldwin Technology Management Incentive Compensation Plan effective January 1, 2004 (filed herewith). 10.66 Strategic Advisory Services Agreement dated October 19, 2003 and effective January 1, 2004 between Baldwin Technology Company, Inc. and Akira Hara (filed herewith). 31.01 Certification of the Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31.02 Certification of the Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.01 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (filed herewith). 32.02 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (filed herewith). (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K dated November 5, 2003 relating to items 7 and 9. The Company filed a Current Report on Form 8-K dated December 12, 2003 relating to items 5 and 7. 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BALDWIN TECHNOLOGY COMPANY, INC. BY /s/ Vijay C. Tharani ------------------------- Vice President, Chief Financial Officer and Treasurer Dated: February 13, 2004 30 EX-10.65 3 y94222exv10w65.txt AMENDMENT TO MANAGEMENT INCENTIVE COMP PLAN EXHIBIT 10.65 BALDWIN TECHNOLOGY COMPANY, INC. MANAGEMENT INCENTIVE COMPENSATION PLAN as summarized on 8/11/03 as amended, effective 1/1/04 OBJECTIVE: The Baldwin Management Incentive Compensation Plan (MICP or Bonus Plan) is designed to reward, recognize and motivate executives and key management employees for their contributions on a corporate-wide, functional and personal basis. PLAN CRITERIA: The MICP is designed to provide each eligible participant a target bonus percentage of his/her base salary upon the achievement of targeted financial and personal performance objectives. For purposes of this plan, a participants base salary will be that which is in effect on July 1st of any given fiscal year. For the purposes of the MICP, the following financial performance objective will be used as the basis to determine the level of payout under the Bonus Plan. 1) FINANCIAL PERFORMANCE OBJECTIVE (AOP TARGET) - For Fiscal 2004, the Company's Annual Operating Plan (AOP) net income before taxes will be used as the basis to determine achievement at both corporate and business unit levels. PAY FOR PERFORMANCE RELATIONSHIP (LEVERAGING): Performance against the financial objective will be rated on a scale of 100 - 120% of AOP target. There will be no payout for achievement below 100% and the maximum achievement is capped at 120% of the AOP target. The following chart shows the % of target bonus opportunity yielded by performance leverage.
Performance Against % of Target AOP Target Bonus Opportunity 100% 100% 110% 125% 120% 150%
BONUS FORMULA: A participants actual bonus payout (except for corporate participants) will be based on both the consolidated and the participant's business unit net income before taxes. For Fiscal 2004, all participants (except corporate participants) will have their 100% target bonus opportunity weighted at 50% from consolidated net income before tax and 50% from their business unit's net income before tax (corporate participants will be based 100% on consolidated net income before tax). The final payout will be calculated by adding together the corporate and business unit bonuses that have been separately calculated. For example: Corporate net income TARGET is $1.0M Business Unit net income TARGET $400K Corporate net income ACTUAL is $1.2M Business Unit net income ACTUAL $300K Salary $100,000 Bonus Eligibility 30% 100% bonus opportunity $ 30,000 (50%/50% split) 150% bonus opportunity $ 45,000 (50%/50% split) A) 50% from Corporate @ 100% $ 15,000 Corporate Performance Leverage 120% (150% target bonus opportunity) Corporate Bonus Portion............ $ 22,500 ------------ B) 50% from business unit @ 100% $ 15,000 Bus Unit Performance Leverage 75% (0% target bonus opportunity) Business Unit Bonus Portion........ $ 0 ------------ TOTAL BONUS $ 22,500 ============
ADMINISTRATIVE: 1) NEW PARTICIPANTS Any newly hired, promoted or transferred employee who becomes eligible to participate in the MICP will do so on a pro-rated basis from the date of such occurrence consistent with the time such participant worked in the fiscal year. All new participants must be approved by the President & CEO. 2) TERMINATION, RETIREMENT OR DEATH A participant who terminates voluntarily or is terminated for just cause (or summary dismissal) before the fiscal year end of the bonus plan year will not receive payment under this plan. In the case of retirement or death of a participant before the fiscal year end of the bonus plan year, payment will be made on a pro-rated basis consistent with the time such employee worked in the fiscal year. 3) CHANGE OF CONTROL In the event of involuntary separation of a participant due to a Change of Control before the fiscal year end of the Bonus Plan year, payment will be made on a pro-rata basis consistent with the time such participant worked during the fiscal