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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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, 1999 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, Suite 200
Mason, Ohio 45040-7198
(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 .
--- ---
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 $12,095,661 based upon the $7.875 per share price at which
the Common Stock was last sold as reported on the Nasdaq National Market through
March 27, 2000.
The number of outstanding shares of Common Stock of Baldwin Piano &
Organ Company ("Company"), as of March 22, 1999, is 3,462,826.
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, 1999 ("1999 Annual Report to
Shareholders"), which is attached hereto as Exhibit 13.1. The 1999 Annual Report
to Shareholders will be mailed to the Company's shareholders along with the
Company's definitive proxy statement for its 2000 Annual Meeting of
Shareholders. The Company currently anticipates that its 2000 Annual Meeting
will be held in June 2000, although the exact date has not yet been established
by the Company's Board of Directors.
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TABLE OF CONTENTS
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PART I. Page
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Item 1. Business 1-14
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of
Security Holders 15
PART II.
Item 5. Market for Registrant's Common Equity 17
and Related Stockholder Matters
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of 18
Financial Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures 18
about Market Risk
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants 18
on Accounting and Financial Disclosure
PART III.
Item 10. Directors and Executive Officers of the 18-20
Registrant
Item 11. Executive Compensation 21-30
Item 12. Security Ownership of Certain Beneficial 31-40
Owners and Management
Item 13. Certain Relationships and Related 40
Transactions
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<TABLE>
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PART IV.
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Item 14. Exhibits, Financial Statement Schedules, 41-48
and Reports on Form 8-K
SIGNATURES 49
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PART I
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ITEM 1. BUSINESS
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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.
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.
As one of its businesses, Baldwin provided in-house consumer
installment financing of musical products through its wholly-owned subsidiaries,
Keyboard Acceptance Corporation and Signature Leasing Company (together referred
to as "Retail Financing"). On March 10, 2000, Baldwin concluded the sale of
these subsidiaries to Deutsche Financial Services Corporation (DFS) for $35.0
million.
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,
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1999 1998 1997
------- ------- -------
Music and Related .................... $ 79.3 $ 91.6 $ 107.5
Electronic Contracting ............... 45.0 42.7 35.6
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Continuing Operations ................ 124.3 134.3 143.1
Retail Financing
(discontinued operations) ....... 8.8 10.4 8.6
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Total ................... $ 133.1 $ 144.7 $ 151.7
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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
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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.
Additional financial information regarding industry segments is shown
in this Form 10-K in Note 15 to the Consolidated Financial Statements of the
Company, incorporated herein and 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 (14%), and an
international dealer network (4%).
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.
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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.
DIGITAL KEYBOARDS
During the 2000 Music Trade Show (NAMM) Baldwin introduced all
new pattern-based or ensemble digital pianos. The new line consists of
5 different models available in numerous finish options. In addition,
Baldwin introduced a new entry-level digital piano to round out the
non-pattern based product offering, a total of 5 models, available in
multiple finish options.
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.
During the NAMM 2000 music trade show, Baldwin introduced
significant changes to its flagship Artist Grand Piano line. Changes
involved not only performance-based improvements to the touch response
and tone quality of the instrument, but also new aesthetic features
improving the overall look of the piano. These new products are
scheduled to begin shipping in March, 2000.
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
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that polyester finish is a prerequisite for entering into Asian and
European piano markets. The Company believes approximately 70% 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, 1998, competing against a large field of
technologically innovative consumer electronics products,
ConcertMaster(TM) won top honors for technical excellence at the New
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). The demand for Baldwin grand pianos continued to
increase -- in no small part due to the consumer appeal of
ConcertMaster(TM).
In early 2000, Baldwin also introduced a new player piano
system called ConcertMaster CD. This new product is targeted at an
entry level price point and is available as a field retrofit kit that
can be installed on any brand of piano, new or used.
In electronic-based keyboard 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 to minimize operating costs.
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.
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Plates from the manufacturing facility are 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 improves the
sound of the piano and sets a standard for the piano industry.
The new arrangement and facilities generates 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 375 independent dealers. The
Company also operates 15 Company-owned stores in seven large
metropolitan areas.
In 1999, no single dealer accounted for more than 5.5% of the
Company's keyboard musical instrument sales. The top ten dealers in
terms of net sales accounted for approximately 27% 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 and services designed to assist
dealers and promote the Company's products, including:
- A Concert and Artist program in which many of the world's
most renowned pianists, composers, conductors, vocalists and
musical institutions endorse Baldwin grand pianos. This
provides Baldwin 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.
- A dealer support program, providing training, promotional
programs and assistance, and sales incentives.
- Institutional loan programs, which provide for short term
piano loans to universities followed by selling events at the
end of the loan term.
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- Sponsorship of educational activities, including piano
competitions.
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 consigned 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.
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
company which 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:
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(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 utilizing 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.
(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 14% of the
Company's total keyboard sales in 1999, 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.
INTERNATIONAL SALES
The Company's products are distributed in Canada through
approximately 30 independent dealers representing approximately 3% of
the Company's total keyboard sales in 1999. The Company markets
products through a number of other international distributors in
markets such as Mexico, France, Taiwan, Japan and England representing
approximately 1% of the Company's total keyboard sales in 1999.
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.
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In the U.S. the piano category has averaged approximately 5%
to 6% growth over the past three years (1997; 1998; and 1999). Because
available industry data reports unit sales from manufacturers to
dealers, and not dealers to consumers, it is difficult to determine
real consumption in any given year. Based on available information from
a variety of sources, we believe 1998 and 1999 were atypical. The
unusually strong growth reported by the industry in 1998 followed by a
decline in 1999 is, in our view, a result of trade inventory loading in
1998. The dealers stocked up because the Asian economic crisis caused a
surge of Asian piano imports into the U.S. at dramatically discounted
piano pricing. Then in 1999 the dealers worked off their excess
inventory before reordering. Therefore, we believe averages over
several years are probably a better predictor of real category growth
dynamics. Nevertheless, average growth of acoustic pianos in the past
three years has been stronger than the previous three years, an
indication of a strong domestic economy, a reduction in the number of
used pianos in the marketplace, and strong media and public interest in
newly published research linking keyboard study to enhance intellectual
development.
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 include 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 quality,
performance characteristics, styling, finish options and electronic
enhancement options.
The Company believes that its domestic unit market share for
new acoustic pianos was approximately 28% in 1997, approximately 24% in
1998 and approximately 22% in 1999. 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,
6% in 1997, and 5% in 1998 and 1999.
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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.
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. Since
1996, this Division has 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-build 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 independent 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
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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.
RETAIL FINANCING OPERATIONS (DISCONTINUED OPERATIONS)
The Company's retail financing units, "Retail Financing", operated
through its installment financing subsidiary, Keyboard Acceptance Corporation
(KAC) and its lease finance subsidiary, Signature Leasing Company (SLC), created
in 1997. Retail Financing provided point-of-sale consumer financing through
keyboard dealers located throughout the United States. On March 10, 2000,
Baldwin completed the sale of its two wholly owned retail financing units to
Deutsche Financial Services Corporation (DFS). Baldwin received gross proceeds
of $35 million. After transaction expenses, Baldwin expects to net approximately
$32.5 million for an after-tax gain of $700,000, or 20 cents per share. Key
elements of the transaction include commitments from Baldwin to continue to
exclusively use KAC and SLC to service the retail financing needs of its
company-owned stores and to use Baldwin's retail outlets to sell pianos
repossessed by KAC and SLC. Baldwin also agreed to retain a contingent
obligation for certain past-due installment receivables for a period of two
years.
DFS is a financially strong strategic buyer with extensive knowledge of
the piano business. They are in an excellent position to maintain Retail
Financing's long-term dealer relationships and continue the high quality service
that Baldwin dealers have come to expect. Based on Baldwin's strong relationship
with DFS, DFS's relationship with piano dealers, including Baldwin dealers, and
other sources of available financing to piano consumers, the Company expects
that the sale of Retail Financing will have no adverse impact on Baldwin's piano
business going forward. Further, with the net proceeds of approximately $32.5
million from the sale of Retail Financing, the Company's balance sheet will be
significantly deleveraged, strengthening Baldwin's remaining businesses.
During the last few years Retail Financing had expanded its focus. In
addition to financing keyboard products sold by Baldwin dealers, Retail
Financing made its consumer financing available through music dealers that do
not carry the Company's keyboard products.
Retail Financing offered music dealers consumer financing programs
which included competitive interest rates, leasing, rent-to-own options and
prompt credit approval. In addition to these services, Retail Financing both
originated and cooperated in special promotional programs with dealers.
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Prior to the March 2000 sale to DFS, Keyboard Acceptance Corporation
maintained 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 were not eligible for sale were retained. Retail Financing
continued to service all installment receivables sold.
At the time of each installment receivable sale, Retail Financing
received 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 was adjusted at each receivable sale and was determined using the loss
experience and effective yield of the portfolio. The buyer of the installment
receivables earned 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, was remitted to Retail Financing as a service fee.
Under the sale agreement with the independent entity, Retail Financing
was required to repurchase accounts that become more than 120 days past due or
accounts that were deemed uncollectible by the independent purchaser. The
repurchase price was equal to the remaining unpaid principal balance of the
contract on the date repurchased, less the related purchase discount.
At December 31, 1999, Retail Financing remained contingently liable on
approximately $114 million of installment receivables. Retail Financing was
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 were 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 was 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.
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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. Since 1996, the
Company has implemented 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.
During the first half of 1999, Baldwin reduced 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. Previous to this consolidation, Baldwin had been
assembling some of Baldwin's Artist Grand pianos at the Trumann plant for over a
year. Synchronous manufacturing techniques made the relocation possible. The
Company incurred one-time expenses of $1.5 million and a capital investment of
approximately $0.5 million in connection with this consolidation. The Company's
polyester finishing operations at Conway were not affected.
In September, 1999, Baldwin sold its Juarez, Mexico manufacturing
facility to an unrelated third party for $7.2 million. The implementation of
synchronous manufacturing techniques at our Juarez facility allowed the Company
to maintain production using only a third of the space once required for the
same operations. The Company's manufacturing in Juarez will remain in Juarez,
but operating in a smaller, leased facility.
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 1999, the fourth quarter accounted for approximately 29% of net sales. This
is slightly higher than fourth quarter results in the previous three years.
BACKLOG
At both December 31, 1999 and 1998, the Company had sales orders for
keyboard products of approximately $9 million and $5 million, respectively. The
sales orders for electronic contracting totaled approximately $30 million at
December 31, 1999 and 1998, respectively. These sales orders are not firm sales
orders and are subject to cancellation by the ordering customers. The Company
anticipates that all such 1999 orders will be filled during 2000.
WORKING CAPITAL
The Company requires significant working capital to support its
operations. The Company builds piano inventory levels during the year to support
its high fourth quarter seasonal sales demand.
The Company finances its working capital needs under a $35 million
Revolving Credit Facility with Fifth Third Bank and Bank One
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(formerly known as NBD Bank). The Company can terminate this Credit Facility at
any time with sixty days' notice without penalty. 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 had entered into agreements to sell substantially all of its
installment receivable contracts up to a maximum outstanding 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" incorporated herein and attached
hereto as Exhibit 13.1.
EMPLOYEES
As of December 31, 1999, the Company had approximately 1,500 full-time
employees. Approximately 291 hourly workers at the Company's Greenwood,
Mississippi facility are represented by the International Chemical Workers
Union, Local Union No. 800 and approximately 210 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
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The Company operates the following manufacturing facilities, all of
which are owned, except for Juarez, Mexico, which is leased. These properties
are pledged as collateral under the Company's various credit facilities.
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Location Industry Segment Principal Products
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Greenwood, Mississippi Music and related Piano cases and wood
components
Conway, Arkansas Music and related Polyester Finishing
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<TABLE>
<S> <C> <C>
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.
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 1999 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The following are the Company's current executive officers. They have
been elected by the Company's Board of Directors to serve until their respective
successors are elected.
KAREN L. HENDRICKS, age 52, 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
-15-
<PAGE> 19
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
ACNielsen Corporation and Columbia Energy Group.
DUANE D. KIMBLE, age 39, is Executive Vice President, Chief Financial
Officer and Corporate Secretary. Mr. Kimble joined the Company in August 1998 as
Vice President, Strategic Planning and then was named Chief Financial Officer in
December 1998. 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.
DANIEL B. BAKER, Age 48, is Senior Vice President, Worldwide Music
Sales. Prior to joining Baldwin in November 1996, Mr. Baker was Vice President,
Professional Health Care Systems, a startup professional healthcare company.
Prior to October 1994, Mr. Baker spent 14 years in Sales at Procter & Gamble,
leaving at the Division Manager level. Prior to his employment with P&G, Mr.
Baker was in the U.S. Army (from 1973 to 1980), leaving the Army with the rank
of captain.
PERRY H. SCHWARTZ, age 61, is the Company's Senior Vice President and
Treasurer. Mr. Schwartz joined the Company as Executive Vice President and Chief
Financial Officer in November 1996 and then in December 1998, Mr. Schwartz was
appointed to his current position. 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.
-16-
<PAGE> 20
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.
<TABLE>
<CAPTION>
Year 1999 Year 1998
--------- ---------
Common Stock Price Range Common Stock Price Range
- -------------------------------------------- ---------------------------------------------
Quarter High Low Quarter High Low
- ------- ---- --- ------- ---- ---
<S> <C> <C> <C> <C> <C>
First $11 1/2 $7 1/2 First $17 $15 1/2
Second $9 5/8 $7 1/8 Second $16 7/8 $14 7/8
Third $9 1/4 $6 Third $15 3/4 $10 3/4
Fourth $9 1/4 $7 Fourth $11 3/4 $ 8 1/2
</TABLE>
As of March 29, 2000, the number of outstanding shares of the Company's
common stock was 3,462,826. The approximate number of record holders of such
shares was 102.
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".
-17-
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Incorporated by reference to Baldwin's 1999 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 Baldwin's 1999 Annual Report to
Shareholders under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
----------------------------------------
ABOUT MARKET RISK
-----------------
Incorporated by reference to Baldwin's 1999 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 the financial statements contained in
Baldwin's 1999 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 year 1997 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 fiscal year 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
seven members, each of whom holds office until the next annual meeting
-18-
<PAGE> 22
of the Company's shareholders. The date of the 2000 annual meeting has not yet
been fixed, but is expected to be held in June 2000.
The following persons are the current directors of the Company:
KAREN L. HENDRICKS, age 52, 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 ACNielsen Corporation and Columbia Energy Group.
GEORGE E. CASTRUCCI, age 62, 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 LanVision Systems, Inc., The Ohio National
Fund, Inc., and ONE Fund, Inc.
WILLIAM B. CONNELL, age 59, 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 Vice President of the Procter & Gamble Company from 1984 to 1989. He
also currently serves as a director of Remington Products Company and
Information Resources, Inc.
HERBERT A. DENTON, age 52, is President and co-founder of Providence
Capital, Inc., a private merchant bank and registered broker dealer. He was
formerly a managing director with Jeffries & Company, Inc. of New York. Mr.
Denton sits on the board of directors for Chic by H.I.S., Inc. and Mesa Air
Group, Inc.
-19-
<PAGE> 23
JOHN H. GUTFREUND, age 70, 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., Universal Bond Fund, Ascent Assurance,
Inc., Evercel, Inc. and AMBI, Inc.
JOSEPH H. HEAD, JR., age 67, 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 65, has been a director of the Company since August
1993. Mr. Howe was formerly the Chairman of the Board of U.S. 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 1999 fiscal year.
-20-
<PAGE> 24
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 1999 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, 1999. 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.
