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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
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For the fiscal year ended Commission File Number
December 31, 1998 0-14903
Baldwin Piano & Organ Company
(Exact name of registrant as specified in its charter)
Delaware 31-1091812
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4680 Parkway Drive
Mason, Ohio 45040-5301
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (513) 754-4500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant is $28,054,211 based upon the $8.125 per share price at which
the Common Stock was last sold as reported on the Nasdaq National Market through
March 22, 1999.
The number of outstanding shares of Common Stock of Baldwin Piano &
Organ Company ("Company"), as of March 22, 1999, is 3,452,826.
DOCUMENTS INCORPORATED BY REFERENCE
All of the information required by Items 6-8 of Part II of this Form
10-K is incorporated by reference from the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1998 ("1998 Annual Report to
Shareholders"). The 1998 Annual Report to Shareholders will be mailed to the
Company's shareholders along with the Company's definitive proxy statement for
its 1999 Annual Meeting of Shareholders. The Company currently anticipates that
its 1999 Annual Meeting will be held in June 1999, although the exact date has
not yet been established by the Company's Board of Directors.
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TABLE OF CONTENTS
PART I. Page
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Item 1. Business 1-13
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Security Holders 14
PART II.
Item 5. Market for Registrant's Common Equity 15-16
and Related Stockholder Matters
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of 16
Financial Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures 16
about Market Risk
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants 17
on Accounting and Financial Disclosure
PART III.
Item 10. Directors and Executive Officers of the 17-19
Registrant
Item 11. Executive Compensation 19-27
Item 12. Security Ownership of Certain Beneficial 28-34
Owners and Management
Item 13. Certain Relationships and Related 35
Transaction
PART IV.
Item 14. Exhibits, Financial Statement Schedules, 36-43
and Reports on Form 8-K
SIGNATURES 44
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PART I
ITEM 1. BUSINESS
As used herein, the terms "Company" or "Baldwin" refer to Baldwin Piano
& Organ Company and its subsidiaries and the Company's predecessors, unless the
context otherwise indicates.
As a leader in the U.S. keyboard market, the Company's core business,
Baldwin manufactures and markets a full range of high quality keyboard
instruments featuring the Baldwin(R), Wurlitzer(R), Chickering(TM),
ConcertMaster(TM) And Pianovelle(TM) trademarks. From artist-accepted concert
grand pianos to innovative digital keyboards, renowned Baldwin instruments are
found in homes, academic institutions and concert halls across the nation.
As one of its core businesses, Baldwin provides in-house consumer
installment financing of musical products through its wholly-owned subsidiaries,
Keyboard Acceptance Corporation and Signature Leasing Corporation (together
referred to as "Retail Financing"). With an emphasis on superior service,
revenues generated by Retail Financing continue to grow significantly,
increasing by 18% in 1998. Baldwin is the only U.S. musical products
manufacturer to offer direct consumer financing of its instruments, and offers
both installment and leasing arrangements.
Through its Contract Electronics Division, Baldwin offers printed
circuit board assemblies, design, engineering, testing, assembly,
post-production repair and order fulfillment services for original equipment
manufacturers.
Sales of the Company's products and other revenue are set forth by
segment in the following table:
(dollars in millions)
Year Ended December 31,
--------------------------
1998 1997 1996
---- ---- ----
Music and Related.................... $ 91.6 $107.5 $ 84.2
Electronic Contracting............... 42.7 35.6 30.9
Retail Financing..................... 10.4 8.6 7.0
----- ----- ----
Total................... $144.7 $151.7 $122.1
====== ====== ======
Beginning in 1997 and concluding in 1998, Baldwin phased out its
historical consignment inventory program. Under its historical consignment
inventory program, the consigned pianos in a dealer's possession remained part
of Baldwin's inventory until actually sold by the dealer. In 1997, as a result
of Baldwin's development and implementation of a more attractive flooring plan,
the dealers opted out of the existing consignment program and most of the
Company inventory in each of these dealers' possession was immediately sold to
the dealers. This created a non-recurring increase in Baldwin's 1997 sales and
net earnings of $14.6 million and $0.9 million, respectively.
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Additional financial information regarding industry segments is shown
in this Form 10-K in Note 15 to the Consolidated Financial Statements of the
Company, attached hereto as Exhibit 13.1.
MUSICAL PRODUCTS
Since 1862, Baldwin's keyboard products have been recognized for their
high quality, value and performance by professional musicians, educators and
consumers. Today, Baldwin's keyboard products are consistent with the Company's
fine heritage and represent a broad range of acoustic and electronic instruments
aimed at a broad consumer base. Baldwin's musical products are sold through
domestic wholesale dealers (82%), Company-owned retail stores (12%), and an
international dealer network (6%).
ACOUSTIC PIANOS
The Company's premier product is the Baldwin(R) concert grand
piano, a product which is widely accepteD for concert performances.
Baldwin is the only domestic manufacturer of concert grand pianos which
also produces a full line of vertical pianos. The Company has
successfully incorporated a number of enhancements and construction
techniques originally designed for Baldwin(R) grand pianos into its
vertical piano lines. The CompanY believes that the quality and
durability of the Baldwin(R) concert grand pianos enhance the
reputation anD marketability of its entire line of acoustic keyboard
instruments.
Baldwin offers three brands of pianos, under the Baldwin(R),
Chickering(TM) and Wurlitzer(R) names, each earmarked for a different
segment of the market on the basis of price and product positioning.
Together, these three brands have represented nearly 50% of all
domestic new piano sales over the past four decades and provide a
significant competitive advantage to the Company. Product development
activity is focused on the development of improved designs, periodic
cabinetry changes, other aesthetic features and electronic
enhancements.
Overall, the Company's product line offering covers all key
price points, piano styles, finishes, and sizes -- ranging from 37-inch
vertical pianos to 9-foot concert grand pianos.
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DIGITAL KEYBOARDS
Baldwin distributes a broad range of electronic keyboard
instruments. Baldwin's products compete in those digital keyboard
market segments that represent over 90% of the market for digital
keyboard products used in the home. To gain a greater share of this
growing segment, Baldwin introduced its digital product line, Baldwin
Pianovelle(TM), in September 1995, and completed the rollout in August
1996. Overall, the line includes seven models.
Pianovelle(TM) products are manufactured to Baldwin's
specifications in Italy by GeneralMusic, Europe's largest digital
keyboard manufacturer. GeneralMusic provides Baldwin with an efficient
source of cutting-edge technology to compete in this rapidly changing
category without incurring any significant costs of its own. Baldwin
enjoys exclusive North American rights to market these products and is
working with GeneralMusic to design a new generation of products with
superior tone and touch.
PRODUCT DEVELOPMENT
The Company's research staff, in conjunction with outside
consulting and design services, continually refines existing products
and develops new products.
In Music, in the third quarter of 1998, Baldwin began dealer
shipments of a new line of grand pianos featuring the Company's new
super high-gloss polyester finishes. These new pianos have a
mirror-like appearance with proven customer appeal. The finish is
extremely hard and durable, is resistant to chemicals, scratches or
abrasions, and is easily repaired should it be damaged. This
achievement was the culmination of years of planning. It was a team
effort including long-term employees and newly-hired experts, thorough
training, and a multi-million-dollar capital investment for
state-of-the-art polyester finishing equipment. The Company is
expanding the rate of production to meet the increase in demand. The
Company believes that polyester finish is a prerequisite for entering
into Asian and European piano markets. The Company believes 70-80% of
the grand pianos sold in the United States have a polyester finish.
Also in Music, in 1996, the Company completed development of a
unique digital player system for acoustic pianos. This system, called
Baldwin ConcertMaster(TM), was introduced in January 1997 and began
shipping during the second quarter of 1997. It employs unique
multi-media storage of music and recording capabilities. It is
available for factory or field installation only on acoustic pianos
with the Company's brand names.
In September, competing against a large field of
technologically innovative consumer electronics products,
ConcertMaster(TM) won top honors for technical excellence at the New
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Orleans EXPO '98 show of the Custom Electronic Design and Installation
Association. Additional features, software and other capabilities are
under development to further enhance the competitiveness of
ConcertMaster(TM).
During 1998, the demand for Baldwin grand pianos continued to
increase -- in no small part due to the consumer appeal of
ConcertMaster(TM).
In early February 1999, Baldwin announced that it had signed
an exclusive 10-year agreement to purchase piano plates from Southland
Marketing - an Arkansas firm with approximately $50 million in annual
sales, operating for 25 years as a primary designer and supplier of
machined complex castings for a wide variety of manufacturing
applications. In connection with that agreement, Baldwin made a capital
investment to help finance the purchase of equipment needed to produce
the piano plates, including computer-numerically-controlled five-axis
drilling and machining equipment unique to the piano plates, and
state-of-the-art powder finishing. Baldwin's investment includes
equipment which can be relocated, but excludes the casting process
itself, which is financed by Southland and its manufacturing
affiliates.
Plates from the manufacturing facility will be made in
accordance with stringent Baldwin performance requirements. Unlike
traditional plates with very high scrap content, Baldwin's will be from
a process that relies almost exclusively on virgin iron ore to produce
plates of the very high chemical purity that the Company believes will
set a standard for the piano industry.
The new arrangement and facilities will generate significant
cost advantages, a major improvement in quality and long-term pricing
stability for this costly key component.
MARKETING AND DISTRIBUTION
The Company distributes its keyboard musical instruments in
North America through approximately 400 independent dealers. The
Company also operates 15 Company-owned stores in seven large
metropolitan areas. The store in Memphis, Tennessee, opened in March
1999.
In 1998, no single dealer accounted for more than 9% of the
Company's keyboard musical instrument sales. The top ten dealers in
terms of net sales accounted for approximately 26% of the Company's
keyboard musical instrument sales, excluding sales through Baldwin's
retail stores.
The Company's domestic unit sales leadership is attributable,
in part, to its excellent dealer network. The Company believes that it
has been able to attract and maintain dealers by offering a superior
product line and numerous programs
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and services designed to assist dealers and promote the Company's
products, including:
o A Concert and Artist program in which over 375
well-known pianists, composers, conductors, vocalists
and musical institutions endorse Baldwin grand pianos,
providing dealers with extensive national and local
product publicity and a method of product
differentiation. This promotes wide use of Baldwin's
pianos in broadcast media and provides for in-store
merchandising materials which promote these
endorsements.
o A dealer support program, providing training,
promotional programs and assistance, and sales
incentives.
o Institutional loan programs, which provide for short
term piano loans to universities followed by selling
events at the end of the loan term.
o Sponsorship of educational activities, including piano
competitions.
o An installment finance program offering retail
customers a source of credit and assurance of the
Company's continued interest and commitment to product
performance. This program was further enhanced by the
opening in late 1997 of a Company-owned retail store in
Atlanta for the resale of repossessed pianos. This
store's purpose is to sell the small number of
repossessed instruments and thereby allow the
elimination of recourse to the dealers - improving
dealer relations.
CONSIGNMENT CONVERSION TO THIRD PARTY FINANCING
Under Baldwin's historical consignment inventory program,
Baldwin placed Baldwin-owned inventory in dealers' retail showrooms,
and charged the dealers interest for use of the inventory after 90
days. The consigned pianos in a dealer's possession remained part of
Baldwin's inventory until actually sold by the dealer. Baldwin was the
sole piano manufacturer operating in the United States under a
consignment program.
During 1997, in conjunction with Deutsche Financial Services,
a premier financier of musical instrument inventory, Baldwin developed
and implemented the Baldwin Inventory Finance Program. This was widely
accepted as a more attractive floor plan for its dealers to finance the
dealers' purchase of Baldwin pianos from the Company. The new Baldwin
Inventory Finance Program provides better financial terms to dealers
than the previous consignment program and is cost-neutral to the
Company. Dealer reaction to this new program has been favorable, and
most of the dealers accepted the Plan. Some chose, for various reasons,
to arrange other third-party financing.
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As a result of the consignment phase out in 1997, most of the
Baldwin inventory in each of these dealers' possession was immediately
sold to the dealers. These sales by the Company to the dealers created
a non-recurring increase in Baldwin's 1997 sales of $14.6 million.
TRUCKING
The Company ceased its Company-managed trucking of pianos to
dealers during 1997, and converted these operations to an independent
contractor who specializes in piano transport. Via a contractual
arrangement, this independent trucking company absorbed the Company's
leased fleet and provides cartage at rates competitive with the
Company's. The benefits to the Company were three-fold:
(1) the Company's delivery time to dealers was improved dramatically,
particularly to dealers on the west coast of the U.S. because the
transport company ships full loads on a more frequent basis, made
possible by the economies of scale of shipping pianos for many
piano manufacturers;
(2) the specialized expertise of the independent contractor reduced
in-transit damage to the Company's pianos; and
(3) the Company reduced administrative costs and increased business
focus by outsourcing trucking to an independent supplier.
RETAIL STORES
The 15 Company-owned retail outlets are located in Atlanta,
Georgia; Cincinnati, Ohio; Indianapolis and Fort Wayne, Indiana;
Louisville and Lexington, Kentucky and Memphis, Tennessee. These
Company-owned retail outlets sell only Company piano lines and are
generally situated in areas where they do not compete directly with the
Company's independent dealers. The Company believes that the existence
of Company-owned stores has not adversely affected the Company's good
relationships with its independent dealers.
In addition to accounting for approximately 12% of the
Company's total keyboard sales in 1998, Baldwin's retail stores provide
the Company with the opportunity to test new retailing concepts and
dealer promotional ideas. Baldwin's retail stores also provide a better
understanding of dealer issues and provide a source of knowledgeable
future management talent.
FACTORY DIRECT SALES
Baldwin introduced the Factory Direct Sales program in 1994.
One of its objectives was to access retail customers who were
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outside the geographic reach of both its Company-owned stores and its
independent dealer network. Another objective of the program, and the
similar Market Development Group (MDG) program which followed, was to
work in conjunction with independent dealers to also cooperatively
increase sales within their areas. The pianos sold under those programs
were sold by the Company directly to the retail customer, at retail
prices. Each dealer participating at a sales event within the MDG
program assisted and shared in the profits. In 1998, the Company
changed the basis of this program to sell the pianos sold at selected
major event sales to the sponsoring dealers at wholesale prices and
assisted the dealer at such sales events. This new program, Major Event
Sales (MES), accounted for approximately 6% of the Company's total
keyboard sales in 1998.
INTERNATIONAL SALES
The Company's products are distributed in Canada through
approximately 30 independent dealers representing approximately 4% of
the Company's total keyboard sales in 1998. The Company markets
products through a number of other international distributors in
markets such as Mexico, France, Taiwan, Japan and England representing
approximately 2% of the Company's total keyboard sales in 1998.
MARKETS AND COMPETITION
The principal targets for the Company's acoustic and
electronic pianos are families with children aged 6 to 12, young
adults, and educational institutions.
In North America, the piano business stabilized in 1997 and
grew about 20% in 1998. Early indications for 1999 are favorable, with
growth in all major categories based on early dealer feedback, which
suggests that the industry may have hit the bottom of its most recent
cycle. This is reasonable given a reduction in the number of used
pianos in the market, increasing birth rates, strong media and public
interest in newly published research linking keyboard study to
intellectual development, and a strong domestic economy.
Sales of the Company's keyboard products are affected by the
market for used keyboard instruments, particularly used acoustic
instruments, although the Company is unaware of any reliable data for
evaluating the size or impact of these used instruments on the sales of
new products. Company sales data includes the sales of new instruments,
as well as a small number of used and non-Baldwin instruments sold by
the Company's retail stores. The revenue represented by these used or
non-Baldwin instruments is nominal.
The Company competes with a number of domestic and foreign
acoustic piano manufacturers based on price relative to tone
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quality, performance characteristics, styling, finish options and
electronic enhancement options. Based on industry statistics, foreign
piano manufacturers' combined market share for acoustic pianos in the
domestic market stands at about 60%. Foreign competition in the piano
market is most heavily concentrated in the market for small grand
pianos, electronically enhanced pianos, and, to a lesser extent, in the
market for large vertical pianos.
The Company believes that its domestic unit market share for
new acoustic pianos was approximately 26% in 1996, approximately 28% in
1997 and approximately 24% in 1998. The Company believes that no single
manufacturer has a domestic market share larger than the Company's. The
Company's domestic market share for digital pianos was approximately 4%
in 1996, 6% in 1997 and 5% in 1998.
CHURCH ORGANS
In early 1997, the Company reached agreement to sell its
church organ business, the sale of which was completed in the fourth
quarter of 1997. The church organ business was considered a non-core
business because of its unique dealer and customer base. Exit from this
business was consistent with the Company's focus on its core piano
business aimed at the consumer market.
RETAIL FINANCING OPERATIONS
The Company's retail financing operations, "Retail Financing", are
conducted through its installment financing subsidiary, Keyboard Acceptance
Corporation and its lease finance subsidiary, Signature Leasing Corporation,
created in 1997. Retail Financing provides point-of-sale consumer financing
through keyboard dealers located throughout the United States. Keyboard
Acceptance Corporation has been doing so for nearly a century. Baldwin is the
only keyboard manufacturer that provides its own consumer financing. The Company
believes that this long-term, strongly-focused attention to the music industry
provides Baldwin with a distinct competitive advantage.
Over the last few years Retail Financing has expanded its focus. In
addition to financing keyboard products sold by Baldwin dealers, Retail
Financing makes its consumer financing available through music dealers that do
not carry the Company's keyboard products. During 1998, many new dealers were
added to the Retail Financing client base as a result of this strategy.
Retail Financing offers music dealers consumer financing programs which
include competitive interest rates, leasing, rent-to-own options and prompt
credit approval. In addition to these continuing services, Retail Financing both
originates and cooperates in special promotional programs with dealers.
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Keyboard Acceptance Corporation maintains agreements to sell
substantially all of its installment receivable contracts up to a maximum
outstanding principal amount of $150 million with General Electric Capital
Corporation and affiliates. Those installment receivables which are not eligible
for sale are retained. Retail Financing continues to service all installment
receivables sold.
At the time of each installment receivable sale, Retail Financing
receives cash equal to the unpaid balance of the contracts, less a purchase
discount applied to the principal balance of the contracts sold. The purchase
discount is adjusted at each receivable sale and is determined using the loss
experience and effective yield of the portfolio. The buyer of the installment
receivables earns interest on the outstanding principal balance of the contracts
based upon a floating interest rate provision. Over the duration of the
contracts, the difference between the actual yield on the installment contracts
sold, and the amount retained by the buyer under the floating interest rate
provision, is remitted to Retail Financing as a service fee.
Under the sale agreement with the independent entity, Retail Financing
is required to repurchase accounts that become more than 120 days past due or
accounts that are deemed uncollectible by the independent purchaser. The
repurchase price is equal to the remaining unpaid principal balance of the
contract on the date repurchased, less the related purchase discount.
At December 31, 1998, Retail Financing remains contingently liable on
approximately $108 million of installment receivables. Retail Financing is
responsible for all credit losses associated with the sold receivables.
Historically, credit losses have been approximately one percent of the Retail
Financing portfolio. Installment receivables are secured by the keyboard
instruments.
Prior to the fourth quarter of 1997, in the event of repossession of an
instrument financed by Retail Financing, the dealer originally selling the
instrument bore some risk of the bad debt loss, but had the right to sell the
repossessed product. The dealer's potential liability to the Company is known as
recourse. In the fourth quarter of 1997, in order to increase the number of
contracts entered into, Retail Financing initiated a program of acquiring
receivables without recourse, and the Company began selling repossessed pianos
through its own retail stores -- primarily through a repossession center located
in the Atlanta metropolitan area. The Company believes an adequate allowance has
been provided for all uncollectible receivables.
Baldwin formed Signature Leasing Corporation, its leasing subsidiary,
to give piano buyers another financing option. Early results are encouraging as
dealers' and the Company's own sales forces begin to offer piano leasing as an
alternative financing method for the consumers' benefit and to increase piano
sales. Baldwin intends to continue to educate both its sales force and its
dealer network about the benefits and selling points of leasing.
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CONTRACT ELECTRONICS
In 1984, the Company began manufacturing printed circuit board
assemblies for original equipment manufacturers outside the music industry.
Currently, the Baldwin Contract Electronics Division provides electronic and
electromechanical products and services to a broad range of original equipment
manufacturers. Final applications include commercial and industrial power
controls, heating and air conditioning systems, vending machines, mail handling
systems, exercise equipment and semiconductor fabrication equipment.
The Contract Electronics Division has increased resource investment,
improved its work systems and expanded its customer/supplier partnerships. In
1996, this Division entered into strategic partnerships with two of its top five
customers. In one strategic partnership, Baldwin has enjoyed preferred supplier
status - increasing the likelihood for preferential access to new business being
outsourced by this customer. In the other, Baldwin has entered into long term
supply arrangements that give the Company preferred supplier status for new
business.
The Contract Electronics Division is a full-service contract supplier,
offering complete system built services, including engineering, design, testing,
repair and rework services, assembly of electronic and electromechanical
products and order fulfillment. Baldwin engineering and operations personnel
work closely with customers to take a concept or design, develop it, test it and
turn it into a manufactured circuit board assembly or finished product
component.
The Company sells electronic assemblies to manufacturers through
Company representatives and electronics manufacturers' representatives with
territories covering 28 states. There are many contract manufacturers of
electronic assemblies, and the Company does not have a significant share of the
market of such products. In terms of sales, the Company believes that this
Division is ranked in the top 65 out of approximately 1,000 contract electronics
manufacturers in the U.S. The industry remains highly fragmented with
predominantly small players and a few large ones. Baldwin has established a
niche in low-to-medium volume assembly. This Division has developed a strong
reputation among its customers in the consistency of its quality and flexibility
in meeting rapidly changing customer demands.
In electronic-based products, the Company uses outside sources for the
development and production of its products, under strict specifications
developed by the Company. Outsourcing has enabled the Company to benefit from
other companies' expertise in advanced electronic technology and new material
development and minimize operating costs.
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MANUFACTURING
The Company has integrated acoustic piano manufacturing capability
beginning with the treatment of raw lumber; proceeding through the fabrication
and finishing of the cabinetry and assembly of the inner workings; and
culminating in the creation of a completed keyboard instrument. Starting in
1996, the Company began implementing an aggressive initiative to modernize and
simplify its piano manufacturing operations.
Utilizing synchronous manufacturing techniques, the Company is gaining
greater process efficiencies, reducing manufacturing costs and inventories,
improving cycle times, increasing capacity and usable space, and producing
consistently higher-quality pianos for its dealer network and consumers.
In early January 1999, Baldwin announced that it will further reduce
its costs by approximately $2 million annually by consolidating the production
of its Artist Grand pianos into its Trumann, Arkansas piano assembly plant, and
ceasing assembly at Conway, Arkansas. Baldwin has been assembling some of
Baldwin's Artist Grand pianos at the Trumann plant for over a year. Synchronous
manufacturing techniques made the relocation possible. One-time expenses of $1.5
million and a capital investment of approximately $0.5 million are anticipated.
The Company's polyester finishing operations at Conway are not affected - nor
are operations at Greenwood, Mississippi and Juarez, Mexico.
Synchronous manufacturing principles have been refined and proven by
advanced Japanese, U.S. and European manufacturers in many industries. For
Baldwin, this approach enables greater efficiency in its continuous flow piano
assembly line. It replaces the older batch production method and its inherent
problems, such as less process control and higher work-in-process and finished
product inventories.
The Company's Contract Electronics manufacturing facility utilizes
specialized, computer-controlled production and testing equipment to assemble
and test printed circuit boards and electromechanical assemblies for its
original equipment manufacturing customers.
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RAW MATERIALS
Raw materials required for the Company's acoustic piano manufacturing
operations are primarily purchased in the United States. Due to the Company's
unique products, a limited number of vendors are available for certain
specialized parts needed for keyboard instruments. The Company has not
experienced significant difficulties in obtaining adequate supplies of raw
materials. However, the failure of one or more such vendors to continue to
supply its products could cause delays in the Company's manufacturing process
until suitable alternate sources could be obtained.
In electronic contracting, electronic components are purchased from
major electronic parts manufacturers and distributors. To minimize costs and
facilitate availability of major components, the Company designs products to
employ standard components wherever possible.
SEASONALITY
The Company's business is somewhat seasonal in nature with fourth
quarter musical products sales generally increasing during the holiday season.
In 1998, the fourth quarter accounted for approximately 27% of net sales. This
is consistent with fourth quarter results in the previous three years.
BACKLOG
At both December 31, 1998 and 1997, the Company had sales orders for
keyboard products of approximately $5 million. The sales orders for electronic
contracting totaled approximately $30 million and $33 million at December 31,
1998 and 1997, respectively. These sales orders are not firm sales orders and
are subject to cancellation by the ordering customers. The Company anticipates
that all such 1998 orders will be filled during 1999.
WORKING CAPITAL
The Company requires significant working capital to support its
operations. The Company builds inventory levels during the year to support its
high fourth quarter seasonal sales demand.
The Company finances its working capital needs under a $44 million
Revolving Credit Facility with Fifth Third Bank and NBD Bank. The Company can
terminate this Credit Facility at any time with sixty days notice. Under the
Credit Facility, the lenders have made available a line of credit based upon
certain percentages of the carrying value of the Company's inventories and
accounts receivable. Retail Financing has entered into agreements to sell
substantially all of its installment receivable contracts up to a maximum
outstanding
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principal amount of $150 million, subject to certain repurchase
provisions, as described above under the caption "Retail Financing Operations".
For more information about the Company's credit facilities, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources" attached hereto as Exhibit 13.1.