year. 4) PAYOUT At fiscal year end, actual financial performance results will be compared to the performance criteria and the payout for each participant will be calculated. Any payout from the Plan will occur no later than August 15th following the end of the fiscal year. In Fiscal 2004, in the event of a Change of Control, the Bonus Plan will make a payment to all participants who qualify for a bonus (as defined above) immediately prior to the closing date (i.e., the Change of Control event). The payout and any performance leverage that may have been earned will be based on the Company's actual performance versus its AOP target (net income before tax) for all completed quarters prior to the quarter in which the Change of Control event occurs. For the quarter in which the Change of Control event occurs, that quarter's AOP target will be divided by three (3) in order to arrive at a monthly AOP target for that quarter, against which the actual results will be measured to calculate the pro-rata share of the bonus payout as well as any performance leverage that may have been earned. For the avoidance of doubt, if a Change of Control event occurs during a month, the bonus and any performance leverage that may have been earned will be pro-rated up to the date of closing based on the actual results of the Company through the month ending just prior to the month in which the Change of Control event occurs. 5) PLAN CHANGES All information contained herein including the payout of bonuses under this Plan may be changed as considered appropriate at the sole discretion of the President and CEO of the Company, provided that changes to the Plan must be approved by the Compensation and Stock Option Committee of the Board of Directors of the Company. EX-10.66 4 y94222exv10w66.txt STRATEGIC ADVISORY SERVICES AGREEMENT EXHIBIT 10.66 AGREEMENT FOR STRATEGIC ADVISORY SERVICES This Agreement for Strategic Advisory Services (the "Agreement"), dated as of October 19, 2003, is entered into by and between Akira Hara, a citizen of Japan with his principal place of residence located at 2-21-6-501 Himonya, Meguro-ku, Tokyo 152-0003, Japan (the "Strategic Adviser"), and Baldwin Technology Company, Inc. ("BTI") having its principal place of business at 12 Commerce Drive, Shelton, CN 06484-0941 USA (each a "Party," and collectively the "Parties"). WHEREAS, the Strategic Adviser is currently employed as the Chairman and serves as a Director of Baldwin Japan Limited ("BJL"), and as a Director of BTI, as well as an officer and/or director of various subsidiaries of BTI (collectively, BTI, BJL and all other subsidiaries and affiliates are referred to as the "BTI Group"); WHEREAS, the Strategic Adviser desires to retire from full-time employment with BJL and from part-time positions with various companies in the BTI Group effective as of the close of business on December 31, 2003; and WHEREAS, BTI desires to continue to benefit from the knowledge and experience of the Strategic Adviser in the form of strategic advisory services rendered on behalf of the BTI Group, and Strategic Adviser is willing to continue in this capacity, under the terms and conditions provided in this Agreement. NOW, THEREFORE, in consideration of the mutual promises contained herein, the sufficiency of which is hereby acknowledged, the Parties agree as follows: 1. ENGAGEMENT. Company hereby engages the Strategic Adviser and the Strategic Adviser hereby agrees to hold himself available to render, at the request of the Chairman and CEO of BTI and the President and Representative Director of BJL, strategic advisory services to the BTI Group, to the best of his ability, upon the terms and conditions hereinafter set forth. - 1 - 2. TERM AND TERMINATION. The term of this Agreement shall begin on January 1, 2004, and shall continue indefinitely until terminated. Either Party may terminate this Agreement at any time, with or without cause, by giving the other Party 180 days notice in advance of termination in accordance with the provisions of Paragraph 12 below, provided however, that if BTI elects to terminate this Agreement without good and substantial cause prior to December 31, 2008, BTI shall cause BJL to pay the Strategic Adviser a cancellation fee equal to the total outstanding and unpaid amount of the Retainer Fee that would have been payable had this Agreement remained in force through December 31, 2008, along with any earned but unpaid Project Fees, both as defined in Paragraph 3 below. 