<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 1999 $372,000 $ -0- 10,000 10,000 $ 13,245
Chairman, Chief Executive 1998 350,000 -0- -0- 10,000 30,039
Officer and President 1997 350,000 98,000 12,500 29,000 27,100
Duane D. Kimble 1999 175,000 -0- -0- 4,000 $ 19,426
Executive Vice President, 1998 67,282 -0- -0- 10,000 12,373
Chief Financial Officer 1997 -0- -0- -0- -0- -0-
And Corporate Secretary
Daniel B. Baker 1999 $144,130 -0- -0- 2,500 $ 4,825
Senior Vice President, 1998 132,275 -0- -0- 2,500 9,529
Music Sales 1997 115,000 24,200 -0- 2,000 5,158
George C. Huebner(5) 1999 $129,229 $ 15,000 -0- 3,000 $ 5,938
Former Senior Vice 1998 120,750 39,159 -0- 3,000 8,591
President and General 1997 116,917 8,962 -0- 3,000 7,783
Manager, Keyboard
Acceptance Corporation
Perry H. Schwartz 1999 $143,833 -0- -0- -0- $ 2,827
Senior Vice President and 1998 186,000 -0- -0- 2,500 13,306
Treasurer 1997 180,000 30,240 -0- 3,000 7,049
Randolph R. Marks(6) 1999 $160,000 -0- -0- 5,000 $ 20,046
Former Executive Vice 1998 215,000 38,700 -0- 20,000 19,775
President, Piano Operations 1997 -0- -0- -0- -0- -0-
</TABLE>
-21-
<PAGE> 25
(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.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Karen L. Hendricks $21,160 $20,500 $20,000
Duane D. Kimble 15,730 6,198 -0-
Daniel B. Baker 12,712 7,817 6,797
George C. Huebner 7,122 7,666 6,910
Perry H. Schwartz 4,315 10,993 5,400
Randolph R. Marks 12,942 12,185 -0-
</TABLE>
(2) The bonuses are shown for the years earned, but were paid in the
following year except for Mr. Huebner's 1999 bonus which was paid in
1999. That bonus was for the purpose of inducing Mr. Huebner to assist
with the transition of the Keyboard Acceptance Corporation operations
to its buyer.
(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. The 10,000 shares of
restricted stock granted to her in 1999 were issued pursuant to the
Company's 1998 Omnibus Stock Plan and will vest 100% on the third
anniversary of the grant date. At December 31, 1999, 15,000 shares of
restricted stock granted to Ms. Hendricks were unvested and had a
market value of $127,500.
(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 Mr. Marks and Mr. Kimble; special incentive payments to Messrs.
Kimble and Marks; 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.
-22-
<PAGE> 26
ALL OTHER COMPENSATION
----------------------
1999 1998 1997
------- ------- -------
Karen L. Hendricks
- ------------------
Retirement Plan $11,160 $23,939 $21,000
Executive Insurance 0 2,400 2,400
Disability Insurance 885 1,480 1,480
Group Life Insurance 1,200 2,220 2,220
------- ------- -------
Totals $13,245 $30,039 $27,100
======= ======= =======
Duane D. Kimble
- ---------------
Retirement Plan $ 2,850 $ 0 $ 0
Group Life Insurance 576 355 0
Relocation Expenses 0 12,018 0
Incentive Payment 16,000 0 0
------- ------- -------
Totals $19,426 $12,373 0
======= ======= =======
Daniel B. Baker
- ---------------
Retirement $ 4,324 $ 8,663 $ 4,425
Group Life Insurance 501 866 733
------- ------- -------
Totals $ 4,825 $ 9,529 $ 5,158
======= ======= =======
George C. Huebner
- -----------------
Retirement Plan $ 5,502 $ 7,783 $ 7,015
Group Life Insurance 436 808 768
------- ------- -------
Totals $ 5,938 $ 8,591 $ 7,783
======= ======= =======
Perry H. Schwartz
- -----------------
Retirement Plan $ 2,158 $12,067 $ 5,850
Group Life Insurance 669 1,239 1,199
------- ------- -------
Totals $ 2,827 $13,306 $ 7,049
======= ======= =======
Randolph R. Marks
- -----------------
Retirement Plan $ 6,570 $ 0 $ 0
Group Life Insurance 576 1,315 0
Relocation Expenses 0 18,460 0
Incentive Payment 12,900 0 0
------- ------- -------
Totals $20,046 $19,775 $ 0
======= ======= =======
(5) Mr. Huebner's employment with the Company terminated on March 10, 2000
in connection with the sale of Keyboard Acceptance Corporation.
(6) The Company hired Mr. Marks effective January 1, 1998. His employment
terminated effective August 13, 1999.
-23-
<PAGE> 27
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company entered into a new Employment Agreement with Karen L.
Hendricks in June 1997, which was amended in September 1999. 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 Ms. Hendricks will continue in the Company's employ
until August 31, 2002, and thereafter, 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 a
restricted stock grant of 12,500 shares of the Company's common stock in 1997,
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. In
March 1999, Ms. Hendricks was granted 10,000 additional shares of restricted
stock pursuant to the Company's 1998 Omnibus Stock Plan which will vest 100% on
the third anniversary of the grant date. Her Employment Agreement provides that
she may receive additional restricted stock grants in the future.
Ms. Hendricks' Employment Agreement provides that in the event the
Company terminates her employment without cause, the Company will continue to
pay her as severance pay her normal monthly salary for 36 months following
termination. At Ms. Hendricks' option, she may elect to be paid a single lump
sum, discounted to present value, within thirty (30) days following 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
-24-
<PAGE> 28
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.
If Ms. Hendricks voluntarily terminates her employment with the Company
for any reason prior to December 1, 2001, she shall receive her salary through
the effective date of termination and all incentive payments earned but not yet
paid to her prior to such date. If Ms. Hendricks voluntarily terminates her
employment with the Company for any reason after December 1, 2001 and (1) she
delivers written notice to the Board of Directors of such termination, (2) such
termination is effective no later than nine months after receipt of that notice
by the Board of Directors, (3) she devotes her full time efforts to her
responsibilities to the Company through the effective date of her termination,
(4) no circumstances exist that would constitute termination for cause, and (5)
she cooperates in good faith with the Board of Directors to recruit a qualified
successor and, if a successor is recruited prior to her termination, to
accomplish an effective transition, then Ms. Hendricks will be entitled to the
same severance payment described above as if she had been terminated without
cause by the Company.
The Company has entered into agreements with Karen L. Hendricks, Daniel
B. Baker, Duane D. Kimble, 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, except for
Ms. Hendricks' agreement which expires on August 31, 2003.
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 under the circumstances described below,
then, 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. The change in control payment to Ms. Hendricks
will become payable in the following circumstances: (1) termination of her
employment, with or without cause, within three years following any change in
control other than a change in control related
-25-
<PAGE> 29
to the Company's sale simultaneously or sequentially of all or substantially all
of the assets of operations of any two of the Company's three businesses of
music, contract electronics or finance; (2) termination of her employment within
45 days prior to a change in control relating to the sale of two divisions, for
reasons other than for cause; and (3) termination of her employment within three
years following a change in control relating to the sale of two divisions,
either by the Company without cause or by Ms. Hendricks for any reason, provided
that if termination is by Ms. Hendricks she delivers nine months' prior written
notice of termination to the Board of Directors and satisfies the same
conditions described above as would entitle her to receive a severance payment
under her employment agreement if she were to terminate her employment after
December 1, 2001. No change in control payment shall be paid if the termination
of Ms. Hendricks' employment is due to her death, disability or retirement after
her normal retirement date.
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.
The Change in Control Agreements of Messrs. Baker, Kimble, and Schwartz
are substantially identical. Pursuant to Mr. Kimble's Change in Control
Agreement, if a change in control occurs during the term of the agreement and
the Company terminates his employment, either by actual termination or by
constructive termination, within two years after the change in control or within
45 days prior to the change in control, then Mr. Kimble will receive two times
his average annual salary and average annual bonus and/or incentive compensation
that he received over the five years immediately preceding his termination.
Pursuant to the Change in Control Agreements for Messrs. Baker and Schwartz, 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 24 months
(in the case of Mr. Kimble) and over 12 months (in the case of Messrs. Baker and
Schwartz) or in a lump sum discounted to present value. These Change in Control
Agreements further provide that health and life insurance
-26-
<PAGE> 30
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 24 months (in the case of Mr. Kimble)
and for 12 months (in the case of Messrs. Baker and Schwartz) 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, Kimble, 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.
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 1999.
<TABLE>
<CAPTION>
Individual Grants(1)
-------------------
Potential Realizable
Number of % of Total Annual Rate of
Securities Options Stock Price
Underlying Granted to Appreciation for
Options Employees Exercise or Option Terms(4)
Granted in Fiscal Base Price Expiration ---------------
Name (#)(2) Year(3) ($/Share) Date 5%($) 10%($)
- ------------------- -------- ---------- ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Karen L. Hendricks 10,000 20.8% $7.625 04/12/09 $47,953 $121,523
Duane D. Kimble 4,000 8.3% $7.625 04/12/09 $19,181 $48,609
Daniel B. Baker 2,500 5.2% $7.625 04/12/09 $11,988 $30,381
George C. Huebner 3,000 6.25% $7.625 04/12/09 $14,386 $36,457
Perry H. Schwartz 0 --- --- --- 0 0
Randolph R. Marks 5,000 10.4% $7.625 04/12/09 $23,977 $60,762
- -------------
</TABLE>
-27-
<PAGE> 31
(1) All grants were made at the fair market value on the grant date.
(2) Options vest over a four year period, 20% on the grant date and 20% on
each anniversary of the grant date.
(3) Total options granted to all executive officers and other employees of
the Company in 1999 were for an aggregate of 48,000 shares of Common
Stock.
(4) Calculated based upon assumed stock prices for the Company's Common
Stock assuming 5% and 10% annual rates of stock appreciation are
achieved over the full term of the options granted to the executive
officers reflected in the table. The potential realizable gain equals
the product of the number of shares underlying the stock option grant
and the difference between the assumed stock price and the exercise
price of each option.
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<PAGE> 32
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth certain information regarding individual
exercises of stock options during 1999 by each of the named executives.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
12/31/99 12/31/99
Shares
Acquired on Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
Name (#) ($) (1) (#) (2) (3) ($)
- ---------------------- ------------ -------- ------------- -------------
<S> <C> <C> <C> <C>
Karen L. Hendricks -0- $ -0- 131,400/ $ 41,750/
27,600 7,000
Duane D. Kimble -0- -0- 4,800/ $ 700/
9,200 2,800
Daniel B. Baker -0- -0- 8,700/ $ 438/
5,800 1,750
George C. Huebner -0- -0- 17,400/ $ 525/
9,600 2,100
Perry H. Schwartz -0- -0- 10,800/ $ 0/
4,700 0
Randolph R. Marks -0- -0- 0/ $ 0/
0 0
</TABLE>
(1) See note (2) to the table appearing under "Option Grants in Last Fiscal
Year" regarding the vesting of options granted in 1999.
(2) The shares of the Company's Common Stock issuable 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
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<PAGE> 33
agreement, have been registered under the 1933 Act and generally can be
resold immediately upon exercise.
(3) Based on a December 31, 1999 closing sale price on the Nasdaq National
Market of $8.50 per share.
COMPENSATION OF DIRECTORS
In 1999, 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 1999, 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> 34
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 16, 2000.
Amount and
Nature of
Name and Address of Beneficial Percent of
Beneficial Owner(1) Ownership Class
------------------- --------- -----
Heartland Advisors, Inc............. 727,100(1)(2) 21.1%
Cameron Baird Foundation............ 455,400(3) 13.2%
Bolero Investment Group, L.P........ 403,569(4) 11.7%
State of Wisconsin Investment
Board.............................. 300,000(5) 8.7%
Dimensional Fund Advisors Inc. 285,500(6) 8.3%
Herbert A. Denton................... 262,300(7) 7.6%
Franklin Resources, Inc. ........... 173,600(8) 5.0%
- -------
(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 Water Street, Milwaukee Wisconsin 53202; the address
of Cameron Baird Foundation is 1350 One M&T Plaza, Buffalo, New York
14203; 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 25 S.E. 2nd Avenue, Suite 720, Miami, Florida 33131; the
address of Herbert A. Denton is 730 Fifth Avenue, New York, New York
10019; the address of Dimensional Fund Advisors Inc. is 1299 Ocean
Avenue, 11th Floor, Santa Monica, California 90401; and the address of
Franklin Resources, Inc. is 777 Mariners Island Boulevard, San Mateo,
California 94404.
(2) Pursuant to Amendment No. 8 to Schedule 13G dated January 12, 2000,
Heartland Advisors, Inc., last informed the Company that it is a
registered investment adviser that may be deemed the beneficial owner
of 727,100 shares of Common Stock. Heartland Advisors, Inc.
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<PAGE> 35
has sole dispositive power and sole voting power over all 727,100
shares.
(3) Pursuant to Amendment No. 2 to Schedule 13D dated March 23, 2000 filed
by The Cameron Baird Foundation (the "Foundation"), Brent D. Baird,
Anne S. Baird, Bridget B. Baird, successor trustee, Jane D. Baird,
Bruce C. Baird, Brian D. Baird, successor trustee, and Aries Hill
Corp.(collectively, the "Baird Parties"), the Baird Parties
beneficially own 455,400 shares of Common Stock in the aggregate. The
Baird Parties have informed the Company that the Foundation is a
charitable private foundation, that Aries Hill Corp., is a private
holding company owned by various members of the Baird family, and that
the other Baird Parties are individuals and/or individuals serving as
trustees of various trusts under trust agreements with Cameron Baird
and Flora M. Baird. Each of the Baird Parties has sole voting and
dispositive power over the number of shares as follows: the
Foundation--199,000 shares; Brent D. Baird--35,000 shares; Anne S.
Baird--10,000 shares; Bridget B. Baird, successor trustee--69,700
shares; Jane D. Baird--100,000 shares; Bruce C. Baird--10,000 shares;
Brian D. Baird, successor trustee--20,000 shares; and Aries Hill
Corp.--11,700 shares.
(4) Pursuant to Amendment No. 14 to Schedule 13D filed on January 18, 2000
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 300,260 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 52,309 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 403,569
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 52,309 shares of Common Stock. In these
Amendments, 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.
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<PAGE> 36
(5) Pursuant to Amendment No. 6 to Schedule 13G dated February 10, 2000,
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.
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<PAGE> 37
(6) Pursuant to Amendment No. 1 to Schedule 13D dated September 9, 1999,
Herbert A. Denton is the beneficial owner of 260,300 shares of Common
Stock. Of these shares, 185,300 are owned of record by U.S. Value
Investment Co., plc ("USVI") to which Mr. Denton is sole advisor, and
75,000 are owned of record by Providence Investors, LLC, to which Mr.
Denton is co-advisor. Mr. Denton and USVI may be deemed to have sole
power to vote and dispose of 185,300 shares and Mr. Denton is deemed to
have shared power to vote and dispose of 75,000 shares. Mr. Denton also
has the right to acquire 2,000 shares of Common Stock pursuant to
outstanding stock options granted by the Company to him upon his
becoming a director of the Company in September 1999.
(7) Pursuant to Schedule 13G, as last amended dated February 4, 2000,
Dimensional Fund Advisors Inc. stated that it is a registered
investment adviser that may be deemed the beneficial owner of 285,500
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 285,500 shares.
(8) Pursuant to Amendment No. 2 to Schedule 13G, dated January 13, 2000,
Franklin Resources, Inc. ("Franklin") last informed the Company that it
is a holding company through which it is the beneficial owner of
173,600 shares of Common Stock. Franklin's investment subsidiary,
Franklin Mutual Advisers, LLC, is an investment advisor that has sole
dispositive power and sole voting power over all 173,600 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> 38
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 16,
2000.
Amount and
Nature of
Beneficial Percent of
Name of Beneficial Owner Ownership Class
------------------------ --------- -----
CURRENT DIRECTORS AND NOMINEES
Karen L. Hendricks ................. 196,500(1)(2) 5.6%
Herbert A. Denton .................. 262,300(2) 7.6%
Joseph H. Head, Jr ................. 30,000(2) 0.9%
Roger L. Howe ...................... 29,000(2) 0.9%
George E. Castrucci ................ 22,000(2) 0.6%
William B. Connell ................. 11,000(2) 0.3%
John H. Gutfreund .................. 14,000(2) 0.4%
NAMED EXECUTIVE OFFICERS
Duane D. Kimble .................... 19,000(1) 0.5%
Daniel B. Baker .................... 14,500(1) 0.4%
George C. Huebner .................. 24,000(1) 0.7%
Perry H. Schwartz .................. 15,500(1) 0.4%
Randolph R. Marks .................. 5,000 0.1%
All executive officers and directors
as a group (10 persons) ........... 613,800(1)(2) 16.4%
- -----------
(1) Includes shares owned beneficially subject to the holder's right to
exercise outstanding incentive stock options: 40,000 shares for Ms.