EMPLOYEES
As of December 31, 1998, the Company had approximately 1,700 full-time
employees. Approximately 273 hourly workers at the Company's Greenwood,
Mississippi facility are represented by the International Chemical Workers
Union, Local Union No. 800 and approximately 213 hourly workers at Fabricantes
Tecnicos, S.A. (wholly-owned subsidiary of the Company) Juarez, Mexico facility
are represented by the National Labor Union of Workers of Electronic Products.
All other employees are not represented by collective bargaining units. The
Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company operates the following manufacturing facilities, all of
which are owned. These properties are pledged as collateral under the Company's
various credit facilities.
<TABLE>
<CAPTION>
Location Industry Segment Principal Products
-------- ---------------- ------------------
<S> <C> <C>
Greenwood, Mississippi Music and related Piano cases and wood
components
Conway, Arkansas Music and related Grand pianos/Polyester
Finishing
Fayetteville, Arkansas Electronic Circuit boards and
Contracting electromechanical and
mechanical assemblies
Trumann, Arkansas Music and related Vertical pianos/
Grand pianos
Juarez, Mexico Music and related Keys and actions
</TABLE>
The Company's corporate offices are located in a 28,000 square foot
leased facility in a suburban office park in the greater Cincinnati, Ohio
metropolitan area. Generally, properties are utilized at normal capacity levels
on a single shift basis.
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings arising in its normal
course of business. The Company does not believe that any existing claim or suit
will have a material adverse effect on the business or financial condition of
the Company.
The operations of the Company and its predecessors are subject to
federal, state and local laws regulating the discharge of pollutants into the
environment. The Company does not anticipate that any environmental matters
currently known to the Company will result in proceedings against the Company or
in any material liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company submitted no matters to a vote of its shareholders during
the fourth quarter of the Company's 1998 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the Company's current executive officers as of March
29, 1999. They have been elected by the Company's Board of Directors to serve
until their respective successors are elected.
KAREN L. HENDRICKS, age 51, is the Company's Chairman of the Board,
Chief Executive Officer and President. Prior to joining the Company in 1994, Ms.
Hendricks served as the Executive Vice President and General Manager, Skin Care
Division of the Dial Corporation since 1992, where she had full responsibility
for Dial's United States bar and liquid soap business and their industrial
products. Ms. Hendricks previously was employed for over twenty years by The
Procter & Gamble Company in various executive positions in product development
and was promoted to General Manager of its Vidal Sassoon Hair Care Company in
1987. In her last two years at Procter & Gamble, she was Manager of Worldwide
Strategic Planning for their hair care business. She also currently serves as a
director of A.C. Nielsen Corporation and Columbia Energy Group.
STEPHEN P. BROCK, age 44, is the Company's Executive Vice President and
General Manager, Music Division since July 1997. Mr. Brock joined the Company as
Senior Vice President, Sales and Marketing in July 1995. Prior to joining the
Company, Mr. Brock most recently served as Marketing Director, Worldwide
Strategic Planning - Laundry Products for The Procter & Gamble Company since
1993. From 1984 to 1993, he served in various Brand Manager and Assistant Brand
Manager positions for The Procter & Gamble Company. From 1979 to 1984, he was
employed by the Cincinnati Opera Association in a variety of roles, including
Administrative Manager.
GEORGE C. HUEBNER, age 56, is the Company's Senior Vice President and
General Manager, Keyboard Acceptance Corporation since 1996. Mr. Huebner joined
the Company in 1960 as Assistant Credit Manager. In
-14-
<PAGE> 18
1979, he was promoted to Director of International Operations; and from 1987 to
December 1989, he was Administrative Services Manager. In January 1990, he
became National Credit Manager of the Consumer Finance Subsidiary; in May 1991,
was promoted to Divisional Vice President, Keyboard Acceptance Corporation; in
1993, he was promoted to Vice President, Keyboard Acceptance Corporation.
DUANE D. KIMBLE, age 38, joined the Company in August 1998 as Vice
President, Strategic Planning. In December 1998, Mr. Kimble was named Chief
Financial Officer. Prior to joining the Company, Mr. Kimble had been director of
financial and operations analysis for Equistar Chemicals, L.P., a leading
producer of industrial chemicals, since 1997. From 1986 to 1997, Mr. Kimble held
a variety of key financial positions with Millennium Petrochemicals, Inc., the
nation's largest domestic producer of polyethylene plastic.
RANDOLPH R. MARKS, age 48, joined the Company as Executive Vice
President, Piano Operations in January 1998. Prior to joining the Company, Mr.
Marks was the Managing Director of InterAmerican Holdings Company, a diversified
operational and management consulting firm based in San Diego since 1987. During
his tenure with InterAmerican Holdings Co., Mr. Marks oversaw the development of
more than 25 manufacturing operations in both North and South America. Mr. Marks
served in a consulting role to Baldwin since April 1996 and, as such, has played
a major role in the re-engineering of Baldwin's manufacturing operations since
November 1996.
PERRY H. SCHWARTZ, age 60, joined the Company as Executive Vice
President and Chief Financial Officer in November 1996. In December 1998, Mr.
Schwartz was appointed Senior Vice President and Treasurer of the Company. Prior
to joining the Company, Mr. Schwartz served as Vice President and Chief
Financial Officer of Richwood Pharmaceuticals, Inc., and from January 1994 to
May 1996, he served as Senior Vice President and Chief Financial Officer of
Brockway Standard Holdings Corporation. From October 1984 to January 1994, Mr.
Schwartz was Senior Vice President and Chief Financial Officer of Heekin Can,
Inc.
There are no family relationships among any of the directors nor among
any of the directors and any executive officers of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not listed on any national securities
exchange, and its principal United States trading market is through the Nasdaq
Stock Market's National Market. Quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
-15-
<PAGE> 19
Year 1998 Year 1997
--------- ---------
Common Stock Bid Range Common Stock Bid Range
----------------------- ----------------------
Quarter High Low Quarter High Low
- ------- ---- --- ------- ---- ---
First $17 $15 1/2 First $14 $11 1/2
Second $16 7/8 $14 7/8 Second $14 1/2 $12 3/4
Third $15 3/4 $10 3/4 Third $18 $13 1/4
Fourth $11 3/4 $ 8 1/2 Fourth $19 15/16 $15 5/8
As of March 22, 1999, the number of outstanding shares of the Company's
common stock was 3,452,826. The approximate number of record holders of such
shares was 109.
The Company has paid no dividends since its inception and intends to
continue its policy of retaining earnings to finance future growth.
No changes have been made to the instruments defining the right of
holders of the Company's common stock or the rights of such shareholders.
On September 4, 1996, the Company and The Provident Bank, as Rights
Agent, entered into a rights agreement. Pursuant to the terms of that 1996
rights agreement, the Board of Directors of the Company authorized the issuance
of one common share purchase right with respect to each common share of common
stock as of September 10, 1996. On April 20, 1998, the Board of Directors of the
Company authorized the redemption of those rights at the redemption price of one
cent ($0.01) per right specified in the 1996 rights agreement which amount
subsequently was paid to the holders of the outstanding rights as of April 20,
1998.
On October 13, 1998, the Company announced that its Board of Directors
had adopted an innovative Shareholder Rights Plan (the "Rights Agreement") and
declared a shareholder dividend of one Stock Purchase Right for each common
share owned on October 22, 1998. For more information about the Rights
Agreement, see "Item 12. Security Ownership of Certain Beneficial Owners and
Management - Rights Agreement".
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference to page 31 of Baldwin's 1998 Annual Report to
Shareholders under the heading of "Baldwin Piano & Organ Company and
Subsidiaries Five-Year Summary."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Incorporated by reference to pages 32 to 36 of Baldwin's 1998 Annual
Report to Shareholders under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
-16-
<PAGE> 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Incorporated by reference to page 35 of Baldwin's 1998 Annual Report to
Shareholders under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference to pages 8 to 30 of Baldwin's 1998 Annual
Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On September 10, 1998, the Registrant dismissed the firm of KPMG Peat
Marwick LLP ("KPMG") as the Registrant's principal independent accountant. Also
on September 16, 1998, the Registrant engaged the firm of Deloitte & Touche LLP
to serve as its principal independent accountant. Such actions were approved by
the Audit Committee of the Board of Directors of the Registrant.
The reports of KPMG on the Registrant's consolidated financial
statements for the fiscal years 1997 and 1996 did not contain an adverse opinion
or a disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
In connection with the audits of the two fiscal years ended December
31, 1997 and during subsequent interim periods, there were no disagreements on
any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the
satisfaction of KPMG, would have caused KPMG to make reference to the matter in
its report.
Additional information regarding the change of accountants is contained
in Baldwin's Form 8-K dated September 10, 1998 as filed with the Securities and
Exchange Commission.
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
The size of the Company's Board of Directors is currently fixed at six
members, each of whom holds office until the next annual meeting of the
Company's shareholders. The Company's 1999 annual meeting of shareholders will
be held on June 14, 1999.
-17-
<PAGE> 21
The following persons are the current directors of the Company as of
March 29, 1999:
KAREN L. HENDRICKS, age 51, is the Company's Chairman of the Board,
Chief Executive Officer and President. Prior to joining the Company in 1994, Ms.
Hendricks served as the Executive Vice President and General Manager, Skin Care
Division of the Dial Corporation since 1992, where she had full responsibility
for Dial's United States bar and liquid soap business and their industrial
products. Ms. Hendricks previously was employed for over twenty years by the
Procter & Gamble Company in various executive positions in product development
and was promoted to General Manager of its Vidal Sassoon Hair Care Company in
1987. In her last two years at Procter & Gamble, she was Manager of Worldwide
Strategic Planning for their hair care business. She also currently serves as a
director of A.C. Nielsen Corporation and Columbia Energy Group.
GEORGE E. CASTRUCCI, age 61, has served as a director of the Company
since May 1987, and served as Chairman of the Board from August 1993 until
December 1994. Prior to his retirement in March 1992, he served as Chairman and
Chief Executive Officer of Great American Broadcasting Company, a
Cincinnati-based broadcast company, and as President and Chief Operating Officer
of its parent company, Great American Communications Company. Mr. Castrucci also
currently serves as a director of BMF Savings Bank, LanVision Systems, Inc., The
Ohio National Fund, Inc., and ONE Fund, Inc.
WILLIAM B. CONNELL, age 58, has served as a director of the Company
since July 1995. In January 1997, Mr. Connell was named Lead Director by the
Board of Directors. Since 1994, he has also served as the Chairman of EDB
Holdings, Inc., a privately-held company engaged in the international retail
sale of optical eyewear, and has been a director since 1988. From 1990 to 1994,
Mr. Connell served as President and Vice Chairman of Whittle Communications, a
limited partnership which specialized in multi-media services. Mr. Connell was
formerly the Vice President of the Beauty Care Division of the Procter & Gamble
Company from 1984 to 1989. He also currently serves as a director of Remington
Products Company.
JOHN H. GUTFREUND, age 69, is President of Gutfreund & Company, Inc., a
New York based financial consulting firm which specializes in advising select
corporations and financial institutions in the United States, Europe and Asia.
Mr. Gutfreund was the former Chairman and Chief Executive Officer of Salomon
Brothers from 1981 to 1991. He also currently serves as a director of Foamex
International Inc., LCA-Vision, Inc. and Universal Bond Fund.
JOSEPH H. HEAD, JR., age 66, has been a director of the Company since
May 1987 and was previously a director from November 1983 until June 1986. He
also served as Secretary of the Company from its formation until May 1989. Mr.
Head is Chairman, former Chief Executive Officer and a director of Atkins &
Pearce, Inc., a manufacturer of industrial textiles, since 1990. He also
currently serves as a director of Fifth Third Bancorp, since 1987.
ROGER L. HOWE, age 64, has been a director of the Company since August
1993. Mr. Howe was formerly the Chairman of the Board of U.S.
-18-
<PAGE> 22
Precision Lens, Inc., a manufacturer of optical components used in industrial
and consumer products. Mr. Howe retired from U.S. Precision Lens, Inc. on
September 1, 1997, where he had been employed in various executive positions
since 1970. He also currently serves as a director of Convergys Corporation,
Cintas Corporation, and Firstar Corporation.
There are no family relationships among any of the directors nor among
any of the directors and any executive officers of the Company.
Ms. Hendricks' employment agreement with the Company provides that she
will be nominated as a director of the Company for each year of her employment
as described under "Item 11. Executive Compensation - Employment Contracts and
Change of Control Agreements".
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------
To the best of the Company's knowledge, all of the Company's directors,
officers and 10% or more shareholders have timely filed with the Securities and
Exchange Commission all reports required to be so filed pursuant to Section 16
of the Securities Exchange Act of 1934 for the Company's 1998 fiscal year except
that one option exercise by Mr. Huebner was not reported on a timely basis on a
Form 4. The transaction by Mr. Huebner was subsequently reported on a Form 5.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table is a summary of certain information concerning the
compensation awarded or paid to, or earned by the Company's Chief Executive
Officer, each of the Company's other four most highly compensated executive
officers in 1998 and one additional individual who would have been one of the
Company's most highly compensated executive officers if he had still been an
executive officer of the Company on December 31, 1998. Information is provided
for each of the last three fiscal years or such shorter period during which the
named executive served as an executive officer of the Company.
-19-
<PAGE> 23
<TABLE>
<CAPTION>
Long Term Compensation
Awards
----------------------
Annual Compensation Restricted Securities
-------------------- Stock Underlying All Other
Name and Salary Bonus Awards Options Compensation
Principal Position Year (1)($) (2)($) (3)($) (#) (4)($)
- ------------------ ---- ------ ------ ------ --- ------
<S> <C> <C> <C> <C> <C> <C>
Karen L. Hendricks 1998 $350,000 $ -0- $ -0- 10,000 $ 30,039
Chairman, Chief Executive 1997 350,000 98,000 12,500 29,000 27,100
Officer and President 1996 318,000 -0- -0- 10,000 31,741
Stephen P. Brock 1998 204,000 -0- -0- 3,000 15,373
Executive Vice 1997 190,000 29,568 -0- 3,000 12,572
President and General 1996 170,500 -0- -0- 12,000 9,846
Manager, Music Division
Perry H. Schwartz 1998 186,000 -0- -0- 2,500 13,306
Senior Vice President and 1997 180,000 30,240 -0- 3,000 7,049
Treasurer 1996 25,155(5) -0- -0- -0- -0-
Randolph R. Marks 1998 215,000(6) 38,700 -0- 20,000 19,775
Executive Vice President,
Piano Operations
George C. Huebner 1998 120,750 39,159 -0- 3,000 8,591
Senior Vice 1997 116,917 8,962 -0- 3,000 7,783
President and General 1996 110,123 -0- -0- 12,000 8,663
Manager, Keyboard
Acceptance Corporation
Ronald P. Geguzys 1998 191,025(7) -0- -0- -0- 26,147
Former Executive Vice
President and General
Manager, Contract
Electronics Division
</TABLE>
-20-
<PAGE> 24
(1) Includes amounts contributed by the following named executives to the
Baldwin Piano & Organ Company Retirement Plan for Salaried Employees
and the Baldwin Piano & Organ Company Non-Qualified Deferred
Compensation Plan as elective salary reduction contributions.
1998 1997 1996
---- ---- ----
Karen L. Hendricks $20,500 $20,000 $35,530
Stephen P. Brock 16,069 13,072 10,010
Perry H. Schwartz 10,993 5,400 -0-
Randolph R. Marks 12,185 -0- -0-
George C. Huebner 7,666 6,910 11,431
Ronald P. Geguzys 13,212 -0- -0-
(2) The bonuses are shown for the years earned, but were paid in the
following year.
(3) In 1994, the Company's Board of Directors adopted the Company's 1994
Long Term Incentive Plan pursuant to which awards of restricted stock
based upon the Company's stock performance in comparison to the Russell
2000 index could be made. No shares of restricted stock have been
earned to date under this Plan. The 12,500 shares of restricted stock
granted to Ms. Hendricks in 1997 were issued pursuant to the terms of
her employment agreement with the Company. At December 31, 1998, 7,500
shares of restricted stock granted to Ms. Hendricks were unvested and
had a market value of $72,187.50.
(4) "All Other Compensation" includes, as shown below, amounts contributed
by the Company under the Baldwin Piano & Organ Company Retirement Plan
for Salaried Employees; amounts contributed by the Company under the
Baldwin Piano & Organ Company Non-Qualified Deferred Compensation Plan;
group term life insurance premiums paid by the Company on policies
obtained by the Company for all employees; relocation expenses incurred
by Messrs. Marks and Geguzys; life insurance premiums paid by the
Company for $500,000 of executive life insurance on the life of Ms.
Hendricks; and insurance premiums paid by the Company for supplemental
disability coverage for Ms. Hendricks providing $10,000 in excess
disability coverage per month. The net proceeds of the executive life
policy is payable to the estate of Ms. Hendricks.
<TABLE>
<CAPTION>
ALL OTHER COMPENSATION
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Karen L. Hendricks
------------------
Retirement Plan $23,939 $21,000 $26,563
Executive Insurance 2,400 2,400 2,400
Disability Insurance 1,480 1,480 780
Group Life Insurance 2,220 2,220 1,980
------- ------- -------
Totals $30,039 $27,100 $31,741
======= ======= =======
Stephen P. Brock
----------------
Retirement Plan $14,014 $11,400 $ 8,745
Group Life Insurance 1,359 1,172 1,101
------- ------- -------
Totals $15,373 $12,572 $ 9,846
======= ======= =======
</TABLE>
-21-
<PAGE> 25
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Perry H. Schwartz
-----------------
Retirement Plan $12,067 $5,850 $ 0
Group Life Insurance 1,239 1,199 0
------- ------ -----
Totals $13,306 $7,049 $ 0
======= ====== =====
Randolph R. Marks
-----------------
Group Life Insurance $1,315 $ 0 $ 0
Relocation Expenses $18,460 0 0
------- ----- -----
Totals $19,775 $ 0 $ 0
======= ===== =====
George C. Huebner
-----------------
Retirement Plan $7,783 $7,015 $8,188
Group Life Insurance 808 768 475
------- ------ ------
Totals $8,591 $7,783 $8,663
====== ====== ======
Ronald P. Geguzys
-----------------
Group Life Insurance $ 999 $ 0 $ 0
Relocation Expenses 25,148 0 0
------- ----- -----
Totals $26,147 $ 0 $ 0
======= ===== =====
</TABLE>
(5) The Company hired Mr. Schwartz effective November 12, 1996.
(6) The Company hired Mr. Marks effective January 1, 1998.
(7) Mr. Geguzys was employed by the Company from January 1, 1998 until November
11, 1998.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company entered into a new Employment Agreement with Karen L.
Hendricks in June 1997. Pursuant to the terms of her Employment Agreement, Ms.
Hendricks will be employed as the Chief Executive Officer, President and
Chairman of the Board of the Company and she will be nominated as a director
for each year of her employment. Her Employment Agreement provides that after
December 31, 1998 she will continue in the Company's employ without a specified
term until terminated by the Company or Ms. Hendricks. Ms. Hendricks will
receive an annual base salary of no less than $350,000. She will participate in
the Company's management incentive plans at the highest participant level and
will receive all other benefits normally accorded to the Company's senior
officers. Ms. Hendricks' Employment Agreement further provides that, in
addition to the customary insurance provided to Company employees, the Company
will purchase a $500,000 term life insurance policy on her life payable to her
beneficiaries and supplemental disability coverage providing $10,000 in excess
disability coverage per month. As an added inducement for Ms. Hendricks to
enter into the Employment Agreement, her Employment Agreement further provided
that she would receive a grant of an additional 19,000 non-qualified stock
options, such options having an exercise price equal to the fair market value
of the Company's Common Stock as of such date. As a further inducement for Ms.
Hendricks to enter into the Employment Agreement, her Employment Agreement
provided that she would receive
-22-
<PAGE> 26
a one time restricted stock grant of 12,500 shares of the Company's common
stock, with 20% of such shares vesting on execution of the Employment Agreement
and the remaining shares vesting 20% on January 1 of each year through January
1, 2001, but only if Ms. Hendricks is employed by the Company on such vesting
dates.
Ms. Hendricks' Employment Agreement provides that in the event the
Company terminates her employment without cause, the Company will pay her as
severance pay a lump sum amount equal to 18 months of base salary at the time of
termination. Such severance payment shall be paid by the Company within ninety
90 days following the date of termination. In the event the Company terminates
Ms. Hendricks' employment without cause, the Company shall also pay the cost of
out placement services for Ms. Hendricks up to an amount equal to 15% of her
annual base salary at the time her employment is terminated. In the event Ms.
Hendricks is terminated for cause, she shall receive her salary through the
effective date of termination and all incentive payments earned by but not yet
paid to her prior to such date. Such amounts shall be paid by the Company within
30 days of the effective date of such termination. Ms. Hendricks' Employment
Agreement contains covenants by Ms. Hendricks not to compete with the Company
for a period of one year after termination of her Employment Agreement by Ms.
Hendricks or by the Company for cause or upon her disability.
The Company also entered into an employment agreement with Randolph
R. Marks effective January 1, 1998. Mr. Marks' employment agreement provides
that the Company will employ him as Executive Vice President, Piano Operations
through December 31, 2000 unless terminated by the Company or Mr. Marks. The
Company agreed to pay Mr. Marks an annual base salary of no less than
$215,000, a cash bonus for 1998 of no less than $38,700 and other benefits
normally accorded to the Company's executive officers. As an added inducement
for Mr. Marks to enter into the employment agreement, the Company granted him
10,000 incentive stock options and 10,000 non-qualified stock options, all
having an exercise price equal to the fair market value of the Company's Common
Stock on January 1, 1998. In future years, he is also eligible to receive
annual cash bonuses, stock options and other performance awards as the Company
may award in its discretion.
Mr. Marks' employment agreement provides that in the event the
Company terminates his employment without cause, the Company will continue to
pay his base salary on a monthly basis through December 31, 1999. In the event
that the Company terminates Mr. Marks' employment for cause or he terminates
his employment voluntarily, then he will receive his salary through the
effective date of termination and all incentive payments earned by but not yet
paid to him prior to such date. Mr. Marks also agreed in his employment
agreement not to compete with the Company for a period of one year after
termination of his employment agreement by him or by the Company for cause.
The Company has entered into agreements with each of Karen L.
Hendricks, Daniel B. Baker, Thomas C. Brewer, Stephen P. Brock, George C.
Huebner, Duane D. Kimble, Randolph R. Marks, and Perry H. Schwartz (the "Change
in Control Agreements"). These Change in Control Agreements provide that if
there is a change in control of the Company and such executive officer's
employment with the Company is terminated within a stated time period
thereafter, the Company must pay certain compensation and provide certain
perquisites to the executive officer. The Change in Control Agreements have a
term of five years. Ms. Hendricks' Change in Control Agreement provides that if
a change in control occurs during the term of the agreement and either the
Company or Ms. Hendricks terminates her employment within three years after the
change in control, Ms. Hendricks will receive 2.99 times the average annual
salary and average annual bonus and/or incentive compensation that she received
over the five years immediately preceding her termination. At Ms. Hendricks'
option, such severance compensation may be paid by the Company over 36 months or
in a lump sum discounted to present value. Ms. Hendricks' Change in Control
Agreement also provides that health and life insurance coverage will be
maintained by the Company at the level in existence at the time of her
termination, and that Ms. Hendricks will be fully vested and continue her
participation in all employee retirement plans maintained by the Company on the
date of her termination, either for 36 months or until Ms. Hendricks becomes
employed by any other employer. Pursuant to Ms. Hendricks' Change in Control
Agreement, any agreement not to compete entered into by the Company and Ms.
Hendricks shall remain in effect.
-23-
<PAGE> 27
The Change in Control Agreements of Messrs. Baker, Brewer, Brock,
Huebner, Kimble, Marks, and Schwartz are identical. Pursuant to those Change in
Control Agreements, if a change in control occurs during the term of the
agreement and the Company terminates the employment of the executive officer
within one year after the change in control, the executive officer will receive
the average annual salary and average annual bonus and/or incentive compensation
that he received over the five years immediately preceding his termination. At
the executive officer's option, such severance compensation may be paid by the
Company over 12 months or in a lump sum discounted to present value. These
Change in Control Agreements further provide that health and life insurance
coverage will be maintained at the level in existence at the time of his
termination, and that the executive officer will be fully vested and continue
his participation in all employee retirement plans maintained by the Company on
the date of his termination, either for 12 months or until the executive officer
becomes employed by any other employer. Also, pursuant to these Change in
Control Agreements, the executive officers are subject to an agreement not to
compete with the Company for one year following the date of termination.
The Change in Control Agreements for each of Ms. Hendricks and Messrs.
Baker, Brewer, Brock, Huebner, Kimble, Marks, and Schwartz also provide that all
stock options, restricted stock and other incentive awards granted to such
executive officers will, upon termination of employment, immediately vest in
full and the executive officers will be entitled to receive immediately upon
termination the cash value of any long term incentives payable under any long
term incentive compensation plans maintained by the Company on the date of
termination.
-24-
<PAGE> 28
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding grants by
the Company of stock options to each of the named executives during 1998.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Individual Grants(1) Stock Price Appreciation
-------------------- Option Term(4)
Number of % of Total --------------
Securities Options
Underlying Granted to
Options Employees Exercise or
Granted in Fiscal Base Price Expiration
Name (#)(2) Year(3) ($/Share) Date 5%($) 10%($)
---- ------ ------- --------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Karen L. Hendricks 10,000 13.47% $15.75 05/18/08 $99,225 $256,725
Stephen P. Brock 3,000 4.04% $15.75 05/18/08 $29,768 $77,018
Perry H. Schwartz 2,500 3.37% $15.75 05/18/08 $24,806 $64,181
George C. Huebner 3,000 4.04% $15.50 05/18/08 $29,295 $73,935
Randolph R. Marks 20,000 26.94% $16.12 01/01/08 $203,112 $492,900
Ronald P. Geguzys -0- -0- -0- -0- -0- -0-
</TABLE>
- -------------
(1) All grants were made at the fair market value on the grant date.
