<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________
SCHEDULE 13D
(AMENDMENT NO. 2)
Under the Securities Exchange Act of 1934
Baldwin Piano & Organ Company
__________________
(Name of issuer)
Common Stock
___________________________
(Title of class of securities)
058246109
--------------
(CUSIP number)
Kenneth W. Pavia, Sr.
Bolero Investment Group, L.P.
1101 E. Balboa Boulevard
Newport Beach, CA 92661-1313
(714) 675-3850
______________________________________________
(Name, address and telephone number of person
authorized to receive notices and communications)
COPY TO:
Scott R. Haber
Latham & Watkins
505 Montgomery Street, Suite 1900
San Francisco, California 94111-2562
(415) 391-0600
October 15, 1996
__________________________________________________
(Date of event which requires filing of this statement)
If the filing person has previously filed a statement on Schedule 13G to
report the acquisition which is the subject of this Schedule 13D, and is
filing this statement because of Rule 13d-1(b)(3) or (4), check the
following box: [ ]
Check the following box if a fee is being paid with the statement: [ ]
Page 1 of 17 Pages
Exhibit Index is on Page 9
<PAGE>
- ----------------------- ---------------------
CUSIP NO. 058246109 SCHEDULE 13D PAGE 2 OF 15 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1
BOLERO INVESTMENT GROUP, L.P.
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
2 (a) [X]
(b) [_]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS
4
AF, WC
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
5 PURSUANT TO ITEMS 2(d) OR 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
CALIFORNIA
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 160,060 SHARES OF COMMON STOCK
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
-0- SHARES OF COMMON STOCK
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 160,060 SHARES OF COMMON STOCK
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
-0- SHARES OF COMMON STOCK
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
160,060 SHARES OF COMMON STOCK
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
12
[_]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
4.7%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON
14
PN
- ------------------------------------------------------------------------------
2
<PAGE>
- ----------------------- ---------------------
CUSIP NO. 058246109 SCHEDULE 13D PAGE 3 OF 15 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1
KENNETH W. PAVIA, SR.
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
2 (a) [X]
(b) [_]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS
4
AF, PF
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
5 PURSUANT TO ITEMS 2(d) OR 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
UNITED STATES OF AMERICA
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 222,060 SHARES OF COMMON STOCK
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
-0- SHARES OF COMMON STOCK
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 222,060 SHARES OF COMMON STOCK
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
-0- SHARES OF COMMON STOCK
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
222,060 SHARES OF COMMON STOCK
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
12
[_]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
6.5%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON
14
IN
- ------------------------------------------------------------------------------
3
<PAGE>
- ----------------------- ---------------------
CUSIP NO. 058246109 SCHEDULE 13D PAGE 4 OF 15 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1
FHI, INC.
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
2 (a) [X]
(b) [_]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS
4
WC
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
5 PURSUANT TO ITEMS 2(d) OR 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
CALIFORNIA
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 62,000 SHARES OF COMMON STOCK
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
-0- SHARES OF COMMON STOCK
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 62,000 SHARES OF COMMON STOCK
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
-0- SHARES OF COMMON STOCK
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
62,000 SHARES OF COMMON STOCK
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
12
[_]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
1.8%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON
14
CO
- ------------------------------------------------------------------------------
4
<PAGE>
Item 1. Security and Issuer.
-----------------------
This Amendment No. 2 to Schedule 13D is being filed on behalf of the
undersigned Reporting Persons to amend the Schedule 13D filed with the
Securities and Exchange Commission (the "Commission") on July 18, 1996, as
amended by Amendment No. 1 to Schedule 13D filed with the Commission on
September 16, 1996 (as amended, the "Schedule 13D"), relating to shares of
common stock, par value $.01 per share (the "Shares"), of Baldwin Piano & Organ
Company, a Delaware corporation (the "Company"). The principal executive
offices of the Company are located at 422 Wards Corner Road, Loveland, Ohio
45140-8390. Unless otherwise indicated, all capitalized terms used herein but
not defined herein shall have the same meanings as set forth in the Schedule
13D.