Hendricks, 24,000 shares for Mr. Huebner, 15,500 shares for Mr.
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<PAGE> 39
Schwartz, 14,000 shares for Mr. Kimble and 14,500 shares for Mr. Baker.
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<PAGE> 40
(2) Includes shares owned beneficially subject to the holder's right to
exercise outstanding non-qualified stock options: 119,000 shares for
Ms. Hendricks, 20,000 shares for each of Messrs. Head and Castrucci,
14,000 shares for Mr. Howe, 10,000 shares for Mr. Connell, 4,000 shares
for Mr. Gutfreund and 2,000 shares each for Messrs. Denton and Huebner.
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
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<PAGE> 41
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 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
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<PAGE> 42
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 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 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.
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<PAGE> 43
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
(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 Committee of the Company will review the
Rights Plan at least every two years and, if a majority of the members of the
Independent Directors Committee 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> 44
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 1999 Annual Report to Shareholders, which is attached hereto
as Exhibit 13.1.
<TABLE>
<CAPTION>
Annual Report
Page Number
-----------
<S> <C>
Independent Auditors' Report
for the years ended December 31, 1999 and 1998. 6
Consolidated Statements of Earnings,
years ended December 31, 1999, 1998 and 1997. 7
Consolidated Statements of Shareholders' Equity,
years ended December 31, 1999, 1998 and 1997. 8
Consolidated Balance Sheets,
as of December 31, 1999 and 1998. 9
Consolidated Statements of Cash Flows,
years ended December 31, 1999, 1998 and 1997. 10
Notes to Consolidated Financial Statements,
years ended December 31, 1999, 1998 and 1997. 11
</TABLE>
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
1.2 Independent Auditors' Report (including Schedule)
for the year ended December 31, 1997. 51
2.1 Consolidated Financial Statement Schedules of
Baldwin Piano & Organ Company and Subsidiaries:
Independent Auditors' Report 52
Schedule for the years ended
December 31, 1999, 1998 and 1997:
VIII. Valuation and Qualifying Accounts. 53
</TABLE>
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<PAGE> 45
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> 46
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on December 10, 1999
announcing that the Company had entered into an agreement to sell its
retail financing operations as conducted by Keyboard Acceptance
Corporation and Signature Leasing Company to Deutsche Financial
Services Corporation. On March 27, 2000, the Company filed a report on
Form 8-K disclosing the completion of such sale on March 10, 2000.
(c) EXHIBITS
2.1 Stock Purchase Agreement dated December 8, 1999 between the Company and
Deutsche Financial Services Corporation. (23)
3.1 Certificate of Incorporation of the Company, as amended. (1)
3.2 Amended and Restated Bylaws of the Company dated as of February 10,
1997. (9)
4.1 Rights Agreement dated as of October 12, 1998 between the Company and
the Provident Bank as Rights Agreement. (15)
MANAGEMENT CONTRACTS, COMPENSATORY PLANS AND ARRANGEMENTS
=========================================================
10.1 Baldwin Piano & Organ Company Retirement Plan for Salaried Employees,
as amended. (1)
10.2 Baldwin Piano & Organ Company Retirement Trust for Salaried Employees
dated September 28, 1984. (1)
10.3 Baldwin Piano & Organ Company 1994 Incentive Stock Option Plan. (4)
10.4 Baldwin Piano & Organ Company 1994 Management Incentive Plan. (5)
10.5 Baldwin Piano & Organ Company 1994 Long Term Incentive Plan. (5)
10.6 Baldwin Piano & Organ Company 1998 Omnibus Stock Plan. (16)
10.7 Agreement of Employment between the Company and Karen L. Hendricks
dated as of June 19, 1997. (10)
10.8 Amendment to Agreement of Employment between the Company and Karen L.
Hendricks dated September 1, 1999. (22)
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<PAGE> 47
10.9 Change in Control Agreement between the Company and Karen L. Hendricks
dated June 26, 1996. (7)
10.10 Amendment to Change in Control Agreement between the Company and Karen
L. Hendricks dated September 17, 1999. (22)
10.11 Form of Indemnification Agreements between the Company and the
Company's Officers and Directors dated June 30, 1986 and accompanying
schedule. (1)
10.12 Change in Control Agreement between the Company and Stephen P. Brock
dated June 11, 1996. (7)(8)
10.13 Amendment to Change in Control Agreement between the Company and Duane
D. Kimble dated September 24, 1999. (22)
10.14 Letter of employment between the Company and Duane D. Kimble as Senior
Vice President, Strategic Planning, dated as of June 30, 1998. (20)
10.15 Agreement of Employment between the Company and Perry H. Schwartz dated
as of November 5, 1996, as amended on November 11, 1996. (11)
10.16 Baldwin Piano & Organ Company Non-Qualified Deferred Compensation Plan.
(2)
10.17 Baldwin Piano & Organ Company Non-Qualified Deferred Compensation Rabbi
Trust Agreement as amended and restated as of October 4, 1993. (2)
OTHER CONTRACTS AND ARRANGEMENTS
10.18 Credit Agreement by and among the 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). (14)
10.19 First Amendment dated October 16, 1997 to the Credit Agreement by and
among the 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.
(14)
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<PAGE> 48
10.20 Second Amendment to Credit Agreement, among the Company and The Fifth
Third Bank and NBD Bank, N.A., dated April 27, 1998. (17)
10.21 Third Amendment to Credit Agreement, among the Company and The Fifth
Third Bank and NBD Bank, N.A., dated June 19, 1998. (18)
10.22 Fourth Amendment to Credit Agreement, among the Company and The Fifth
Third Bank and NBD Bank, N.A., dated September 21, 1998. (19)
10.23 Fifth Amendment to Credit Agreement, among the Company and the Fifth
Third Bank and NBD Bank, N.A. dated January 29, 1999 (21)
10.24 Sixth Amendment to Credit Agreement, among the Company and the Fifth
Third Bank and Bank One, Indiana (formerly NBD Bank) dated July 15,
1999. (22)
10.25 Waiver and Seventh Amendment to Credit Agreement, among the Company and
the Fifth Third Bank and Bank One, Indiana dated December 3, 1999
10.26 Waiver and Eighth Amendment to Credit Agreement, among the Company and
the Fifth Third Bank and Bank One, Indiana dated February 28, 2000.
10.27 Form of Subsidiary Security Agreement dated October 16, 1997 between
the Fifth Third Bank and certain subsidiaries of the Company. (12) (14)
10.28 Form of Subsidiary Guaranty dated October 16, 1997 by certain
subsidiaries of the Company in favor of the Fifth Third Bank and NBD
Bank, N.A. (13) (14)
10.29 Amended and Restated Term Loan Agreement, among the 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.(18)
10.30 First Amendment to Amended and Restated Term Loan Agreement among the
Company, Fifth Third Bank and Bank One, Indiana (formerly NBD Bank)
dated July 15, 1999. (22)
10.31 Waiver and Second Amendment to Amended and Restated Term Loan Agreement
among the Company, Fifth Third Bank and Bank One, Indiana (formerly NBD
Bank) dated December 3, 1999.
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<PAGE> 49
10.32 Amended and Restated Inventory Purchase and Consignment Agreement,
between Baldwin Piano & Organ Company and Deutsche Financial Services
Corporation, dated October 28, 1998. (19)
10.33 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.
(3)
10.34 Letter of Credit Reimbursement Agreement dated as of August 13, 1993
between the Company and The Fifth Third Bank. (3)
10.35 Office lease between Baldwin Piano & Organ Company and Duke Realty
Limited Partnership, dated July 2, 1998. (19)
10.36 Distribution Agreement between Baldwin Piano & Organ Company and
GeneralMusic S.p.A. dated as of July 1, 1995. (6)
10.37 Amended and Restated Amendment and Supplemental Agreement between
Baldwin Piano & Organ Company and GeneralMusic S.p.A. dated as of
January 1, 1997. (11)
10.38 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.
(11)
13.1 Information incorporated by reference to Baldwin's 1999 Annual Report
to Shareholders for the year ended December 31, 1999: "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)
-46-
<PAGE> 50
99.4 Press Release dated March 13, 2000
(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, 1993.
(3) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1993.
(4) Incorporated by reference from the Company's proxy statement relating
to its May 10, 1994 Annual Meeting of Shareholders.
(5) Incorporated by reference from the Company's Form 10-Q for the period
ended June 30, 1994.
(6) Incorporated by reference from the Company's Form 10-Q for the period
ended September 30, 1995.
(7) Incorporated by reference from the Company's Form 10-Q for the period
ended June 30, 1996.
(8) Substantially identical documents were entered into by Baldwin Piano &
Organ Company with Perry H. Schwartz, Duane D. Kimble and Daniel B.
Baker dated November 12, 1996, July 5, 1998 and February 26, 1998,
respectively.
(9) Incorporated by reference from the Company's Form 8-K dated February
10, 1997 as filed with the Commission on February 27, 1997.
(10) Incorporated by reference from the Company's Form 10-Q for the period
ended June 30, 1997.
(11) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1996.
(12) 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.
(13) Subsidiary Guaranty was executed by each of The Wurlitzer Company,
Baldwin Trading Company, Signature Leasing Company and The Baldwin
Company Limited.
-47-
<PAGE> 51
(14) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1997.
(15) Incorporated by reference to the Company's Form 8-K dated October 12,
1998.
(16) Incorporated by reference to the Company's Proxy Statement dated April
27, 1998 relating to the Company's 1998 Annual Meeting of Shareholders.
(17) Incorporated by reference from the Company's Form 10-Q for the period
ended March 31, 1998.
(18) Incorporated by reference from the Company's Form 10-Q for the period
ended June 30, 1998.
(19) Incorporated by reference from the Company's Form 10-Q for the period
ended September 30, 1998.
(20) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1998.
(21) Incorporated by reference from the Company's Form 10-Q for the period
ended March 31, 1999.
(22) Incorporated by reference from the Company's Form 10-Q for the period
ended September 30, 1999.
(23) Incorporated by reference from the Company's Form 8-K dated December 9,
1999.
Index to Exhibits - pages 46-55.
-48-
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BALDWIN PIANO & ORGAN COMPANY
By: /s/ Karen L. Hendricks
-----------------------------------
Karen L. Hendricks, Chairman,
Chief Executive Officer and President
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Principal Executive Officer:
Date: March 30, 2000 /s/ Karen L. Hendricks
--------------- ------------------------------------
Karen L. Hendricks, Chairman, Chief
Executive Officer, President
and Director
Date: March 30, 2000 /s/ George E. Castrucci
--------------- ------------------------------------
George E. Castrucci, Director
Date: March 30, 2000 /s/ William B. Connell
--------------- ------------------------------------
William B. Connell, Director
Date: March 30, 2000 /s/ Herbert A. Denton
--------------- ------------------------------------
Herbert A. Denton, Director
Date: March 30, 2000 /s/ John H. Gutfreund
-------------- ------------------------------------
John H. Gutfreund, Director
Date: March 30, 2000 /s/ Joseph H. Head, Jr.
--------------- ------------------------------------
Joseph H. Head, Jr., Director
Date: March 30, 2000 /s/ Roger L. Howe
--------------- ------------------------------------
Roger L. Howe, Director
Principal Financial and Accounting
-49-
<PAGE> 53
Officer:
Date: March 30, 2000 /s/ Duane Kimble
--------------- ------------------------------------
Duane Kimble, Executive Vice
President and Chief Financial Officer
-50-
<PAGE> 54
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Baldwin Piano & Organ Company
We have audited the consolidated statements of earnings, shareholders' equity,
and cash flows of Baldwin Piano & Organ Company and subsidiaries for the year
ended December 31, 1997. In connection with our audit of the consolidated
financial statements, we have also audited the financial statement schedule of
valuation and qualifying accounts for the year 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 audit. 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 consolidated financial
statements referred to above present fairly, in all material respects, the
results of operations and cash flows of Baldwin Piano & Organ Company for the
year ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule for
the year ended December 31, 1997 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
-51-
<PAGE> 55
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, 1999 and 1998, and have issued our report thereon dated March 13,
2000. Such financial statements and report are included in your Annual Report to
Shareholders and are incorporated herein by reference. Our audits also included
the financial statement schedule of Baldwin Piano & Organ Company for the years
ended December 31, 1999 and 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 audits. 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
March 13, 2000
-52-
<PAGE> 56
SCHEDULE VIII
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Description Beginning Additions Other Charge-offs Ending
Balance Balance
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999 $ 707,000 $ 300,000 $ - $ 108,000(1) $ 899,000
Year ended December 31, 1998 $ 1,020,000 $ 264,000 $ - $ 577,000(1) $ 707,000
Year ended December 31, 1997 $ 3,228,000 $ 290,800 $ - $ 2,498,800(1) $ 1,020,000
</TABLE>
(1) Represents adjustments and accounts charged off, less recoveries.
-53-
<PAGE> 57
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Exhibit Sequentially
Number ------ Numbered
- ------ Page
----
<S> <C> <C>
2.1 Stock Purchase Agreement dated December 8, 1999 between the Company and Deutsche *
Financial Services Corporation. (23)
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. (9)
4.1 Rights Agreement dated as of October 12, 1998 between the Company and the *
Provident Bank as Rights Agreement. (15)
MANAGEMENT CONTRACTS, COMPENSATORY PLANS AND ARRANGEMENTS
=========================================================
10.1 Baldwin Piano & Organ Company Retirement Plan for Salaried Employees, as amended. *
(1)
10.2 Baldwin Piano & Organ Company Retirement Trust for Salaried Employees dated *
September 28,
</TABLE>
-54-
<PAGE> 58
<TABLE>
<CAPTION>
Exhibit Exhibit Sequentially
Number ------ Numbered
- ------ Page
----
<S> <C> <C>
1984. (1)
10.3 Baldwin Piano & Organ Company 1994 Incentive Stock Option Plan. (4) *
10.4 Baldwin Piano & Organ Company 1994 Management Incentive Plan. (5) *
10.5 Baldwin Piano & Organ Company 1994 Long Term Incentive Plan. (5) *
10.6 Baldwin Piano & Organ Company 1998 Omnibus Stock Plan. (16) *
10.7 Agreement of Employment between the Company and Karen L. Hendricks dated as of *
June 19, 1997. (10)
10.8 Amendment to Agreement of Employment between the Company and Karen L. Hendricks *
dated September 1, 1999. (22)
10.9 Change in Control Agreement between the Company and Karen L. Hendricks dated June *
26, 1996. (7)
10.10 Amendment to Change in Control Agreement between the Company and Karen L. *
Hendricks
</TABLE>
-55-
<PAGE> 59
<TABLE>
<CAPTION>
Exhibit Exhibit Sequentially
Number ------ Numbered
- ------ Page
----
<S> <C> <C>
dated September 17, 1999. (22)
</TABLE>
-56-
<PAGE> 60
<TABLE>
<S> <C> <C>
10.11 Form of Indemnification Agreements between the Company and the Company's Officers and *
Directors dated June 30, 1986 and accompanying schedule. (1)
10.12 Change in Control Agreement between the Company and Stephen P. Brock dated June 11, *
1996. (7) (8)
10.13 Amendment to Change in Control Agreement between the Company and Duane D. Kimble *
dated September 24, 1999. (22)
10.14 Agreement of Employment between the Company and Duane D. Kimble as Senior Vice *
President, Strategic Planning, dated June 30, 1998. (20)
10.15 Agreement of Employment between the Company and Perry H. Schwartz dated as of *
November 5, 1996 as amended on November 11, 1996. (11)
10.16 Baldwin Piano & Organ Company Non-Qualified Deferred Compensation Plan. (2) *
10.17 Baldwin Piano & Organ Company Non-Qualified Deferred Compensation Rabbi Trust *
Agreement as amended and restated as of October 4, 1993. (2)
OTHER CONTRACTS AND ARRANGEMENTS
================================
</TABLE>
-57-
<PAGE> 61
<TABLE>
<S> <C> <C>
10.18 Credit Agreement by and among the 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). (14)
10.19 First Amendment dated October 16, 1997 to the Credit Agreement by and among the *
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. (14)
10.20 Second Amendment to Credit Agreement among the Company and The Fifth Third Bank and *
NBD Bank, N.A., dated April 27, 1998. (17)
10.21 Third Amendment to Credit Agreement among the Company, The Fifth Third Bank and NBD *
Bank, N.A., dated June 19, 1998. (18)
10.22 Fourth Amendment to Credit Agreement among the Company, The Fifth Third Bank and NBD *
Bank, N.A., dated September 21, 1998. (19)
10.23 Fifth Amendment to Credit Agreement, among the Company and the Fifth Third Bank and *
NBD Bank, N.A. dated January 29, 1999. (21)
</TABLE>
-58-
<PAGE> 62
<TABLE>
<S> <C> <C>
10.24 Sixth Amendment to Credit Agreement, among the Company and the Fifth Third Bank and *
Bank One, Indiana (formerly NBD Bank) dated July 15, 1999. (22)
10.25 Waiver and Seventh Amendment to Credit Agreement, among the Company and the Fifth #
Third Bank and Bank One, Indiana dated December 3, 1999.