(2) Options vest over a four year period, 20% on the grant date and 20% on each
anniversary of the grant date.
(3) Total options granted to all executive officers and other employees of the
Company in 1998 were for an aggregate of 74,250 shares of Common Stock.
(4) Calculated based upon assumed stock prices for the Company's Common Stock
assuming 5% and 10% annual rates of stock appreciation are achieved over
the full term of the options granted to the executive officers reflected in
the table. The potential realizable gain equals the product of the number
of shares underlying the stock option grant and the difference between the
assumed stock price and the exercise price of each option.
- 25 -
<PAGE> 29
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth certain information regarding individual
exercises of stock options during 1998 by each of the named executives.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
12/31/98 12/31/98
Shares
Acquired on Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
Name (#) ($) (1) (#) (2) (3) ($)
- ---- --- --- -------- -----------
<S> <C> <C> <C> <C>
Karen L. Hendricks -0- $ -0- 117,600/ $ -0-
31,400
Stephen P. Brock -0- -0- 16,400/ -0-
11,600
George C. Huebner 1,000 4,750 13,600/ -0-
11,400
Randolph R. Marks -0- -0- 4,000/ -0-
16,000
Perry H. Schwartz -0- -0- 7,700/ -0-
7,800
Ronald P. Geguzys -0- -0- -0- -0-
</TABLE>
(1) All stock options issued to the named executives under the Company's 1986
Incentive Stock Option Plan are fully vested and are currently exercisable.
See note (2) to the table appearing under "Option Grants in Last Fiscal
Year" regarding the vesting of options granted in 1998.
(2) The shares of the Company's Common Stock issuable upon the exercise of
outstanding stock options granted under the Company's 1986 Incentive Stock
Option Plan, or upon the exercise of non-qualified stock options (except as
noted below), have not been registered under the Securities Act of 1933
("1933 Act"). Generally, such shares may not be resold by the holder for a
minimum period of one year following exercise of the option. The shares of
the Company's Common Stock issuable upon the exercise of outstanding stock
options granted under the Company's 1994 Incentive Stock Option Plan and
1998 Omnibus Stock Plan, and the shares issuable upon the exercise of
100,000 non-qualified stock options granted to Ms. Hendricks under her
employment agreement, have been registered under the 1933 Act and generally
can be resold immediately upon exercise.
- 26 -
<PAGE> 30
(3) The value of unexercised in-the-money options is calculated by determining
the difference between $9.625 per share, the last reported sale price of
the Common Stock on the Nasdaq National Market on December 31, 1998, and
the exercise price of the option as of such date, multiplied by the number
of shares subject to the option. All unexercised stock options granted in
1994 have an exercise price of $16.00 per share, except for the 100,000
stock options granted to Ms. Hendricks under her employment agreement which
have an exercise price of $12.50. All unexercised stock options granted in
1995 have an exercise price of $11.75 per share, except for options granted
to Stephen P. Brock at $13.375 per share. All unexercised stock options
granted in 1996 to the Company's executive officers have exercise prices of
$13.25 and $13.00 per share. All unexercised stock options granted in 1997
have an exercise price of $13.63 per share, except for 19,000 stock options
granted to Ms. Hendricks under her employment agreement which have an
exercise price of $13.00 per share. All unexercised stock options granted
in 1998 to named executive officers have an exercise price of $15.75 except
for options granted to George C. Huebner which have exercise price of
$15.50. Based upon the $9.625 per share market price of the Common Stock at
December 31, 1998, the unexercised stock options held by the named
executive officers had no value because the exercise prices exceeded the
market price.
COMPENSATION OF DIRECTORS
In 1998, non-employee directors of the Company were compensated for
serving on the Board of Directors and the committees thereof, in the amount of
$10,000 per year, payable in quarterly installments, and received an additional
$900 for each Board of Directors meeting and each committee meeting attended in
person or by telephone. Such directors are reimbursed for all reasonable
expenses incurred in connection with their services and receive an annual grant
of 2,000 non-qualified stock options under the 1998 Omnibus Stock Plan having an
exercise price equal to the market price on the date of the grant. Ms. Hendricks
receives no additional compensation for serving on the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Head and Howe comprised the Company's entire Executive
Compensation Committee during 1997, and were both non-employee directors of the
Company. No director or executive officer of the Company serves on any board of
directors or compensation committee of any entity which compensates Messrs. Head
or Howe.
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<PAGE> 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
HOLDERS OF MORE THAN FIVE PERCENT BENEFICIAL OWNERSHIP
The following table sets forth information regarding all persons known
to the Company to be the beneficial owners of more than five percent of the
Company's Common Stock as of March 22, 1999.
Amount and
Nature of
Name and Address of Beneficial Percent of
Beneficial Owner(1) Ownership Class
------------------- --------- -----
Heartland Advisors, Inc. ....... 762,600(2) 22.1%
Bolero Investment Group, L.P.... 349,660(3) 10.1%
David L. Babson & Company, Inc.. 345,600(4) 10.0%
R. S. Harrison ................. 302,167(5) 8.8%
State of Wisconsin Investment
Board ......................... 300,000(6) 8.7%
Dimensional Fund Advisors Inc... 190,300(7) 5.5%
Societe Generale Asset
Management Corp.............. 187,000(8) 5.4%
Franklin Resources, Inc......... 186,000(9) 5.4%
- -------------
(1) Based upon the Schedule 13D's and Schedule 13G's provided to the Company by
the named shareholders: the address of Heartland Advisors, Inc. is 790
North Milwaukee Street, Milwaukee Wisconsin 53202; the address of David L.
Babson & Company, Inc. is One Memorial Drive, Cambridge, Massachusetts
02142; the address of R. S. Harrison is 4040 Mt. Carmel Road, Cincinnati,
Ohio 45244; the address of State of Wisconsin Investment Board is P.O. Box
7842, Madison, Wisconsin 53707; the address of Bolero Investment Group,
L.P. is 1101 E. Balboa Boulevard, Newport Beach, California 92661; the
address of Societe Generale Asset Management Corp. is 1221 Avenue of the
Americas, New York, New York 10020; the address of Dimensional Fund
Advisors Inc. is 1299 Ocean Avenue, 11th Floor, Santa Monica, California;
and the address of Franklin Resources, Inc. is 777 Mariners Island
Boulevard, San Mateo, California 94404.
(2) Pursuant to Amendment No. 7 to Schedule 13G dated January 13, 1999,
Heartland Advisors, Inc., last informed the Company that it is a registered
investment adviser that may be deemed the beneficial owner of 762,600
shares of Common Stock. Heartland Advisors, Inc.
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<PAGE> 32
has sole dispositive power over all 762,600 shares and sole voting power of
405,100 shares.
(3) Pursuant to Forms 3 last delivered to the Company by Bolero Investment
Group, L.P. ("Bolero"), Kenneth W. Pavia, Sr. ("Pavia"), FHI, Inc.
("FHI"), Florence Partners Inc. ("Florence") and Charles Powers ("Powers")
(collectively, "Bolero Investment Group, et. al."), Bolero, a limited
partnership whose principal business is investing in marketable
securities, directly owns 264,660 shares of Common Stock. FHI, whose
principal business is private investment banking, directly owns 51,000
shares of Common Stock, and Florence, a corporation whose principal
business is investing in marketable securities, directly owns 34,000
shares of Common Stock. As a result, Pavia, whose principal business is to
make and hold investments, and who is the sole general partner of Bolero
and the founder, a director, and the sole executive officer and
shareholder of FHI and the managing director of Florence, may be deemed
the beneficial owner of 349,660 shares of Common Stock. Powers, whose
principal business is to make and hold investments, and who is the sole
director, executive officer and shareholder of Florence, and a limited
partner of Bolero, may be deemed the beneficial owner of 34,000 shares of
Common Stock. In these Forms 3, Messrs. Pavia and Powers have disclaimed
beneficial ownership of the shares that may be attributed to them and the
reporting persons have stated that they have not affirmed the existence of
a "group" as defined in Section 13(d) of the Securities Exchange Act of
1934.
(4) Pursuant to Amendment No. 9 to Schedule 13G dated January 15, 1999, David
L. Babson & Company, Inc. last informed the Company that it is a registered
investment adviser that may be deemed the beneficial owner of 345,600
shares of Common Stock. David L. Babson & Company, Inc. has sole
dispositive power over all 345,600 shares and sole voting power over
341,900 shares.
(5) Pursuant to Amendment No. 11 to Schedule 13G dated February 12, 1999, Mr.
Harrison last informed the Company that he directly owns 232,955 shares
(including a trust for his benefit and 69,212 shares of Common Stock held
under four trusts for the benefit of his four adult children which Mr.
Harrison is also deemed to beneficially own.
(6) Pursuant to Amendment No. 5 to Schedule 13G dated January 16, 1999, State
of Wisconsin Investment Board last informed the Company that it is a
government agency which manages public pension funds and that it may be
deemed the beneficial owner of 300,000 shares of Common Stock. State of
Wisconsin Investment Board has sole dispositive power and sole voting power
over all 300,000 shares.
- 29 -
<PAGE> 33
(7) Pursuant to Schedule 13G dated February 12, 1999, Dimensional Fund Advisors
Inc. stated that it is a registered investment adviser that may be deemed
the beneficial owner of 190,300 shares of Common Stock as a result of its
role as investment advisor to four investment companies and investment
manager to certain other investment vehicles, including commingled group
trusts. Dimensional Fund Advisors Inc. disclaims beneficial ownership of
all such shares. Dimensional Fund Advisors Inc. has sole dispositive power
and sole voting power over all 190,300 shares.
(8) Pursuant to Amendment No. 2 to Schedule 13G dated January 5, 1999, Societe
Generale Asset Management Corp. last informed the Company that it is an
investment adviser and is the beneficial owner of 187,000 shares of Common
Stock.
(9) Pursuant to Amendment No. 1 to Schedule 13G, dated January 22, 1999,
Franklin Resources, Inc. ("Franklin") last informed the Company that it is
a holding company through which it is the beneficial owner of 186,000
shares of Common Stock. Franklin's investment subsidiary, Franklin Advisory
Services, Inc., is an investment advisor that has sole dispositive power
and sole voting power over all 186,000 shares. Charles B. Johnson and
Rupert H. Johnson, Jr. each own in excess of 10% of the outstanding common
stock of Franklin.
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<PAGE> 34
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the ownership of
Common Stock of the Company for each director, each nominee, each named
executive and all executive officers and directors as a group as of March 22,
1999.
Amount and
Nature of
Beneficial Percent of
Name of Beneficial Owner Ownership Class
------------------------ --------- -----
CURRENT DIRECTORS AND NOMINEES
Karen L. Hendricks............... 186,500(1)(2) 5.2%
Joseph H. Head, Jr............... 34,000(2) 1.0%
Roger L. Howe.................... 27,000(2) 0.8%
George E. Castrucci.............. 26,000(2) 0.8%
William B. Connell............... 9,000(2) 0.3%
John H. Gutfreund................ 12,000(2) 0.3%
NAMED EXECUTIVE OFFICERS
Stephen P. Brock................. 30,000(1)(2) 0.9%
George C. Huebner................ 28,000(1)(2) 0.8%
Randolph R. Marks................ 25,000(1)(2) 0.8%
Perry H. Schwartz............... 15,500(1) 0.4%
All executive officers and directors
as a group (10 persons)......... 393,000(1)(2) 11.4%
- -----------
(1) Includes shares owned beneficially subject to the holder's right to
exercise outstanding incentive stock options: 30,000 shares for Ms.
Hendricks, 26,000 shares for Mr. Brock, 23,000 shares for Mr. Huebner,
10,000 shares for Mr. Marks and 15,500 shares for Mr. Schwartz.
(2) Includes shares owned beneficially subject to the holder's right to
exercise outstanding non-qualified stock options: 119,000 shares for Ms.
Hendricks, 24,000 shares for each of Messrs. Head and Castrucci, 12,000
shares for Mr. Howe, 8,000 shares for Mr. Connell, 2,000 shares for each of
Messrs. Brock, Huebner and Gutfreund and 10,000 shares for Mr. Marks.
- 31 -
<PAGE> 35
No agreements, formal or informal, exist among the various officers and
directors to vote their shares collectively. Except as otherwise indicated
herein, no director is a party to any contracts, arrangements or understandings
with any person with respect to any securities of the Company. In addition,
except as otherwise indicated herein, no director nor any associate of any
director has any arrangements or understandings with any person with respect to
any future employment by the Company or with respect to any future transaction
to which the Company will or may be a party. See "Item 11. Executive
Compensation-Employment Contracts and Change in Control Agreements."
RIGHTS AGREEMENT
The preceding tables under "Holders of More than Five Percent
Beneficial Ownership" and "Security Ownership of Directors and Executive
Officers" do not reflect the effect of the Rights Agreement entered into by the
Company in October 1998 (the "Rights Agreement"). Pursuant to the terms of the
Rights Agreement, the Board of Directors of the Company authorized the issuance
of one common share purchase right (a "Right") with respect to each outstanding
share of Common Stock. The Rights were issued on October 23, 1998 to the holders
of record of Common Stock on October 22, 1998. Each Right entitles the
registered holder to purchase from the Company one share of Common Stock at a
price of $45.00 (the "Purchase Price"), subject to adjustment. All of the rights
previously issued by the Company under its September 1996 rights agreement were
redeemed in April 1998.
Initially, the Rights will attach to all Common Stock certificates
representing outstanding shares and no separate Right Certificate will be
distributed. The Rights will separate from the Common Stock and a distribution
date (the "Distribution Date") will occur upon the earlier of (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired beneficial ownership of
15% or more of the outstanding Voting Shares (as defined below) of the Company
other than pursuant to a Qualifying Offer (as defined below), or such earlier or
later date (not beyond the thirtieth day after the share acquisition date) as
the Company's Board of Directors may from time to time by resolution adopted
prior to the Distribution Date that otherwise would have occurred, or (ii) 10
business days following the commencement or announcement of an intention to
commence a tender offer or exchange offer the consummation of which would result
in any person becoming an Acquiring Person. "Voting Shares" means (i) the Common
Stock and (ii) any other shares of capital stock of the Company entitled to vote
generally in the election of directors or entitled to vote together with the
Common Stock in respect of any merger or consolidation of the Company, any sale
of all or substantially all of the Company's assets or any liquidation,
dissolution or winding up of the Company.
Until the Distribution Date, (or earlier redemption or expiration of
the rights), the Rights will be transferred with and only with the
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<PAGE> 36
Common Stock. Common Stock certificates issued after October 22, 1998, but
prior to the Distribution Date shall evidence one Right for each share of Common
Stock represented thereby and shall contain a legend incorporating by reference
the terms of the Rights Agreement. Promptly following the Distribution Date,
separate certificates evidencing the Rights ("Right Certificates") will be
mailed to holders of record of Common Stock at the Distribution Date.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on October 12, 2008 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or the Rights are earlier redeemed or exchanged by
the Company as described below.
If any person becomes an Acquiring Person, each Right then outstanding
(other than Rights beneficially owned by the Acquiring Person which would become
null and void) would become a right to buy that number of shares of Common Stock
that at the time of such acquisition would have a market value of two times the
purchase price of the Right.
If, at any time after a person becomes an Acquiring Person, the Company
were acquired in a merger or other business combination transaction or more than
50% of its consolidated assets or earning power were sold, proper provision will
be made so that each holder of a Right will thereafter have the right to
receive, upon the exercise thereof at the then current Purchase Price of the
Right, that number of shares of common stock of the acquiring company which at
the time of such transaction would have a market value of two times the purchase
price of the Right.
The offer and sale of the Common Stock issuable upon the exercise of
the Rights will be registered with the Securities and Exchange Commission, but
such registration will not be effective until the Rights become exercisable. As
described above, however, the Rights will not be transferable separately from
the Common Stock until the Distribution Date.
The number of shares of Common Stock or other securities or property
issuable upon exercise of the Rights, and the Purchase Price payable, are
subject to customary adjustments from time to time to prevent dilution.
The number of outstanding Rights and the number of shares of Common
Stock issuable upon exercise of each Right are also subject to adjustment in the
event of a stock split of the Common Stock or a stock dividend on the Common
Stock payable in shares of Common Stock or subdivisions, consolidations or
combinations of the Common Stock occurring, in any such case, prior to the
Distribution Date.
At any time after a person becomes an Acquiring Person and before the
acquisition by a person or group of 50% or more of the outstanding Voting Shares
(other than pursuant to a Qualifying Offer), the Company's
- 33 -
<PAGE> 37
Board of Directors, may, at its option, issue Common Stock in mandatory
redemption of, or in exchange for, all or part of the then outstanding and
exercisable Rights (other than Rights owned by such Acquiring Person or group
which would become null and void) at an exchange ratio of one share of Common
Stock for each two shares of Common Stock for which each Right is then
exercisable, subject to adjustment.
At any time before a person becomes an Acquiring Person, the Board of
Directors, may redeem all, but not less than all, of the then outstanding Rights
at a price of $0.001 per Right (the "Redemption Price"). The redemption of the
Rights may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish.
Immediately upon the action of the Board of Directors ordering redemption of the
Rights, the right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.
The terms of the Rights may be amended by the Company's Board of
Directors without the consent of the holders of the Rights, including an
amendment to extend the Final Expiration Date, and, provided a Distribution Date
has not occurred, to extend the period during which the Rights may be redeemed,
except that after the Distribution Date no such amendment may materially and
adversely affect the interests of the holders of the Rights
The Rights will not be exercisable if a person or group were to acquire
15% or more of the Voting Shares pursuant to a "Qualifying Offer." A "Qualifying
Offer" is defined as an all cash tender offer for all outstanding voting shares
of the Company which meets the requirements specified in the Agreement,
including:
(1) the offer is accompanied by firm written commitments from responsible
financial institutions to provide funds for such offer which, when added to
the offeror's available cash, will be sufficient to pay for all shares on a
fully-diluted basis and the second-step transaction described below; and
(2) after consummation of the offer, the offeror will own at least 75% of the
then outstanding voting shares of the Company; and
(3) the offer remains open for at least 45 Business Days; and
(4) the offer is accompanied by a written opinion of a nationally recognized
investment banking firm stating that the price to be paid in the offer is
fair from a financial point of view to the Company's stockholders; and
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<PAGE> 38
(5) the offeror agrees to consummate the second-step transaction in which all
shares not acquired upon completion of the tender offer will be acquired at
the same price per share paid in such offer.
The independent directors of the Company will review the Rights Plan
at least every two years and, if a majority of the independent directors deems
it appropriate, may recommend a modification or termination of the Rights Plan.
This summary description of the Rights does not purport to be complete
and is qualified in its entirety by reference to the Rights agreement. A copy of
the Rights Agreement has been filed with the Securities and Exchange Commission
as an Exhibit to the Company's Form 8-K dated October 12, 1998. Shareholders may
obtain a copy of the Rights Agreement free of charge from the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
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<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENT SCHEDULES
1.1 The following Consolidated Financial Statements of Baldwin Piano & Organ
Company and Subsidiaries are incorporated by reference to Baldwin's 1998
Annual Report to Shareholders.
Annual Report
Page Number
-----------
Independent Auditors' Report
for the year ended December 31, 1998. 7
Consolidated Statements of Earnings,
years ended December 31, 1998, 1997 and 1996. 8
Consolidated Statements of Shareholders' Equity,
years ended December 31, 1998, 1997 and 1996. 9
Consolidated Balance Sheets,
as of December 31, 1998 and 1997. 10
Consolidated Statements of Cash Flows,
years ended December 31, 1998, 1997 and 1996. 11
Notes to Consolidated Financial Statements,
years ended December 31, 1998, 1997 and 1996. 12-30
Page Number
-----------
1.2 Independent Auditors' Report (including Schedule)
for the years ended December 31, 1997 and 1996. 45
2.1 Consolidated Financial Statement Schedules of
Baldwin Piano & Organ Company and Subsidiaries:
Independent Auditors' Report 44
Schedule for the years ended
December 31, 1998, 1997 and 1996:
VIII. Valuation and Qualifying Accounts. 46
All other schedules are omitted, as the required information is
inapplicable or the information is presented in the consolidated
financial statements or related notes.
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<PAGE> 40
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on October 13, 1998 announcing the
declaration of a right, for each outstanding share of common stock per
value $.01 per share, entitling the holder to purchase from the Company
one share of common stock for $45.00.
(c) EXHIBITS
3.1 Certificate of Incorporation of the Company, as amended. (1)
3.2 Amended and Restated Bylaws of Baldwin Piano & Organ Company dated as of
February 10, 1997. (15)
4.1 Rights Agreement between the Company and The Provident Bank dated as of
September 4, 1996. (16)
4.2 Rights Agreement dated as of October 12, 1998 between the Company and the
Provident Bank as Rights Agreement. (22)
MANAGEMENT CONTRACTS, COMPENSATORY PLANS AND ARRANGEMENTS
10.1 Baldwin Piano & Organ Company 1986 Incentive Stock Option Plan adopted on
June 30, 1986. (1)
10.2 Baldwin Piano & Organ Company Retirement Plan for Salaried Employees, as
amended. (1)
10.3 Baldwin Piano & Organ Company Retirement Trust for Salaried Employees
dated September 28, 1984. (1)
10.4 Form of Indemnification Agreements between the Company and the Company's
Officers and Directors dated June 30, 1986 and accompanying schedule. (1)
10.5 Baldwin Piano & Organ Company Deferred Directors Fee Plan. (5)
10.6 Baldwin Piano & Organ Company Non-Qualified Deferred Compensation
Plan. (5)
10.7 Baldwin Piano & Organ Company Non-Qualified Deferred Compensation Rabbi
Trust Agreement as amended and restated as of October 4, 1993. (5)
10.8 Baldwin Piano & Organ Company 1994 Incentive Stock Option Plan. (7)
10.9 Baldwin Piano & Organ Company 1994 Management Incentive Plan. (8)
10.10 Baldwin Piano & Organ Company 1994 Long Term Incentive Plan. (8)
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<PAGE> 41
10.11 Change in Control Agreement between Baldwin Piano & Organ Company and
Karen L. Hendricks dated June 26, 1996. (13)
10.12 Change in Control Agreement between Baldwin Piano & Organ Company and
Stephen P. Brock dated June 11, 1996. (13)(14).
10.13 Agreement of Employment between Baldwin Piano & Organ Company and Perry H.
Schwartz dated as of November 5, 1996, as amended on November 11, 1996.
(19)
10.14 Agreement of Employment between Baldwin Piano & Organ Company and Karen L.
Hendricks dated as of June 19, 1997. (17)
10.15 Agreement of Employment between Baldwin Piano & Organ Company and Randolph
R. Marks as Executive Vice President, Piano Operations, dated as of July
29, 1997. (18)
10.16 Letter of employment between Baldwin Piano & Organ Company and Duane D.
Kimble as Senior Vice President, Strategic Planning, dated as of June 30,
1998.
10.17 Baldwin Piano & Organ Company 1998 Omnibus Stock Plan. (23)
OTHER CONTRACTS AND ARRANGEMENTS
10.18 Office Space Lease Agreement between Wards Corner Associates Limited
Partnership and the Company dated as of June 16, 1986. (1)
10.19 Guaranty by BPO Finance Corporation in favor of General Electric Capital
Corporation dated October 25, 1990. (3)
10.20 Guaranty Agreement among the Company, BPO Finance Corporation, Retailer
Funding Corporation and General Electric Capital Corporation dated as of
October 1, 1990. (3)
10.21 Indemnification Agreement among BPO Finance Corporation, General Electric
Capital Corporation and Kidder Peabody & Co. Incorporated as of October 1,
1990. (3)
10.22 Retail Accounts Receivable Purchase Agreement among the Company, BPO
Finance Corporation and The Wurlitzer Company dated as of October 1, 1990.
(3)
10.23 Amendment dated as of February 15, 1994 to the October 1, 1990 Guaranty
Agreement among the Company, Keyboard Acceptance Corporation, Retailer
Funding Corporation and General Electric Capital Corporation. (6)
10.24 Amended and Restated General Loan and Security Agreement dated as of
February 24, 1994 between the Company and The Fifth Third Bank. (6)
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<PAGE> 42
10.25 Irrevocable Standby Letter of Credit issued August 13, 1993 by The Fifth
Third Bank on behalf of the Company in favor of Harold S. Smith. (6)
10.26 Letter of Credit Reimbursement Agreement dated as of August 13, 1993
between the Company and The Fifth Third Bank. (6)
10.27 Amendment to Office Space Lease Agreement between Baldwin Piano & Organ
Company and Nooney Management Company dated as of June 11, 1991. (4)
10.28 Indemnification agreement dated as of December 1, 1994 among General
Electric Capital Corporation, Lehman Commercial Paper, Inc. and Keyboard
Acceptance Corporation (formerly BPO Finance Corporation). (9)
10.29 Amendment No. 1 dated as of April 3, 1995 to that certain Amended and
Restated General Loan and Security Agreement dated as of February 24, 1994
between the Company and The Fifth Third Bank. (10)
10.30 Distribution Agreement between Baldwin Piano & Organ Company and
GeneralMusic S.p.A. dated as of July 1, 1995. (11)
10.31 Amendment No. 2 dated as of October 1, 1995 to that certain Amended and
Restated General Loan and Security Agreement dated as of February 24, 1994
between the Company and The Fifth Third Bank. (12)
10.32 Amendment to Office Space Lease Agreement between Baldwin Piano & Organ
Company and Nooney Krombach Company dated as of February 16, 1996. (12)
10.33 Land Lease Agreement between Fabricantes Tecnicos, S.A. DE C.V. and Delphi
Automotive Systems, S.A. DE C.V. dated as of December 13, 1996. (19)
10.34 Amended and Restated Amendment and Supplemental Agreement between Baldwin
Piano & Organ Company and GeneralMusic S.p.A. dated as of January 1, 1997.