Item 3. Source and Amount of Funds or Other Consideration.
--------------------------------------------------
As of the close of business on October 16, 1996, Bolero held 160,060
Shares, of which (i) 10,000 were contributed to Bolero by Mr. Pavia, (ii) 39,600
were contributed to Bolero by Balboa, (iii) 28,000 were contributed to Bolero by
limited partners of Bolero (other than Balboa) and (iv) 82,460 were purchased by
Bolero. Mr. Pavia purchased the Shares which he contributed to Bolero for an
aggregate purchase price (excluding commissions) of $126,750, which amount was
provided from his personal funds. Balboa purchased the Shares which it
contributed to Bolero for an aggregate purchase price (excluding commissions) of
$502,975, which amount was provided from borrowings under standard broker margin
arrangements which have been repaid. It is anticipated that Balboa will be
liquidated in the near future and the limited partner interests in Bolero which
it holds will be distributed to its general partner, Mr. Pavia, and certain of
its limited partners, including FHI. The Shares contributed to Bolero by
limited partners (other than Balboa) had an aggregate market value, at the time
they were contributed, of $404,875. Bolero purchased the Shares that it
purchased for an aggregate purchase price (excluding commissions) of $1,248,043,
which amount was provided from its working capital.
As of the close of business on October 16, 1996, FHI held an aggregate
of 62,000 Shares which it had purchased for an aggregate purchase price
(excluding commissions) of $789,500, which amount was provided from FHI's
working capital.
None of the Shares is currently subject to any margin arrangements,
although the Reporting Persons may from time to time enter into one or more of
such arrangements in the future.
Item 4. Purpose of Transaction.
-----------------------
Item 4 to the Schedule 13D is hereby amended, in pertinent part, as
follows:
On October 15, 1996, Bolero submitted a letter to the Company, which
letter is filed as Exhibit 3 and is incorporated by reference
5
<PAGE>
herein, outlining examples of issues which Bolero believes that the Company had
failed to address in order to rectify its laggard sales, erratic earnings and
poor stock market performance. The letter also reiterated Mr. Pavia's request
that the Company hire a nationally recognized investment banker to explore a
possible sale, merger or business combination involving the Company to enhance
the Company's value. On October 15, 1996, Bolero issued a press release, which
press release is filed as Exhibit 2 and is incorporated by reference herein.
On October 17, 1996, Bolero submitted another letter to the Board of
Directors of the Company, which letter is filed as Exhibit 4 and is incorporated
by reference herein. The October 17 letter presented a number of questions and
comments regarding the Company, including issues regarding the illiquidity of
the Company's stock, the increase in inventory, high administrative expenses,
installment receivables, the variety in the Company's product lines,
management's compensation, the decrease in the Company's bad debt provision and
increase in receivables, the Company's sensitivity to a downturn in the economy
and the relatively minor expenditures on research and development. The letter
also reiterated that if the Company denies Bolero's request for retention of an
investment banker, Pavia would present the proposal outlined in his September
13, 1996 letter to the Company's shareholders.
Item 5. Interest in Securities of the Issuer.
-------------------------------------
(a)-(b) As of the close of business on October 16, 1996, Bolero
directly owned in the aggregate 160,060 Shares, which represent approximately
4.7% of the 3,422,196 Shares outstanding as of August 1, 1996, as reported in
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
(the "Outstanding Shares"). Bolero, acting through its sole general partner,
Mr. Pavia, has the sole power to vote or direct the vote, and to dispose or to
direct the disposition of, the Shares which it owns directly.
As of the close of business on October 16, 1996, FHI directly owned in
the aggregate 62,000 Shares, which represent approximately 1.8% of the
Outstanding Shares. FHI has the sole power to vote or direct the vote, and to
dispose or to direct the disposition of, the Shares which it owns directly.
As of the close of business on October 16, 1996, Mr. Pavia did not
hold any Shares directly. As the sole general partner of Bolero, Mr. Pavia may
be deemed to beneficially own the Shares held by Bolero. As the sole executive
officer and shareholder of FHI, Mr. Pavia may be deemed to beneficially own the
Shares held by FHI.