3. RETAINER FEE AND PROJECT FEE. BTI shall cause BJL to pay the Strategic Adviser an annual retainer fee of Six Million Seven Hundred and Twenty Thousand (JPY6,720,000) Japanese Yen (adjusted annually for inflation in Japan)(1) divided into 12 equal monthly payments to fulfill the duties set forth in Paragraph 4(a) and 4(b) below (the "Retainer Fee"). Payment of the Retainer Fee shall entitle the Chairman and CEO of BTI and the President and Representative Director of BJL to call upon the Strategic Adviser for up to a maximum of 45 days per year, provided however, that the Retainer Fee shall be due and payable whether or not the services of the Strategic Adviser are actually required for the entire 45 days in any given year. If services of the Strategic Adviser in excess of 45 days per year are required, and the Strategic Adviser is willing and able to render such additional services, the Strategic Adviser shall be paid at the rate of One Hundred Twenty Thousand (JPY120,000) Japanese Yen per day, with a half-day minimum being guaranteed at Sixty Thousand (JPY60,000) Japanese Yen (the "Project Fee"). The Retainer Fee and the Project Fee shall be payable without deduction, except for Japanese withholding taxes if and as required by law, and shall be paid monthly on the same day and in the same manner as BJL makes its regular monthly payroll deposits. - ------------------- (1) adjusted annually as of January 1 of each calendar year commencing January 1, 2005 - 2 - 4. DUTIES AND SUPPORT. The Strategic Adviser shall perform the following duties for the BTI Group: (a) Strategic Adviser shall continue to serve as the Chairman and as a Director of BJL, and as a Director of Baldwin India Private Limited ("BIN"), and will serve for one additional term if re-elected by the shareholder of each entity upon expiration of the current terms. Strategic Adviser shall serve as the representative of BJL to the Japan Printing Machinery Industry Association (the "JPMA"), where he is currently a Vice President, so long as he remains as Chairman of BJL or until such time as the JPMA requests that he resign from the Vice President post. (b) If the Strategic Adviser ceases to serve in an executive position at the JPMA, he shall resign from the position of Chairman of BJL, but shall continue as a strategic adviser pursuant to the terms and conditions of this Agreement. (c) Strategic Adviser shall perform additional duties and provide strategic advice as reasonably requested by the Chairman and CEO of BTI and the President and Representative Director of BJL. In addition to the above duties, the Strategic Advisor shall continue to serve as a Director of BTI, and if re-elected by the shareholders of BTI, will serve for one additional term as a Director of BTI. The Strategic Adviser will not receive a fee for attending Board of Directors meetings of BTI, and time doing so shall not be counted towards the 45 days per year covered by the Retainer Fee. He shall, however, be entitled to receive any and all other benefits, stock options and perquisites afforded to (2)Directors of BTI. Consistent with (c) above, the Strategic Adviser shall report directly to the Chairman and CEO of BTI, and to the President and Representative Director of BJL. The BTI Group shall provide the Strategic Adviser with the support necessary to perform his duties effectively. In particular and without limitation, BTI and BJL shall provide the Strategic Adviser, in a timely manner, with all pertinent information relating to the business and affairs of the BTI Group, as well as with specific and general information relating to the field of graphic arts and control products at-large (the "Industry"). - ------------------- (2)...to "Non-Employee Directors"... - 3 - 5. CLUB MEMBERSHIPS AND EXPENSES. The Strategic Adviser shall be reimbursed on a monthly basis by BJL for all reasonable business expenses incurred by the Strategic Adviser in connection with the performance of his services hereunder in the same manner as present. Specifically, and without limitation, the Strategic Adviser shall continue to be entitled to payment by BJL of all current club membership dues, such as the Tokyo American Club, and shall continue to enjoy the same travel and business expense reimbursement policies as he currently enjoys. 6. RETIREMENT PAYMENTS, AND SOCIAL AND WELFARE BENEFITS. BTI shall cause BJL to continue to provide the Strategic Adviser with all vested and accrued retirement payments, and all Japanese social and welfare benefits as currently enjoyed by the Strategic Adviser. Nothing contained herein shall be deemed to amend, modify or reduce any retirement compensation or other benefits provided to the Strategic Adviser under any prior agreement, retirement allowance program, or other arrangement currently in place. 