(19)
10.35 Credit Agreement by and among Baldwin Piano & Organ Company as Borrower,
the Fifth Third Bank as Agent and The Fifth Third Bank and NBD Bank, N.A.
as Lenders dated October 16, 1997 (excluding nonmaterial exhibits).
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<PAGE> 43
10.36 First Amendment dated October 16, 1997 to the Credit Agreement by and
among Baldwin Piano & Organ Company as Borrower, the Fifth Third Bank as
Agent and The Fifth Third Bank and NBD Bank, N.A. as Lenders dated October
16, 1997.
10.37 Form of Subsidiary Security Agreement dated October 16, 1997 between The
Fifth Third Bank and certain subsidiaries of Baldwin Piano & Organ
Company. (20)
10.38 Form of Subsidiary Guaranty dated October 16, 1997 by certain subsidiaries
of Baldwin Piano & Organ Company in favor of The Fifth Third Bank and NBD
Bank, N.A. (21)
10.39 Amended and Restated Purchase and Administration Agreement dated as of
October 31, 1997 among Retailer Funding Corporation, Keyboard Acceptance
Corporation, Baldwin Piano & Organ Company and General Electric Capital
Corporation as a consenting party (excluding nonmaterial exhibits). (24)
10.40 First Amendment dated October 31, 1997 to the Guaranty Agreement dated as
of October 1, 1990 among Retailer Funding Corporation, Keyboard Acceptance
Corporation, Baldwin Piano & Organ Company and General Electric Capital
Corporation. (24)
10.41 Amendment dated October 24, 1997 to the Retail Accounts Receivable
Purchase Agreement dated as of October 1, 1990 among Baldwin Piano & Organ
Company, The Wurlitzer Company and Keyboard Acceptance Corporation. (24)
10.42 Second Amendment to Credit Agreement, among Baldwin Piano & Organ Company
and The Fifth Third Bank and NBD Bank, N.A., dated April 27, 1998. (25)
10.43 Termination Agreement, among Keyboard Acceptance Corporation, Retailer
Funding Corporation, General Electric Capital Corporation, Bankers Trust
Company, PaineWebber Incorporated - as successor to Kidder, Peabody & Co.
Incorporated, Lehman Commercial Paper, Inc. and Conn Credit Corporation,
dated March 20, 1998. (25)
10.44 Third Amendment to Guaranty Agreement, among Baldwin Piano & Organ
Company, Keyboard Acceptance Corporation, Retailer Funding Corporation,
General Electric Capital Corporation, dated March 20, 1998. (25)
10.45 Second Amended and Restated Purchase and Administration Agreement, among
Baldwin Piano & Organ Company, Keyboard Acceptance Corporation and
Retailer Funding Corporation, dated March 20, 1998. (25)
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<PAGE> 44
10.46 Third Amendment to Credit Agreement, among Baldwin Piano & Organ Company
and The Fifth Third Bank and NBD Bank, N.A., dated June 19, 1998.(26)
10.47 Amended and Restated Term Loan Agreement, among Baldwin Piano & Organ
Company, Baldwin Piano Company (Canada) Limited, The Wurlitzer Company,
Baldwin Trading Company, Signature Leasing Company, The Fifth Third
Company and NBD Bank, N.A., dated May 15, 1998.(26)
10.48 Fourth Amendment to Credit Agreement, among Baldwin Piano & Organ Company
and The Fifth Third Bank and NBD Bank, N.A., dated September 21, 1998.
(27)
10.49 Office lease between Baldwin Piano & Organ Company and Duke Realty Limited
Partnership, dated July 2, 1998. (27)
10.50 Amended and Restated Inventory Purchase and Consignment Agreement, between
Baldwin Piano & Organ Company and Deutsche Financial Services Corporation,
dated October 28, 1998. (27)
13.1 Information incorporated by reference to Baldwin's 1998 Annual Report to
Shareholders for the year ended December 31, 1998: "Independent Auditors'
Report", "Financial Statements" (including Notes thereto), "Five Year
Summary" and "Management's Discussion and Analysis of Financial Condition
and Results of Operation".
22.1 Subsidiaries of the Company.
23.1 Consent of Independent Accountants - Deloitte & Touche LLP*
23.2 Consent of Independent Accountants - KPMG LLP*
27.1 Financial Data Schedule.
99.1 Baldwin Stock Repurchase Plan. (2)
99.2 Amendment No. 1 to Baldwin Stock Repurchase Plan. (3)
99.3 Amendment No. 2 to Baldwin Stock Repurchase Plan. (4)
99.4 Press Release dated October 13, 1998
99.5 Press Release dated December 16, 1998
99.6 Press Release dated February 24, 1999
* Previously filed with initial Form 10-K.
(1) Incorporated by reference from the Company's Form S-1 Registration
Statement as declared effective by the Commission on October 8, 1986.
(2) Incorporated by reference from the Company's Form 10-Q for the period
ended September 30, 1987.
- 41 -
<PAGE> 45
(3) Incorporated by reference from the Company's Form 8-K dated October 25,
1990 as filed with the Commission on November 9, 1990.
(4) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1991.
(5) Incorporated by reference from the Company's Form 10-Q for the period
ended September 30, 1993.
(6) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1993.
(7) Incorporated by reference from the Company's proxy statement relating to
its May 10, 1994 Annual Meeting of Shareholders.
(8) Incorporated by reference from the Company's Form 10-Q for the period
ended June 30, 1994.
(9) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1994.
(10) Incorporated by reference from the Company's Form 10-Q for the period
ended March 31, 1995.
(11) Incorporated by reference from the Company's Form 10-Q for the period
ended September 30, 1995.
(12) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1995.
(13) Incorporated by reference from the Company's Form 10-Q for the period
ended June 30, 1996.
(14) Substantially identical documents were entered into by Baldwin Piano &
Organ Company with George C. Huebner, Perry H. Schwartz, Randolph Marks,
Duane D. Kimble, Thomas C. Brewer and Daniel B. Baker dated June 18, 1996,
November 12, 1996, January 1, 1998, July 5, 1998, November 20, 1998 and
February 26, 1998, respectively.
(15) Incorporated by reference from the Company's Form 8-K dated February 10,
1997 as filed with the Commission on February 27, 1997.
(16) Incorporated by reference from the Company's Form 8-K dated September 3,
1996 as filed with the Commission on September 13, 1996.
(17) Incorporated by reference from the Company's Form 10-Q for the period
ended June 30, 1997.
- 42 -
<PAGE> 46
(18) Incorporated by reference from the Company's Form 10-Q for the period
ended September 30, 1997.
(19) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1996.
(20) Subsidiary Security Agreements with The Fifth Third Bank were entered into
by The Wurlitzer Company, Baldwin Trading Company, Signature Leasing
Company and The Baldwin Piano Company Limited.
(21) Subsidiary Guaranty was executed by each of The Wurlitzer Company, Baldwin
Trading Company, Signature Leasing Company and The Baldwin Company
Limited.
(22) Incorporated by reference to the Company's Form 8-K dated October 12,
1998.
(23) Incorporated by reference to the Company's Proxy Statement dated April 27,
1998 relating to the Company's 1998 Annual Meeting of Shareholders.
(24) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1997.
(25) Incorporated by reference from the Company's Form 10-Q for the period
ended March 31, 1998.
(26) Incorporated by reference from the Company's Form 10-Q for the period
ended June 30, 1998
(27) Incorporated by reference from the Company's Form 10-Q for the period
ended September 30, 1998.
Index to Exhibits - pages 48-56
- 43 -
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused Amendment No. 1 to this
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized.
BALDWIN PIANO & ORGAN COMPANY
By: /s/ KAREN L. HENDRICKS
-------------------------------------
Karen L. Hendricks, Chairman,
Chief Executive Officer and President
Date: May 21, 1999
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
Amendment No. 1 to this report on Form 10-K has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Principal Executive Officer:
<S> <C>
Date: May 21, 1999 /s/ KAREN L. HENDRICKS
--------------- ------------------------------------
Karen L. Hendricks, Chairman, Chief
Executive Officer, President
and Director
Principal Financial and Accounting
Officer:
Date: May 21, 1999 /s/ DUANE KIMBLE
--------------- ------------------------------------
Duane Kimble, Executive Vice
President and Chief Financial Officer
</TABLE>
- 44 -
<PAGE> 48
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Baldwin Piano & Organ Company
We have audited the consolidated balance sheet of Baldwin Piano & Organ Company
and subsidiaries as of December 31, 1997, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
years in the two-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Baldwin Piano & Organ
Company and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule for
the years ended December 31, 1997 and 1996, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG LLP
Cincinnati, Ohio
February 23, 1998
- 45 -
<PAGE> 49
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Baldwin Piano & Organ Company:
We have audited the financial statements of Baldwin Piano & Organ Company as of
December 31, 1998 and have issued our report thereon dated February 24, 1999;
such financial statements and report are incorporated herein by reference. Our
audit also included the financial statement schedule of Baldwin Piano & Organ
Company for the year ended December 31, 1998, listed in Item 14. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit. In our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Cincinnati, Ohio
February 24, 1999
- 46 -
<PAGE> 50
<TABLE>
<CAPTION>
SCHEDULE VIII
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1997 and 1996
Beginning Ending
Description Balance Additions Other Charge-offs Balance
- ----------- ------- --------- ----- ----------- -------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended December 31, 1998 $1,537,732 $1,146,000 $ -- $1,496,732(1) $1,187,000
Year ended December 31, 1997 $3,538,123 $ 512,588 $ -- $2,512,979(1) $1,537,732
Year ended December 31, 1996 $4,004,192 $ 549,867 $ -- $1,015,936(1) $3,538,123
<CAPTION>
RESERVE FOR INSTALLMENT RECEIVABLES SOLD WITH RECOURSE (2):
Year ended December 31, 1998 $1,810,000 $ -- $1,368,173(3) $2,409,173(1) $ 769,000(2)
Year ended December 31, 1997 $1,407,000 $ 953,000 $ 0 $ 550,000(1) $1,810,000
Year ended December 31, 1996 $1,510,000 $ 700,000 $ 0 $ 803,000(1) $1,407,000
<CAPTION>
RESERVE FOR RECOURSE OBLIGATIONS(3):
Year ended December 31, 1998 $1,368,173 $ -- $1,368,173(3) $ -- $ --
Year ended December 31, 1997 $ -- $1,368,173 $ -- $ -- $1,368,173
</TABLE>
(1) Represents adjustments and accounts charged off, less recoveries.
(2) Represents reserve related to accounts repurchased.
(3) Includes reserve related to implementation of FASB 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinquishments of
Liabilities " Beginning in 1998, such reserve is included in the reserve
for installment receivables sold with recourse.
-47-
<PAGE> 51
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
3.1 Certificate of Incorporation of the Company, as *
amended. (1)
3.2 Amended and Restated Bylaws of Baldwin Piano & *
Organ Company dated as of February 10,1997. (15)
4.1 Rights Agreement between the Company and The *
Provident Bank dated as of September 4, 1996. (16)
4.2 Rights Agreement dated as of October 12, 1998 *
between the Company and the Provident Bank
as Rights Agreement.
10.1 Baldwin Piano & Organ Company 1986 Incentive *
Stock Option Plan adopted on June 30, 1986. (1)
10.2 Baldwin Piano & Organ Company Retirement Plan. *
10.3 Baldwin Piano & Organ Company Retirement Trust *
for Salaried Employees dated September 28, 1984. (1)
10.4 Form of Indemnification Agreements between the *
Company and the Company's Officers and Directors
dated June 30, 1986 and accompanying schedule. (1)
10.5 Baldwin Piano & Organ Company Deferred *
Directors Fee Plan. (5)
10.6 Baldwin Piano & Organ Company Non-Qualified *
Deferred Compensation Plan. (5)
10.7 Baldwin Piano & Organ Company Non-Qualified *
Deferred Compensation Rabbi Trust Agreement as
amended and restated as of October 4, 1993. (5)
10.8 Baldwin Piano & Organ Company 1994 Incentive *
Stock Option Plan. (7)
10.9 Baldwin Piano & Organ Company 1994 Management *
Incentive Plan. (8)
10.10 Baldwin Piano & Organ Company 1994 Long Term *
Incentive Plan. (8)
</TABLE>
- 48 -
<PAGE> 52
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
10.11 Change in Control Agreement between Baldwin *
Piano & Organ Company and Karen L. Hendricks
dated June 26, 1996. (13)
10.12 Change in Control Agreement between Baldwin *
Piano & Organ Company and Stephen P. Brock
dated June 11, 1996. (13)(14)
10.13 Agreement of Employment between Baldwin Piano *
& Organ Company and Perry H. Schwartz dated as
of November 5, 1996 as amended on November
11, 1996. (19)
10.14 Agreement of Employment between Baldwin Piano & *
& Organ Company and Karen L. Hendricks dated as
of June 19, 1997.
10.15 Agreement of Employment between Baldwin Piano *
& Organ Company and Randy R. Marks as Executive
Vice President, Piano Operations, dated July 29,
1997. (18)
10.16 Agreement of Employment between Baldwin Piano 57
& Organ Company and Duane D. Kimble as Senior Vice
President, Strategic Planning, dated June 30, 1998.
10.17 Baldwin Piano & Organ Company 1998 Omnibus *
Stock Plan. (23)
10.18 Space Lease Agreement Between Wards Corner *
Associates Limited Partnership and the Company
dated as of June 16, 1986. (1)
10.19 Guaranty by BPO Finance Corporation in favor *
Of General Electric Capital Corporation dated
October 25, 1990 (3).
10.20 Guaranty Agreement among the Company, BPO *
Finance Corporation, Retailer Funding
Corporation and General Electric Capital
Corporation dated as of October 1, 1990. (3)
10.21 Indemnification Agreement among BPO Finance *
Corporation, General Electric Capital Corporation
and Kidder Peabody & Co. Incorporated
as of October 1, 1990. (3)
</TABLE>
- 49 -
<PAGE> 53
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
10.22 Retail Accounts Receivable Purchase Agreement *
among the Company, BPO Finance Corporation
and The Wurlitzer Company dated as of October
1, 1990. (3)
10.23 Amendment dated as of February 15, 1994 to the *
October 1, 1990 Guaranty Agreement among the
Company, Keyboard Acceptance Corporation,
Retailer Funding Corporation and General
Electric Capital Corporation. (6)
10.24 Amended and Restated General Loan and Security *
Agreement dated as of February 24, 1994 between
the Company and The Fifth Third Bank. (6)
10.25 Irrevocable Standby Letter of Credit issued *
August 13, 1993 by The Fifth Third Bank on
behalf of the Company in favor of Harold
S. Smith. (6)
10.26 Letter of Credit Reimbursement Agreement *
dated as of August 13, 1993 between the
Company and The Fifth Third Bank. (6)
10.27 Amendment to Office Space Lease Agreement *
between Baldwin Piano & Organ Company and
Nooney Management Company dated as of
June 11, 1991. (4)
10.28 Indemnification Agreement dated as of December 1, *
1994 among General Electric Capital
Corporation, Lehman Commercial Paper, Inc.
and Keyboard Acceptance Corporation (formerly
BPO Finance Corporation). (9)
10.29 Amendment No. 1 dated as of April 3, 1995 *
to that certain Amended and Restated General
Loan and Security Agreement dated as of
February 24, 1994 between the Company and
The Fifth Third Bank. (10)
10.30 Distribution Agreement between Baldwin Piano *
& Organ Company and GeneralMusic S.p.A.
dated as of July 1, 1995. (11)
</TABLE>
- 50 -
<PAGE> 54
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
10.31 Amendment No. 2 dated as of October 1, 1995 *
to that certain Amended and Restated General
Loan and Security Agreement dated as of
February 24, 1994 between the Company and
The Fifth Third Bank. (12)
10.32 Amendment to Office Space Lease Agreement *
between Baldwin Piano & Organ Company and
Nooney Krombach Company dated as of
February 16, 1996. (12)
10.33 Land Lease Agreement between Fabricantes *
Tecnicos, S.A. DE C.V. and Delphi Automotive
Systems, S.A. DE C.V. dated as of December
13, 1996. (19)
10.34 Amended and Restated Amendment and Supplemental *
Agreement between Baldwin Piano & Organ Company
and GeneralMusic S.p.A. dated as of January
1, 1997. (19)
10.35 Credit Agreement by and among Baldwin Piano *
& Organ Company as Borrower, the Fifth Third
Bank as Agent and The Fifth Third Bank and
NBD Bank, N.A. as Lenders dated October 16, 1997
(excluding nonmaterial exhibits).
10.36 First Amendment dated October 16, 1997 to the *
Credit Agreement by and among Baldwin Piano & Organ Company as
Borrower, the Fifth Third Bank as Agent and The Fifth Third Bank
and NBD Bank, N.A. as Lenders dated October 16, 1997.
10.37 Form of Subsidiary Security Agreement dated *
October 16, 1997 between The Fifth Third Bank and certain
subsidiaries of Baldwin Piano & Organ Company. (20)
10.38 Form of Subsidiary Guaranty dated October 16, *
1997 by certain subsidiaries of Baldwin Piano & Organ Company in
favor of The Fifth Third Bank and NBD Bank, N.A. (21)
</TABLE>
- 51 -
<PAGE> 55
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
10.39 Amended and Restated Purchase and Administration *
Agreement dated as of October 31, 1997 among Retailer Funding
Corporation, Keyboard Acceptance Corporation, Baldwin Piano & Organ
Company and General Electric Capital Corporation as a consenting
party (excluding nonmaterial exhibits). (24)
10.40 First Amendment dated October 31, 1997 to the *
Guaranty Agreement dated as of October 1, 1990 among Retailer
Funding Corporation, Keyboard Acceptance Corporation Baldwin Piano
& Organ Company and General Electric Capital Corporation. (24)
10.41 First Amendment dated October 24, 1997 to the *
Retail Accounts Receivable Purchase Agreement dated as of October
1, 1990 among Baldwin Piano & Organ Company, The Wurlitzer Company
and Keyboard Acceptance Corporation. (24)
10.42 Second Amendment to Credit Agreement among *
Baldwin Piano & Organ Company and The Fifth Third Bank and NBD
Bank, N.A., dated April 27, 1998. (25)
10.43 Termination Agreement among Keyboard Acceptance *
Corporation, Retailer Funding Corporation, General
Electric Capital Corporation, Bankers Trust
Company, PaineWebber Incorporated - as successor
to Kidder, Peabody & Co., Incorporated, Lehman
Commercial Paper, Inc. and Conn Credit Corporation,
dated March 20, 1998. (25)
10.44 Third Amendment to Guaranty Agreement among *
Baldwin Piano & Organ Company, Keyboard Acceptance
Corporation, Retailer Funding Corporation,
General Electric Capital Corporation, dated
March 20, 1998. (25)
10.45 Second Amended and Restated Purchase and *
Administration Agreement among Baldwin Piano
& Organ Company, Keyboard Acceptance Corporation
and Retailer Funding Corporation, dated
March 20, 1998. (25)
</TABLE>
- 52 -
<PAGE> 56
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
10.46 Third Amendment to Credit Agreement among Baldwin *
Piano & Organ Company, The Fifth Third Bank
and NBD Bank, N.A., dated June 19, 1998. (26)
10.47 Amended and Restated Term Loan Agreement among *
Baldwin Piano & Organ Company, Baldwin Piano
Company (Canada) Limited, The Wurlitzer Company,
Baldwin Trading Company, Signature Leasing
Company, The Fifth Third Company and NBD Bank, N.A.,
dated May 15, 1998. (26)
10.48 Fourth Amendment to Credit Agreement among Baldwin *
Piano & Organ Company, The Fifth Third Bank and
NBD Bank, N.A., dated September 21, 1998. (27)
10.49 Office lease between Baldwin Piano & Organ Company *
and Duke Realty Limited Partnership, dated
July 2, 1998. (27)
10.50 Amended and Restated Inventory Purchase and *
Consignment Agreement between Baldwin Piano &
Organ Company and Deutsche Financial Services
Corporation, dated October 28, 1998. (27)
13.1 Information incorporated by reference to Baldwin's
1998 Annual Report to Shareholders for the year
ended December 31, 1998: "Independent Auditors'
Report", "Financial Statements" (including Notes
thereto), "Five Year Summary", and "Management's
Discussion and Analysis of Financial Condition and
Results of Operation".
22.1 Subsidiaries of the Registrant. 62
23.1 Consent of Independent Accountants **
- Deloitte & Touche LLP.
23.2 Consent of Independent Accountants **
- KPMG LLP.
27.1 Financial Data Schedule.
99.1 Baldwin Stock Repurchase Plan. (2) *
99.2 Amendment No. 1 to Baldwin Stock Repurchase *
Plan. (3)
</TABLE>
- 53 -
<PAGE> 57
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
99.3 Amendment No. 2 to Baldwin Stock Repurchase *
Plan. (4)
99.4 Press Release dated October 13, 1998. 65-66
99.5 Press Release dated December 16, 1998. 67-68
99.6 Press Release dated February 24, 1999. 69-73
</TABLE>
* Incorporated by reference as indicated in the applicable
footnote.
** Previously filed with initial Form 10-K.
(1) Incorporated by reference from the Company's Form S-1
Registration Statement as declared effective by the Commission on
October 8, 1986.
(2) Incorporated by reference from the Company's Form 10-Q for the
period ended September 30, 1987.
(3) Incorporated by reference from the Company's Form 8-K dated
October 25, 1990 as filed with the Commission on November 9,
1990.
(4) Incorporated by reference from the Company's Form 10-K for the
period ended December 31, 1991.
(5) Incorporated by reference from the Company's Form 10-Q for the
period ended September 30, 1993.
(6) Incorporated by reference from the Company's Form 10-K for the
period ended December 31, 1993.
(7) Incorporated by reference from the Company's Proxy Statement
relating to its May 10, 1994 Annual Meeting of Shareholders.
(8) Incorporated by reference from the Company's Form 10-Q for the
period ended June 30, 1994.
(9) Incorporated by reference from the Company's Form 10-K for the
period ended December 31, 1994.
(10) Incorporated by reference from the Company's Form 10-Q for the
period ended March 31, 1995.
(11) Incorporated by reference from the Company's Form 10-Q for the
period ended September 30, 1995.
- 54 -
<PAGE> 58
(12) Incorporated by reference from the Company's Form 10-K for the
period ended December 31, 1995.
(13) Incorporated by reference from the Company's Form 10-Q for the
period ended June 30, 1996.
(14) Substantially identical documents were entered into by Baldwin
Piano & Organ Company with George C. Huebner, Perry Schwartz,
Randolph Marks, Duane D. Kimble, Thomas C. Brewer and Daniel B.
Baker dated June 18, 1996, November 12, 1996, December 18, 1997,
January 1, 1998, July 5, 1998, November 20, 1998 and February 26,
1999, respectively.
(15) Incorporated by reference from the Company's Form 8-K dated
February 10, 1997 as filed with the Commission on February 27,
1997.
(16) Incorporated by reference from the Company's Form 8-K dated
September 3, 1996 as filed with the Commission on September 13,
1996.
(17) Incorporated by reference from the Company's Form 10-Q for the
period ended June 30, 1997.
(18) Incorporated by reference from the Company's Form 10-Q for the
period ended September 30, 1997.
(19) Incorporated by reference from the Company's Form 10-K for the
period ended December 31, 1996.
(20) Subsidiary Security Agreements with The Fifth Third Bank were
entered into by The Wurlitzer Company, Baldwin Trading Company,
Signature Leasing Company and The Baldwin Piano Company Limited.
(21) Subsidiary Guaranty was executed by each of The Wurlitzer
Company, Baldwin Trading Company, Signature Leasing Company and
The Baldwin Company Limited.
(22) Incorporated by reference to the Company's Form 8-K dated October
12, 1998.
(23) Incorporated by reference to the Company's Proxy Statement dated
April 27, 1998 relating to the Company's 1998 Annual Meeting of
Shareholders.
- 55 -
<PAGE> 59
(24) Incorporated by reference from the Company's Form 10-K for the
period ended December 31, 1997.
(25) Incorporated by reference from the Company's Form 10-Q for the
period ended March 31, 1998.
(26) Incorporated by reference from the Company's Form 10-Q for the
period ended June 30, 1998.
(27) Incorporated by reference from the Company's Form 10-Q for the
period ended September 30, 1998.
- 56 -
<PAGE> 1
Exhibit 10.16
BALDWIN PIANO & ORGAN COMPANY
422 Wards Corner Road
Loveland, Ohio 45140-8390
(513-576-4500
June 30, 1998
Duane D. Kimble
17503 Hidden Forest Circle
Spring, Texas 77379
Dear Duane:
This letter is to formally outline the offer of employment by Baldwin Piano and
Organ Company to employ you as Senior Vice President, Strategic Planning.
The following is more specific information about the offer. Of course, all of
these items are subject to the details of the specific plan documents referred
to herein.
POSITION You will serve as Senior Vice
President, Strategic Planning,
reporting to the Chairman and Chief
Executive Officer of the Company.
COMPENSATION
Base Salary Your starting annual base salary
will be $160,000 (less withholdings
and deductions), which will be paid
monthly on the 25th of the month.
Your performance and compensation
will be reviewed annually.