As of the close of business on October 16, 1996, Mrs. Pavia did not
hold any Shares directly. Mrs. Pavia has no right to vote or dispose of any
Shares held by Bolero or FHI, and therefore does not beneficially own any of
such Shares.
As of the close of business on October 16, 1996, Balboa did not hold
any Shares directly. As a limited partner of Bolero, Balboa has no right to
vote or dispose of any Shares held by Bolero, and therefore does not
beneficially own any Shares.
The Reporting Persons may be deemed to be acting as a group in
relation to their respective investments in the Company.
Except as set forth in this Item 5(a)-(b), each of the persons named
in this Item 5(a)-(b) disclaims beneficial ownership of any Shares owned
beneficially or of record by any other person named in this Item 5(a)-(b).
(c) In addition to the acquisitions of Shares reported in Amendment
No. 1 to Schedule 13D, within the past 60 days Bolero has purchased 17,500
Shares through open market purchases in the following transactions, all of which
were effected in the over-the-counter market:
6
<PAGE>
<TABLE>
<CAPTION>
Date Number of Shares Price per Share*
-------- ---------------- ----------------
<S> <C> <C>
09/13/96 5,000 $15.25
09/20/96 5,500 $15.75
10/02/96 3,000 $16.00
10/04/96 2,000 $16.10
10/07/96 2,000 $15.75
</TABLE>
* Excluding commissions
Except as set forth herein, none of the Reporting Persons, Mrs. Pavia or Balboa
has effected any transaction in the Shares during the past 60 days.
(d) Not applicable.
(e) Not applicable.
Item 7. Material to be Filed as Exhibits.
---------------------------------
Exhibit 1 Joint Filing Agreement dated as of July 17, 1996, which was filed as
Exhibit 1 to the Schedule 13D filed on July 18, 1996 by the Reporting
Persons and is incorporated by reference herein.
Exhibit 2 Form of Press Release.
Exhibit 3 Letter from Bolero to the Company dated October 15, 1996.
Exhibit 4 Letter from Bolero to the Company dated October 17, 1996.
7
<PAGE>
SIGNATURE
---------
After reasonable inquiry and to the best of each of the undersigned's
knowledge and belief, each of the undersigned certifies that the information set
forth in this statement is true, complete and correct.
Dated: October 16, 1996
Bolero Investment Group, L.P.
By: /s/ Kenneth W. Pavia, Sr.
-----------------------------------
Name: Kenneth W. Pavia, Sr.
Its: General Partner
/s/ Kenneth W. Pavia, Sr.
---------------------------------------
Kenneth W. Pavia, Sr.
FHI, Inc.
By: /s/ Kenneth W. Pavia, Sr.
----------------------------------
Name: Kenneth W. Pavia, Sr.
Its: President
8
<PAGE>
EXHIBIT INDEX
-------------
Exhibit 1 Joint Filing Agreement dated as of July 17, 1996, which was filed as
Exhibit 1 to the Schedule 13D filed on July 18, 1996 by the Reporting
Persons and is incorporated by reference herein.
Exhibit 2 Form of Press Release.
Exhibit 3 Letter from Bolero to the Company dated October 15, 1996.
Exhibit 4 Letter from Bolero to the Company dated October 17, 1996.
9
<PAGE>
EXHIBIT 2
BOLERO INVESTMENT GROUP L.P.
----------------------------
PO DRAWER 5208 1101 E. BALBOA BLVD
HILTON HEAD ISLAND NEWPORT BEACH, CA 92661-1313
(803) 785-7730 (714) 675-3850
(803) 686-2659 (FAX) (714) 673-0434 (FAX)
CONTACT: KENNETH W. PAVIA
FOR RELEASE: IMMEDIATELY
SEPTEMBER 13, 1996
BOLERO INVESTMENT GROUP ANNOUNCES
---------------------------------
INCREASE IN INVESTMENT BY 18% PERCENT
-------------------------------------
Investors hold 6.5% of Baldwin Shares
-------------------------------------
Hilton Head Island, SC, October 15, 1996--
Bolero Investment Group L.P. and its General Partner, Kenneth W. Pavia Sr.,
have announced that they have increased their stake in Baldwin Piano and Organ
Co. to 6.5% percent. Mr. Pavia reports that the additional shares acquired,
which represent an 18% percent increase over the shares owned on July 18, 1996,
were acquired as an investment which he views as having significant potential
for increased value.