7. D&O INSURANCE, LIMITATION OF LIABILITY, AND INDEMNIFICATION. BTI shall maintain at all times officer and director insurance covering the Strategic Adviser in the same manner as it does for the other Directors of BTI and the BTI Group, for so long as Strategic Adviser remains as a Director of BTI or of any company in the BTI Group. The Strategic Adviser shall not be answerable for the default or misconduct of any agent, accountant or attorney appointed by him in pursuance of his duties hereunder, if such agent, accountant or attorney shall have been selected with reasonable care. The duties and responsibilities of the Strategic Adviser shall be limited to those expressly set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Strategic Adviser. BTI shall indemnify and save harmless the Strategic Adviser from any claim, liability, loss, cost or expense of any kind or character whatsoever, and will at all times pay all costs and expenses of any suit or litigation of any character, arising from, in connection with or with respect to this Agreement, and if the Strategic Adviser, BTI or any member of the BTI Group, as the case may be, shall be made a party thereto, BTI shall pay all costs and expenses, including reasonable counsel fees and expenses, to which the Strategic Adviser may be subject by reason thereof. The Strategic Adviser may consult with counsel, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or omitted or suffered by the Strategic Adviser, as - 4 - the case may be, hereunder in good faith and in accordance with such opinion. Notwithstanding anything contained herein to the contrary, the Strategic Adviser shall not be liable for any ordinary, actual, direct, special, indirect or consequential damages or for loss of profits or business resulting from the conduct or advice of the Strategic Adviser. 8. NON-COMPETITION. The Strategic Adviser shall not compete, directly or indirectly, with the BTI Group during the term of this Agreement, or for a period of six months following its termination, except as provided in Paragraph 9 below. 9. INVENTIONS AND INTELLECTUAL PROPERTY. The special terms and conditions pertaining to the rights of BTI and the Strategic Adviser with respect to any inventions or other intellectual property created or otherwise developed by the Strategic Adviser ("IPR") are set forth in Appendix A, attached hereto and incorporated herein by reference. 10. ASSIGNMENT. Neither BTI nor the Strategic Adviser shall voluntarily or by operation of law assign or otherwise transfer the obligations incurred on their respective parts, pursuant to the terms of this Agreement, without the prior written consent of the other, provided however, that(3) the parties shall have the automatic right to assign their IPR to any company in which (4)they own, directly or indirectly, a controlling interest. Any attempted assignment or transfer in violation of the preceding sentence shall be wholly void. It is expressly understood that any request by BTI to assign this Agreement shall be accompanied by a written undertaking, in form and substance reasonably acceptable to the Strategic Adviser, from the assignee unequivocally stating that it will assume, and faithfully fulfill, all of the terms and conditions of this Agreement. 11. MODIFICATION OF AGREEMENT. This Agreement can be modified by the Parties only by a written supplemental agreement executed by both Parties. - ------------------- (3)...either of the parties... (4)...it owns, directly... - 5 - 12. NOTICE. Any notice required, or permitted, to be given hereunder shall be sufficient if in writing, and if sent by courier or by registered or certified mail, postage prepaid, addressed as follows: If to BTI: Baldwin Technology Company, Inc. 12 Commerce Drive Shelton, CN 06484-0941 USA Attn: Mr. Gerald A. Nathe(5) With a copy to: Baldwin Japan Limited 2-4-34 Toyo Kohtoh-ku, Tokyo 135-8384 Japan Attn: President and Representative Director If to the Strategic Adviser: Akira Hara 2-21-6-501 Himoniya Meguro-ku, Tokyo 152-0003, Japan 13. WAIVER OF BREACH. The waiver by either Party of any beach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 14. HEADINGS. Paragraph headings have been inserted in this Agreement as a matter of convenience for reference only and it is agreed that such paragraph headings are not a part of this Agreement and shall not be used in the interpretation of any provision of this Agreement. - ----------------- (5)(or then current CEO) - 6 - 15. GOVERNING LAW AND CHOICE OF FORUM. This Agreement shall be governed by the laws of Japan without regard to the conflict of law rules thereof. All disputes, controversies or differences which may arise between the Parties hereto, out of or in relation to or in connection with this Agreement shall be finally settled by arbitration in Tokyo, Japan in accordance with the Commercial Arbitration Rules of The Japan Commercial Arbitration Association. Arbitration shall be conducted before a single arbitrator if both Parties can agree on the arbitrator. If the Parties cannot agree on a single arbitrator, three arbitrators shall be appointed, with each Party selecting one arbitrator and the two so selected jointly agreeing on the third arbitrator who shall serve as chair of the arbitral panel. The award rendered by the arbitrator(s) shall be final and binding upon the Parties hereto. The language of any such arbitration, and the award, shall be Japanese. 16. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the Parties with respect to the subject matter hereof and supercedes all contracts, agreements and understandings between the Parties concerning the subject matter hereof, except as contemplated by, and provided for in, Paragraph 6 above. IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed, as of the day and year first above written, in triplicate with each signed version being deemed to be an original. STRATEGIC ADVISER: BALDWIN TECHNOLOGY COMPANY, INC. /s/ Akira Hara By: /s/ Gerald A. Nathe - ------------------------------ ---------------------------- Akira Hara Gerald A. Nathe President & CEO ACKNOWLEDGED AND AGREED: BALDWIN JAPAN LIMITED By: /s/ Takayuki Miyaoku --------------------- Takayuki Miyaoku President and Representative Director - 7 - APPENDIX A (REFERENCE PARAGRAPH 9) INVENTIONS AND INTELLECTUAL PROPERTY The Strategic Adviser may, but shall not be obligated to, create or otherwise develop valuable IPR, whether patentable or not, with applications in the Industry during the term of this Agreement. In the event that the Strategic Adviser creates or otherwise develops multiple IPR, the provisions of this Appendix A shall apply to each item of IPR separately. With respect to the IPR, the Strategic Adviser hereby grants to BTI a right of first refusal to license the IPR, subject to the following terms and conditions: A. The Strategic Adviser shall, in his sole discretion and cost, decide whether or not to apply for patents and other legal protection with respect to the IPR. It is currently anticipated that patent applications, if filed at all, will be limited to major Industry countries such as, the US, Japan, China, India, the UK, Italy France and Germany. B. At such time as the Strategic Adviser believes, in his sole discretion, that the IPR is commercially valuable in the Industry, or a patent application has been filed, the Strategic Adviser shall provide BTI with a written description of the IPR (the "Disclosure") solely for the purpose of evaluation. BTI shall have no right to use, directly or indirectly, the IPR contained in the Disclosure other than for the purpose of evaluation. Specifically, and without limitation, BTI shall not use the Disclosure to further its own research and development without having first entered into a license agreement with the Strategic Adviser as contemplated herein. C. BTI shall hold the Disclosure in strict confidence, disclose it to employees only on a "need to know" basis, and shall treat it in the same manner as it treats its own confidential and proprietary information. D. Any improvements, inventions or other intellectual property made by BTI in connection with or resulting from the Disclosure shall be jointly owned by BTI and the Strategic Adviser. E. In the event that the Disclosure is of interest to BTI, then BTI shall pay to the Strategic Adviser the non-refundable sum of Five Thousand ($5,000) US Dollars to compensate the Strategic Adviser for the time and effort required to assist BTI during the evaluation. This sum will be credited to the non-refundable, lump sum, upfront royalty payment contemplated in paragraph 2 below in the event that the Strategic Adviser and BTI enter into a license agreement for the IPR. F. Within 90 days of the Disclosure, BTI shall inform the Strategic Adviser in writing whether or not BTI intends to exercise its right to entire into a license agreement with the Strategic Adviser (the "Notice of Intent to License") for the IPR. G. Within 30 days after receipt of the Notice of Intent to License, the Parties shall enter into good faith negotiations with the aim of concluding a mutually acceptable license agreement covering the IPR. Failure to conclude a valid and binding license agreement within 180 days after the start of good faith negotiations shall be treated in the same manner - 8 - as a notice from BTI to the Strategic Adviser that it does not intend to license the IPR, to wit, the Strategic Adviser shall be released from his obligations hereunder to BTI with respect to the IPR, including without limitation the duty not to compete as provided in Paragraph 8 of the Agreement, and he shall be free to use, sell, license or otherwise benefit, directly or indirectly, from the IPR in any manner as he deems appropriate in his sole discretion. H. In the event BTI (a) notifies the Strategic Adviser that it does not intend to license the IPR, or (b) fails to send the Notice of Intent to License as contemplated in F above in a timely manner, or (c) fails to enter into good faith negotiations as contemplated in G above in a timely manner, then the Strategic Adviser shall be released from his obligations hereunder to BTI with respect to the IPR, including without limitation the duty not to compete as provided in Paragraph 8 of the Agreement, and he shall be free to use, sell, license or