10.26 Waiver and Eighth Amendment to Credit Agreement, among the Company and the Fifth #
Third Bank and Bank One, Indiana dated February 28, 2000.
10.27 Form of Subsidiary Security Agreement dated October 16, 1997 between The Fifth Third *
Bank and Certain subsidiaries of the Company. (12) (14)
10.28 Form of Subsidiary Guaranty dated October 16, 1997 by certain subsidiaries of the *
Company in favor of The Fifth Third Bank and NBD Bank, N.A. (13) (14)
10.29 Amended and Restated Term Loan Agreement among the 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. (18)
# Included, but not page numbered.
</TABLE>
-59-
<PAGE> 63
<TABLE>
<S> <C> <C>
10.30 First Amendment to Amended and Restated Term Loan Agreement among the Company, Fifth *
Third Bank and Bank One, Indiana (formerly NBD Bank) dated July 15, 1999. (22)
10.31 Waiver and Second Amendment to Amended and Restate Term Loan Agreement among the #
Company, Fifth Third Bank and Bank One, Indiana (formerly NBD Bank) dated December 3,
1999.
10.32 Amended and Restated Inventory Purchase and Consignment Agreement between Baldwin *
Piano & Organ Company and Deutsche Financial Services Corporation, dated October 28,
1998. (19)
10.33 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. (3)
10.34 Letter of Credit Reimbursement Agreement dated as of August 13, 1993 between the *
Company and The Fifth Third Bank. (3)
10.35 Office lease between Baldwin Piano & Organ Company and Duke Realty Limited *
Partnership, dated July 2, 1998. (19)
10.36 Distribution Agreement between Baldwin Piano & Organ Company and GeneralMusic S.p.A. *
dated as of July 1, 1995. (6)
</TABLE>
-60-
<PAGE> 64
# Included, but not page numbered.
-61-
<PAGE> 65
<TABLE>
<S> <C> <C>
10.37 Amended and Restated Amendment and Supplemental Agreement between Baldwin Piano & *
Organ Company and GeneralMusic S.p.A. dated as of January 1, 1997. (11)
10.38 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. (11)
13.1 Information incorporated by reference to Baldwin's 1999 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. 67
23.1 Consent of Independent Accountants 68
-Deloitte & Touche LLP
23.2 Consent of Independent Accounts 69
-KPMG LLP
27.1 Financial Data Schedule. 70
</TABLE>
-62-
<PAGE> 66
<TABLE>
<S> <C> <C>
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 March 13, 2000. 59-60
* Incorporated by reference as indicated in the applicable footnote.
</TABLE>
(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, 1993.
(3) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1993.
(4) Incorporated by reference from the Company's Proxy Statement relating
to its May 10, 1994 Annual Meeting of Shareholders.
-63-
<PAGE> 67
(5) Incorporated by reference from the Company's Form 10-Q for the period
ended June 30, 1994.
(6) Incorporated by reference from the Company's Form 10-Q for the period
ended September 30, 1995.
(7) Incorporated by reference from the Company's Form 10-Q for the period
ended June 30, 1996.
(8) Substantially identical documents were entered into by Baldwin Piano &
Organ Company with Perry Schwartz, Duane D. Kimble and Daniel B. Baker
dated November 12, 1996, July 5, 1998 and February 26, 1999,
respectively.
(9) Incorporated by reference from the Company's Form 8-K dated February
10, 1997 as filed with the Commission on February 27, 1997.
(10) Incorporated by reference from the Company's Form 10-Q for the period
ended June 30, 1997.
(11) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1996.
(12) 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.
(13) Subsidiary Guaranty was executed by each of The Wurlitzer Company,
Baldwin Trading Company, Signature Leasing Company and The Baldwin
Company Limited.
-64-
<PAGE> 68
(14) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1997.
(15) Incorporated by reference to the Company's Form 8-K dated October 12,
1998.
(16) Incorporated by reference to the Company's Proxy Statement dated April
27, 1998 relating to the Company's 1998 Annual Meeting of Shareholders.
(17) Incorporated by reference from the Company's Form 10-Q for the period
ended March 31, 1998.
(18) Incorporated by reference from the Company's Form 10-Q for the period
ended June 30, 1998.
(19) Incorporated by reference from the Company's Form 10-Q for the period
ended September 30, 1998.
(20) Incorporated by reference from the Company's Form 10-K for the period
ended December 31, 1998.
(21) Incorporated by reference from the Company's Form 10-Q for the period
ended March 31, 1999.
(22) Incorporated by reference from the Company's Form 10-Q for the period
ended September 30, 1999.
-65-
<PAGE> 69
(23) Incorporated by reference from the Company's Form 8-K dated December 9,
1999.
-66-
<PAGE> 1
EXHIBIT 10.25
- -------------
WAIVER AND SEVENTH AMENDMENT TO CREDIT AGREEMENT
THIS WAIVER AND SEVENTH AMENDMENT TO CREDIT AGREEMENT ("Seventh Amendment")
dated as of December 3, 1999 is by and among BALDWIN PIANO & ORGAN COMPANY, a
Delaware corporation, (hereinafter, together with its successors in title and
assigns called "Borrower" or "Baldwin"), FIFTH THIRD BANK, an Ohio banking
corporation, as Agent (in such capacity, the "Agent"), FIFTH THIRD BANK ("Fifth
Third"), as a Lender, and BANK ONE, INDIANA, N.A., formerly known as NBD BANK,
N.A., a national banking association, ("Bank One") as a Lender, (Fifth Third and
Bank One are hereinafter collectively the "Lenders" and each individually a
"Lender").
PRELIMINARY STATEMENT
---------------------
WHEREAS, Borrower, Agent and Lenders have entered into a Credit Agreement
dated as of October 16, 1997, as amended by a First Amendment dated as of
October 16, 1997, a Second Amendment dated as of April 27, 1998, a Third
Amendment dated June 19, 1998, a Fourth Amendment dated September 21, 1998, a
Fifth Amendment dated January 29, 1999, and a Sixth Amendment dated July 15,
1999 (collectively, the "Credit Agreement"); and
WHEREAS, Borrower has requested Agent and Lenders to make various revisions
to the Credit Agreement as set forth herein; and
WHEREAS, Borrower, Agent and Lenders now wish to amend the Credit Agreement
in accordance with the terms and provisions hereof;
NOW, THEREFORE, the parties hereto agree to supplement and amend the Credit
Agreement upon such terms and conditions as follows:
1. CAPITALIZED TERMS. All capitalized terms used herein shall have the
meanings assigned to them in the Credit Agreement unless the context hereof
requires otherwise. Any definitions as capitalized terms set forth herein shall
be deemed incorporated into the Credit Agreement as amended by this Seventh
Amendment.
2. DEFINITIONS. The following definition contained in Section 1.2 of the
Credit Agreement is hereby amended and restated in its entirety as follows:
"INTEREST RATE" means the rate of interest per annum equal to the Prime
Rate.
3. WAIVER. (a) The Agent and the Lenders hereby consent to waive the
application of Section 10.3(a)(iv) of the Credit Agreement solely as it relates
to the four quarter period ending September 30, 1999; PROVIDED, HOWEVER, that
this waiver shall expire on the earlier of (i) the date Lenders shall have
received satisfactory evidence, in form and substance satisfactory to Lenders,
of the sale by Borrower of all of the stock of Keyboard Acceptance Corporation
(f/k/a BPO Finance
<PAGE> 2
-2-
Corporation), a Delaware corporation and a subsidiary of Borrower, pursuant to
that certain Stock Purchase Agreement dated as of December 8, 1999 between
Borrower and Deutsche Financial Services Corporation (the "Purchase Agreement"),
(ii) the failure of Borrower to consummate the transactions contemplated by the
Purchase Agreement, and (iii) February 28, 2000.
(b) The Agent and the Lenders hereby consent to waive the application of
Section 10.3(a)(iv) of the Credit Agreement solely as it relates to the four
quarter period ending December 31, 1999; PROVIDED, HOWEVER, that this waiver
shall expire on the earlier of (i) the date Lenders shall have received
satisfactory evidence, in form and substance satisfactory to Lenders, of the
sale by Borrower of all of the stock of Keyboard Acceptance Corporation (f/k/a
BPO Finance Corporation), a Delaware corporation and a subsidiary of Borrower,
pursuant to that certain Stock Purchase Agreement dated as of December 8, 1999
between Borrower and Deutsche Financial Services Corporation (the "Purchase
Agreement"), (ii) the failure of Borrower to consummate the transactions
contemplated by the Purchase Agreement, and (iii) February 28, 2000.
4. Section 3.1 of the Credit Agreement is hereby amended to read in its
entirety as follows:
"Section 3.1. TOTAL CREDIT FACILITY. In consideration of Baldwin's
payment and performance of its Obligations and subject to the terms and
conditions contained in this Credit Agreement, the Lenders agree to
provide, and Baldwin agrees to accept, an aggregate credit facility of up
to Thirty-Five Million and 00/100 Dollars ($35,000,000.00) (the "TOTAL
CREDIT"), subject to the terms and conditions hereof (the "CREDIT
FACILITY"). No Loans need be made by the Lenders if Baldwin is in Default
or if there exists any Unmatured Default. This is an agreement regarding
the extension of credit, and not the provision of goods or services."
5. ELIGIBLE ACCOUNTS AND ELIGIBLE INVENTORY. Section 3.2(a)(i) and Section
3.2(a)(ii) of the Credit Agreement are hereby amended to in their entirety to
read as follows:
"(i) ELIGIBLE ACCOUNTS. On receipt of each Borrowing Base Certificate,
in the form of Exhibit C, together with such supporting information as
Agent may require from time to time (the "BORROWING BASE CERTIFICATE"),
Agent will credit Baldwin with the lesser of: (i) eighty-five percent (85%)
of the net amount of the Eligible Accounts which are, absent error or other
discrepancy, listed in such Borrowing Base Certificate ("ELIGIBLE ACCOUNT
AVAILABILITY"); and (ii) Fifteen Million and 00/100 Dollars
($15,000,000.00). For purposes hereof, the net amount of Eligible Accounts
at any time shall be the face amount of such Eligible Accounts LESS any and
all returns, discounts (which may, at Agent's option, be calculated on
shortest terms), credits, rebates, allowances, or excise taxes of any
nature at any time issued, owing, claimed by Account Debtors, granted,
outstanding, or payable in connection with such Accounts at such time.
<PAGE> 3
-3-
(ii) ELIGIBLE INVENTORY. On receipt of each Borrowing Base
Certificate, Agent will credit Baldwin with the lesser of: (i)
seventy-five percent (75%) of the Value of Eligible Inventory which
is, absent error or other discrepancy, listed in such Borrowing Base
Certificate, and (ii) Thirty Million Dollars and 00/100 Dollars
($30,000,000.00)."
6. SALE OR TRANSFER OF ASSETS. Section 10.2(b) of the Term Loan Agreement
is hereby amended in its entirety to read as follows:
(b) SALE OR TRANSFER OF ASSETS. Except in the ordinary course of
business or except as consented to in writing by Agent, or except for sales
to a Lender or any affiliate thereof or except for sales to and by KAC as
contemplated by the Permitted Securitization Documents, or except for sales
to Deutsche Financial Services Corporation of finished inventory pursuant
to the Amended and Restated Inventory Purchase and Consignment Agreement
entered into by and between Borrower and Deutsche Financial Services
Corporation as of June 30, 1998, as amended on January 13, 2000 which such
agreement shall be in form and substance satisfactory to Agent, provided
that, after giving effect to such sale, Deutsche Financial Services
Corporation does not own Retail Consigned Goods (as defined therein)
purchased from Borrower pursuant to this subsection with an aggregate value
greater than $5,000,000 or Consigned Goods (as defined therein) purchased
from Borrower pursuant to this subsection with an aggregate value greater
than $20,000,000, Baldwin and the Subsidiaries will not sell, transfer,
lease (including sale-leaseback) or otherwise dispose of all or any
substantial part of their assets; provided, however, that any sales of Sold
Accounts by Baldwin to KAC under the Permitted Securitization
Documentation, and sales, contributions or other transfers of Sold Accounts
under the Permitted Securitization Documentation by KAC, shall be
permitted. This provision will not apply to any sale if the proceeds of
such sale pay the Obligations in full.
7. REAFFIRMATION OF COVENANTS, WARRANTIES AND REPRESENTATIONS. Borrower
hereby agrees and covenants that all representations and warranties in the
Credit Agreement, including without limitation all of those warranties and
representations set forth in Article 9, are true and accurate as of the date
hereof. Borrower further reaffirms all covenants in the Credit Agreement, and
reaffirm each of the affirmative covenants set forth in Section 10.1, the
negative covenants set forth in Section 10.2 and the financial covenants set
forth in Section 10.3 thereof, as if fully set forth herein, except to the
extent modified by this Seventh Amendment.
8. CONDITIONS PRECEDENT TO CLOSING OF SEVENTH AMENDMENT. On or prior to the
closing of the Seventh Amendment (hereinafter the "Seventh Amendment Closing
Date"), each of the following conditions precedent shall have been satisfied:
(a) PROOF OF CORPORATE AUTHORITY. Agent shall have received from
Borrower copies, certified by a duly authorized officer to be true and
complete on and as of the Seventh Amendment Closing Date, of records of all
action taken by Borrower to authorize (i) the
<PAGE> 4
-4-
execution and delivery of this Seventh Amendment and all other
certificates, documents and instruments to which it is or is to become a
party as contemplated or required by this Seventh Amendment, and (ii) its
performance of all of its obligations under each of such documents.
(b) DOCUMENTS. Each of the documents to be executed and delivered at
the Seventh Amendment Closing and all other certificates, documents and
instruments to be executed in connection herewith shall have been duly and
properly authorized, executed and delivered by Borrower and shall be in
full force and effect on and as of the Seventh Amendment Closing Date.
(c) LEGALITY OF TRANSACTIONS. No change in applicable law shall have
occurred as a consequence of which it shall have become and continue to be
unlawful (i) for Agent and each Lender to perform any of its agreements or
obligations under any of the Loan Documents, or (ii) for Borrower to
perform any of its agreements or obligations under any of the Loan
Documents.
(d) PERFORMANCE, ETC. Except as set forth herein, Borrower shall have
duly and properly performed, complied with and observed each of its
covenants, agreements and obligations contained in each of the Loan
Documents. Except as set forth herein, no event shall have occurred on or
prior to the Seventh Amendment Closing Date, and no condition shall exist
on the Seventh Amendment Closing Date, which constitutes a Default or an
Event of Default.
(e) CHANGES; NONE ADVERSE. Since the date of the most recent balance
sheets of Borrower delivered to Agent, no changes shall have occurred in
the assets, liabilities, financial condition, business, operations or
prospects of Borrower which, individually or in the aggregate, are material
to Borrower, and Agent shall have completed such review of the status of
all current and pending legal issues as Agent shall deem necessary or
appropriate.
9. MISCELLANEOUS. (a) Borrower shall reimburse Agent for all fees and
disbursements of legal counsel to Agent which shall have been incurred by Agent
in connection with the preparation, negotiation, review, execution and delivery
of this Seventh Amendment and the handling of any other matters incidental
hereto.