Annual Incentive
You will be eligible to participate
in Baldwin's Management Incentive
Plan ("MIP"), which provides an
opportunity for an annual cash
bonus. Pursuant to the MIP, you will
be eligible for an annual incentive
of 24%, 30%, or 45% of your base
salary, subject to the level of the
performance of the Company. The plan
runs on a fiscal year basis. This
annual incentive will be prorated
for the number of months you are
employed in 1998.
- 57 -
<PAGE> 2
Annual Incentive In 1999, you will be eligible for an
Stock Options annual incentive stock option grant,
determined by the CEO, based on your
individual contribution for fiscal
1998.
Special Stock Immediately upon your commencement
Option Grant date, the Company will grant you an
incentive stock option to acquire
10,000 shares of the Company's
common stock, pursuant to the
Company's 1998 Omnibus Stock Plan.
The per share exercise price of such
option shall equal the last sale
price of the company's common stock
on the NASDAQ market on the
commencement date, or if no trades
are made on such date, the next
business day following the
commencement on which trades of the
Company's common stock are reported.
Your right to acquire the shares
subject to this option shall vest at
20% of such shares immediately and
shall vest an additional 20% of such
shares on each anniversary date of
the grant. Such options shall expire
on the earlier of ten years from the
date of grant or three months
following the termination of your
employment.
Medical and Dental Benefits You will be eligible to participate
in the medical and dental plan on
the first of the month following
90 days of employment. You will
have the option of electing either
a PPO Plan (Preferred Provider
Organization which is a network
of physicians) or a POS Plan
(Point-of-Service, where you will
select a primary care physician, who
will direct your medical care). Your
share of the monthly premium in 1998
for single coverage under the PPO
Plan is $58.00 or $155.00 for
family, for the POS Plan, your share
of the monthly premium in 1998 for
family coverage is $138.00 or $52.00
for single coverage. You may go to
any dentist under our Dental Plan.
The co-pay for a doctor's visit in
network for the POS or PPO network
is $12.00 There is a prescription
card with a co-pay of
- 58 -
<PAGE> 3
$7.00 for generic drugs and $12.00
for brand name drugs. Also, there
is a mail order prescription
provision with a $7.00 co-pay for
a three-month supply of maintenance
drugs.
Flexible Spending Plan You will be eligible to participate
in the Flexible Spending Account
Plan on the first day of the month
following ninety days of service.
This Plan allows you to make a
salary deferral to be reimbursed for
certain items with pre-tax dollars.
You may defer up to $2,000 annually
to a Medical Reimbursement Account
and up to $5,000 to a Dependent Care
Reimbursement Account.
Vacation You will be entitled to four weeks
of paid vacation annually beginning
January 1, 1999. You will receive
pro-rata vacation for 1998. Vacation
days are to be taken during the
calendar year and may not be carried
over.
Long-Term Disability You will be offered long-term
disability at group rates.
Life Insurance The Company provides life insurance
in an amount equal to 1 1/2 times
your annual W-2 earnings. This
amount is adjusted annually.
Group Travel Accident The Company provides coverage at 5
times annual salary, minimum benefit
is $250,000 and maximum benefit is
$1,500,000.
Accidental Death & Dismemberment
AD&D Insurance You will be eligible to elect
coverage amounts from $10,000 to
$250,000 available at group rates.
Educational Assistance You will be eligible for educational
assistance after one year of
employment.
- 59 -
<PAGE> 4
Retirement Plan After the prescribed waiting period,
you will be eligible to participate
in the Baldwin Piano & Organ Company
Retirement Plan for Salaried
Employees (the "Retirement Plan").
After you have been employed for 30
days, you will be eligible to make
salary deferral contributions to the
Retirement Plan (up to a certain
limit). Second, after you have been
employed for one year, the Company
will contribute on an annual basis
to your account an amount equal to
3% of your salary, plus match your
salary deferral contributions at the
rate of 50% (up to a certain overall
limit).
In addition, Baldwin has a
Non-Qualified Deferred Compensation
Plan, to which you also will be able
to make salary deferral
contributions (up to a certain
limit) after 30 days of employment.
After one year of employment, your
deferrals to this Plan will be
matched at the rate of 50% (again,
up to a certain overall limit).
You will choose from the options
available in each plan how to direct
the investment of these funds.
You will be 100% vested in all
Company contributions after five
years.
Relocation Expenses We provide a comprehensive
relocation program, administered by
Prudential Relocation that provides
assistance with home marketing, home
finding, closing management, and
other relocation services. These are
described in detail in our
relocation policy, of which you have
already received a copy.
Our policy includes a repayment
provision. If you voluntarily
terminate your employment with
Baldwin within twelve months of your
Commencement Date, you will be
required to pay up to 100% of the
relocation expenses. This provision
is explained in detail in the
Repayment Agreement, which is
attached to the Relocation Policy.
You are required to sign this
Repayment Agreement.
CONFIDENTIAL INFORMATION/
NON-SOLICITATION AGREEMENT You agree to execute a separate
agreement regarding non-disclosure
of confidential information and
non-solicitation of customers and
employees.
OTHER
Employment at Will If employed, your employment with
the Company is at-will.
Change of Control Agreement The Change of Control Agreement
exists for a few select, critical
senior executives. The Agreement,
which will be sent by separate
cover, would apply under the
conditions specified under such
Agreement.
Drug Screen/Background Check This offer is contingent upon
successful completion of a
pre-employment drug screen and a
background check.
- 60 -
<PAGE> 5
Proof of Identity To comply with federal law, you will
need to provide the Company with
appropriate proof of identity and an
appropriate document that
establishes employment eligibility.
Duane, I am certainly looking forward to having you join us at Baldwin Piano. If
you have any questions or would like to discuss anything further, please feel
free to call me at 576-4693 or Jerri Hall at 576-4692. Upon acceptance of this
offer, please sign below and return the original in the envelope.
Sincerely,
Karen
By: /s/ KAREN L. HENDRICKS
----------------------
Karen L. Hendricks
Chairman, Chief Executive Officer and President
I have read, understand and agree to all of the provisions of this letter
agreement.
/s/ DUANE D. KIMBLE
----------------------
Duane D. Kimble
June 30, 1998
----------------------
Date
- 61 -
<PAGE> 1
EXHIBIT 13.1
BALDWIN HIGHLIGHTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
($ millions except per share) 1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales from Operations $134.3 $128.5* $115.1
Net Earnings from Operations 0.7 3.6 2.1
Basic Earnings Per Share from Operations .21 1.05 .60
Working Capital 53.6 47.9 31.5
Shareholders' Equity 61.3 60.8 56.3
- ---------------------------------------------------------------------------------------
</TABLE>
========================
Net Sales from Operations
(millions)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
$122.3 $122.6 $115.1 $128.5* $134.3
========================
EPS from Operations
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
$0.10 $1.16 $0.60 $1.05* $0.21
========================
Book Value Per Share
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
$14.69 $15.85 $16.45 $17.66 $17.75
========================
Music Sales from Operations
(millions)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
$85.8 $79.9 $79.8 $91.0* $89.5
========================
Contract Electronics Sales
(millions)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
$28.4 $30.7 $30.9 $35.7 $42.3
========================
KAC Paper Written
(millions)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
$59.9 $69.6 $74.2 $87.2 $104.5
========================
BALDWIN [LOGO]
MUSIC PRODUCTS
Products: Grand pianos, vertical pianos, computerized auto-player piano systems
and digital pianos.
Brand Names: Baldwin(R), Chickering(R) and Wurlitzer(R) acoustic pianos.
ConcertMaster(R) computerized player piano systems. Baldwin Pianovelle(R)
digital keyboards.
Markets: North America, Asia, South America and Europe.
Annual Sales: $ 89.5 million.
Distribution Network: 375 independent dealers and 14 Company-owned stores.
Plant Sites: Greenwood, Mississippi (piano cases and wood components). Trumann,
Arkansas (grand & vertical pianos). Conway, Arkansas (polyester finishing).
Juarez, Mexico (keys and actions).
Outlook: Baldwin is America's largest manufacturer of acoustic pianos,
represented by the Baldwin, Chickering and Wurlitzer brands. Pianovelle digital
pianos are now solidly established in the marketplace. The ConcertMaster
computerized player piano system is winning "best of show" awards for its
state-of-the-art features and performance.
Baldwin's commitment to innovation, reflected in products, marketing and
quality, is the focus of the Company's future direction, and a reflection of its
past.
RETAIL FINANCING
Products: Point-of-sale consumer financing for new and used pianos, and special
promotion programs. Piano leasing programs.
Markets: United States.
Annual Revenue: $ 10.4 million.
Distribution Network: More than 500 dealers.
Location: Mason, Ohio.
Outlook: Keyboard Acceptance Corporation has been the leading retail financier
of keyboards for almost a century. Loan portfolio grew by 14 percent in 1998,
fueled by aggressive marketing and a healthy economy. This trend is expected to
continue in 1999.
CONTRACT ELECTRONICS
Products: Printed circuit board assemblies, design, engineering, testing,
electro-mechanical and mechanical assemblies, post-production repair and order
fulfillment.
Markets: Original Equipment Manufacturers in the United States.
Annual Sales: $ 42.7 million.
Distribution Network: Internal and independent sales representatives.
Plant Site: Fayetteville, Arkansas.
Outlook: Baldwin competes in the highly fragmented $60 billion electronics
manufacturing services industry in North America. Baldwin Contract Electronics
will focus on operational control and profit margin progress in 1999, absorbing
the 20% growth in 1998.
* During 1997, the phase-out of the Company's consignment inventory
program and other one-time events added $14.6 million to sales, $0.9
million to net earnings and $0.25 to earnings per share. Amounts above
exclude these items. Total 1997 sales, net earnings and basic earnings
per share were $143.1 million, $4.4 million and $1.30, respectively.
1
<PAGE> 2
TO OUR SHAREHOLDERS:
The Asian financial crisis struck the U.S. piano market in 1998. The flood of
low-priced Asian piano imports that followed, and the decisive pricing action we
took to defend our market share, sharply reduced Baldwin's profitability in
1998.
Company-wide, net sales from operations rose 5% to $134.3 million, up from
$128.5 million in 1997. Net earnings from operations for 1998 were $737,000, or
21 cents per share, down significantly from last year's $3.6 million, or $1.05
per share. Costs related to increased Asian imports represented the majority of
the profit shortfall.
The flood of lower-priced vertical piano imports began to enter the U.S. market
in March, as Asian manufacturers stepped up exports to offset the collapse of
their own domestic markets. By June, it was clear we had to act. The aggressive
defensive spending program we initiated restored Baldwin's vertical piano sales
to near prior-year levels, but cut sharply into profit margins. However, had we
not acted aggressively, market share erosion would have been considerably
deeper.
In September, with imports still on the rise, we initiated steps that led to an
examination of Asian piano imports by the U.S. International Trade Commission
(USITC). That examination is still underway, and we await the May 1999 release
of the USITC's report.
Piano imports notwithstanding, Baldwin made substantial progress against its
strategic plan in 1998. In many ways the turmoil in the marketplace helped
galvanize management and the board around accelerating the plan's
implementation. Baldwin is competing in an increasingly global marketplace,
where the challenge of positioning the Company to prosper and grow demands that
we: 1) speed up the pace of innovation, 2) streamline cost structures to improve
gross margins, and 3) increase asset utilization. Much of what we must do to
achieve these three operational goals is already well underway. And while the
heavy lifting will continue throughout 1999, successful implementation of our
strategic plan should position each of our three businesses for dramatic profit
improvement in 2000.
As for 1998, operating results for Baldwin's three core businesses were clearly
mixed:
Music Division sales fell 2% in 1998, due entirely to the impact of Asian
imports. While this was disappointing in a year of otherwise strong demand,
sales of Baldwin's grand pianos enjoyed double-digit growth, partially
offsetting the decline in vertical pianos. During 1998, we also introduced
important new products to the market, including a significant enhancement to our
award-winning ConcertMaster electronic player system. For 1999, the product
pipeline is full of exciting new initiatives, and we fully expect our new
high-gloss polyester finishes to further enhance the showroom appeal of our
finest pianos.
In 1998, many of the biggest strides in our music business came on the
operational front: We completed the start up of our new polyester finishing
facility, which should increase sales and decrease repair costs for many years
to come; we worked with our new supplier of piano plates to complete the
ground-up development of a new foundry and finishing facility, which should
reduce costs, enhance product quality and improve supply reliability; and
lastly, we finalized plans to consolidate all piano assembly at a single plant,
which should reduce operating costs, improve asset utilization and consolidate
critical technical resources in one location. As we move aggressively to
complete the plant consolidation by mid-1999, we will continue to focus on the
kinds of improvements in product quality, inventory control and asset
utilization that will allow us to achieve even higher gross margins.
2
<PAGE> 3
We expect the Asian import situation to continue to be with us in 1999, but we
remain confident that our music business will rebound in response to improving
Asian economies and innovative, new, high-quality Baldwin products. While the
past year has driven home the reality of the global marketplace, it has also
revealed some important new opportunities for Baldwin to explore in the years
ahead.
Retail Financing, Baldwin's point-of-sale consumer financing and leasing unit,
had a great year. Benefiting from lower interest rates and strong demand for
pianos in 1998, revenues grew 20%, driven by a 14% increase in the size of the
portfolio and 20% growth in the value of new contracts. Baldwin's aggressive
defensive spending program and the Company's growing leasing business also
improved revenue growth. In addition, the Company's new National Piano
Repossession Center helped minimize potential losses, contributing to the unit's
improved profitability. In 1999, we hope to expand into new markets and achieve
higher operating efficiencies in our pursuit of even greater growth and
profitability.
Contract Electronics sales rose 20% in 1998, reflecting strong outsourcing
demand from both new and existing customers. Profit growth, however, was not
nearly as strong, a result of expediting existing orders to accommodate new
growth. Today we are making major strides in improving margins through more
responsive supply chain management, tighter inventory controls and streamlined
shop-floor processes. By the latter half of 1999, we should be well positioned
to translate higher sales into higher profits. We anticipate strong demand for
Contract Electronics' services through the year 2000, when we expect to realize
this unit's full profit potential.
Baldwin's businesses have yet to derive full benefit from what has been achieved
and will be achieved in terms of greater productivity, reduced operating costs,
and new business opportunities. We believe that benefit should begin to
materialize in the second half of 1999, and will have an even more significant
impact on profitability the following year. Our strategic plan recognizes
Baldwin's need to adapt to a far more competitive and global marketplace. We
have made significant progress against that plan and continue to believe that
its timely execution will yield greater value for our loyal shareholders.
We weathered a difficult year in 1998, particularly in our music business.
Building the ship while at sea is difficult enough, but in a storm it takes
courage, too. I'm very proud of every one of Baldwin's dedicated employees.
Their actions, described in the pages that follow, speak louder than my words
here.
[PHOTO] /s/ KAREN L. HENDRICKS
----------------------
Karen L. Hendricks
Chairman, Chief Executive Officer and President
3
<PAGE> 4
BALDWIN MUSIC PRODUCTS DIVISION
Results for Baldwin's Music Products Division were mixed in 1998. Baldwin's line
of grand pianos and ConcertMaster continued to enjoy very solid double-digit
growth. While 1998 sales of Pianovelle digital pianos kept pace with 1997, a
second-generation product, introduced in December 1998, holds considerable
promise for 1999.
Easily the most difficult challenge the Music Division faced in 1998 was the
unexpected fallout from the Asian financial crisis. The resulting flood of
low-cost Asian imports that hit the U.S. market reduced sales and cut margins on
Baldwin's vertical pianos. Management acted quickly and spent aggressively to
minimize potential market share erosion, holding the overall decline in 1998
Music Division sales to 2%.
In 1998, Baldwin's successful synchronous manufacturing initiative created
sufficient space to justify a major plant consolidation. Baldwin completed
planning and preparation for the move late in the year, and in January 1999
announced that all grand piano assembly would be moved to its plant in Trumann,
Arkansas. The consolidation, which should be completed by mid-1999, offers
significant economic benefits that Baldwin will fully realize in 2000.
Also in 1998, Baldwin helped design and create a new foundry and finishing
operation for cast iron piano plates -- the single most expensive component in
any piano. Contractual and financial arrangements with the new supplier will
ensure Baldwin a steady, dependable supply of higher-quality, lower-cost plates
for the foreseeable future.
For the Music Division, 1998 was also a year of significant product innovation,
and none was more significant than the introduction late in the year of
high-gloss polyester finishes on Baldwin Artist Grands. These durable,
mirror-like finishes are applied at Baldwin's new, state-of-the-art finishing
facility in Conway, Arkansas, and should be available on most piano models by
the end of 1999. More than just a significant technological step forward,
polyester should boost U.S. piano sales and make Baldwin a more effective
competitor in Europe and Asia, where polyester is the finish of choice among
consumers.
In early 1999, Baldwin introduced a number of other new products, including new
Limited Edition models of the Hamilton vertical piano, Baldwin's new
second-generation Pianovelle digital pianos, and improved cosmetics on
Chickering grands. Also introduced was Baldwin's new, extended-range version of
ConcertMaster, which won the 1998 Best New Technology award from the prestigious
Custom Electronic Design & Installation Association (CEDIA).
Baldwin's chain of 14 retail stores turned in an outstanding year with 19% sales
growth fueled, in part, by new promotion, advertising and point-of-sale
programs. The new, more contemporary campaign, which has won three advertising
awards, is being rolled out at dealerships nationwide. In 1998, these same
initiatives helped produce a 30% increase in Baldwin's roster of Million Dollar
Dealers.
Baldwin's Concert & Artist Division continued to build its impressive list of
Baldwin-exclusive artists and institutions. Pop artists Patrick Moraz (formerly
of The Moody Blues and Yes) and Ben Folds (of Ben Folds Five) joined the artist
roster in 1998, as did key institutions such as the New Orleans Jazz Festival,
Brooklyn Philharmonic and Opera Company of Philadelphia, among others.
After two decades of declining sales, the U.S. piano market grew in 1998. We
find the outlook for the industry encouraging and believe this growth is
sustainable. A healthy economy, the declining availability of used pianos and
the fast-growing popularity of automatic player systems all favor stronger sales
of new pianos in the years ahead.
4
<PAGE> 5
BALDWIN RETAIL FINANCING
Baldwin's retail financing subsidiaries, Keyboard Acceptance Corporation and
Signature Leasing Corporation, experienced strong growth in 1998. Combined,
their outstanding portfolios were up 14% at year-end, driven by a 20% increase
in new loan volume. Revenues jumped 20%, fueled by higher volume and a slight
improvement in margins driven by lower interest rates.
Several factors contributed to higher volume in 1998. The healthy U.S. economy,
which gave a strong lift to the keyboard category; the addition of several, new
high-volume dealers; and Baldwin's aggressive "defense plan" to increase sales
volume on vertical pianos created a favorable market opportunity that these
subsidiaries were well positioned to serve.
Signature Leasing, the Company's fledgling leasing business formed in late 1997,
made progress in 1998, as dealers began to better understand the benefits and
selling points of leasing. Like auto leasing, which has steadily grown in
popularity among consumers, piano leasing offers the customer a lower monthly
payment than a conventional loan and the option to return the instrument at the
end of the lease, or purchase it at a pre-determined price.
Special event sales continued to be popular and productive events for dealers
across the country. Keyboard Acceptance Corporation (KAC) personnel work
hand-in-hand with dealers at these events to ensure customers understand the
affordability of the fine keyboard instruments offered for sale. KAC originates,
cooperates and participates in scores of these special-event sales each year to
ensure their success and demonstrate their commitment to dealers and the
keyboard market.
Net losses on retail financing contracts were again under 1% this year, a
particularly impressive performance given the rising national trend in personal
bankruptcies. One key to KAC's consistently low losses has been the success of
the Company's National Piano Repossession Center in Atlanta, Georgia. The
Center, which handles the resale of repossessed instruments, minimizes credit
losses by offering cost-conscious buyers excellent values on nearly new
instruments at reasonable recovery rates for the lender.
Baldwin's retail financing subsidiaries offer keyboard dealers highly
competitive financing programs, attractive terms, rent-to-own options and prompt
credit approval. Today, as they have for nearly a century, keyboard dealers
across the country rely on the Company as their preferred credit source because
of the high level of service and the unique understanding that comes from their
association with a major keyboard manufacturer.
5
<PAGE> 6
BALDWIN CONTRACT ELECTRONICS
Baldwin's Contract Electronics Division (CE) achieved 20% sales growth in 1998,
reflecting consistently strong demand from both new and existing customers.
Profits, however, were unable to keep pace with top line growth. Customer
deadline pressures, stemming from the otherwise welcomed surge in new business,
triggered supply chain constraints and generated significant additional costs to
meet on-time delivery commitments.
To address these important issues, CE began to reconfigure operations in late
1998. That ongoing work focuses on improving supply chain management to reduce
the number of qualified suppliers, requiring suppliers to warehouse bonded
inventory for Baldwin, and implementing tighter "just-in-time" deliveries. CE is
also beginning to implement synchronous manufacturing, which should, based on
Baldwin's experience with pianos, reduce floor space requirements, cut direct
labor, trim work-in-process inventories, increase throughput and improve
first-run quality.
As an industry, contract electronics continues to benefit from the growing
outsourcing trend among original equipment manufacturers -- a market that is
expected to grow to $60 billion this year, up from just $27 billion in 1996.
While contract electronics remains highly fragmented, with nearly a thousand
such companies, Baldwin has grown into a solid mid-size player currently ranked
at number 65 based on revenues.
Just as important to CE's future growth is its successful niche strategy.
Baldwin focuses on "under-outsourced" segments industrial, instrument and
consumer products -- deliberately side-stepping the more volatile,
commodity-driven computer, peripherals and communications sectors. For Baldwin's
current customers and its most promising prospects, electronics is not a core
business. Instead, these businesses must be able to adapt electronics to their
more traditional products in order to compete. Such customers prefer a
full-service outsourcing partner, such as Baldwin, that cannot only provide
assembly, but help re-engineer products to reduce costs, improve reliability and
stay competitive.
Compelling industry fundamentals provide a solid foundation for strong revenue
and earnings growth in the years ahead. For CE, there are ample opportunities
both for new business and for additional work from CE's loyal and longstanding
customer base. New business development seems limited only by Baldwin's ability
to ensure its capabilities grow at the same pace as its revenues...an important
lesson from 1998. However, once infrastructure development catches up with
burgeoning demand for what Baldwin has to offer, prospects for sustained growth
in contract electronics are extremely strong.
6
<PAGE> 7
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
DIRECTORS
KAREN L. HENDRICKS
Chairman, Chief Executive Officer and President
Baldwin Piano & Organ Company
GEORGE E. CASTRUCCI
Management Consultant, Former Chairman
& Chief Executive Officer of Great American Broadcasting Company
WILLIAM B. CONNELL
Lead Director of Baldwin Piano & Organ Company
Chairman of EDB Holdings, Inc.
JOHN H. GUTFREUND
President of Gutfreund & Company, Inc.
Retired Chairman and Chief Executive Officer of Salomon Brothers, Inc.
JOSEPH H. HEAD, JR.
Chairman of Atkins & Pearce, Inc.
ROGER L. HOWE
Retired Chairman of U.S. Precision Lens, Inc.