On October 15, 1996, the Bolero Partnership and Mr. Pavia submitted a
letter to the Board of Directors of Baldwin that outlined examples of issues the
company had failed to address in order to rectify its laggard sales, erratic
earnings and poor stock market performance. As a result of this failure, the
Bolero Partnership and Mr. Pavia recently called on Baldwin to hire an
investment banker to explore the possible sale, merger, or business combination
as a method of enhancing the company's value. In the event that Baldwin refuses
to hire an investment banker, Mr. Pavia has announced his intent to advance a
proposal at Baldwin's 1997 annual meeting of shareholders which would call for
the hiring of an investment banker to explore the possible sale, merger, or
other business combination involving Baldwin as a method of enhancing the
company's value.
<PAGE>
EXHIBIT 3
BOLERO INVESTMENT GROUP, L.P.
-----------------------------
PO BOX 5208 1101 E. BALBOA BLVD.
HILTON HEAD ISLAND, SC 29938 NEWPORT BEACH, CA 92661-1313
(803) 785-7730 (714) 675-3850
(803) 686-2659 (FAX) (714) 673-0434 (FAX)
October 15, 1996
Ms. Karen Hendricks
CEO
Baldwin Piano & Organ Co.
422 Wards Corner
Loveland, OH 45140-8390
Dear Ms. Hendricks:
I am in receipt of your September 20th letter. As we wait for the
Board of Directors to consider my proposal, I felt it would be beneficial to
provide the possible issues that we would have discussed if given the
opportunity to meet. Since your "busy schedule" prevented us from meeting, the
following are examples of questions that remain unanswered and their possible
benefits were not addressed. As we enter into the third year of your tenure as
CEO, Baldwin Piano and Organ Co.'s performance continues to suffer from laggard
sales, erratic earnings and a stock price hovering near book value. The Board
and management, in their fiduciary capacity, should have addressed the issues
presented in order to effectuate a reversal of these trends. Based on the
Board's and management's seeming unwillingness to address these issues, the
Bolero Partnership was placed in a position of having to call on the Board to
hire an investment banker to explore a possible sale, merger or business
combination involving the company.
According to the latest figures contained in the company's 10K,
Baldwin's main competition in the manufacturing of acoustic and digital pianos
came from abroad. Foreign piano manufacturers control sixty-one (61%) percent
of the acoustic piano market in an era where overall sales of acoustic pianos
have decreased. In response to this fact, had any efforts been made to lobby
the government to rectify the business advantages foreign competition enjoys as
a result of our import laws? Many other American businesses have effectively
utilized similar techniques in order to achieve a competitive balance in our
domestic market. With public sentiment favoring a "Buy American" mentality,
Baldwin seemed to have a threshold opportunity to capitalize on being the sole
manufacturer of pianos in the United States. By creating an even playing field,
Baldwin could have conceivably captured a greater percentage of the domestic
market.
Similarly, you were recently quoted as stating that Baldwin was
preparing to enter the Japanese, South Korean and German markets. While the
aforementioned seems on its face a worthy endeavor, it appears to suffer from
specious characteristics. The stated
<PAGE>
goal of having future international sales constituting five (5%) percent of
total sales by the year 2000 hardly evoked confidence in this strategy for
future growth. While not attempting to interfere in the traditional province of
management, the Bolero Partnership would have been interested in learning of the
overall strategy of management for increasing its market share abroad.
Additionally, as competitors prepare to enter the Latin American market, would
it be reasonable to assume that Baldwin had also targeted this geographic area
for expansion? Another area that may have deserved consideration is the Middle
East. As previously stated, the Bolero Partnership has numerous contacts in the
Arab world and could have possibly facilitated Baldwin's entry into this market.