(b) All of the terms, conditions and provisions of the Agreement not
herein modified shall remain in full force and effect. In the event a term,
condition or provision of the Agreement conflicts with a term, condition or
provision of this Seventh Amendment, the latter shall govern.
(c) This Seventh Amendment shall be governed by and shall be construed
and interpreted in accordance with the laws of the State of Ohio.
<PAGE> 5
-5-
(d) This Seventh Amendment shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, successors and
assigns.
(e) This Seventh Amendment may be executed in several counterparts,
each of which shall constitute an original, but all which together shall
constitute one and the same agreement.
[Remainder of page intentionally left blank. Signature page follows.]
<PAGE> 6
IN WITNESS WHEREOF, this Seventh Amendment has been duly executed and
delivered by or on behalf of each of the parties as of the day and in the year
first above written.
BALDWIN PIANO & ORGAN COMPANY,
Borrower
By: /s/ Duane Kimble
----------------------------------
Name: Duane Kimble
--------------------------------
Title: Executive VP, CFO and Secretary
-------------------------------
FIFTH THIRD BANK, Agent
By: /s/ Robert C. Ries
----------------------------------
Name: Robert C. Ries
--------------------------------
Title: Vice President
-------------------------------
FIFTH THIRD BANK, Lender
By: /s/ Robert C. Ries
----------------------------------
Name: Robert C. Ries
--------------------------------
Title: Vice President
-------------------------------
BANK ONE, INDIANA, N. A., Lender
By: /s/Edward C. Hathaway
---------------------------------
Name: Edward C. Hathaway
-------------------------------
Title: First Vice President
------------------------------
<PAGE> 7
The undersigned, guarantors of the obligations of Baldwin Piano & Organ Company
under the Credit Agreement, hereby acknowledge and accept the above Seventh
Amendment and the terms and conditions therein.
SIGNATURE LEASING COMPANY
By: /s/ Duane Kimble
----------------------------------
Name: Duane Kimble
--------------------------------
Title: Executive Vice President, CFO and Secretary
-------------------------------------------
BALDWIN TRADING COMPANY
By: /s/ Duane Kimble
----------------------------------
Name: Duane Kimble
--------------------------------
Title: Executive Vice President, CFO and Secretary
-------------------------------------------
BALDWIN PIANO COMPANY (CANADA) LIMITED
By: /s/ Duane Kimble
----------------------------------
Name: Duane Kimble
--------------------------------
Title: Executive Vice President, CFO and Secretary
-------------------------------------------
THE WURLITZER COMPANY
By: /s/ Duane Kimble
----------------------------------
Name: Duane Kimble
--------------------------------
Title: Executive Vice President, CFO and Secretary
-------------------------------------------
<PAGE> 1
EXHIBIT 10.26
- -------------
WAIVER AND EIGHTH AMENDMENT TO CREDIT AGREEMENT
THIS WAIVER AND EIGHTH AMENDMENT TO CREDIT AGREEMENT ("Eighth Amendment")
dated as of February 28, 2000 is by and among BALDWIN PIANO & ORGAN COMPANY, a
Delaware corporation, (hereinafter, together with its successors in title and
assigns called "Borrower" or "Baldwin"), FIFTH THIRD BANK, an Ohio banking
corporation, as Agent (in such capacity, the "Agent"), FIFTH THIRD BANK ("Fifth
Third"), as a Lender, and BANK ONE, INDIANA, N.A., formerly known as NBD BANK,
N.A., a national banking association, ("Bank One") as a Lender, (Fifth Third and
Bank One are hereinafter collectively the "Lenders" and each individually a
"Lender").
PRELIMINARY STATEMENT
---------------------
WHEREAS, Borrower, Agent and Lenders have entered into a Credit Agreement
dated as of October 16, 1997, as amended by a First Amendment dated as of
October 16, 1997, a Second Amendment dated as of April 27, 1998, a Third
Amendment dated June 19, 1998, a Fourth Amendment dated September 21, 1998, a
Fifth Amendment dated January 29, 1999, and a Sixth Amendment dated July 15,
1999, and a Waiver and Seventh Amendment dated December 3, 1999 (collectively,
the "Credit Agreement"); and
WHEREAS, Borrower has requested Agent and Lenders to make various
revisions to the Credit Agreement as set forth herein; and
WHEREAS, Borrower, Agent and Lenders now wish to amend the Credit
Agreement in accordance with the terms and provisions hereof;
NOW, THEREFORE, the parties hereto agree to supplement and amend the
Credit Agreement upon such terms and conditions as follows:
1. CAPITALIZED TERMS. All capitalized terms used herein shall have the
meanings assigned to them in the Credit Agreement unless the context hereof
requires otherwise. Any definitions as capitalized terms set forth herein shall
be deemed incorporated into the Credit Agreement as amended by this Eighth
Amendment.
2. EXHIBITS. Effective immediately upon consummation of the Sale (as
defined in Section ), the following Exhibits to the Credit Agreement shall be
amended in their entirety to read as the corresponding Exhibits to this Eighth
Amendment:
(a) Exhibit C Form of Borrowing Base Certificate
3. Effective immediately upon consummation of the Sale (as defined in
Section 7), Section 3.1 of the Credit Agreement shall be amended to read in its
entirety as follows:
<PAGE> 2
-2-
"Section 3.1. TOTAL CREDIT FACILITY. In consideration of Baldwin's
payment and performance of its Obligations and subject to the terms and
conditions contained in this Credit Agreement, the Lenders agree to
provide, and Baldwin agrees to accept, an aggregate credit facility of up
to (i) Twenty Million and 00/100 Dollars ($20,000,000.00) on or before
March 29, 2000 and (ii) Seventeen Million and 00/100 Dollars
($17,000,000.00) after March 29, 2000 (the "TOTAL CREDIT"), subject to the
terms and conditions hereof (the "CREDIT FACILITY"). No Loans need be made
by the Lenders if Baldwin is in Default or if there exists any Unmatured
Default (and such Default or Unmatured Default has not been waived by
Agent and Lenders). This is an agreement regarding the extension of
credit, and not the provision of goods or services."
4. ELIGIBLE ACCOUNTS AND ELIGIBLE INVENTORY. Effective immediately upon
consummation of the Sale (as defined in Section ), Section 3.2(a)(i) and Section
3.2(a)(ii) of the Credit Agreement shall be amended in their entirety to read as
follows:
"(i) ELIGIBLE ACCOUNTS. On receipt of each Borrowing Base
Certificate, in the form of Exhibit C, together with such
supporting information as Agent may require from time to time (the
"BORROWING BASE CERTIFICATE"), Agent will credit Baldwin with the
lesser of: (i) seventy-five percent (75%) of the net amount of the
Eligible Accounts which are, absent error or other discrepancy,
listed in such Borrowing Base Certificate ("ELIGIBLE ACCOUNT
Availability"); and (ii) Eight Million Five Hundred Thousand and
00/100 Dollars ($8,500,000.00). For purposes hereof, the net amount
of Eligible Accounts at any time shall be the face amount of such
Eligible Accounts LESS any and all returns, discounts (which may, at
Agent's option, be calculated on shortest terms), credits, rebates,
allowances, or excise taxes of any nature at any time issued, owing,
claimed by Account Debtors, granted, outstanding, or payable in
connection with such Accounts at such time.
(ii) ELIGIBLE INVENTORY. On receipt of each Borrowing
Base Certificate, Agent will credit Baldwin with the lesser of: (i)
sixty-five percent (65%) of the Value of Eligible Inventory which
is, absent error or other discrepancy, listed in such Borrowing Base
Certificate, and (ii) Seventeen Million and 00/100 Dollars
($17,000,000.00)."
5. LETTERS OF CREDIT. Effective immediately upon consummation of the
Sale (as defined in Section ), Article 4 of the Credit Agreement shall be
amended to add Section 4.9 to read in its entirety as follows:
"Section 4.9 REQUIREMENTS AFTER TERMINATION OF AGREEMENT.
Upon termination of the Agreement, whether at stated maturity or by
acceleration, Borrower shall deposit in a non-interest bearing, blocked
deposit account at Fifth Third Bank to which only the Agent will have
access (the "LOC Account"), and Agent is hereby authorized to draw,
advance or disburse under the Agreement, a sum in immediately available
funds equal to the aggregate
<PAGE> 3
-3-
amount of all of the issued and outstanding Letters of Credit. The LOC
Account will secure solely Borrower's obligations under the Letters of
Credit and Borrower hereby grants to Agent, for the benefit of the
Lenders, a security interest in such funds and the LOC Account and all
interest, income, proceeds, investments and reinvestments thereof.
Borrower agrees that after the termination of the Notes, Agent is hereby
authorized to liquidate such account (or any part thereof) and apply the
proceeds as reimbursement for the amount of such drawing or payment under
or with respect to the Letters of Credit. The LOC Account shall continue
until such time as the Letters of Credit shall expire or have been
terminated . At such time, any part of the funds remaining in the Account
shall be remitted to Borrower and discharged from the security interest
granted hereby. Notwithstanding the foregoing provisions of this Section
4.9, Borrower shall not be required to establish the LOC Account or
deposit funds therein upon termination of this Agreement with respect to
any issued and outstanding Letter of Credit that is secured by a letter of
credit from another financial entity reasonably acceptable to Lenders (it
being understood that General Electric Capital Corporation or First Union
National Bank, or affiliates of either such entity which issue letters of
credit in the ordinary course of business, are acceptable to Lenders)."
6. CONTINUATION OF WAIVER. (a) The Agent and the Lenders hereby consent
to waive the application of Section 10.3(a)(iv) of the Credit Agreement solely
as it relates to the four quarter period ending September 30, 1999; PROVIDED,
HOWEVER, that this waiver shall expire on the earlier of (i) March 29, 2000 and
(ii) the date on which good faith negotiations between Borrower and General
Electric Capital Corporation for the refinancing of the Loan shall cease.
(b) The Agent and the Lenders hereby consent to waive the
application of Section 10.3(a)(iv) of the Credit Agreement solely as it relates
to the four quarter period ending December 31, 1999; PROVIDED, HOWEVER, that
this waiver shall expire on the earlier of (i) March 29, 2000 and (ii) the date
on which good faith negotiations between Borrower and General Electric Capital
Corporation for the refinancing of the Loan shall cease.
7. SALE OF KAC AND SIGNATURE LEASING COMPANY. The Agent and the
Lenders hereby consent to the sale by Borrower of all of the stock of (i)
Keyboard Acceptance Corporation (f/k/a BPO Finance Corporation) a Delaware
corporation and a subsidiary of Borrower, and (ii) Signature Leasing Company, an
Ohio corporation and a subsidiary of Borrower, pursuant to that Stock Purchase
Agreement between Borrower and Duetsche Financial Services Corporation and dated
as of December 8, 1999 (the "Sale"); PROVIDED, HOWEVER, that the proceeds of the
Sale shall first be applied in the inverse order of maturity to the payment of
the remaining installments on the Term Loan, and at any time after the Term Loan
shall have been repaid in full, such proceeds shall be applied in repayment of
the Loan. For purposes of this Section , "Term Loan" shall mean the Obligations
as defined in the Amended and Restated Term Loan Agreement dated as of May 15,
1998, by and among Borrower, Agent and the Lenders thereto, as amended by the
First Amendment thereto dated as of July 15, 1999 and the Waiver and Second
Amendment thereto dated as of December 3, 1999.
<PAGE> 4
-4-
8. REAFFIRMATION OF COVENANTS, WARRANTIES AND REPRESENTATIONS. Borrower
hereby agrees and covenants that all representations and warranties in the
Credit Agreement, including without limitation all of those warranties and
representations set forth in Article 9, are true and accurate as of the date
hereof. Borrower further reaffirms all covenants in the Credit Agreement, and
reaffirm each of the affirmative covenants set forth in Section 10.1, the
negative covenants set forth in Section 10.2 and the financial covenants set
forth in Section 10.3 thereof, as if fully set forth herein, except to the
extent modified by this Eighth Amendment.
9. CONDITIONS PRECEDENT TO CLOSING OF EIGHTH AMENDMENT. On or prior to
the closing of the Eighth Amendment (hereinafter the "Eighth Amendment Closing
Date"), each of the following conditions precedent shall have been satisfied:
(a) PROOF OF CORPORATE AUTHORITY. Agent shall have received from
Borrower copies, certified by a duly authorized officer to be true and
complete on and as of the Eighth Amendment Closing Date, of records of all
action taken by Borrower to authorize (i) the execution and delivery of
this Eighth Amendment and all other certificates, documents and
instruments to which it is or is to become a party as contemplated or
required by this Eighth Amendment, and (ii) its performance of all of its
obligations under each of such documents.
(b) DOCUMENTS. Each of the documents to be executed and delivered
at the Eighth Amendment Closing and all other certificates, documents and
instruments to be executed in connection herewith shall have been duly and
properly authorized, executed and delivered by Borrower and shall be in
full force and effect on and as of the Eighth Amendment Closing Date.
(c) LEGALITY OF TRANSACTIONS. No change in applicable law shall
have occurred as a consequence of which it shall have become and continue
to be unlawful (i) for Agent and each Lender to perform any of its
agreements or obligations under any of the Loan Documents, or (ii) for
Borrower to perform any of its agreements or obligations under any of the
Loan Documents.
(d) PERFORMANCE, ETC. Except as set forth herein, Borrower shall
have duly and properly performed, complied with and observed each of its
covenants, agreements and obligations contained in each of the Loan
Documents. Except as set forth herein, no event shall have occurred on or
prior to the Eighth Amendment Closing Date, and no condition shall exist
on the Eighth Amendment Closing Date, which constitutes a Default or an
Event of Default.
(e) CHANGES; NONE ADVERSE. Since the date of the most recent
balance sheets of Borrower delivered to Agent, no changes shall have
occurred in the assets, liabilities, financial condition, business,
operations or prospects of Borrower which, individually or in the
aggregate, are material to Borrower, and Agent shall have completed such
review of the status of all current and pending legal issues as Agent
shall deem necessary or appropriate.
<PAGE> 5
-5-
(f) CLOSING FEE. Agent, for the pro rata benefit of the Lenders,
shall have received a closing fee in the amount of Twenty Thousand and
00/100 Dollars ($20,000.00).
10. MISCELLANEOUS. (a) Borrower shall reimburse Agent for all fees and
disbursements of legal counsel to Agent which shall have been incurred by Agent
in connection with the preparation, negotiation, review, execution and delivery
of this Eighth Amendment and the handling of any other matters incidental
hereto.
(b) All of the terms, conditions and provisions of the Agreement
not herein modified shall remain in full force and effect. In the event a term,
condition or provision of the Agreement conflicts with a term, condition or
provision of this Eighth Amendment, the latter shall govern.
(c) This Eighth Amendment shall be governed by and shall be
construed and interpreted in accordance with the laws of the State of Ohio.
(d) This Eighth Amendment shall be binding upon and shall inure to
the benefit of the parties hereto and their respective heirs, successors and
assigns.
(e) This Eighth Amendment may be executed in several counterparts,
each of which shall constitute an original, but all which together shall
constitute one and the same agreement.
[Remainder of page intentionally left blank. Signature page follows.]
<PAGE> 6
IN WITNESS WHEREOF, this Eighth Amendment has been duly executed and
delivered by or on behalf of each of the parties as of the day and in the year
first above written.
BALDWIN PIANO & ORGAN COMPANY, Borrower
By: /s/ Duane Kimble
--------------------------------
Name: Duane Kimble
------------------------------
Title: Executive Vice President
-----------------------------
FIFTH THIRD BANK, Agent
By: /s/ Robert C. Ries
--------------------------------
Name: Robert C. Ries
------------------------------
Title: Vice President
-----------------------------
FIFTH THIRD BANK, Lender
By: /s/ Robert C. Ries
--------------------------------
Name: Robert C. Ries
------------------------------
Title: Vice President
-----------------------------
BANK ONE, INDIANA, N. A., Lender
By: /s/ Edward C. Hathaway
--------------------------------
Name: Edward C. Hathaway
------------------------------
Title: First Vice President
-----------------------------
<PAGE> 7
The undersigned, guarantors of the obligations of Baldwin Piano & Organ Company
under the Credit Agreement, hereby acknowledge and accept the above Eighth
Amendment and the terms and conditions therein.