EXECUTIVE OFFICERS
KAREN L. HENDRICKS
Chairman, Chief Executive Officer and President
STEPHEN P. BROCK
Executive Vice President, Music
DUANE D. KIMBLE
Executive Vice President, Chief Financial Officer and Corporate Secretary
RANDOLPH R. MARKS
Executive Vice President, Operations
THOMAS C. BREWER
Senior Vice President, Contract Electronics Operations
GEORGE C. HUEBNER
Senior Vice President, Retail Financing
PERRY H. SCHWARTZ
Senior Vice President and Treasurer
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS BALDWIN PIANO & ORGAN COMPANY:
We have audited the accompanying consolidated balance sheet of Baldwin Piano &
Organ Company and subsidiaries as of December 31, 1998, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
financial statements of the Company for the years ended December 31, 1997 and
1996 were audited by other auditors whose report, dated February 23, 1998,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Baldwin
Piano & Organ Company and subsidiaries as of December 31, 1998, and the results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Cincinnati, Ohio
February 24, 1999
7
<PAGE> 8
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31, 1998, 1997 and 1996
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $134,290 $143,101 $115,070
Cost of goods sold 113,970 115,052 92,495
- --------------------------------------------------------------------------------------------
Gross profit 20,320 28,049 22,575
Income on the sale of installment receivables 8,671 7,378 5,811
Interest income on installment receivables 1,690 1,249 1,296
Other operating income, net 1,267 2,304 3,476
- --------------------------------------------------------------------------------------------
31,948 38,980 33,158
Selling, general and administrative 27,923 29,451 27,186
- --------------------------------------------------------------------------------------------
Operating profit 4,025 9,529 5,972
Interest expense 3,138 2,865 2,868
- --------------------------------------------------------------------------------------------
Earnings before income taxes 887 6,664 3,104
Income taxes 150 2,215 1,048
- --------------------------------------------------------------------------------------------
Net earnings $ 737 $ 4,449 $ 2,056
============================================================================================
Basic earnings per share $ .21 $ 1.30 $ .60
- --------------------------------------------------------------------------------------------
Weighted average number of common shares 3,450 3,435 3,421
- --------------------------------------------------------------------------------------------
Diluted earnings per share $ .21 $ 1.28 $ .59
- --------------------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares 3,490 3,483 3,462
============================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
8
<PAGE> 9
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996 (In thousands)
<TABLE>
<CAPTION>
Accumulated other
Common Additional Retained comprehensive Cost of
stock paid-in capital earnings income (loss) treasury shares Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $42 $12,001 $48,278 -- $(6,207) $ 54,114
Proceeds from exercise of
stock options -- 105 -- -- -- 105
Net earnings -- -- 2,056 -- -- 2,056
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 42 12,106 50,334 -- (6,207) 56,275
Proceeds from exercise of
stock options, net of
treasury stock acquired -- 210 -- -- (176) 34
Stock grants issued -- 65 -- -- -- 65
Net earnings -- -- 4,449 -- -- 4,449
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 42 12,381 54,783 -- (6,383) 60,823
Proceeds from exercise of
stock options, net of
treasury stock acquired -- 191 -- -- (113) 78
Stock grants issued -- 65 -- -- -- 65
Stock rights purchased -- (34) -- -- -- (34)
Comprehensive income:
Net earnings -- -- 737 -- -- 737
Foreign currency
translation adjustment -- -- -- (394) -- (394)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 343
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $42 $12,603 $55,520 $(394) $(6,496) $ 61,275
=================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
9
<PAGE> 10
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997 (In thousands)
<TABLE>
<CAPTION>
Assets 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 327 $ 680
Receivables, net 23,273 23,201
Inventories 51,089 36,649
Deferred income taxes 1,671 2,460
Other current assets 6,429 4,423
- ----------------------------------------------------------------------------------------------
Total current assets 82,789 67,413
- ----------------------------------------------------------------------------------------------
Installment receivables, less current portion 14,616 16,502
Property, plant and equipment, net 22,724 18,262
Deferred income taxes 1,089 --
Other assets 16,032 12,183
- ----------------------------------------------------------------------------------------------
Total assets $137,250 $114,360
==============================================================================================
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 11,582 $ 10,812
Current portion of long-term debt 11,380 900
Income taxes payable 452 575
Accrued liabilities 5,766 7,221
- ----------------------------------------------------------------------------------------------
Total current liabilities 29,180 19,508
- ----------------------------------------------------------------------------------------------
Long-term debt, less current portion 42,817 27,650
Deferred income taxes -- 237
Other liabilities 3,978 6,142
- ----------------------------------------------------------------------------------------------
Total liabilities 75,975 53,537
- ----------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock (4,220,694 issued shares in 1998 and
4,205,094 issued shares in 1997) 42 42
Additional paid-in capital 12,603 12,381
Accumulated other comprehensive income (loss) (394) --
Retained earnings 55,520 54,783
Less cost of treasury shares (767,868 shares in 1998 and
760,380 shares in 1997) (6,496) (6,383)
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 61,275 60,823
- ----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $137,250 $114,360
==============================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
10
<PAGE> 11
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996 (In thousands)
<TABLE>
<CAPTION>
Increase (Decrease) in Cash 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 737 $ 4,449 $ 2,056
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,887 3,421 2,204
Gain on sale of assets (128) -- --
Provision for doubtful accounts 1,146 1,466 1,250
Deferred income taxes (537) 1,236 1,069
Change in assets and liabilities:
Trade receivables (958) (7,471) 161
Inventories (14,440) 17,805 (10,516)
Other current assets (2,005) 73 223
Other assets (4,067) (5,393) 220
Accounts payable, accrued
and other liabilities (3,245) 2,890 (3,486)
Income taxes payable (123) 421 (468)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (20,733) 18,897 (7,287)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (8,375) (4,996) (3,602)
Proceeds from sale of assets 1,437 -- --
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,938) (4,996) (3,602)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Installment receivables written (104,496) (87,186) (74,244)
Installment receivables liquidated 9,169 4,474 6,495
Proceeds from sale of installment receivables 96,919 74,383 66,523
Net borrowing on short-term debt 10,380 -- --
Borrowing (repayment) on long-term debt 15,268 (5,700) 12,355
Proceeds from exercise of stock options,
net of treasury stock acquired 78 34 105
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 27,318 (13,995) 11,234
- --------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (353) (94) 345
Cash at beginning of year 680 774 429
- --------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 327 $ 680 $ 774
==========================================================================================================================
Supplemental Disclosure of Cash Flow Information
- --------------------------------------------------------------------------------------------------------------------------
Cash paid during the year for: Interest $ 2,957 $ 3,018 $ 2,781
Income taxes (refunded) $ (197) $ 527 $ 595
==========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
11
<PAGE> 12
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
(All dollar amounts in thousands, except where indicated)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of Baldwin Piano & Organ Company and all of its
subsidiaries (Company). All material intercompany balances and transactions have
been eliminated.
REVENUE RECOGNITION - Prior to mid 1997, the Company shipped keyboard
instruments to a majority of its dealers on a consignment basis and retained
title to each consigned instrument until it was sold by the dealer. Under
consignment, sales are recorded when the dealer sells an instrument to one of
its customers. Starting in June 1997, the Company phased out its consignment
program. For dealers not in consignment, title is transferred at the time of
shipment to the dealer and the Company recognizes a sale at that time.
While the Company was shipping on consignment, a monthly display fee was charged
on all consigned inventory held by dealers longer than ninety days. This display
fee, on an annual basis, ranged from 10.5% to 15.5% of the selling price of such
inventory to the dealer. In 1997 and 1996 display fee income composed the
majority of the amount reported in the Consolidated Statement of Earnings as
"Other operating income, net." In 1998 the majority of the amount reported as
"Other operating income, net" was composed of tuning income, delivery income and
late charges on installment receivables.
The Company produces electronic, furniture and keyboard components on behalf of
other manufacturers. These contract businesses transfer title and recognize
revenue at the time of shipments to their customers.
INSTALLMENT RECEIVABLES - Installment receivables are recorded at the principal
amount of the contracts. Interest on the contracts is recorded as income using
the interest method.
The Company's wholly-owned finance subsidiary (Retail Financing) maintains an
agreement with an unconsolidated, qualifying special purpose entity to sell
substantially all of its installment receivable contracts up to a maximum
outstanding principal amount of $150 million. The buyer of the installment
receivables earns interest on the outstanding principal balance of the contracts
based upon a floating interest rate provision. Retail Financing continues to
contractually service all installment receivables sold. Over the lives of the
contracts, the spread between the actual yield on the installment contracts sold
and the amount retained by the buyer under the floating rate provision is
remitted to Retail Financing as a servicing fee. This amount is recorded in the
Consolidated Statements of Earnings as "Income on the sale of installment
receivables".
ALLOWANCE FOR DOUBTFUL ACCOUNTS - An allowance for losses on receivables is
provided through a charge to operations based on estimates of possible losses.
Accounts deemed to be uncollectible are charged and recoveries credited to the
allowance for doubtful accounts.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost is
determined using the last-in first-out (LIFO) method for a substantial portion
of inventories. Cost for the remaining portion is determined using the first-in
first-out (FIFO) method.
12
<PAGE> 13
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost. Depreciation is calculated using the straight-line method over the
estimated useful lives of the related property. The estimated useful lives are
principally as follows:
Description Years
-----------------------------------------------
Buildings 25 - 35
Building equipment 5
Machinery and equipment 3 - 20
Leasehold improvements are amortized over the shorter of the lease term or
estimated useful life of the asset. The cost of maintenance, repairs, minor
renewals and betterments of property, plant and equipment is charged to expense
in the year incurred. Major expenditures for renewals and betterments are
capitalized and depreciated over their estimated useful lives.
OTHER ASSETS - Other assets consists primarily of institutional and concert and
artist inventory of $7.7 million and $6.6 million at December 31, 1998 and 1997,
respectively, and goodwill. Goodwill, which represents the excess of purchase
price over the fair value of the net assets acquired, is amortized on a straight
line basis over the expected periods to be benefited, generally 40 years. The
Company evaluates long-lived assets, including goodwill and other intangibles,
based on fair values or projected undiscounted cash flows whenever significant
events or changes in circumstances occur which indicate the carrying amount may
not be recoverable.
TAXES ON INCOME - Deferred income taxes reflect the future tax consequences of
differences between the tax base of assets and liabilities and their financial
reporting amounts at each balance sheet date, based upon enacted income tax laws
and tax rates. Income tax expense or benefit is provided based on earnings
reported in the financial statements. The provision for income tax expense or
benefit differs from the amounts of income taxes currently payable because
certain items of income and expense included in the consolidated financial
statements are recognized in different time periods by taxing authorities.
STOCK OPTION PLANS - Prior to January, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the date of
the grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation",
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of the grant. Alternatively, SFAS
123 also allows entities to continue to apply the provisions of APB 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS 123 had been applied. The Company has
elected to continue to apply the provisions of APB 25 and provide the pro forma
disclosure provisions of SFAS 123.
RETIREMENT PLANS - Substantially all hourly and salaried employees located in
the United States are covered by either a defined contribution and/or a defined
benefit plan. The Company also maintains a deferred compensation plan for
certain key employees. The Company's cost of providing these retirement plans is
recognized as a charge to income in the year cost is incurred. The Company has
adopted the disclosure requirement of SFAS No. 132, "Employers' Disclosures
about Pension and other Postretirement Benefits."
13
<PAGE> 14
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS - The Company is contractually
obligated to make health care benefits available to a certain group of retired
employees. Also, the Company sponsors several postemployment plans for various
groups of employees. These plans' provisions include severance benefits in which
the employees' rights either vest or accumulate for each additional year of
service performed.
The Company charges the expected cost of retiree health and certain
postemployment benefits to expense during the years employees render service.
The Company funds these postretirement and postemployment benefits primarily on
a pay-as-you-go basis.
FOREIGN CURRENCY TRANSLATION - The financial statements of the Company's
Canadian subsidiary are measured using the local currency as the functional
currency. Assets and liabilities are translated into U.S. dollars at the rate of
exchange existing at year-end. Income statement amounts are translated at the
average of the monthly exchange rates. The resulting translation adjustments are
recorded directly into a separate component of accumulated comprehensive income.
Gains and losses resulting from actual foreign currency transactions are
recognized currently in results of operations. The functional currency of the
Company's subsidiary in Mexico, which operates as an integral component of the
U.S. operations, is the U.S. dollar. Gains and losses resulting from
remeasurement of monetary assets and liabilities are recognized currently in
results of operations.
DERIVATIVE FINANCIAL INSTRUMENTS - Premiums paid for purchased interest rate cap
agreements are amortized to interest expense over the term of the caps.
Unamortized premiums are included in other assets in the Consolidated Balance
Sheets. Amounts receivable under cap agreements are accounted for as a reduction
of interest expense. The Company has an interest rate swap agreement to adjust
the interest sensitivity of long-term, fixed rate installment receivables. Net
interest income (expense) resulting from the differential between exchanging
floating and fixed-rate swap interest payments is recorded on an accrual basis
as an adjustment to the interest income of the associated asset. The Company
does not hold or issue derivative financial instruments for trading purposes.
During June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Company will
be required to adopt SFAS No. 133 no later than January 2000. Management is
determining the impact that this statement will have on the Company's financial
statements.
EARNINGS PER SHARE - Basic earnings per share is based upon the weighted average
number of common shares outstanding during the year. Diluted earnings per share
is computed based on the weighted average number of common and common equivalent
shares outstanding. Unless otherwise indicated, references to per share amounts
are basic per share amounts.
TRANSFER AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES -
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was adopted on January 1, 1997, and provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. SFAS 125 requires an entity that
sells installment receivables with contractual servicing rights retained to
allocate the previous carrying amount between the assets sold and any retained
interest based on their relative fair values at the date of transfer. The
resulting servicing rights are amortized in proportion to, and over the period
of, estimated net servicing revenues. Servicing rights are assessed for
impairment periodically based on fair value of estimated future cash flows using
discount rates that approximate current market conditions and expected future
prepayment rates, with any impairment recognized through a valuation allowance.
For purposes of measuring impairment, the underlying receivables are stratified
based on original interest rates and estimated maturities.
14
<PAGE> 15
USE OF ESTIMATES - The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Future events could affect these
estimates.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform
with current year financial presentation.
(2) RECEIVABLES
Receivables consist of the following:
1998 1997
--------------------------------------------------------------------
Trade $15,296 $14,770
Installment - owned 10,175 13,447
Holdback on installment accounts sold 13,391 12,586
Other 214 438
--------------------------------------------------------------------
Total receivables 39,076 41,241
Less allowance for doubtful accounts 1,187 1,538
--------------------------------------------------------------------
Net receivables 37,889 39,703
Less noncurrent portion 14,616 16,502
--------------------------------------------------------------------
Net current receivables $23,273 $23,201
====================================================================
In the normal course of business, the Company extends credit to various dealers
where certain concentrations of credit risk exist. These concentrations of
credit risk may be similarly affected by changes in economic or other conditions
and may, accordingly, impact the Company's overall credit risk. However,
management believes that consolidated trade accounts receivable are well
diversified, thereby reducing potential material credit risk, and that the
allowance for doubtful accounts is adequate to absorb estimated losses as of
December 31, 1998 and 1997.
Installment receivables owned by Retail Financing are net of unearned interest
charges of $1.0 million and $0.7 million at December 31, 1998 and 1997,
respectively. See Note 5 for additional information on installment receivables
and Note 6 for information regarding the use of receivables to secure
borrowings.
(3) INVENTORIES
Inventories consist of the following:
1998 1997
--------------------------------------------------------------------
FIFO cost: Raw materials $22,224 $18,406
Work-in-process 11,573 8,865
Finished goods 27,492 19,306
--------------------------------------------------------------------
61,289 46,577
Less revaluation to LIFO 10,200 9,928
--------------------------------------------------------------------
$51,089 $36,649
====================================================================
15
<PAGE> 16
At December 31, 1998 and 1997, approximately 74% and 68%, respectively, of the
Company's inventories were valued on the LIFO method.
Net earnings for 1998 are approximately $0.2 million less than would have been
reported had the FIFO method been used. Net earnings for 1997 are approximately
$1.8 million greater than would have been reported had the FIFO method been
used. Of that amount approximately $0.9 million was attributable to the
phase-out of the Company's consignment inventory program. Net earnings for 1996
are approximately $0.6 million less than would have been reported had the FIFO
method been used.
During 1997 the liquidation of LIFO inventory layers carried at lower costs
prevailing in prior years as compared with the current cost of inventories
decreased cost of sales and, therefore, increased earnings before income taxes
by approximately $5.6 million, offset by the effect of inflation in 1997 of $2.6
million.
See Note 6 for information regarding the use of inventories to secure
borrowings.
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------
<S> <C> <C>
Land $ 421 $ 414
Buildings and building equipment 15,406 14,462
Machinery and equipment 18,773 14,314
Leasehold improvements 718 549
Construction in process 6,012 4,951
-------------------------------------------------------------------
41,330 34,690
Less accumulated depreciation and amortization 18,606 16,428
-------------------------------------------------------------------
$22,724 $18,262
===================================================================
</TABLE>
Depreciation expense was $2.6 million, $3.1 million and $2.1 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
See Note 6 for information regarding the use of property, plant and equipment to
secure borrowings.
(5) DISCLOSURE REGARDING RETAIL FINANCING SUBSIDIARY
The Company sells certain of its keyboard instruments to customers on the
installment method. The Company has a continuing agreement to sell all of its
installment receivables to Retail Financing. Also, Retail Financing purchases
installment receivables for music products from independent retail dealers.
In 1997, Retail Financing amended its agreement with an independent entity to
sell substantially all of its installment receivable contracts up to a maximum
outstanding principal amount of $150 million. Certain installment receivables
are not eligible for sale and are retained by Retail Financing. Retail Financing
continues to service all installment receivables sold.
At the time of each installment receivable sale, Retail Financing receives cash
equal to the unpaid principal balance of the contracts, less a purchase discount
applied to the principal balance of the contracts sold. The purchase discount is
adjusted at each receivable sale and is determined using the loss experience and
effective yield of the portfolio.
16
<PAGE> 17
The buyer of the installment receivables earns interest on the outstanding
principal balance of the contracts based upon a floating interest rate
provision. Over the duration of the contracts, the difference between the actual
yield on the installment contracts sold and the amount retained by the buyer
under the floating interest rate provision is remitted to Retail Financing as a
servicing fee. This amount is recorded in the Consolidated Statement of Earnings
as "Income on the sale of installment receivables." The interest retained by the
buyer for 1998, 1997 and 1996 represented an average interest rate of 6.6%,
6.8%, and 6.8%, respectively. See Note 7 regarding derivative financial
instruments.
The installment contracts are written generally at fixed rates ranging from 12%
to 16% with terms extending over three to five years.
Under the sale agreements, Retail Financing is required to repurchase accounts
that become more than 120 days past due or accounts that are deemed
uncollectible. The repurchase price is equal to the remaining unpaid principal
balance of the contract on the date repurchased, less the related purchase
discount. Retail Financing is responsible for all credit losses associated with
the sold receivables.
At December 31, 1998 and 1997, the balance of installment receivables on which
Retail Financing remains contingently liable, is as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------
<S> <C> <C>
Principal balance of installment receivables sold $121,093 $102,011
Less related holdback 13,391 12,586
---------------------------------------------------------------------------
Contingent liability $107,702 $ 89,425
===========================================================================
</TABLE>
The fair value of the principal balance of installment receivables sold before
related purchase discount is $123.9 million and $105.0 million at December 31,
1998 and 1997, respectively. The fair value is determined as the present value
of expected future cash flows discounted at a rate the Company believes a
purchaser would require as a rate of return, approximately 12%. The carrying
amount of the purchase discount on accounts sold is included in Note 2 as
"Holdback on installment accounts sold" under the indicated caption.
Each installment receivable is secured by the keyboard instrument financed by
the receivable. Prior to the fourth quarter of 1997, in the event of
repossession of the instrument because of nonpayment, the dealer originally
selling the instrument bore some risk of the bad debt loss, but had the right to
sell the repossessed product. This dealer risk was borne in the form of a
potential liability to the Company. This is referred to as recourse. In that
fourth quarter, Retail Financing initiated a program of acquiring receivables
without such recourse, and the Company began selling repossessed pianos through
its own retail stores, primarily through a repossession center located in the
Atlanta metropolitan area.
17
<PAGE> 18
As of December 31, 1998 and 1997, the Company had recorded a servicing asset of
$2.9 and $2.8 million, respectively, which is included in other assets in the
Consolidated Balance Sheets. The fair value of these assets at December 31, 1998
and 1997 approximates their carrying value.
Condensed balance sheets of Retail Financing are as follows:
<TABLE>
<CAPTION>
1998 1997
Assets
-----------------------------------------------------------------------------
<S> <C> <C>
Installment receivables owned $ 9,194 $12,810
Holdback on accounts sold 13,391 12,586
Allowance for doubtful accounts (482) (518)
----------------------------------------------------------------------------
Installment receivables, net 22,103 24,878
Deferred income taxes -- 807
Servicing asset 2,958 2,785
Other assets 6,441 3,736
----------------------------------------------------------------------------
Total assets $31,502 $32,206
============================================================================
Liabilities and Shareholder's Equity
----------------------------------------------------------------------------
Other liabilities $ 2,829 $ 5,037
Due to parent 18,357 20,315
Shareholder's equity 10,316 6,854
----------------------------------------------------------------------------
Total liabilities and shareholder's equity $31,502 $32,206
============================================================================
</TABLE>
Condensed statements of earnings of Retail Financing are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------
<S> <C> <C> <C>
Income on installment receivables:
Sold $ 8,671 $ 7,378 $ 5,811
Owned 1,690 1,249 1,296
----------------------------------------------------------------------------
Total revenue 10,361 8,627 7,107
Expenses:
General and administrative 2,878 3,032 2,873
Provision for doubtful accounts 797 1,162 854
Other operating income (expense) (102) 287 256
----------------------------------------------------------------------------
Operating profit 6,584 4,720 3,636
Interest expense 1,133 1,017 419
----------------------------------------------------------------------------
Earnings before income taxes 5,451 3,703 3,217
Income taxes 1,989 1,363 1,223
----------------------------------------------------------------------------
Net earnings $ 3,462 $ 2,340 $ 1,994
============================================================================
</TABLE>
See Note 7 for information regarding derivative financial instruments.
18
<PAGE> 19
(6) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit agreement $34,317 $25,200
Term loan 9,500 3,350
Inventory purchase and consignment agreement 10,380 --
---------------------------------------------------------------------------------------
54,197 28,550
Less maturities due within one year
included in current liabilities 11,380 900
---------------------------------------------------------------------------------------
$42,817 $27,650
=======================================================================================
</TABLE>
The Company has a long-term, secured $40 million revolving Credit Facility
expiring on October 1, 2000; however, the Company can terminate the agreement at
any time with sixty days' notice. Under the Credit Facility, the lenders have
made available a line of credit based upon certain percentages of the carrying
value of the Company's inventories and accounts receivable. At December 31,
1998, the Company had approximately $2.8 million of additional borrowing
available under this Credit Facility.
The annual rate of interest under the Credit Facility is equal to 1.5 percentage
points per annum above LIBOR, or under certain specified circumstances, 0.5
percentage points per annum above the Prime Rate. The rate under the Credit
Facility was 6.9% and 7.5% at December 31, 1998 and 1997, respectively.
The financial covenants of the Credit Facility agreement require the Company to
maintain certain financial ratios and tangible net worth within defined amounts
and restrict the amount of capital expenditures that can be made each year. As
of December 31, 1998, the Company was in compliance with the terms of the Credit
Facility.
The Company has $9.5 million outstanding on a secured term loan, payable in
quarterly installments of $250,000 through May 1, 2003, with a final payment of
$5.0 million due on May 1, 2003. At December 31, 1998, the annual rate of
interest under the term loan is equal to 1.75 percentage points over the LIBOR
rate. The rate was 7.03% at December 31, 1998. At December 31, 1997, the annual
rate of interest under the term loan was a fixed rate of 7.1%.
Substantially all of the tangible assets of the Company and its subsidiaries are
pledged as collateral under the various debt agreements.
During 1998, the Company entered into an inventory purchase and consignment
agreement. Under the terms of this product financing arrangement, the Company's
borrowings are collateralized by pianos consigned to colleges, universities,
artists and concert halls. All debt under this agreement is classified as
current with an annual rate of interest of approximately 9%.
See Note 7 for information regarding derivative financial instruments.
(7) DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage well-defined
interest rate risks.
In February 1994, Retail Financing entered into a five year interest rate swap
agreement in order to reduce the potential impact of an increase in interest
rates on $20 million of
19
<PAGE> 20
installment contracts. The agreement entitles Retail Financing to receive from a
counterparty, on a monthly basis, interest income to the extent the floating
rate retained by the buyer of installment receivables exceeds 6% or requires
Retail Financing to pay interest expense to the extent the floating rate is less
than 6%. Under the swap agreement, Retail Financing paid $51,000 in 1998,
$65,000 in 1997 and $87,000 in 1996.
The fair value of Retail Financing's interest rate swap agreement at December
31, 1998 and 1997 approximates its carrying value of zero. The fair value is
estimated by comparing the above interest rate to a rate that would be
applicable if the Company entered into a similar agreement for the remaining
term of the swap.
In December 1998 and November 1997, the Company entered into two-year interest
rate cap agreements in order to reduce the potential impact of increases in
interest rates on $44 million and $20 million, respectively, of floating-rate
long-term debt. The agreements entitle the Company to receive from the
counterparty, on a monthly basis, interest income to the extent the one-month
commercial paper rate exceeds 12%. As the commercial paper rate did not exceed
12% in 1998 and 1997, the Company did not receive interest income for those
years.
Due to the short maturity of the interest rate cap agreements, fair market value
approximates carrying value. The carrying amount of the unamortized premiums was
$20,000 and $10,000 at December 31, 1998 and 1997, respectively.
The Company and Retail Financing are exposed to credit losses in the event of
non-performance by the counterparties to its interest rate swap and cap
agreements but have no off-balance sheet credit risk of accounting loss. The
Company and Retail Financing anticipate, however, that the counterparties will
be able to fully satisfy their obligations under the contracts. The Company and
Retail Financing do not obtain collateral or other security to support financial
instruments subject to credit risk but monitor the credit standing of the
counterparties.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has only limited involvement with financial instruments and does not
use them for trading purposes.
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1998 and 1997. SFAS 107,
"Disclosures about Fair Value of Financial Instruments," defines the fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
1998 1997
------------------ -------------------
Carrying Fair Carrying Fair
amount value amount value
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Installment receivables owned $10,175 $9,779 $13,447 $13,195
Term loan $9,500 $9,500 $3,350 $3,328
==============================================================================
</TABLE>
The carrying amounts shown in the table above are included in Notes 2 and 6
under the indicated captions.
The fair value of installment receivables owned is determined as the present
value of expected future cash flows discounted at a rate the Company believes a
purchaser would require as a rate of return, approximately 12%. The fair value
of the term loan is estimated by discounting the future cash flows at rates
currently offered for similar debt instruments of comparable maturities.
20
<PAGE> 21
The fair value of the Credit Facility equals carrying value as a result of the
variable nature of the interest rate. Note 5 presents the estimated fair value
of installment receivables on which Retail Financing remains contingently liable
as well as the related discount. Note 7 presents the estimated fair values of
derivative financial instruments.
For all financial instruments other that those noted above, fair value
approximates carrying value primarily due to the short maturity of those
instruments.
(9) INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------
<S> <C> <C> <C>
Current: Federal $ 331 $ 736 $ (410)
State 238 151 (73)
Foreign 118 113 222
--------------------------------------------------------------------------
687 1,000 (261)
--------------------------------------------------------------------------
Deferred: Federal (324) 860 1,123
State (213) 355 186
--------------------------------------------------------------------------
(537) 1,215 1,309
--------------------------------------------------------------------------
$ 150 $2,215 $1,048
==========================================================================
</TABLE>
Earnings before income taxes aggregated $0.1 million, $5.6 million, and $2.1
million for domestic operations and $0.8 million, $1.1 million, and $1.0 million
for foreign operations in 1998, 1997 and 1996, respectively.