In regard to Baldwin's domestic operations, the company's factories
are primarily located in Arkansas and Mississippi. The last two 10-K's of the
company have stated that several of the factories have not been utilized at
capacity levels. Based on this fact, wouldn't Baldwin have been better served
by consolidating operations and selling the under-utilized factories? Reducing
the duplication of activities and streamlining operations could have been
potential benefits. In the alternative, did the company have reasonable belief
as to the anticipation of business growth in order to justify the warehousing of
excess space?
Another possibility regarding Baldwin's manufacturing operations
concerned the ownership of the physical plants. Baldwin currently owns all of
its manufacturing facilities. Had Baldwin considered selling its interest in
the facilities and entering into long-term lease arrangements? The selling of
the facilities could have provided Baldwin with an additional source of capital
necessary to expand and improve on its current operations, or to be used in the
finance subsidiary.
Similarly, Baldwin's corporate headquarters are located in Loveland,
Ohio. The 50,000 square foot facility houses the corporate offices as well as a
retail showroom. With all the manufacturing facilities located primarily in
Arkansas, what were the benefits of maintaining the corporate offices in Ohio?
Would it be reasonable to assume that the company would have benefited by having
its corporate offices near the manufacturing process? Would relocation have
promoted continuity and expediency? The company could have explored potential
incentives and tax benefits offered by cities in order to induce relocation.
In analyzing Baldwin's distribution system, management should have
considered the following questions or areas of interest. The company currently
supplies its pianos through independent dealers, eleven company-owned stores and
a factory direct sales program. Had the company considered alternatives to
owning the stores? Taking into account the expense of operating the company
owned stores in eleven locations, was there any merit to Baldwin selling its
stores and reemploying the proceeds? Could the stores have been sold to
independent dealers? Baldwin could have continued to provide pianos in the
areas affected through independent dealers in order to avoid any loss in
revenue.
Additionally, Baldwin currently charges a monthly "display fee" for
all consigned inventory held by dealers longer than ninety (90) days, thereby
affording Baldwin an additional source of revenue and income. In analyzing this
practice, the company could have considered the seemingly favorable implications
of restructuring the
<PAGE>
dealer relationship by having the dealers rent or lease the pianos. Would
renting or leasing the pianos have allowed Baldwin to depreciate the pianos on
its financial statements while still receiving the revenue benefits, thereby
increasing cash flow and profitability? The company could have passed on some
of the benefits received to the dealers as incentive to restructure the
arrangement.
In regard to the contract electronics division, the company states
that "it does not occupy a significant portion of the printed circuit board
industry." The division was created in 1984, and has enjoyed significant
investment from Baldwin for state of the art equipment and facilities. With the
availability of alternative manufacturers, both foreign and domestic, what was
the rationale for the division's existence? Did the benefits of maintaining
this division outweigh the costs? Would it be reasonable to assume that the
company would have profited from a potential sale or spinoff of this division?
Is the facility in Fayetteville one of the factories which is under-utilized?
Did the dominance of foreign manufacturers preclude Baldwin from capturing an
increased share of the market? Was there a strategy in place which addressed
the division's failure to capture a significant share of the market?
Additionally, the limited information contained in the Note entitled Segment
Information raised several questions. While sales and other revenue in the
electronic contracting division rose from 1994 to 1995, the net operating profit
decreased in the division for each of the last three years. What was the reason
for this decrease? Was this a trend? The Notes contain an explanation stating
that the operating profit was lower due to lower margins on a changing mix of
sales. The partnership would have wanted to discuss this statement and its
meaning with management.
The finance company division has provided Baldwin with a potential
competitive advantage over other piano manufacturers. With KAC recently
entering into the business of financing the purchase of other pianos and
instruments, what steps had Baldwin implemented in promoting this change in
policy? What marketing strategies had been implemented to attract potential
consumers/borrowers? Additionally, it appears that Baldwin pianos retain a high
resale value. Given this fact, had Baldwin contemplated a lease program? A
lease program could have made the acquisition of a piano more attractive to
Baldwin's main focus group, families with children between the ages of six and
twelve. Other potential consumers that would have been attracted by a lease
option would be instructions such as colleges, universities and churches.