BALDWIN TRADING COMPANY
By: /s/ Duane Kimble
--------------------------------
Name: Duane Kimble
------------------------------
Title: Executive Vice President
-----------------------------
BALDWIN PIANO COMPANY (CANADA) LIMITED
By: /s/ Duane Kimble
--------------------------------
Name: Duane Kimble
------------------------------
Title: Executive Vice President
-----------------------------
THE WURLITZER COMPANY
By: /s/ Duane Kimble
--------------------------------
Name: Duane Kimble
------------------------------
Title: Executive Vice President
-----------------------------
<PAGE> 8
EXHIBIT C
FORM OF BORROWING BASE CERTIFICATE
----------------------------------
<TABLE>
<S> <C> <C>
BALDWIN PIANO & ORGAN COMPANY Report # Today's date
-------------------- -------------------------
Accounts Reported as of
------------------
Inventory Reported as of
-----------------
- -----------------------------------------------------------------------------------------------------------------------------
I. ELIGIBLE ACCOUNT AVAILABILITY
- -----------------------------------------------------------------------------------------------------------------------------
A. ELIGIBLE ACCOUNT AVAILABILITY
1. Accounts $
----------------
LESS:
2. From sales of goods and services > 60 Days from
date of sale, except Biasco --------------
3. Biasco (other than Biasco Special Account),
Due > 130 Days from date of sale (3/15/99) --------------
4. Biasco Special Account (after 3/1/99) --------------
5. Contract Electronics unpaid > 90 Days
and others > 120 days --------------
6. Entire Account, if 50% or more unpaid > 90 Days --------------
7. Affiliate Accounts --------------
8. Consignment Receivables > 120 Days --------------
9. Conditional --------------
10. Non U.S./Canada --------------
11. Non Reps & Warr. (per section 9.18 of Credit Agreement) --------------
12. Demonstration/Loan --------------
13. Progress/Barter/Contra --------------
14. Personal/family/household --------------
15. Agent Designated Accounts --------------
16. TOTAL INELIGIBLE (sum lines 2 through 15) ( )
------------
17. SUBTOTAL --------------
18. LESS: ELIGIBLE ACCOUNT NET AVAILABILITY ( )
(25% times Line 17) ------------
19. TOTAL ELIGIBLE ACCOUNT AVAILABILITY $
(Line 17, Less Line 18) ============
---------------
20. TOTAL CREDIT FOR ELIGIBLE ACCOUNTS
(Lesser of Line 19, or $8,500,000) $
---------------
- ------------------------------------------------------------------------------------------------------------------
II. ELIGIBLE INVENTORY AVAILABILITY
- ------------------------------------------------------------------------------------------------------------------
A. ELIGIBLE INVENTORY AVAILABILITY
21. INVENTORY (Wholesale Dealer Cost)
</TABLE>
<PAGE> 9
-2-
<TABLE>
<S> <C> <C> <C>
LESS:
22. Work in Progress ( )
23. Spare Parts/Shipping and Packaging Materials ( )
24. Defective Inventory ( )
25. Returned or repossessed ( )
26. Non U.S./Canada ( )
27. TOTAL INELIGIBLE INVENTORY: ( )
(Sum of Lines 22 through 26)
28. SUBTOTAL
29. LESS: NET ELIGIBLE INVENTORY ( )
(35% times Line 28)
30. TOTAL ELIGIBLE INVENTORY AVAILABILITY
(Line minus Line 29)
----------------
31. TOTAL CREDIT FOR ELIGIBLE INVENTORY
(THE LESSER OF LINE 30, OR $17,000,000) ----------------
- ---------------------------------------------------------------------------------------------------------------
III. ELIGIBLE RAW MATERIALS AVAILABILITY
- ---------------------------------------------------------------------------------------------------------------
The Sum of:
32. Value of Raw Materials/electronic (Baldwin's Cost)
33. Times 10% X .10 = $
34. PLUS: The Value of all other Raw Materials
(Baldwin's Cost)
35. Times 50% X .50 = $
36. TOTAL
=============
-----------------
37. RAW MATERIALS AVAILABILITY
(Lesser of Line 35 or $ )
--------- -----------------
- ---------------------------------------------------------------------------------------------------------------
38. TOTAL BORROWING BASE AVAILABILITY
(Sum of Lines 20, 31, and 37) $
- ---------------------------------------------------------------------------------------------------------------
39. Lesser of Line 38 and the Total Credit ($20,000,000) -----------------
as determined by the Credit Agreement
-----------------
40. LESS: Outstanding Standby Letters of Credit -----------------
( )
-----------------
-----------------
41. LESS: Outstanding Revolving Credit Balance ( )
-----------------
- ---------------------------------------------------------------------------------------------------------------
TOTAL AVAILABILITY TO BORROWERS
(Sum of Lines 39, 40 and 41) $
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 10
-3-
We certify that the foregoing report is true and correct.
BALDWIN PIANO & ORGAN COMPANY
Name:
----------------------------
Title:
---------------------------
<PAGE> 1
EXHIBIT 10.31
- -------------
WAIVER AND SECOND AMENDMENT TO
AMENDED AND RESTATED TERM LOAN AGREEMENT
THIS WAIVER AND SECOND AMENDMENT TO AMENDED AND RESTATED TERM LOAN
AGREEMENT ("Second Amendment") dated as of December 3, 1999 is by and among
BALDWIN PIANO & ORGAN COMPANY, a Delaware corporation, (hereinafter, together
with its successors in title and assigns called "Borrower" or "Baldwin"), FIFTH
THIRD BANK, an Ohio banking corporation, as Agent (in such capacity, the
"Agent"), FIFTH THIRD BANK ("Fifth Third"), as a Lender, and BANK ONE, INDIANA,
N.A., formerly known as NBD BANK, N.A., a national banking association, ("Bank
One") as a Lender, (Fifth Third and Bank One are hereinafter collectively the
"Lenders" and each individually a "Lender").
PRELIMINARY STATEMENT
---------------------
WHEREAS, Borrower, Agent and Lenders have entered into a Amended and
Restated Term Loan Agreement dated as of May 15, 1998, as amended by the First
Amendment thereto dated as of July 15, 1999 (as amended hereby, the "Term Loan
Agreement"); and
WHEREAS, Borrower have requested Agent and Lenders to make various
revisions to the Term Loan Agreement as set forth herein; and
WHEREAS, Borrower, Agent and Lenders now wish to amend the Term Loan
Agreement in accordance with the terms and provisions hereof;
NOW, THEREFORE, the parties hereto agree to supplement and amend the Term
Loan Agreement upon such terms and conditions as follows:
1. CAPITALIZED TERMS. All capitalized terms used herein shall have the
meanings assigned to them in the Term Loan Agreement unless the context hereof
requires otherwise. Any definitions as capitalized terms set forth herein shall
be deemed incorporated into the Term Loan Agreement as amended by this Second
Amendment.
2. DEFINITIONS.
(a) Section 2.1 of the Term Loan Agreement is hereby to amend the
following definitions to read in their entirety as follows:
"INTEREST RATE" means, with respect to the Term Loan, the rate of
interest per annum equal to the Prime Rate.
3. EXHIBITS. The following Exhibit to the Term Loan Agreement is hereby
amended in its entirety to read as the corresponding Exhibit to this Second
Amendment:
<PAGE> 2
-2-
(a) Exhibit A Form of Term Promissory Note;
4. WAIVER. (a) The Agent and the Lenders hereby consent to waive the
application of Section 7.3(a)(iv) of the Term Loan Agreement solely as it
relates to the four quarter period ending September 30, 1999; PROVIDED, HOWEVER,
that this waiver shall expire on the earlier of (i) the date Lenders shall have
received satisfactory evidence, in form and substance satisfactory to Lenders,
of the sale by Borrower of all of the stock of Keyboard Acceptance Corporation
(f/k/a BPO Finance Corporation), a Delaware corporation and a subsidiary of
Borrower, pursuant to that certain Stock Purchase Agreement dated as of December
8, 1999 between Borrower and Deutsche Financial Services Corporation (the
"Purchase Agreement"), (ii) the failure of Borrower to consummate the
transactions contemplated by the Purchase Agreement, and (iii) February 28,
2000.
(b) The Agent and the Lenders hereby consent to waive the application of
Section 7.3(a)(iv) of the Term Loan Agreement solely as it relates to the four
quarter period ending December 31, 1999; PROVIDED, HOWEVER, that this waiver
shall expire on the earlier of (i) the date Lenders shall have received
satisfactory evidence, in form and substance satisfactory to Lenders, of the
sale by Borrower of all of the stock of Keyboard Acceptance Corporation (f/k/a
BPO Finance Corporation), a Delaware corporation and a subsidiary of Borrower,
pursuant to that certain Stock Purchase Agreement dated as of December 8, 1999
between Borrower and Deutsche Financial Services Corporation (the "Purchase
Agreement"), (ii) the failure of Borrower to consummate the transactions
contemplated by the Purchase Agreement, and (iii) February 28, 2000.
4. SALE OR TRANSFER OF ASSETS. Section 7.2(b) of the Term Loan Agreement
is hereby amended in its entirety to read as follows:
(b) SALE OR TRANSFER OF ASSETS. Except in the ordinary course of
business or except as consented to in writing by Agent, or except for
sales to a Lender or any affiliate thereof or except for sales to and by
KAC as contemplated by the Permitted Securitization Documents, or except
for sales to Deutsche Financial Services Corporation of finished inventory
pursuant to the Amended and Restated Inventory Purchase and Consignment
Agreement entered into by and between Borrower and Deutsche Financial
Services Corporation as of June 30, 1998, as amended on January 13, 2000,
which such agreement shall be in form and substance satisfactory to Agent,
provided that, after giving effect to such sale, Deutsche Financial
Services Corporation does not own Retail Consigned Goods (as defined
therein) purchased from Borrower pursuant to this subsection with an
aggregate value greater than $5,000,000 or Consigned Goods (as defined
therein) purchased from Borrower pursuant to this subsection with an
aggregate value greater than $20,000,000, Baldwin and the Subsidiaries
will not sell, transfer, lease (including sale-leaseback) or otherwise
dispose of all or any substantial part of their assets; provided, however,
that any sales of KAC Accounts by Baldwin to KAC under the Permitted
Securitization Documentation, and sales, contributions or other transfers
of KAC Accounts under the Permitted Securitization Documentation by KAC,
shall be permitted. This provision will not apply to any sale if the
proceeds of such sale pay the Obligations in full.
<PAGE> 3
-3-
5. REAFFIRMATION OF COVENANTS, WARRANTIES AND REPRESENTATIONS. Borrower
hereby agrees and covenants that all representations and warranties in the Term
Loan Agreement, including without limitation all of those warranties and
representations set forth in Article 6 are true and accurate as of the date
hereof. Borrower further reaffirms all covenants in the Term Loan Agreement, and
reaffirm each of the affirmative covenants set forth in Section 7.1, the
negative covenants set forth in Section 7.2 and the financial covenants set
forth in Section 7.3 thereof, as if fully set forth herein, except to the extent
modified by this Second Amendment.
6. CONDITIONS PRECEDENT TO CLOSING OF SECOND AMENDMENT. On or prior to
the closing of the Second Amendment (hereinafter the "Second Amendment Closing
Date"), each of the following conditions precedent shall have been satisfied:
(a) PROOF OF CORPORATE AUTHORITY. Agent shall have received from
Borrower copies, certified by a duly authorized officer to be true and
complete on and as of the Second Amendment Closing Date, of records of all
action taken by Borrower to authorize (i) the execution and delivery of
this Second Amendment and all other certificates, documents and
instruments to which it is or is to become a party as contemplated or
required by this Second Amendment, and (ii) its performance of all of its
obligations under each of such documents.
(b) DOCUMENTS. Each of the documents to be executed and delivered at
the Second Amendment Closing, including, without limitation, executed Term
Promissory Notes substantially in the form of Exhibit A hereto, and all
other certificates, documents and instruments to be executed in connection
herewith shall have been duly and properly authorized, executed and
delivered by Borrower and shall be in full force and effect on and as of
the Second Amendment Closing Date.
(c) LEGALITY OF TRANSACTIONS. No change in applicable law shall have
occurred as a consequence of which it shall have become and continue to be
unlawful (i) for Agent and each Lender to perform any of its agreements or
obligations under any of the Loan Documents, or (ii) for Borrower to
perform any of its agreements or obligations under any of the Loan
Documents.
(d) PERFORMANCE, ETC. Except as set forth herein, Borrower shall
have duly and properly performed, complied with and observed each of its
covenants, agreements and obligations contained in each of the Loan
Documents. Except as set forth herein, no event shall have occurred on or
prior to the Second Amendment Closing Date, and no condition shall exist
on the Second Amendment Closing Date, which constitutes a Default or an
Event of Default.
(e) CHANGES; NONE ADVERSE. Since the date of the most recent balance
sheets of Borrower delivered to Agent, no changes shall have occurred in
the assets, liabilities, financial condition, business, operations or
prospects of Borrower which, individually or in
<PAGE> 4
-4-
the aggregate, are material to Borrower, and Agent shall have completed
such review of the status of all current and pending legal issues as Agent
shall deem necessary or appropriate.
(f) FEE. Agent shall have received, for the pro rata benefit of
Lenders, a closing fee in the amount of $108,750.00
7. MISCELLANEOUS. (a) Borrower shall reimburse Agent for all fees and
disbursements of legal counsel to Agent which shall have been incurred by Agent
in connection with the preparation, negotiation, review, execution and delivery
of this Second Amendment and the handling of any other matters incidental
hereto.
(b) All of the terms, conditions and provisions of the Agreement not
herein modified shall remain in full force and effect. In the event a term,
condition or provision of the Agreement conflicts with a term, condition or
provision of this Second Amendment, the latter shall govern.
(c) This Second Amendment shall be governed by and shall be construed
and interpreted in accordance with the laws of the State of Ohio.
(d) This Second Amendment shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, successors and
assigns.
(e) This Second Amendment may be executed in several counterparts,
each of which shall constitute an original, but all which together shall
constitute one and the same agreement.
[Remainder of page intentionally left blank. Signature page follows.]
<PAGE> 5
-5-
IN WITNESS WHEREOF, this Second Amendment has been duly executed and
delivered by or on behalf of each of the parties as of the day and in the year
first above written.
BALDWIN PIANO & ORGAN COMPANY,
Borrower
By: /s/ Duane Kimble
----------------------------------
Name: Duane Kimble
--------------------------------
Title: Executive VP, CFO and Secretary
-------------------------------
FIFTH THIRD BANK, Agent
By: /s/ Robert C. Ries
----------------------------------
Name: Robert C. Ries
--------------------------------
Title: Vice President
-------------------------------
FIFTH THIRD BANK, Lender
By: /s/ Robert C. Ries
----------------------------------
Name: Robert C. Ries
--------------------------------
Title: Vice President
-------------------------------
BANK ONE, INDIANA, N. A., Lender
By: /s/ Edward C. Hathaway
----------------------------------
Name: Edward C. Hathaway
--------------------------------
Title: First Vice President
-------------------------------
<PAGE> 6
The undersigned, guarantors of the obligations of Baldwin Piano & Organ Company
under the Loan Agreement, hereby acknowledge and accept the above Second
Amendment and the terms and conditions therein.
SIGNATURE LEASING COMPANY
By: /s/ Duane Kimble
----------------------------------
Name: Duane Kimble
--------------------------------
Title: Executive VP, CFO and Secretary
-------------------------------
BALDWIN TRADING COMPANY
By: /s/ Duane Kimble
----------------------------------
Name: Duane Kimble
--------------------------------
Title: Executive VP, CFO and Secretary
-------------------------------
BALDWIN PIANO COMPANY (CANADA)
LIMITED
By: /s/ Duane Kimble
----------------------------------
Name: Duane Kimble
--------------------------------
Title: Executive VP, CFO and Secretary
-------------------------------
THE WURLITZER COMPANY
By: /s/ Duane Kimble
----------------------------------
Name: Duane Kimble
--------------------------------
Title: Executive VP, CFO and Secretary
-------------------------------
<PAGE> 7
EXHIBIT A
Form of Term Promissory Note
THIRD AMENDED AND RESTATED TERM PROMISSORY NOTE(1)
$[ ] Cincinnati, Ohio
------------ December __, 1999
THIS SECOND AMENDED AND RESTATED TERM PROMISSORY NOTE ("Note") is made and
entered into as of the date hereof by BALDWIN PIANO & ORGAN COMPANY, a Delaware
corporation, (the "Borrower") to the order of _______________ (hereinafter,
together with its permitted successors and assigns, called "Bank").