The difference between the taxes provided in the accompanying Consolidated
Statements of Earnings and the amount which would be computed by applying the
U.S. Federal income tax rate to earnings before income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected tax $302 $2,262 $1,055
State income taxes, net of
Federal tax benefit 17 195 75
Favorable settlement - foreign taxes -- (300) --
Foreign tax rate differences (101) -- --
Other (68) 58 (82)
-----------------------------------------------------------------------------------
$150 $2,215 $1,048
===================================================================================
</TABLE>
21
<PAGE> 22
The significant components of deferred income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Reserves for inventories $(154) $ 597 $ 983
Allowance for doubtful accounts 558 655 133
Nondeductible accruals 317 566 337
LIFO inventory decrease (384) (539) (648)
Investments in affiliated companies (783) -- --
Other (91) (64) 504
-----------------------------------------------------------------------------
Deferred tax expense (benefit) $(537) $1,215 $1,309
=============================================================================
</TABLE>
Components of deferred tax balances as of December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 674 $ 1,232
Inventories, principally inventory reserves 347 --
Nondeductible accruals, principally due to
accrual for financial reporting purposes 2,248 2,565
Valuation allowance (232) --
Other 528 361
-----------------------------------------------------------------------------------
Total gross deferred tax assets 3,565 4,158
-----------------------------------------------------------------------------------
Deferred tax liabilities:
Inventories, principally due to differences in
LIFO -- (191)
Property, plant and equipment, principally
due to differences in depreciation (641) (1,260)
Investments in affiliated companies, principally
due to undistributed income of affiliated
companies -- (262)
State income taxes (164) (222)
-----------------------------------------------------------------------------------
Total gross deferred tax liabilities (805) (1,935)
-----------------------------------------------------------------------------------
Net deferred tax assets $2,760 $ 2,223
===================================================================================
</TABLE>
The Company has approximately $1.1 million in foreign tax credits for which the
utilization of a portion is uncertain. The Company has reserved for a portion of
these credits through a valuation allowance at December 31, 1998.
22
<PAGE> 23
(10) ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------
<S> <C> <C>
Accrued liabilities:
Compensation and benefits $1,784 $2,204
Reserve for installment receivables sold with
recourse 769 1,810
Other 3,213 3,207
-------------------------------------------------------------------------------
$5,766 $7,221
===============================================================================
Other liabilities:
Deferred compensation $1,398 $1,735
Postretirement and postemployment 511 683
Other 2,069 3,724
-------------------------------------------------------------------------------
$3,978 $6,142
===============================================================================
</TABLE>
(11) Retirement Plans
The Company maintains retirement plans under Section 401(k) of the Internal
Revenue Code. Under these plans, the Company makes an annual contribution up to
3% of compensation paid to all covered employees. To the extent employees
contribute up to 6% of their compensation, the Company will match a portion of
each dollar contributed. The Company also maintains a deferred compensation plan
for certain key employees and a defined benefit plan for certain hourly
employees. The cost of providing these retirement benefits is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Defined contribution 401(k) $ 696 $ 681 $ 742
Deferred compensation 163 200 147
Defined benefit 266 340 240
-----------------------------------------------------------------------------------
$1,125 $1,221 $1,129
===================================================================================
</TABLE>
Benefits to employees under the defined benefit plan are based upon their years
of credited service. Contributions to the plan are designed to fund the plan's
current service cost on a current basis and initial prior service cost over 30
years. Plan assets consist primarily of U.S. government obligations, Federal
agency obligations, mortgages, corporate bonds and notes, and common stocks.
The Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" in 1998. Adoption of this standard did not impact
the reported results of operations or financial position, however additional
footnote disclosures have been made.
23
<PAGE> 24
Net pension expense for plans included the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 160 $ 157 $ 131
Interest cost 240 226 174
Return on plan assets (222) (282) (196)
Net amortization and deferral 88 239 131
-----------------------------------------------------------------------------------
Net periodic pension expense $ 266 $ 340 $ 240
===================================================================================
</TABLE>
The following table shows reconciliations of pension plan obligations and
assets:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------
1998 1997
---------------------------------------------------------------------------------
<S> <C> <C>
Beginning benefit obligation $3,477 $3,054
Service cost 160 157
Interest cost 240 226
Benefits paid (100) (95)
Actuarial loss 76 135
---------------------------------------------------------------------------------
Ending benefit obligation $3,853 $3,477
=================================================================================
Beginning fair value of plan assets $2,568 $2,262
Actual return on plan assets 222 282
Company contributions 340 210
Benefits paid (100) (95)
Plan expense payments (100) (91)
---------------------------------------------------------------------------------
Ending fair value of plan assets $2,930 $2,568
=================================================================================
Funded status of the plan $ (923) $ (909)
Unrecognized actuarial loss 336 188
Unrecognized prior service cost 485 539
Unrecognized transition obligation 25 32
Additional minimum liability (99) (92)
---------------------------------------------------------------------------------
Accrued pension liability $ (176) $ (242)
=================================================================================
</TABLE>
The weighted average rate assumptions used in determining pension
costs and the benefit obligations were:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6.8% 7.0% 7.5%
Long-term rate of return on plan assets 9.0% 8.0% 8.0%
=================================================================================
</TABLE>
24
<PAGE> 25
(12) SHAREHOLDERS' EQUITY
At December 31, 1998 and 1997, the Company had 14,000,000 shares of $.01 per
value common stock authorized and 4,220,694 and 4,205,094 shares issued,
respectively. The Company held 767,868 shares and 760,380 shares in treasury at
December 31, 1998, and 1997, respectively.
The Company maintains two incentive stock option plans. Under these plans,
options for 450,000 shares of common stock may be granted to key managerial
personnel of the Company. In 1998 the Company adopted a Omnibus Stock Plan
("Omnibus Plan") which allows the Company to grant up to 200,000 non-qualified
stock options, incentive stock options, restricted stock, stock appreciation
rights, performance units and performance shares to directors, executive
officers and other key employees. The Company has also granted other
non-qualified stock options to key employees and to each non-employee director.
In all cases, the option price shall not be less than the fair market value of
the common stock at the date of grant.
At December 31, 1998, there were 51,250 additional shares available for grant
under the two incentive stock option plans, and 164,500 additional shares
available for grant under the 1998 Omnibus Plan. The per share weighted-average
fair value of stock options granted during 1998, 1997 and 1996 was $7.03, $6.26
and $6.29, respectively, on the date of the grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1998 -
expected dividend yield of 0%, expected volatility of 32.3%, risk-free interest
rate of 5.21%, and an expected life of 7 years; 1997 - expected dividend yield
of 0%, expected volatility of 32.4%, risk-free interest rate of 5.62%, and an
expected life of 7 years; 1996 - expected dividend yield of 0%, expected
volatility of 31.6%, risk-free interest rate of 6.32%, and an expected life of 7
years.
The Company applies APB 25 in accounting for its plans and, accordingly, no
compensation cost has been recognized for its stock options in the consolidated
financial statements. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS 123, the Company's
net earnings, basic earnings per share and diluted earnings per share would have
been reduced to the pro forma amounts indicated below (In thousands, except
earnings per share):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings:
As reported $737 $4,449 $2,056
Pro forma 536 4,211 1,874
Basic earnings per share:
As reported $.21 $ 1.30 $ .60
Pro forma .16 1.23 .55
Diluted earnings per share:
As reported $.21 $ 1.28 $ .59
Pro forma .15 1.21 .54
=====================================================================================
</TABLE>
Pro forma net earnings reflect only options granted in 1998, 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net earnings amounts presented
above because compensation cost is reflected over the options' vesting period of
five years and compensation cost for options granted prior to January 1, 1995,
is not considered.
25
<PAGE> 26
A summary of the activity of the stock option plans follows (In thousands,
except per share data):
<TABLE>
<CAPTION>
Shares Weighted average
subject to per share
option option price
-------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1995 286 $12.56
Options granted 177 13.21
Options exercised (10) 10.21
Options expired (42) 11.44
-------------------------------------------------------------------------------
Balance, December 31, 1996 411 $13.00
Options granted 72 13.46
Options exercised (17) 12.07
Options expired (53) 12.20
-------------------------------------------------------------------------------
Balance, December 31, 1997 413 $13.10
Options granted 84 15.46
Options exercised (15) 12.26
Options expired (17) 14.27
-------------------------------------------------------------------------------
Balance, December 31, 1998 465 $13.51
===============================================================================
</TABLE>
At December 31, 1998, the range of exercise prices was $8.63 - $17.25, and
weighted-average remaining contractual life of outstanding options was 7 years.
At December 31, 1998 and 1997, the number of options exercisable was 301,410 and
232,000, respectively, and the weighted-average exercise price of those options
was $13.19 and $13.02, respectively.
The Company had adopted a shareholder rights plan declaring a dividend
distribution of one Common Share Purchase Right for each outstanding share of
the Company's common stock. Under the plan, shareholders of record on September
10, 1996, received one right for each common share held on that date. This
distribution was not taxable to shareholders. The rights had a ten year life and
could be exercised if a party acquired 15 percent or more of the Company's
common stock, or announced a tender offer to do so, without the consent of the
Company's Board of Directors. In April 1998, the Company adopted a resolution to
terminate this shareholder rights plan. Each holder of a right was paid $.01 per
right on May 8, 1998 in redemption of the rights, an aggregate amount of
$34,457. The termination of this rights agreement had no impact on the number of
shares of common stock outstanding.
In October 1998, the Company adopted a new shareholder rights plan declaring a
dividend distribution of one Common Stock Purchase Right for each outstanding
share of the Company's common stock to the shareholders of record on October 22,
1998. Each right entitles the holder to purchase from the Company one share of
common stock for $45 if a party acquires 15 percent or more of the Company's
common stock, or announces a tender offer to do so, without the consent of the
Company's Board of Directors.
26
<PAGE> 27
(13) EARNINGS PER SHARE
(In thousands, except per share data):
<TABLE>
<CAPTION>
Net earnings Shares Per share
1998 (Numerator) (Denominator) amount
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Net earnings available to
common shareholders $ 737 3,450 $ .21
Effect of dilutive securities
stock options -- 40 --
-----------------------------------------------------------------------------------
Diluted earnings per share:
Earnings available to common
stockholders and assumed
conversions $ 737 3,490 $ .21
===================================================================================
1997
-----------------------------------------------------------------------------------
Basic earnings per share:
Net earnings available to
common shareholders $4,449 3,435 $1.30
Effect of dilutive securities
stock options -- 48 --
-----------------------------------------------------------------------------------
Diluted earnings per share:
Earnings available to common
stockholders and assumed
conversions $4,449 3,483 $1.28
===================================================================================
1996
-----------------------------------------------------------------------------------
Basic earnings per share:
Net earnings available to
common shareholders $2,056 3,421 $ .60
Effect of dilutive securities
stock options -- 41 --
-----------------------------------------------------------------------------------
Diluted earnings per share:
Earnings available to common
stockholders and assumed
conversions $2,056 3,462 $ .59
===================================================================================
</TABLE>
Options to purchase 446,600, 50,600, and 61,500 shares of common stock were
outstanding in 1998, 1997 and 1996, respectively, but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of common shares.
27
<PAGE> 28
(14) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in litigation arising in its normal course of business.
The Company does not believe that any existing claim or suit will have a
material adverse effect on the business, financial condition or cash flows of
the Company.
The operations of the Company and its predecessors are subject to Federal, state
and local laws regulating the discharge of materials into the environment. The
Company does not anticipate that any environmental matters currently known to
the Company will result in any material liability.
At December 31, 1998, the Company was obligated under non-cancelable operating
leases for real and personal property which are subject to certain renewal and
purchase options. Non-cancelable operating leases in effect at December 31,
1998, require rental payments of $2.0 million, $1.8 million, $1.7 million, $1.5
million and $1.4 million for the years 1999 through 2003, respectively, and $4.7
million for years thereafter. Lease expense for all operating leases was $1.6
million, $1.9 million, and $2.3 million for 1998, 1997 and 1996, respectively.
(15) Segment Information
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for
reporting information about operating segments. The adoption of this statement
in 1998 resulted in additional financial statement information reported on the
basis used internally by management to evaluate performance and allocate
resources. The Company did not make material changes to its previously reported
segment groupings. In order for these allocations to be consistently applied to
all periods presented, certain prior year amounts have been restated.
28
<PAGE> 29
<TABLE>
<CAPTION>
1998 1997* 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Music and related $ 91,567 $107,492 $ 84,176
Contract Electronics 42,723 35,609 30,894
Retail Financing 10,361 8,627 7,107
--------------------------------------------------------------------------------
Sales and other revenue $144,651 $151,728 $122,177
================================================================================
Music and related $ 4,269 $ 10,478 $ 7,848
Contract Electronics 56 1,374 1,421
Retail Financing 6,584 4,720 3,636
Corporate G&A & Other Unallocated (6,884) (7,043) (6,933)
--------------------------------------------------------------------------------
Operating profit $ 4,025 $ 9,529 $ 5,972
================================================================================
Music and related $ 74,549 $ 53,096 $ 63,739
Contract Electronics 24,701 23,581 19,907
Retail Financing 31,502 32,206 22,486
Corporate G&A 6,498 5,477 5,932
--------------------------------------------------------------------------------
Identifiable assets $137,250 $114,360 $112,064
================================================================================
Music and related $ 1,618 $ 2,230 $ 1,309
Contract Electronics 762 721 451
Retail Financing 40 34 27
Corporate G&A 467 436 417
--------------------------------------------------------------------------------
Depreciation & amortization $ 2,887 $ 3,421 $ 2,204
================================================================================
Music and related $ 7,764 $ 3,705 $ 1,044
Contract Electronics 175 1,132 1,852
Retail Financing 65 52 48
Corporate G&A 371 107 658
--------------------------------------------------------------------------------
Capital additions $ 8,375 $ 4,996 $ 3,602
================================================================================
</TABLE>
*During 1997 the Company phased-out its consignment inventory program. This
created a large, one-time increase in the Company's Music and related sales and
operating profit. Sales and operating profit for Music and related would have
been $92,826 and $9,086, respectively, without the effect of one-time phase-out
of consignment.
The amounts reflected as "Sales and other revenue" in the above table are
included in the "Net sales", "Income on the sale of installment receivables",
and "Interest income on installment receivables" captions of the Consolidated
Statements of Earnings.
The Music and related segment includes a broad range of acoustic and electronic
instruments serving a broad consumer base. Keyboard instruments are sold through
Company-owned retail stores, domestic wholesale dealers, factory direct sales
and an international dealer network. In addition, this segment includes
furniture and musical components produced on behalf of other manufacturers.
29
<PAGE> 30
The Contract Electronics segment assembles printed circuit boards and
electromechanical devices for original equipment manufacturers (OEMs) outside
the music industry.
The Retail Financing segment provides point-of-sale consumer financing through
keyboard instrument dealers located throughout the United States.
The Company uses the LIFO method of valuing Music and related products inventory
and the FIFO method for Contract Electronics inventory.
(16) SUBSEQUENT EVENT
On January 6, 1999, the Company announced it would stop assembling grand pianos
in its Conway, Arkansas, plant and consolidate all of its piano assembly
operations in its Trumann, Arkansas, plant. The Company expects the
consolidation to be completed by mid-1999. The Company expects to incur pre-tax
expenses of approximately $1.5 million during 1999, primarily severance and
other exit related costs. Additionally, fixed asset expenditures related to the
consolidation are expected to approximate $0.5 million.
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
The sum of the quarter's earnings per share amounts may not add to full year
earnings per share because each quarter is calculated independently. Quarterly
financial data for the years ended December 31, 1998 and 1997 are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
1998 First Second Third Fourth Year
===================================================================================
<S> <C> <C> <C> <C> <C>
Net sales $31,687 $32,108 $34,277 $36,218 $134,290
-----------------------------------------------------------------------------------
Gross profit 5,314 5,413 5,393 4,200 20,320
-----------------------------------------------------------------------------------
Net earnings 370 172 93 102 737
Basic earnings
per share .11 .05 .03 .03 .21
-----------------------------------------------------------------------------------
Diluted earnings
per share .11 .05 .03 .03 .21
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997 First Second Third Fourth Year
===================================================================================
<S> <C> <C> <C> <C> <C>
Net sales $27,309 $42,404 $33,915 $39,473 $143,101
-----------------------------------------------------------------------------------
Gross profit 4,776 8,153 7,376 7,744 28,049
-----------------------------------------------------------------------------------
Net earnings 246 1,642 1,059 1,502 4,449
Basic earnings
per share .07 .48 .31 .44 1.30
-----------------------------------------------------------------------------------
Diluted earnings
per share .07 .47 .30 .42 1.28
===================================================================================
</TABLE>
30
<PAGE> 31
Baldwin Piano & Organ Company and Subsidiaries
FIVE-YEAR SUMMARY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Earnings Statement Data:
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $134,290 $143,101 $115,070 $122,634 $122,347
Cost of goods sold 113,970 115,052 92,495 96,333 96,559
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 20,320 28,049 22,575 26,301 25,788
Income on the sale of installment receivables 8,671 7,378 5,811 4,946 4,828
Interest income on installment receivables 1,690 1,249 1,296 906 735
Other operating income, net 1,267 2,304 3,476 4,010 4,482
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit and other operating revenue 31,948 38,980 33,158 36,163 35,833
Selling, general and administrative 27,923 29,451 27,186 27,755 33,173
- ----------------------------------------------------------------------------------------------------------------------------
Operating profit 4,025 9,529 5,972 8,408 2,660
Interest expense 3,138 2,865 2,868 2,087 2,101
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 887 6,664 3,104 6,321 559
- ----------------------------------------------------------------------------------------------------------------------------
Income taxes 150 2,215 1,048 2,361 214
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 737 $ 4,449 $ 2,056 $ 3,960 $ 345
============================================================================================================================
Basic earnings per share $ .21 $ 1.30 $ .60 $ 1.16 $ .10
- ----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .21 $ 1.28 $ .59 $ 1.15 $ .10
============================================================================================================================
============================================================================================================================
Balance Sheet Data (at December 31):
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Working capital $ 53,609 $ 47,905 $ 31,462 $ 34,703 $ 35,759
- ----------------------------------------------------------------------------------------------------------------------------
Total assets 137,250 114,360 112,064 101,429 97,460
- ----------------------------------------------------------------------------------------------------------------------------
Current portion of long-term debt 11,380 900 30,901 17,646 16,746
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current portion 42,817 27,650 3,350 4,250 5,000
Shareholders' equity 61,275 60,823 56,275 54,114 50,154
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
1998 was a challenging year for Baldwin. The Music Division faced the unexpected
fallout from the Asian financial crisis, resulting in a flood of low-priced
Asian imports that hit the U.S. market. The Music Division launched a defensive
spending program; however, sales and margins were lower on vertical pianos as a
result. Contract Electronics achieved 20% sales growth; however, profits were
unable to keep pace with topline growth. Increased customer demand triggered
supply chain constraints and generated significant additional costs to meet
on-time delivery commitments. Retail Financing was a key strength in 1998,
fueled by a healthy U.S. economy which gave a strong lift to the keyboard
category and Baldwin's aggressive defense plan on vertical pianos that reduced
financing rates.
Net sales, excluding 1997's impact of $14.6 million related to the one-time
phase-out of consignment, increased 5% to $134.3 million. Sales growth with
existing Contract Electronics (CE) customers represents the majority of CE's 20%
sales increase. Music's sales, 2% lower than 1997, were adversely impacted by
significant price reductions on a surge of Asian imports. Baldwin offered
significant incentives to defend its U.S. market leadership position of vertical
pianos and, as a result, experienced only a 4% drop in vertical unit sales.
Partially offsetting the decline in vertical piano sales, Baldwin realized a 17%
increase in grand piano unit sales and a 74% unit increase in Baldwin's award
winning auto player unit - ConcertMaster.
Net earnings for 1998, excluding 1997's impact of $0.9 million related to the
one-time phase-out of consignment, was $0.7 million or $0.21 per share, down
from $3.6 million or $1.05 per share. The Music Division's profits were
primarily impacted ($0.53 per share lower) by costs incurred and incentives
offered to defend its market leadership position from the flood of low priced
Asian imports in the United States. Contract Electronics' profits were adversely
impacted ($0.25 per share lower) by manufacturing and administrative
inefficiencies caused by inadequate infrastructure to support the 20% growth in
sales. Profits from Retail Financing operations increased 35% ($0.24 per share
higher) because of lower interest rate costs and a 14% increase in its
portfolio. Also, Retail Financing's profits were favorably impacted ($0.08 per
share) by the effect of SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". Based on expectations of
portfolio growth, the Company believes that the impact on future period earnings
as a result of SFAS No. 125 will be less than that experienced during 1998 and
1997.
The Company values a substantial portion of its inventory on the last-in,
first-out (LIFO) method. Because of the significant decline in inventories
during 1997, earnings, excluding impact of consignment sales, were favorably
impacted in the prior year by lower costs resulting from LIFO decrements ($0.28
per share lower) which did not recur in 1998. Further, the 1998 gross profit is
$0.3 million (or $0.06 per share lower) lower than the amount that would have
been reported had the first-in, first-out (FIFO) method been used.
All other changes in net earnings ($0.06 per share unfavorable) are primarily
due to higher interest expenses.
1997 COMPARED TO 1996
During 1997, the Company phased out its consignment inventory program. Under the
Company's historical consignment inventory program, Company pianos in the
dealer's possession remained part of the Company's inventory until actually sold
by the dealer. In 1997, the Company, in conjunction with a third party, provided
a more attractive floor plan to its dealers to finance the dealers' purchase of
products from the Company. As a result, most dealers opted out of the existing
consignment program and the Company inventory in each of these dealers'
possession was immediately sold to the dealers. This transfer of title was a
sale to the dealer and created a large, one-time increase in Baldwin's sales.
32
<PAGE> 33
Net sales for 1997 increased 24% to $143.1 million from $115.1 million for the
same period in 1996. The increase in sales included $14.6 million related to the
one-time phase-out of consignment. This occurred also in spite of the loss of
$2.3 million in contract furniture sales, a business exited in 1996.
Measured before the impact of the phase-out of consignment, sales for the
Company's core acoustic and digital music businesses rose $12.2 million (18%)
over 1996. This increase is due to improved piano quality, innovative new
products, a healthy economic climate and new marketing programs. Additionally,
sales for the Company's contract electronics business increased $4.7 million
(15%) over 1996, mainly as a result of new customers.
Net earnings for 1997 more than doubled, to $4.4 million ($1.30 per share)
compared to $2.1 million ($.60 per share) in 1995. Without the impact of
discontinuing consignment sales and other events, net earnings for 1997 would
have been $3.6 million ($1.05 per share). Previous year's net earnings were
negatively impacted by strategic initiatives designed to enhance future
competitiveness.
The Company values a substantial portion of its inventory on the last-in,
first-out (LIFO) method. The 1997 net earnings are $1.8 million greater than the
amount that would have been reported had the first-in, first-out (FIFO) method
been used. Of that amount, approximately $0.9 million was attributable to the
phase-out of the Company's consignment inventory program.
Income on the sale of installment receivables increased $1.6 million from 1996,
while interest income on installment receivables remained at the same level as
in 1996. This increase is primarily the result of the effect of the required
adoption of SFAS 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." SFAS 125 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996, and is to be applied prospectively. SFAS 125 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. The Company has recorded a
servicing asset of $2.8 million.
Prior to the fourth quarter of 1997, in the event of repossession of an
instrument financed by the Company's wholly-owned subsidiary (Retail Financing),
the dealer originally selling the instrument bore some risk of the bad debt
loss, but had the right to sell the repossessed product. This dealer risk was
borne in the form of a potential liability to the Company. This is referred to
as recourse. In that fourth quarter, Retail Financing initiated a program of
acquiring receivables without such recourse, and the Company began selling
repossessed pianos through its own retail stores, primarily through a
repossession center located in the Atlanta metropolitan area.
Other operating income decreased in 1997 by $1.2 million primarily due to lower
floor plan income resulting from the phase-out of the consignment inventory
program.
Selling, general and administrative expenses increased by $2.3 million from
1996. Of that amount approximately $0.9 million was attributable to one-time
items, and $1.4 million relates to higher advertising and promotional spending,
increased investor relations activity and acquisition related matters.
INFLATION, OPERATIONS AND INTEREST RATES
The impact of inflation on manufacturing and operating costs can affect the
Company's results. However, the Company has generally been able to offset the
impact of higher employment costs per hour and higher raw material unit costs by
increases in sales prices. During 1998, this was not the case for vertical piano
selling prices.
The operations of the Company and its predecessors are subject to Federal, state
and local laws regulating the discharge of materials into the environment. The
Company does not
33
<PAGE> 34
anticipate that any environmental matters currently known to the Company will
result in any material liability.
The Company and its subsidiaries' operating results are sensitive to changes in
interest rates primarily because of fixed interest rates on its Retail Financing
installment receivables contracts and the floating interest rates on a
substantial portion of the Company's indebtedness. Additionally, the buyer of
the installment receivables earns interest on the outstanding principal balance
of the contracts based upon a floating interest rate provision.