The most recent 10K states that the company's retail stores and most
of its independent dealers sell used keyboard products. Was there a system in
place to refurbish and retune pianos received as trade-ins? Was there financing
available for used pianos? What promotional strategies were in place to
actively sell and distribute used pianos? What steps were being taken to
compete with Baldwin's potentially largest competitor, namely, the sellers of
used Baldwin's Pianos? The partnership would also have been interested in what
strategies Baldwin had implemented to take advantage of the used digital piano
market.
In regard to the financial statement of the company, there are several
issues from an accounting standpoint as well as a presentation standpoint that
should have been addressed. Currently, Baldwin accounts for a substantial
portion of its inventory (77%) by applying the last in first out method (LIFO).
Other inventory is accounted for using the
<PAGE>
first in first out method (FIFO). What was the rationale for using alternative
methods? What is the industry practice for accounting for inventory? The Note
to the 1995 financial statement states that net earnings were $1.4 million less
than would have been reported had the FIFO method been used.
Additionally, the financial statement states that the revolving line
of credit (Revolver) is classified as a current portion of long term debt.
Assuming that the reasoning behind this classification is correct, would it have
been in the company's best interest to renegotiate the terms of the line of
credit in order to classify this debt as a long term obligation? What would
have been the effect of restructuring this arrangement so as not to be required
to reflect it as a current portion of long term debt? Would the positive result
of achieving a restructuring have outweighed the effort involved?
In the area of presentation of the financial statement, there are
additional questions which should have been discussed. The financial statement
contains a Note entitled Segment Information where limited data is provided on
the individual divisions. What was the rationale for not providing more
specific data on the divisions? Would it have been reasonable to assume that by
providing more detailed data, Baldwin would have afforded the investment
community a more accurate picture of the company's performance and perhaps aided
in achieving a more favorable multiple.
Finally, in the area of the company's stock, there are many areas that
should have been addressed. As you are hopefully aware, the company's stock
suffers from illiquidity. According to the 1995 Financial Statement, the
company has authorized 14,000,000 shares of common stock. However, the only
portion of the authorized stock has been issued. Had the issuance of more
shares been contemplated? Would solving the problem of illiquidity negate any
other considerations? Similarly, were there any marketing strategies in place
to raise the awareness of Baldwin with investors? Did the company employ a
public relations firm? Was the company attempting to attract additional market
makers? There are approximately 17.3 million dollars available for the
repurchase of stock. Had the company considered the repurchase of stock, and if
not, what were the reasons for not implementing a repurchase plan? In regard to
the dealers, had the company considered the granting of stock options as
incentives? This might have been an inexpensive manner to motivate the dealers
and decrease illiquidity. The partnership would have liked to discuss these
issues and any other potential solutions that management had considered.
In summary, it was my hope to examine all facets of the company in
order to attempt to aid management. Specific areas of inquiry would have
included, but were not limited to, the following: illiquidity of stock; flat
sales and earnings; effect of foreign competition; limited number of market
makers and analysts following the company; lack of public interest and
decreasing profitability of the company. Additionally, with the current
management team commencing its third year at the helm of Baldwin, the
partnership would have addressed the seeming lack of depth of management as well
as the lack of leadership initiative in the product and finance divisions. The
Bolero Partnership continues to view its investment in Baldwin as having
significant potential for increased value. Yet, with management's apparent
inability or refusal to address the issues raised in this letter it became
readily apparent that the hiring of an investment banker was not a luxury but a
necessity.
<PAGE>
The management's seemingly conscious avoidance of the weakness of the
company was affecting the owners, its shareholders. Ultimately, the investment
banker's analysis will devolve into an objective set of criteria. Once this
criteria is defined, it will become apparent that Baldwin's performance has been
substandard and not in conformance with the expectations for a company of its
size, stature and duration. In support of this contention I offer the following
proof: laggard sales, erratic earnings and a stock price hovering near book
value. As much, I renew my request to hire a nationally recognized investment
banker to explore a possible sale, merger or business combination involving the
company as alternatives in enhancing the company's value. In the event that my
request is denied, I reiterate my intention to submit the proposal contained in
my September 13th letter at the 1997 Annual Meeting of Shareholders.