This Note has been executed and delivered pursuant to a certain General
Loan and Security Agreement dated as of June 15, 1989 by and between Borrower
and Fifth Third Bank, as amended by an Amended and Restated General Loan and
Security Agreement dated as of February 24, 1994 by and between Borrower and
Fifth Third Bank, as amended by an Amended and Restated Term Loan Agreement
dated as of May 15, 1998, by and among Borrower, Fifth Third Bank, an Ohio
banking corporation, as "Agent", and the Banks listed therein and a First
Amendment to Amended and Restated Term Loan Agreement dated as of July 15, 1999
(collectively, and as the same may be amended, modified, supplemented or
restated, the "Loan Agreement"), and is subject to the terms and conditions of
the Loan Agreement, including without limitation, acceleration upon the terms
provided therein. All capitalized terms used herein shall have the meanings
assigned to them in the Loan Agreement unless the context hereof requires
otherwise.
Borrower, for value received, promises to pay to the order of Bank, at
Agent's Head Office, for the account of Bank in accordance with the Loan
Agreement, the principal sum of [______________] AND 00/100 DOLLARS
($5,000,000.00) (the "Credit Commitment") or so much thereof as is loaned by
Bank pursuant to the provisions hereof and the terms and provisions of the Loan
Agreement, together with interest on the unpaid principal amount at the annual
rate defined, determined and adjusted pursuant to the Loan Agreement ("Interest
Rate"). Interest shall be due and payable quarterly in arrears commencing on
January 2, 2000, and on each April 1, July 1, October 1 and January 1
thereafter. All interest under this Note shall be computed on the basis of the
actual number of days elapsed over an assumed year consisting of three hundred
sixty (360) days.
- ----------------------
(1) This Third Amended and Restated Term Promissory Note is one of two
notes issued as of the date hereof in exchange for and in substitution for two
Second Amended and Restated Secured Promissory Notes, each in the original
principal amount of $5,000,000.00 and dated as of May 18, 1998 ("Second Amended
and Restated Notes"), which such Second Amended and Restated Notes were issued
in exchange for and in substitution of an Amended and Restated Secured
Promissory Note dated as of February 24, 1994 (the "Amended Note") which Amended
Note was issued in exchange for and in substitution of a Secured Promissory Note
dated as of June 15, 1989 (the "Original Note"). This Note is not and shall not
be construed as a novation or be construed in any manner as an extinguishment of
the obligations arising under the Second Amended and Restated Notes, the Amended
Note or the Original Note, or to affect the priority of the security interest
granted in connection with either the Second Amended and Restated Notes, the
Amended Note or the Original Note, with it being expressly understood and agreed
by the parties hereto, and any third parties relying on its terms, that this
Note does not replace the original indebtedness, but merely modifies the terms
and conditions of such indebtedness evidenced by the Original Note, as modified
by the Amended Note, the Second Amended and Restated Notes and the underlying
loan documents, as the same have been amended and restated.
<PAGE> 8
ii
Borrower shall pay to Bank, commencing on January 2, 2000, and on each
April 1, July 1, October 1 and January 1 thereafter, and on the date this Note
is due (whether by maturity, acceleration or otherwise), quarterly installments
of principal in the amount of ONE HUNDRED TWENTY-FIVE THOUSAND AND 00/100
DOLLARS ($125,000.00), provided that, in any event, the last installment payable
on this Note shall be in an amount sufficient to pay in full the entire unpaid
principal and accrued interest of this Note. All of the indebtedness evidenced
by this Note shall, if not sooner due and payable as provided in the Loan
Agreement, be in any event absolutely and unconditionally due and payable in
full by Borrower on May 1, 2003.
This Note is subject to mandatory prepayment upon the terms and conditions
set forth in the Loan Agreement. This Note may be prepaid in whole or in part as
set forth in the Loan Agreement. Amounts borrowed hereunder and repaid or
prepaid may not be reborrowed.
If this Note is accelerated pursuant to the Loan Agreement or if a Default
or an Event of Default with respect to any monetary payment under the Loan
Agreement shall have occurred and during the period in which such Default or
Event of Default is continuing, the outstanding principal and all accrued
interest as well as any other Obligations due Bank or Agent under any Loan
Document shall bear interest at three percent (3.0%) above the Interest Rate.
If any payment of principal, interest or other charge due hereunder is not
paid when due, or in the event of an Event of Default under the Loan Agreement,
this Note shall, at the option of Bank, become immediately due and payable, upon
demand by Bank, except that if there shall be an Event of Default under Sections
8.12, 8.13 or 8.14 of the Loan Agreement, this Note shall automatically and
immediately be due and payable without demand.
The Borrower hereby: (i) waives presentment, demand, notice of demand,
protest, notice of protest, notice of presentment and notice of nonpayment and
any other notice required to be given by law, except as otherwise specifically
provided in the Loan Agreement, in connection with the delivery, acceptance,
performance, default or enforcement of this Note, of any indorsement or guaranty
of this Note; and (ii) consents to any and all delays, extensions, renewals or
other modifications of this Note or waivers of any term hereof or the failure to
act on the part of Agent or Bank or any indulgence shown by Agent or Bank, from
time to time and in one or more instances, (without notice to or further assent
from Borrower) and agrees that no such action, failure to act or failure to
exercise any right or remedy, on the part of Agent or Bank shall in any way
affect or impair the obligations of Borrower or be construed as a waiver by Bank
of, or otherwise affect, any of Bank's rights under this Note, or under any
indorsement or guaranty of this Note. Subject to the terms of the Loan
Agreement, Borrower further agrees to reimburse Agent and Bank for all advances,
charges, costs and expenses, including reasonable attorney's fees, incurred or
paid in exercising any right, power or remedy conferred by this Note, or in the
enforcement thereof.
Anything herein to the contrary notwithstanding the obligations of
Borrower under this Note, the Loan Agreement or any other Loan Documents shall
be subject to the limitation that payments of interest shall not be required to
the extent that receipt of any such payment by any Bank would
<PAGE> 9
iii
be contrary to the provisions of law applicable to such Bank limiting the
maximum rate of interest that may be charged or collected by the Bank. Without
limiting the generality of the foregoing, all calculations of the rate of
interest contracted for, charged or received under this Note which are made for
the purposes of determining whether such rate of interest exceeds the maximum
rate of interest permitted by applicable law shall be made, to the extent
permitted by applicable law, by amortizing, prorating, allocating and spreading
in equal parts during the period of the full stated term of this Note, all
interest at any time contracted for, charged or received in connection with the
indebtedness evidenced by this Note, and then to the extent that any excess
remains, all such excess shall be automatically credited against and in
reduction of the principal balance, and any portion of said excess which exceeds
the principal balance shall be paid by Bank to Borrower, it being the intent of
the parties hereto that under no circumstances shall Borrower be required to pay
any interest in excess of the highest rate permissible under applicable law.
The provisions of this note shall be governed by and interpreted in
accordance with the laws of Ohio.
The undersigned hereby designates all courts of record sitting in
Cincinnati, Ohio and having jurisdiction over the subject matter, state and
federal, as forums where any action, suit or proceeding in respect of or arising
from or out of this Note, its making, validity or performance, may be prosecuted
as to all parties, their successors and assigns, and by the foregoing
designation the undersigned consents to the jurisdiction and venue of such
courts.
[Remainder of page intentionally left blank. Signature page follows.]
<PAGE> 10
iv
TIME IS OF THE ESSENCE IN THE PERFORMANCE OF THE OBLIGATIONS OF THIS NOTE.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the day
and year set forth above.
BALDWIN PIANO & ORGAN COMPANY,
a Delaware corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
<PAGE> 1
Exhibit 13.1
ABOUT THE COVER
Baldwin Artist Series grand piano models now feature a variety of enhancements
which positively impact tonal characteristics, touch response, aesthetic
qualities and structural attributes. A few examples include piano plates made
with virgin iron ore; one-piece, continuously bent rims constructed entirely of
maple; and enhanced keys and action components. The improvements combined
represent the most substantial changes to the popular grand line in more than
two decades.
Baldwin Piano & Organ Company
1999 Annual Report
4680 Parkway Drive, Mason, Ohio 45040 (513) 754-4500
e-mail: [email protected] web sites: www.baldwinpiano.com & www.pianovelle.com
<PAGE> 2
BALDWIN HIGHLIGHTS
($ millions except per share) 1999 1998 1997
- --------------------------------------------------------------------------------
Net Sales $ 124.3 $ 134.3 $ 128.5*
Net Earnings (loss) (7.7) 0.7 3.6*
Basic Earnings (loss) Per Share (2.24) .21 1.05*
Working Capital 52.5 53.6 47.9
Shareholders' Equity 53.7 61.3 60.8
- --------------------------------------------------------------------------------
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(TM) computerized player piano
systems. Baldwin Pianovelle(TM) digital keyboards.
MARKETS: North America, Asia, South America and Europe.
ANNUAL SALES: $ 79.3 million.
DISTRIBUTION NETWORK: 375 independent dealers and 15 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).
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: $ 45.0 million.
DISTRIBUTION NETWORK: Independent sales representatives.
PLANT SITES: Fayetteville, Arkansas.
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: $ 9.1 million.
DISTRIBUTION NETWORK: More than 500 dealers.
LOCATION: Mason, Ohio.
Retail Financing was acquired by Deutsche Financial Services in March, 2000.
(*)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.
[BAR GRAPH]
NET SALES
1995 1996 1997 1998 1999
$122.6 $115.1 $128.5* $134.3 $124.3
(millions)
[BAR GRAPH]
EARNINGS PER SHARE
1995 1996 1997 1998 1999
$1.16 $0.60 $1.05* $0.21 $(2.24)
(dollars)
[BAR GRAPH]
BOOK VALUE PER SHARE
1995 1996 1997 1998 1999
$15.85 $16.45 $17.66 $17.75 $15.54
(dollars)
[BAR GRAPH]
MUSIC SALES
1995 1996 1997 1998 1999
$79.9 $79.8 $91.0* $89.5 $79.3
(millions)
[BAR GRAPH]
CONTRACT ELECTRONICS SALES
1995 1996 1997 1998 1999
$30.7 $30.9 $35.7 $42.7 $45.0
(millions)
<PAGE> 3
TO OUR SHAREHOLDERS
The year 1999 was one of repeated challenges. The Asian financial crisis
triggered an enormous flood of low-priced Asian piano imports into the United
States in 1998. But for Baldwin, the full impact of the crisis was not truly
felt until 1999, when many of our dealers began the year with large overstocks
of both Baldwin and Asian pianos. This seriously disrupted our traditional
reorder cycle, resulting in sharply lower Music Division sales, a situation that
dragged on well into the second half of 1999.
The dramatic cutbacks in production needed to compensate for the inventory
buildup sharply increased unabsorbed manufacturing overhead, which, together
with lower music sales, were the key contributors to Baldwin's losses in 1999.
Company-wide, net sales from operations were $124 million, down from $134
million in 1998. Net losses were $7.7 million, or $2.24 per share, down from net
income of $737,000 or 21 cents per share, in 1998.
Baldwin took several decisive steps in 1999 to advance its strategic plan
and mitigate the anticipated profit shortfall.
Early in 1999, we consolidated all grand piano assembly operations at the
Company's plant in Trumann, Arkansas, while phasing out these operations at our
Conway, Arkansas, facility. The consolidation was made possible by the 1997
introduction of synchronous manufacturing techniques at our facilities. This
produced a dramatic reduction in floor space at our Trumann plant, providing
ample room for additional assembly operations and enabling Baldwin to realize
annualized savings of $2 million.
Following several years of careful development and capital investment,
the Company brought on line a new supply source for the iron plates that are
critical to the manufacture of pianos. These new, sand-cast plates not only
offer advantages in terms of cost, quality, and reliability, but their
performance and appearance are superior to the plates they replaced. The new
plates, a major element in our upgraded Baldwin Artist Grand, were formally
introduced to enthusiastic dealers at the industry's biggest U.S. trade show in
February 2000.
Earlier, in September, Baldwin announced the sale of its Juarez, Mexico,
facility, recording a one-time gain of $3.6 million. Here too, synchronous
manufacturing techniques allowed us to reduce required floor space by one-half
without any reduction in normal production levels. The sale of this
under-utilized plant, replaced by a far smaller, leased facility in Juarez, will
reduce manufacturing overhead costs and improve overall asset utilization.
In December, Baldwin announced the sale of its two wholly owned retail
financing units - Keyboard Acceptance Corporation and Signature Leasing Company
- - to Deutsche Financial Services (DFS). DFS, a financially strong strategic
buyer with extensive experience in the piano industry, is well positioned to
maintain the long-term dealer relationships and high levels of quality
service that Baldwin dealers have come to expect. Shareholders also stand to
benefit from the deleveraging of our remaining businesses.
All of these important changes reinforce our key objective: focus on
Baldwin's core business of making and selling fine pianos -- competitively
and profitably. The elimination of plant floor space and overhead; superior
asset utilization; more competitively priced materials; and a deleveraging of
our balance sheet will all position Baldwin for profit improvement in 2000.
Operating results for Baldwin's core businesses in 1999 were,
nonetheless, disappointing:
Music Division sales were off 12% in 1999, due largely to overstocked trade
and Baldwin inventories from 1998. Overall consumer demand, however, remained
strong. For Baldwin, the final quarter of 1999 saw a marked pickup in sales,
enabling the Company to begin
Baldwin Piano & Organ Company 1999 Annual Report
2
<PAGE> 4
the new millennium with strong back orders for its products. Baldwin's new
polyester finish, in particular, was especially well received by dealers and
customers, with sizeable back orders reflecting pent-up demand for the new
finish.
We anticipate a return to stability in 2000. Inventories will be back in
line and the benefits associated with consolidation and the new process
start-ups in polyester finishing and piano plates will contribute to improved
performance. The demand for pianos remains solid, and will likely continue to be
strong as long as the U.S. economy remains healthy and interest rates stay at
reasonable levels.
To help boost top-line growth, Baldwin will introduce a number of
innovative products in the first half of 2000. These will include notably
improved models in our popular Artist Grand piano line, a new line of digital
pianos, and a lower-cost alternative to our top-of-the-line ConcertMaster
electronic player system. All are expected to positively impact top-line growth.
In contrast to 1999, when we had to sharply reduce output and trim
inventories, production levels will once again track orders and improve overhead
absorption, addressing the two factors at the heart of this year's weak
performance.
Contract Electronics sales rose 5% in 1999, reflecting continued demand
from new and existing customers. Profits, however, did not materialize as
planned. Significant organizational expenses were incurred as revamping our
supply chain management system, streamlining shop-floor processes, reorganizing
for a team-based alignment with key customers, and introducing tighter inventory
controls all took longer than anticipated to execute.
Nonetheless, with much of the heavy lifting now behind us, we enter 2000
with renewed optimism. Our Contract Electronics business is leaner; product
pricing and cost have been improved for higher margins. The outlook is for
strong demand. Our primary focus in 2000 is a return to profitability.
Retail Financing, Baldwin's point-of-sale consumer financing segment,
turned in a solid performance in 1999, though not as strong as in 1998. Without
a repeat of 1998's heavy promotional spending, the growth in new dollar volume
and new contracts was lower than in 1998. Margins for this business, under
greater pressure because of interest rate hikes, were narrower than a year
earlier. One important goal that Retail Financing did achieve in 1999 was a
sharp reduction in overall account delinquency.
Baldwin came through another tough year in 1999. I believe we weathered
this difficult year as well as circumstances would allow and have emerged a
stronger more competitive company. In 2000, the required pace of change will
slow, as we begin to see additional benefits from last year's many changes.
While there is still much work ahead of us, the outlook for Baldwin Piano &
Organ has improved considerably, and we look forward to rewarding the patient
support of our loyal shareholders.