The Company can partially offset the effect of interest rate changes by
increasing interest rates on its new installment receivable contracts. In
November 1997 and December 1998 the Company entered into two-year interest rate
cap agreements in order to reduce the potential impact of increases in interest
rates on $20 million and $44 million, respectively, of floating-rate long-term
debt. These two agreements entitle the company to receive from the counterparty,
on a monthly basis, interest income to the extent the one-month commercial paper
rate exceeds 12%. Further, in mid-March 1999, the Company made arrangements to
replace the swap agreement with a counter party for a two-year "no-cost collar"
of $32 million which has a floor at the mid-March Commercial Paper rate and a
ceiling of 108 basis points higher. The Company is exposed to credit losses in
the event of nonperformance by the counterparty to its interest rate caps, but
has no off-balance sheet credit risk of accounting loss. The Company
anticipates, however, that the counterparty will be able to fully satisfy its
obligations under the contracts. The Company does not obtain collateral or other
security to support financial instruments subject to credit risk, but monitors
the credit standing of the counterparty.
The annual rate of interest under the Company's revolving Credit Facility is
equal to 1.5 percentage points above LIBOR, or under certain specified
circumstances, 0.5 percentage points per annum above the Prime Rate.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had outstanding indebtedness of $54.2
million. The Company considers that indebtedness of $22.6 million supports the
retained portion of Retail Financing's portfolio and the remaining indebtedness
of $31.6 million supports the $134 million operations of Music and Contract
Electronics. Also, at December 31, 1998, the Company had significant investment
in inventories, some of which were intentional to minimize impact on delivery to
customers as the Company closes its grand assembly operation in Conway,
Arkansas, and moves to a new piano plate supplier. These inventories
approximated $6.0 million and the Company has plans to reduce these inventories
by middle of 1999. Further, the Company has plans to re-engineer its inventory
management systems and expects positive cash flow results from this effort as
well in 1999. The Company believes that cash flow will be sufficient to support
operations based on cash provided from operations, available borrowings and
inventory reductions.
On October 16, 1997, the Company replaced its short-term $50 million revolving
line of credit with a long-term, secured $40 million revolving Credit Facility
expiring on October 1, 2000; however, the Company can terminate the agreement at
any time with sixty days' notice. Under the Credit Facility, the lenders have
made available a line of credit based upon certain percentages of the carrying
value of the Company's inventories and accounts receivable. The annual rate of
interest under the Credit Facility is equal to 1.5 percentage points above
LIBOR, or under certain specified circumstances, 0.5 percentage points per annum
above the Prime Rate. At December 31, 1998, the rate under the Credit Facility
was 6.9% and the Company had approximately $2.8 million of additional borrowing
available under this Credit Facility.
The Company's debt agreements contain covenants that require the Company to
maintain certain financial ratios and tangible net worth within defined amounts.
34
<PAGE> 35
In October 1997, the Company's finance subsidiary (Retail Financing) amended its
agreements with an independent entity to sell substantially all of its
installment receivable contracts up to a maximum outstanding principal amount of
$150 million. Certain installment receivables are not eligible for sale and are
retained by Retail Financing. Retail Financing continues to service all
installment receivables sold. At the time of each installment receivable sale,
Retail Financing receives cash equal to the unpaid principal balance of the
contracts, less a purchase discount applied to the principal balance of the
contracts sold. The purchase discount is adjusted at each receivable sale using
the loss experience and effective yield of the portfolio.
The buyer of the installment receivables earns interest on the outstanding
principal balance of the contracts based upon a floating interest rate
provision. Over the duration of the contracts, the difference between the actual
yield on the installment contracts sold and the amount retained by the buyer
under the floating interest rate provisions is remitted to Retail Financing as a
service fee.
Proceeds from the sale of installment receivables amounted to $96.9 million for
1998, $74.4 million for 1997, and $66.5 million for 1996. This increase in 1998
compared with 1997 is largely the result of an increase in the volume of new
installment contracts written at traditional keyboard dealers and at the
Company's retail stores.
Under the sale agreements, Retail Financing is required to repurchase accounts
that become more than 120 days past due or accounts that are deemed
uncollectible. The repurchase price is equal to the remaining unpaid principal
balance of the contract on the date repurchased, less the related purchase
discount. Retail Financing is responsible for all credit losses associated with
the sold receivables. Retail Financing remains contingently liable on
approximately $107.7 million of installment receivables sold. The Company
believes an adequate allowance has been provided for any uncollectible
receivables.
Capital expenditures amounted to $8.4 million, $5.0 million and $3.6 million for
1998, 1997 and 1996, respectively. As of December 31, 1998, the Company had less
than $0.5 million in outstanding capital commitments. The Company expects 1999
capital expenditures to be less than depreciation expense.
MARKET RISK
The principal market risk (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed is interest rates on
debt and fixed rate installment receivables and the commodity price of wood used
in the manufacturing process.
At December 31, 1998, the carrying value and estimated fair value of Company's
debt totaled $54.2 million. All of the Company's debt at December 31, 1998, was
at variable interest rates. For such floating rate debt, interest rate changes
generally do not affect the fair market value but do impact earnings and cash
flows, assuming other factors are held constant. Holding other variables
constant (such as foreign exchange rates and debt levels), the earnings and cash
flows impact for the next year resulting from a one percentage point increase in
interest rates on variable rate debt would be approximately $0.5 million. The
Company has limited its risk related to interest rate changes by purchasing
certain interest rate caps and collars discussed above under "Inflation,
Operations and Interest Rates".
The Company is subject to market risk with respect to certain commodities,
principally wood prices, because the ability to recover increased costs through
higher pricing may be limited by the competitive environment in which the
Company operates. The Company does not use futures contracts to hedge
anticipated purchases of wood used in the manufacturing and assembly of piano
cases.
35
<PAGE> 36
YEAR 2000
The Year 2000 problem is a result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which would result in miscalculations
or system failures.
The Company's major computer systems consist of third-party software. The
conclusion of the Company's research is that the latest existing releases of
this software contain the necessary changes to correct any significant Year 2000
problems. As a matter of ongoing policy, in order to assure continuing
contractual vendor support, the Company promptly installs and implements new
releases of third-party software. To date, the Company has implemented
third-party releases that it believes are Year 2000 compliant for 90% of its
software. The Company has spent approximately $0.5 million on these releases
during 1998, which amounts were planned expenditures irrespective of any Year
2000 issues. The remaining 10% of new third party releases will be installed
during the first half of 1999 at an anticipated cost of approximately $0.1
million, which expenditures would have been incurred by the Company irrespective
of any Year 2000 issues. The Company has tested and has further plans to test
its software for compliance. Costs of addressing potential problems have not and
are not currently expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods.
The Company's compliance plan includes review of Year 2000 readiness of its
major manufacturing equipment, products, suppliers, and customers. The Company
has no Electronic Data Interchange (EDI) interfaces with either its customers or
vendors. To date, the Company has not discovered any significant Year 2000
issues in these areas and does not anticipate any significant problems.
Therefore, the Company has not developed specific contingency plans in
preparation for the year 2000. As the Company continues to evaluate and test its
readiness for the year 2000, the Company will assess whether there are any
specific areas where a contingency plan could help alleviate possible adverse
effects from the year 2000. If so, the Company will develop contingency plans in
those areas prior to the end of 1999. Accordingly, the Company plans to devote
the necessary resources to resolve all significant Year 2000 issues in a timely
manner.
The most likely Year 2000 problems that the Company may face appear to arise
from the possible noncompliance of third parties. Possible difficulties could
arise in receiving materials from suppliers or from failures in the operations
of the Company's electronic contracting customers. In addition, in the event
that the Year 2000 would cause widespread loss of power or other utilities in
areas where the Company, its suppliers or customers operate, the Company's
business and operations could be disrupted. Such events could have a material
adverse impact on the Company.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements include, without limitations,
the Company's beliefs about trends in the Company's industries, and its views
about the long-term future of these industries and the Company. The following
factors, among others, could cause the Company's financial performance to differ
materially from that expressed in such statements: (i) changes in consumer
preferences resulting in a decline in the demand for pianos, (ii) the inability
to reduce SG&A expenses as expected, (iii) an increase in the price of raw
materials, (iv) political and/or economic instability in foreign countries where
the Company has operations or has suppliers who supply the Company, (v) an
unexpected increase in interest rates, (vi) a shift in strength of the overall
U.S. economy thereby possibly reducing durable goods purchases, and, (vii)
failure to remedy in a timely manner any Year 2000 issues that might arise.
36
<PAGE> 37
SHAREHOLDER INFORMATION
HOME OFFICE
- --------------------------------------------------------------------------------
4680 Parkway Drive, Mason, Ohio 45040 (513) 754-4500
e-mail: [email protected] web sites: www.baldwinpiano.com & www.pianovelle.com
MANUFACTURING LOCATIONS
- --------------------------------------------------------------------------------
Conway, Fayetteville and Trumann, Arkansas; Greenwood, Mississippi;
Juarez, Mexico
RETAIL LOCATIONS
- --------------------------------------------------------------------------------
Company Owned Outlets: Atlanta, Georgia; Cincinnati, Ohio; Indianapolis and Fort
Wayne, Indiana; Louisville and Lexington, Kentucky
Independent Keyboard Dealers (375)
REGISTRAR AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Provident Bank, One East Fourth Street, Cincinnati, Ohio 45202
AUDITORS
- --------------------------------------------------------------------------------
Deloitte & Touche LLP, Cincinnati, Ohio
SECURITIES MARKET
- --------------------------------------------------------------------------------
The Nasdaq National Market; Symbol: BPAO
FORM 10-K
- --------------------------------------------------------------------------------
A copy of the Company's Form 10-K as filed with the Securities and Exchange
Commission is available to shareholders by writing to Corporate Secretary,
Baldwin Piano & Organ Company, 4680 Parkway Drive, Mason, Ohio 45040.
MARKET AND DIVIDEND INFORMATION
- --------------------------------------------------------------------------------
The Company's common stock is listed on the Nasdaq National Market under the
symbol BPAO. As of March 19, 1999, the number of outstanding shares of the
Company's common stock was 3,452,826 and the approximate number of record
holders of such shares was 109. The Company has paid no dividends since its
inception and intends to continue its policy of retaining earnings to finance
future growth.
<TABLE>
<CAPTION>
1998 1997
------------------ -------------------
Common Stock Price Range High Low High Low
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $17 $15 1/2 $14 $11 1/2
Second Quarter 16 7/8 14 7/8 14 1/2 12 3/4
Third Quarter 15 3/4 10 3/4 18 13 1/4
Fourth Quarter 11 3/4 8 1/2 19 15/16 15 5/8
</TABLE>
<PAGE> 1
Exhibit 22.1
SUBSIDIARIES OF REGISTRANT
Jurisdiction of
Name Incorporation
---- -------------
Keyboard Acceptance Corporation Delaware
The Wurlitzer Company Delaware
Baldwin Trading Company Ohio
Signature Leasing Company Ohio
The Baldwin Piano Company Canada
(Canada) Limited
Fabricantes Tecnicos, S.A. Mexico
Servicios Baldwin, S.A. Mexico
Immobiliaria Baldwin, S.A. Mexico
Korean American Musical Instrument Korea
Corporation
-62-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF EARNINGS, CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF
CASH FLOWS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS: #'S 2 AND 4, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 327
<SECURITIES> 0
<RECEIVABLES> 39,076
<ALLOWANCES> 1,187
<INVENTORY> 51,089
<CURRENT-ASSETS> 82,789
<PP&E> 41,330
<DEPRECIATION> 18,606
<TOTAL-ASSETS> 137,250
<CURRENT-LIABILITIES> 29,180
<BONDS> 42,817
0
0
<COMMON> 42
<OTHER-SE> 61,233
<TOTAL-LIABILITY-AND-EQUITY> 137,250
<SALES> 134,290
<TOTAL-REVENUES> 145,918
<CGS> 113,970
<TOTAL-COSTS> 113,970
<OTHER-EXPENSES> 23,777
<LOSS-PROVISION> 1,146
<INTEREST-EXPENSE> 3,138
<INCOME-PRETAX> 887
<INCOME-TAX> 150
<INCOME-CONTINUING> 737
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 737
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.21
</TABLE>
<PAGE> 1
Exhibit 99.4
BALDWIN PIANO & ORGAN COMPANY
4680 Parkway Drive
Mason, Ohio 45040
(513) 754-4500
CONTACT: Perry Schwartz, CFO Ken Di Paola or Art Gormley
Baldwin Piano & Organ Company The Dilenschneider Group
(513) 576-4500 (212) 922-0900
BALDWIN PIANO ADOPTS INNOVATIVE SHAREHOLDER RIGHTS PLAN
PLAN PERMITS QUALIFIED OFFERS TO PROCEED WITHOUT BOARD APPROVAL
LOVELAND, Ohio, October 13, 1998 -- The Baldwin Piano & Organ Company
(NASDAQ: BPAO) today announced that its board of directors has adopted a
Shareholder Rights Plan and declared a shareholder dividend of one Stock
Purchase Right for each share of common stock owned on October 22, 1998, the
record date for the dividend.
The Rights Plan was adopted to protect shareholders against partial
tender offers and other abusive takeover tactics that might be used to gain
control of Baldwin without paying all shareholders a full and fair price. Unlike
Rights Plans adopted by hundreds of other publicly held companies, Baldwin's
innovative plan will permit a Qualified Offer to go forward without board
approval.
A Qualified Offer, as defined by the plan, must meet certain reasonable
and equitable criteria to ensure that the rights of all shareholders are
protected, among them: the offer must be all cash, made to all shareholders,
contain a firm financing commitment, and a fairness opinion from a nationally
recognized investment bank. A Qualified Offer must result in the offeror
acquiring at least 75 percent of Baldwin's then outstanding shares.
The Rights Plan also mandates that the company's outside directors
review the plan at least every two years to determine whether retaining the plan
continues to be in the best interests of the company's shareholders.
Karen L. Hendricks, chairman, president and chief executive officer of
Baldwin, said: "The Rights Plan is in keeping with the board's fiduciary duty to
protect the rights of all shareholders. It will not prevent a takeover of
Baldwin in the face of a Qualified Offer.
-more-
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<PAGE> 2
-2-
"The board's action was triggered by the alarming weakness in U.S.
securities markets. With share prices in free fall without regard to underlying
value, this Rights Plan will prevent an acquirer with a "front-end loaded" offer
from seizing control of the company without offering a full and fair price to
all shareholders. This is of particular concern to Baldwin given the
concentration of share ownership."
She added, "The Rights are not intended to interfere with a transaction
that is in the best interests of the Company's shareholders; it will not in any
way weaken Baldwin's financial strength, or interfere with its business plans.
The issuance of Rights under the Plan does not result in dilution, will not
affect reported earnings per share, is not taxable to Baldwin or its
shareholders, and will not change the way in which Baldwin shares are traded."
Details of the Rights Plan will be contained in a letter to be mailed
to all shareholders of record and in documents filed with the Securities and
Exchange Commission.
The Baldwin Piano & Organ Company has marketed piano products for over
136 years and has been providing consumer financing for the keyboard industry
for nearly a century. Maker of America's best-selling pianos under the Baldwin,
Chickering, and Wurlitzer brand names, the company also manufactures electronic
and electro-mechanical components for original equipment manufacturers. Revenues
in 1997 exceeded $143 million.
# # #
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995: This release contains forward looking statements that are subject to risks
and uncertainties, including, but not limited to, the impact of competitive
products and pricing, product demand and market acceptance, reliance on key
strategic alliances, fluctuations in operating results and other risks detailed
from time to time in the company's filings with the Securities and Exchange
Commission.
-66-
<PAGE> 1
EXHIBIT 99.5
BALDWIN PIANO & ORGAN COMPANY
4680 Parkway Drive
Mason, Ohio 45040
(513) 754-4500
CONTACTS: Duane D. Kimble Ken DiPaola or Joel Pomerantz
Baldwin Piano The Dilenschneider Group, Inc.
(513) 754-4500 (212) 922-0900
BALDWIN PIANO APPOINTS DUANE KIMBLE CFO;
PERRY SCHWARTZ NAMED CORPORATE TREASURER
MASON, OHIO, December 16, 1998 -- The Baldwin Piano & Organ Company
(NASDAQ:BPAO) today announced the appointment of Duane D. Kimble, 37, as chief
financial officer. He succeeds Perry H. Schwartz, 60, who will assume the post
of corporate treasurer.
Before joining Baldwin in August to oversee the company's strategic
planning function, Mr. Kimble had been director of financial and operations
analysis for Texas-based Equistar Chemicals, L.P., a leading producer of
industrial chemicals. At Equistar, he was directly responsible for budgeting,
strategic planning and overseeing the company's $300 million of annual capital
expenditures. Prior to Equistar, he held a variety of key financial positions
with Cincinnati-based Millennium Petrochemicals, Inc., the nation's largest
domestic producer of polyethylene plastic.
Joining Millennium in l986, Mr. Kimble was named controller and a
member of the firm's Operating Committee in August 1996. At Millennium, he
supervised all accounting and internal controls and spearheaded financial
initiatives that significantly enhanced the company's shareholder value and
competitive position.
Commenting on the appointments, Baldwin Chairman, CEO and President Karen
Hendricks said: "We are fortunate, indeed to have attracted someone of Duane
Kimble's caliber to succeed Perry Schwartz. In the brief time Duane has been
with Baldwin, he has helped us work through some very complex strategic planning
issues. His excellent leadership and financial planning skills will add much to
our continuing efforts to improve manufacturing efficiency, further reduce
operating costs, and meet new competitive challenges.
-more-
-67-
<PAGE> 2
-2-
"With Baldwin's ongoing efforts to cut inventories, reduce receivables
and improve cash flow, the importance of the treasury function has grown
tremendously. We are very pleased that Perry Schwartz will be applying his
considerable financial skills to the task of establishing and overseeing this
critical function."
Mr. Kimble began his professional career in 1983 at Price Waterhouse,
the global audit, tax and consulting firm where he served as a senior auditor.
Baldwin's new CFO earned his accounting degree at Miami University (Oxford,
Ohio) in 1983.
The Baldwin Piano & Organ Company has marketed piano products for over
137 years and has been providing consumer financing for the keyboard industry
for nearly a century. Maker of America's best-selling pianos under the Baldwin,
Chickering, and Wurlitzer brand names, the company also manufactures electronic
and electro-mechanical components for original equipment manufacturers. Revenues
in 1997 exceeded $143 million.
# # #
-68-
<PAGE> 1
EXHIBIT 99.6
BALDWIN PIANO & ORGAN COMPANY
4680 Parkway Drive
Mason, Ohio 45040
(513) 754-4500
CONTACTS: Duane Kimble Joel Pomerantz
Baldwin Piano The Dilenschneider Group
(513) 754-4647 (212) 922-0900
BALDWIN PIANO REPORTS
FOURTH-QUARTER AND YEAR-END 1998 RESULTS
MASON, OH, February 24, 1999 -- Baldwin Piano & Organ Company
(NASDAQ:BPAO) today announced results for the fourth quarter and year ended
December 31, 1998.
Total fourth-quarter sales declined to $36.2 million, compared with
$39.5 million for the same period a year ago. Net earnings for the quarter fell
to $104,000, or 3 cents per diluted share, down from $1.5 million, or 42 cents
per diluted share, last year. Fourth quarter 1997 results include adjustments
related to Baldwin's phase-out of consignment sales, which reduced reported net
earnings for that period by approximately $200,000, or 6 cents per diluted
share.
Net earnings for the full year were $737,000, or 21 cents per diluted
share, on 1998 sales of $134.3 million. A year ago, the company reported net
earnings of $4.4 million, or $1.28 per diluted share, on 1997 sales of $143.1
million. Results for 1997 include $14.6 million of sales related to the one-time
phase-out of consignment. Before such one-time adjustments, 1997 earnings were
$3.6 million, or $1.05 per diluted share, on sales of $128.5 million.
Commenting on the results, Karen L. Hendricks, president, chairman and
chief executive officer of Baldwin said, "The low-end of the U.S. piano
marketplace was extremely competitive throughout 1998, due in large part to
fallout from the Asian financial crisis, which triggered a major surge in
imports of vertical pianos. This put considerable downward pressure on retail
prices and hurt profitability significantly in this high-volume segment of our
business.
"To combat this competitive threat, Baldwin implemented an aggressive
strategy to preserve market share. While vertical piano sales revenues and units
sold fell 4 percent year-over-year, market share erosion would have been
considerably higher had it not been for the defensive action we took. In 1999,
we continue to foresee pressure on margins and sales from Asian imports.
-more-
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<PAGE> 2
-2-
"Sales of Baldwin's high-end grand pianos remained strong in 1998," Ms.
Hendricks added, noting that grand piano sales revenues and units sold for 1998
were up 17 percent and 14 percent, respectively, versus a year ago. Likewise,
1998 sales of Baldwin's Concert Master electronic player system were up sharply
over 1997, posting increases in sales dollars and units of 74 percent and 51
percent, respectively.
"Late in the fourth quarter, we also began shipping a new line of grand
pianos featuring super high-gloss polyester finishes. Early indications are that
demand for this new finish is strong, and we are encouraged at the prospect of
dramatically expanding Baldwin's share of the high margin grand piano market.
"Contract electronics sales grew 20 percent to $42.7 million in 1998,
up from $35.7 million a year ago. However, margins were adversely impacted by
this unit's rapid growth, which triggered supply chain constraints and
additional costs associated with fulfilling existing customer demand on a timely
basis. Looking ahead, the company expects steady margin improvements in 1999, as
management shifts its focus from sales growth to operational efforts that
enhance margins.
"Revenues for Baldwin's retail financing unit grew 20 percent in 1998
to $10.3 million, up from $8.6 million a year ago. Last year's particularly
strong growth was triggered, in part, by the financing terms we offered to spur
Baldwin's sales in response to Asian imports."
Ms. Hendricks added, "Throughout the year, Baldwin continued to improve
capacity utilization at its various piano plants. In January 1999, Baldwin
announced the consolidation of all piano assembly operations at its facility in
Trumann, Arkansas. The consolidation, which is expected to be completed in 1999,
will greatly enhance the cost effectiveness of our piano assembly operations. In
connection with the move, the Company expects to incur one-time expenses to
approximately $1.5 million.
Earlier this month, the Company announced it would change its primary
supplier of piano plates, the second most costly component in piano
manufacturing. The new relationship gives Baldwin some decided advantages in
terms of cost, quality and delivery. Throughout 1999, Baldwin will continue to
actively explore additional ways to address capacity and productivity issues
even more aggressively."
Baldwin Piano & Organ Company has marketed keyboard musical products
for over 136 years and has been providing consumer financing for the keyboard
industry for nearly a century. Baldwin, maker of America's best selling pianos,
also manufactures electronic and electro-mechanical components for Original
Equipment Manufacturers.
# # #
-70-
<PAGE> 3
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995:
This release contains forward looking statements that are subject to risks
and uncertainties, including, but not limited to, the impact of
competitive products and pricing, product demand and market acceptance,
reliance on key strategic alliances, fluctuations in operating results and
other risks detailed from time to time in the company's filings with the
Securities and Exchange Commission.
(Condensed Earnings Statement and Balance Sheet Attached)
-71-
<PAGE> 4
<TABLE>
<CAPTION>
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
THREE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales (1) $36,218 $39,472 $134,290 $143,101
Cost of goods sold (1) 32,017 31,728 113,970 115,052
------- ------- -------- --------
Gross profit 4,201 7,744 20,320 28,049
Interest income on installment receivables 3,683 2,312 10,361 8,627
Other operating income, net 301 497 1,267 2,304
Selling, general and administrative (2,3) 7,359) (7,998) (27,923) (29,451)
Interest expense (968) (617) (3,138) (2,865)
------- ------- --------- --------
Earnings (loss) before income taxes (142) 1,938 887 6,664
Income taxes (1,2,3) (246) 436 150 2,215
------- ------- --------- --------
Net earnings $ 104 $ 1,502 $ 737 $ 4,449
======= ======= ======== ========
Net earnings excluding one time events $ 104 $ 1,705 $ 737 $ 3,592
======= ======= ======== ========
Basic earnings per share $ 0.03 $ 0.44 $ 0.21 $ 1.30
======= ======= ======== ========
Basic earnings per share excluding
one time events $ 0.03 $ 0.50 $ 0.21 $ 1.05
======= ======= ======== ========
Diluted earnings per share $ 0.03 $ 0.42 $ 0.21 $ 1.28
======= ======= ======== ========
Average number of shares outstanding 3,453 3,444 3,450 3,435
======= ======= ======= =======
Diluted number of shares outstanding 3,454 3,540 3,490 3,483
======= ======= ======= =======
<CAPTION>
CONSOLIDATED SUMMARY BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Assets
Receivables, net $ 23,273 $ 23,201
Inventories 51,089 36,649
Other current assets 9,516 7,563
-------- --------
Total current assets 83,878 67,413
Installment receivables, less current portion 14,616 16,502
Property, plant and equipment, net 22,724 18,262
Other assets 16,032 12,183
-------- --------
Total assets $137,250 $114,360
======== ========
Liabilities and Shareholders' Equity
Current portion of long-term debt $ 11,380 $ 900
Other liabilities 17,563 18,608
-------- --------
Total current liabilities 28,943 19,508
Long-term debt, less current portion 42,817 27,650
Other liabilities 4,215 6,379
Shareholders' equity 61,275 60,823
-------- --------
Total liabilities and shareholders' equity $137,250 $114,360
======== ========
</TABLE>
-72-
<PAGE> 5
(1) 1997 year-to-date Sales and Cost of Sales included one time sales and
associated cost of sales related to the Company's decision to phase out of
its Consignment inventory program. The sales (and associated LIFO impact)
increased reported net income by 69 cents per share for 1997.
(2) Prior year Cost of Sales and S,G&A included one time expenses associated
with the Company's decision to phase out its Church Organ business. The
expense reduced reported net income by 32 cents per share for 1997.
(3) Prior year S,G&A expense included one time expenses for a proxy defense.
The expense reduced reported net income by 10 cents per share for 1997.
-73-