otherwise benefit, directly or indirectly, from the IPR in any manner as he deems appropriate in his sole discretion. Release of the Strategic Adviser's obligations as contemplated by the preceding sentence is contingent on the Strategic Adviser having negotiated in good faith with BTI. In order to guide the Parties negotiations as contemplated in G above, any license agreement shall include the following: 1. Payment of a sum of money sufficient to compensate the Strategic Adviser for all of his reasonable costs and expenses, including, without limitation, attorneys' fees, licensing fees for included technology, other third party charges, and patent application fees. The costs and expenses are estimated to be in the approximate range of Seventy-five Thousand ($75,000) to One Hundred Thousand ($100,000) US Dollars depending on the complexity of the IPR and the number of countries in which patent protection is sought. 2. Payment of a non-refundable, lump sum, upfront royalty based on a mutually agreed joint estimate of the net invoice value of the IPR during the first two years of the license agreement (the "Lump Sum Royalty"). The amount of the Lump Sum Royalty is estimated to be between One Hundred Thousand ($100,000) and Three Hundred Thousand ($300,000) US Dollars for most IPR. Seventy-five percent (75%) of the Lump Sum Royalty will be applied as a credit against the payment of running royalties, if any, calculated pursuant to Paragraph 3 below during the first two years of the license agreement; provided however, that the Strategic Adviser shall not be obligated under any circumstances to refund any part or portion of the Lump Sum Royalty. 3. Payment of a running royalty calculated in accordance with the following schedule: (a) 3% of net invoice value for IPR that is not the subject of a patent application or issued patent, (b) 5% of net invoice value for IPR that is the subject of a patent application or issued patent, (c) 7% of net invoice value for IPR that is the subject of a patent application or issued patent, and is very useful to BTI, and (d) 10% of net invoice value for IPR that is the subject of a patent application or issued patent, is very useful to BTI, and gives BTI a substantial competitive advantage in the Industry. - 9 - For purposes of Paragraph 3(c), IPR that is very useful is any IPR that allows BTI not only to develop and enter into the market with a new or improved product but also provides a strong sales or cost reduction opportunity or technological advantage(s) over competitors. IPR providing a substantial competitive advantage in the Industry under Paragraph 3(d) means IPR that enables BTI to develop and market a new or improved product with an exclusive technological solution or advantage for extremely strong sales or cost reduction opportunities. 4. Such other terms and conditions, such as audit rights, as are customarily found in international license agreements pertaining to intellectual property rights. -END- - 10 - EX-31.01 5 y94222exv31w01.txt 302 CERTIFICATION: CEO EXHIBIT 31.01 CERTIFICATIONS I, Gerald A. Nathe, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Baldwin Technology Company, Inc. ("the registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Gerald A. Nathe ------------------------------------ Gerald A. Nathe Chairman, President and Chief Executive Officer Date: February 13, 2004 EX-31.02 6 y94222exv31w02.txt 302 CERTIFICATION: CFO EXHIBIT 31.02 CERTIFICATIONS I, Vijay C. Tharani, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Baldwin Technology Company, Inc. ("the registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Vijay C. Tharani --------------------------------------- Vijay C. Tharani Vice President, Chief Financial Officer and Treasurer Date: February 13, 2004 EX-32.01 7 y94222exv32w01.txt 906 CERTIFICATION EXHIBIT 32.01 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 In connection with the Quarterly Report of Baldwin Technology Company, Inc. (the "Company") on Form 10-Q for the period ended December 31, 2003 to be filed with Securities and Exchange Commission on or about the date hereof (the "Report"), I, Gerald A. Nathe, Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934. Date: February 13, 2004 By: /s/ Gerald A. Nathe -------------------- Gerald A. Nathe Chief Executive Officer EX-32.02 8 y94222exv32w02.txt 906 CERTIFICATION EXHIBIT 32.02 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 In connection with the Quarterly Report of Baldwin Technology Company, Inc. (the "Company") on Form 10-Q for the period ended December 31, 2003 to be filed with Securities and Exchange Commission on or about the date hereof (the "Report"), I, Vijay C. Tharani, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934. Date: February 13, 2004 By: /s/ Vijay C. Tharani -------------------------------- Vijay C. Tharani Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----