Sincerely,
/s/ Kenneth W. Pavia
Kenneth W. Pavia, G.P.
<PAGE>
EXHIBIT 4
[LETTERHEAD OF BOLERO INVESTMENT GROUP, L.P.]
October 17, 1996
Ms. Karen Hendricks
Baldwin Piano & Organ Co.
422 Wards Corner
Loveland, OH 45140-8390
Dear Mr. Hendricks:
As follow up to my October 15th letter, the following are a number of
questions and comments recently posed to the Bolero Partnership by various
interested parties. These parties have apparently actively followed the
developments of Baldwin Piano and Organ Co. and are familiar with the public
information concerning the company. I felt a responsibility, in reference to
your busy schedule, to express these concerns in one format in order to reduce
the time that would have been necessary to consider them individually.
An area of concern that has been frequently mentioned is the illiquidity of
Baldwin's stock. With institutional investors comprising 66% of the total number
of shareholders as well as insiders constituting 19%, Baldwin has an extremely
small float available for shareholder investment. With a broader investment
group comprised of individuals possibly providing long term stability and
liquidity, what efforts have been undertaken by management to accomplish greater
shareholder diversity? Has Baldwin considered implementing a "road show" to
attract retail brokers? Is there a strategy in place to attract the attention of
regional analysts?
Another issue that has been raised concerns inventory. Inventory accounted
for nearly 46% of total assets as of December 31, 1995, and rose to nearly 50%
in the first quarter of 1996. What is the reason for this increase? What is the
inventory turnover ratio? Does Baldwin have an explanation as to why inventory
is at record levels when the factories are not operating at full capacity?
Additionally, while consolidated revenue decreased, expenses continued to
be relatively unchanged. Cost of goods sold and administrative expenses did not
decrease proportionally to revenue. As a result, the overall operating profit
has decreased
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by over 12%. What efforts, if any, has the company made to decrease
administrative expenses? Is there an overall strategy to reduce fixed costs?
There have also been various questions posed regarding Baldwin's
installment receivables. Why is the company apparently gambling on interest
rates (fixed v. floating)? What is the reason in taking this risk while also
maintaining the potential liability for bad debts? What is management's
rationale for selling receivables when earnings on these receivables is greater
than the return on operations?
Regarding Baldwin's products, the company currently has over sixty
different styles and finishes. What is the rationale for having so many? Does
management have a breakdown as to the number of different styles and finishes
sold in any given year? Is there a mechanism in place to identify
under-performing product lines? What is Baldwin's overall marketing strategy
regarding the individual styles and finishes?
Several questions have been raised concerning management's compensation.
The CEO owns only 4,000 shares and has options on an additional 100,000, with a
lucrative severance agreement. The rest of management's compensation is even
less performance based. Has Baldwin considered making management's compensation
based on the overall performance of the company? Do employees in general have
any performance incentives or equity related rewards?
Other areas of inquiry included, but were not limited to, the decrease in
the bad debt provision while receivables increased; the company's sensitivity to
a downturn in the economy; and the relatively minor expenditures on research and
development. As stated, the issues presented in this letter are merely some of
the concerns raised by interested parties to the Bolero Partnership. As such, I
felt an obligation to forward them, and have provided you with a simplified
format in deference to your busy schedule. Management's failure/refusal to
explore all reasonable alternatives in addressing the variety of challenges
facing Baldwin forced the Bolero Partnership into advocating the voluntary
retention of an investment banker to explore a possible sale, merger, or
business combination involving the company. In the event my request is denied, I
look forward to presenting my proposal as outlined in my September 13th letter
to Baldwin's shareholders.
Sincerely,
/s/ Kenneth W. Pavia
Kenneth W. Pavia, G.P.
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