/s/ Karen L. Hendricks
Karen L. Hendricks
Chairman, Chief Executive Officer and President
Baldwin Piano & Organ Company 1999 Annual Report
3
<PAGE> 5
MUSIC PRODUCTS DIVISION
Results for Baldwin's Music Products Division were disappointing in 1999.
With import-driven trade and warehouse inventories as much as 40% above normal
levels going into the year, sales to our dealers were down across almost every
one of the Company's product lines. Overall piano industry sales to consumers,
however, remained strong throughout the year. Once overstocked inventories are
depleted, our dealer sales should return to normal. This was the experience of
the second half of 1999.
Advancing Baldwin's strategic plan in 1999 produced enormous changes in the
Company's music division: grand piano assembly start-up in our Trumann,
Arkansas plant necessitated a 34% increase in the workforce there;
certification of new plates for every piano size was required; increased output
and finish qualification in the new polyester plant; and the sale of the Juarez
facility, which required a focused effort to locate and build out a newly leased
facility.
Despite a multitude of operational demands, product innovation continued at
a rapid pace in 1999, which will result in the introduction of several important
product upgrades in early 2000. Baldwin's flagship piano, the Artist Grand,
received several significant performance improvements along with an attractive
facelift.
Baldwin's award-winning ConcertMaster computerized player system welcomed a
new family member, ConcertMaster CD. This value-priced version of the popular
ConcertMaster player system retains many of the original's most popular
features. But, unlike ConcertMaster, which is offered only on Baldwin branded
pianos, ConcertMaster CD can be installed in the many millions of cherished
pianos already found in American homes.
Baldwin also introduced a full line of Pianovelle digital pianos in two
distinct series. The RP (Real Piano) Series features realistic acoustic piano
tone and touch while this year's PS (Pattern Series) digitals offer on-board
sequencing, a new vocal harmonizer and nearly twice as many fully orchestrated
rhythm patterns as the Company's earlier models. The new digital pianos were
enthusiastically received by Baldwin dealers at February's NAMM (National
Association of Music Merchants) Trade Show.
Now that many of the Asian economies have begun to improve and Asian
currencies are regaining their value against the dollar, the U.S. piano
marketplace has become less volatile. Baldwin believes the outlook for the
industry is good, supported by a healthy U.S. economy, reasonable interest
rates, and the popularity of computerized/high tech player systems.
CONTRACT ELECTRONICS DIVISION
Sales for Baldwin's Contract Electronics Division (CE) in 1999 grew 5% to
$44.9 million. Results reflected consistent demand from existing customers and
management's desire to moderate growth and allow the division to revamp its
infrastructure, with the goal of returning to profitability in the year 2000.
In 1999, one of the key organizational changes was a strengthening of the
production planning department that schedules customer demand and manages
available manufacturing capacity. The engineering department was reorganized to
apply greater focus to such key areas as design, testing and process control.
The production department increased the number of shifts to improve
responsiveness and to reduce overtime costs. Coupled with other organizational
and key personnel changes in purchasing, CE was able to reduce its total
inventory by $3 million in 1999.
In September, CE completed the first phase of its synchronous manufacturing
project, which yielded several significant benefits. The project cut the
distance that products travel during manufacturing, which freed up floor
Baldwin Piano & Organ Company 1999 Annual Report
4
<PAGE> 6
space, eliminated the cost of non-productive move time and reduced potential
problems associated with excessive handling. In addition, changing critical
in-circuit testing from a stand-alone batch operation to an in-line
manufacturing process improved real-time feedback on product quality, reduced
manufacturing errors and decreased rework costs.
In the second quarter, CE initiated a comprehensive cost containment
program that will continue to improve margins. Every cost was thoroughly
examined and lower cost alternatives were used, where appropriate. Personnel
costs were reduced through a combination of redeployment, attrition and job
elimination.
CE is now prepared to return to meaningful profitability in 2000.
Strategically, Baldwin will continue to avoid the commodity-driven electronics
market in favor of serving the higher margin contract manufacturing needs of the
industrial, instrument and consumer products market segments. While demand from
new and existing customers remains strong, management will continue to pursue a
strategy of controlled growth in the 5% range. Once the changes initiated in
1999 have demonstrated sustained improvement, it will provide a stable platform
for growth and improved performance in the future.
RETAIL FINANCING DIVISION
Facing the growing capital needs of its Retail Financing Division,
consisting of Keyboard Acceptance Corporation (KAC) and Signature Leasing
Company (SLC), Baldwin decided to seek a buyer for these units in July 1999. In
addition to providing KAC and SLC greater access to growth capital, a sale would
sharply reduce Baldwin's debt and allow management to focus greater financial
resources on the Company's core music and contract electronics businesses. After
extensive discussions with several potential buyers, Baldwin reached an
agreement to sell KAC and SLC to Deutsche Financial Services (DFS) for $35
million. The transaction closed in March 2000.
Growth flattened for Baldwin's Retail Financing Division in 1999. In the
absence of 1998's heavy defensive spending, in the form of lower financing
rates, new dollar volume and new contracts were lower than in 1998.
Nevertheless, KAC added a substantial number of new dealers in 1999, expanding
its enrolled dealer base by nearly 20%. KAC and SLC now have active
relationships with approximately one-half of all keyboard dealers in the
industry.
The Division also achieved a major improvement in portfolio quality during
1999. By virtually every measure, delinquencies, gross charge-offs and net
losses all improved dramatically, reaching the lowest levels in several years.
The Company's National Piano Repossession Center in Atlanta, Georgia has also
been a significant factor in loss management. The Center's ability to facilitate
the resale of repossessed instruments avoids potentially contentious price
negotiations with dealers, allowing Baldwin to preserve these valuable
relationships.
Rising interest rates in 1999 put considerable pressure on financing
margins. Industry retail rates, however, moved very little as competitive
lenders sought to preserve market share. This strategy has its limitations and a
general increase in retail rates is expected in 2000. KAC and SLC, of course,
have never competed on price alone. Both have well deserved reputations for
superior service and adhering to reasonable, consistent policies, hallmarks that
are unlikely to change under DFS's management.
Baldwin Piano & Organ Company 1999 Annual Report
5
<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.
HERBERT A. DENTON
President, Providence Capital, 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
DUANE D. KIMBLE
Executive Vice President, Chief Financial Officer and
Corporate Secretary
DANIEL B. BAKER
Senior Vice President, Music Sales
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 sheets of Baldwin Piano &
Organ Company and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
the years 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 audits. The
financial statements of the Company for the year ended December 31, 1997 were
audited by other auditors whose report, dated February 23, 1998, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 1999 and 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, 1999 and 1998,
and the results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
Deloitte & Touche LLP
Cincinnati, Ohio
March 13, 2000
Baldwin Piano & Organ Company 1999 Annual Report
6
<PAGE> 8
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 1999, 1998 and 1997 (In thousands, except earnings per
share)
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 124,289 $ 134,290 $ 143,101
Cost of goods sold 120,902 113,970 115,052
- ---------------------------------------------------------------------------------------------------
Gross profit 3,387 20,320 28,049
Other operating income, net 6,896 1,369 2,017
- ---------------------------------------------------------------------------------------------------
10,283 21,689 30,066
Selling, general and administrative 23,586 24,248 25,257
- ---------------------------------------------------------------------------------------------------
Operating profit(loss) (13,303) (2,559) 4,809
Interest expense 3,519 2,005 1,848
- ---------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations
before income taxes (16,822) (4,564) 2,961
Income tax expense (benefit) (7,221) (1,839) 852
- ---------------------------------------------------------------------------------------------------
Net earnings (loss) from continuing operations (9,601) (2,725) 2,109
Discontinued Operations:
Income from operations of Retail Financing to be
Disposed of (net of income taxes of $1,108 in 1999,
$1,989 in 1998 and $1,363 in 1997) 1,858 3,462 2,340
- ---------------------------------------------------------------------------------------------------
Net earnings (loss) $ (7,743) $ 737 $ 4,449
===================================================================================================
Basic earnings (loss) per share
Earnings (loss) from continuing operations $ (2.78) $ (.79) $ .62
Earnings from discontinued operations .54 1.00 .68
--------- --------- ---------
$ (2.24) $ .21 $ 1.30
- ---------------------------------------------------------------------------------------------------
Weighted average number of common shares 3,455 3,450 3,455
- ---------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share
Earnings (loss) from continuing operations $ (2.78) $ (.79) $ .61
Earnings from discontinued operations .54 1.00 .67
--------- --------- ---------
$ (2.24) $ .21 $ 1.28
- ---------------------------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares 3,455 3,490 3,483
===================================================================================================
See accompanying Notes to Consolidated Financial Statements
</TABLE>
Baldwin Piano & Organ Company 1999 Annual Report
7
<PAGE> 9
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997 (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, 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
Stock grants issued -- 32 -- -- -- 32
Comprehensive income (loss):
Net loss -- -- (7,743) -- -- (7,743)
Foreign currency
translation adjustment -- -- -- 124 -- 124
- -----------------------------------------------------------------------------------------------------------------
Total Comprehensive Income (loss) (7,619)
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 42 $ 12,635 $ 47,777 $ (270) $ (6,496) $ 53,688
=================================================================================================================
See accompanying Notes to Consolidated Financial Statements
</TABLE>
Baldwin Piano & Organ Company 1999 Annual Report
8
<PAGE> 10
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998 (In thousands)
<TABLE>
<CAPTION>
Assets 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 1,705 $ --
Receivables, net 11,703 14,280
Installment receivables retained 5,344 7,031
Inventories 38,786 51,089
Deferred income taxes 9,838 2,347
Other current assets 2,974 1,066
Net assets of discontinued operations 21,748 21,642
- -----------------------------------------------------------------------------------------------------
Total current assets 92,098 97,455
- -----------------------------------------------------------------------------------------------------
Property, plant and equipment, net 20,985 22,724
Deferred income taxes 874 1,089
Other assets 14,035 13,664
- -----------------------------------------------------------------------------------------------------
Total assets $ 127,992 $ 134,932
=====================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 21,541 $ 11,648
Current portion of long-term debt 12,765 11,380
Income taxes payable 1,855 452
Accrued liabilities 3,393 4,295
- -----------------------------------------------------------------------------------------------------
Total current liabilities 39,554 27,775
- -----------------------------------------------------------------------------------------------------
Long-term debt, less current portion 32,582 42,817
Other liabilities 2,168 3,065
- -----------------------------------------------------------------------------------------------------
Total liabilities $ 74,304 $ 73,657
- -----------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock (4,220,694 issued shares in 1999 and 1998) 42 42
Additional paid-in capital 12,635 12,603
Accumulated other comprehensive income (loss) (270) (394)
Retained earnings 47,777 55,520
Less cost of treasury shares (767,868 shares in 1999 and in 1998) (6,496) (6,496)
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 53,688 61,275
=====================================================================================================
Total liabilities and shareholders' equity $ 127,992 $ 134,932
=====================================================================================================
See accompanying Notes to Consolidated Financial Statements
</TABLE>
Baldwin Piano & Organ Company 1999 Annual Report
9
<PAGE> 11
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997 (In thousands)
<TABLE>
<CAPTION>
Increase (Decrease) in Cash 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from continuing operating activities:
Net earnings (loss) from continuing operations $ (9,601) $ (2,725) $ 2,109
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,216 2,887 3,421
Gain on sale of assets (5,917) (128) --
Provision for doubtful accounts 192 (313) (2,208)
Deferred income taxes (7,276) (2,020) 1,388
Change in assets and liabilities:
Trade receivables 2,385 (50) (4,930)
Installment receivables retained 1,687 523 (1,074)
Inventories 12,303 (14,440) 19,906
Other current assets (1,908) 585 (377)
Other assets (573) (4,236) (4,961)
Accounts payable, accrued and other liabilities 8,218 (307) 1,171
Income taxes payable 1,403 (123) 421
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) continuing operating activities 4,129 (20,347) 14,866
- -------------------------------------------------------------------------------------------------
Discontinued operations:
Income 1,858 3,462 2,340
Adjustment to derive cash flows from operating activities 360 (3,619) 1,157
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) discontinued operations 2,218 (157) 3,497
- -------------------------------------------------------------------------------------------------
Net operating activities 6,347 (20,504) 18,363
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (2,146) (8,375) (4,996)
Proceeds from sale of assets 6,820 1,437 --
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) continuing investing activities 4,674 (6,938) (4,996)
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowing on short-term debt 1,385 10,380 --
Borrowing (repayment) on long-term debt (10,235) 15,268 (5,700)
Proceeds from exercise of stock options,
net of treasury stock acquired 78 34
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) continuing financing activities (8,850) 25,726 (5,666)
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) discontinued operations (466) 1,592 (8,329)
- -------------------------------------------------------------------------------------------------
Net financing activities (9,316) 27,318 (13,995)
- -------------------------------------------------------------------------------------------------
Net (decrease) increase in cash 1,705 (124) (628)
Cash at beginning of year 124 752
- -------------------------------------------------------------------------------------------------
Cash at end of year $ 1,705 $ 124
Supplemental Disclosure of Cash Flow Information
- -------------------------------------------------------------------------------------------------
Cash paid during the year for: Interest $ 4,255 $ 2,957 $ 3,018
Income taxes (refunded) $ 262 $ (197) $ 527
=================================================================================================
See accompanying Notes to Consolidated Financial Statements
</TABLE>
Baldwin Piano & Organ Company 1999 Annual Report
10
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999, 1998 and 1997 (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.
In 1999, a one-time gain of approximately $3.6 million was recorded on the
sale of the Juarez, Mexico manufacturing facility. This gain is included in
"Other operating income, net" in the accompanying Consolidated Statement of
Earnings for the year ended December 31, 1999. The remaining amount included in
"other operating income, net" in 1999 and in 1998 was primarily comprised of
piano service income, delivery income and late charges on installment
receivables. In 1997, while the Company was shipping on consignment, a monthly
display fee was charged on all consigned inventory held by dealers longer than
90 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 display fee income
composed the majority of the amount reported in the Consolidated Statement of
Earnings as "Other operating income, net."
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.
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.
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 consist primarily of institutional and concert and
artist inventory of $8.5 million and $7.7 million at December 31, 1999 and 1998,
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
Baldwin Piano & Organ Company 1999 Annual Report
11
<PAGE> 13
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 of 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 has 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.
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. In March 1999, the Company entered into a two- year zero
cost interest rate collar agreement to adjust the sensitivity of long-term,
fixed rate installment receivables. The net effect was to provide a collar on
$32 million of installment receivables within which floating interest rates
could
Baldwin Piano & Organ Company 1999 Annual Report
12
<PAGE> 14
move between 4.82% and 6.485%. The Company does not hold or issue derivative
financial instruments for trading purposes. During June 1998, and as
subsequently amended, 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 2001. Management
has not yet determined 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.
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.
RESTRUCTURING CHARGES - 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 consolidation
was completed in mid-1999. The Company incurred 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 approximated $0.5 million. As of December 31, 1999, substantially
all severance payments have been paid and all other exit related cash payments
have been made.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform
with current year financial presentation and to reflect the discontinued
operations of the Company (Note 5).
(2) RECEIVABLES
Receivables consist of the following:
1999 1998
- -------------------------------------------
Trade $12,161 $14,745
Other 441 242
- -------------------------------------------
Total receivables 12,602 14,987
Less allowance for
doubtful accounts 899 707
- -------------------------------------------
Net receivables $11,703 $14,280
===========================================
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. Trade
receivables from two large customers have historically ranged from 10 to 20% of
total accounts receivable. 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, 1999 and 1998.
(3) INVENTORIES
Inventories consist of the following:
1999 1998
- --------------------------------------------
FIFO cost:
Raw materials $17,716 $22,224
Work-in-process 9,247 11,573
Finished goods 22,474 27,492
- --------------------------------------------
49,437 61,289
Less revaluation to LIFO 10,651 10,200
- --------------------------------------------
$38,786 $51,089
============================================
At December 31, 1999 and 1998, approximately 76% and 74%, respectively, of
the Company's inventories were valued on the LIFO method.
Net earnings for 1999 and 1998 are approximately $0.2 million less than
would have
Baldwin Piano & Organ Company 1999 Annual Report
13
<PAGE> 15
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.
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:
1999 1998
- -------------------------------------------
Land $ 346 $ 421
Buildings & building
equipment 17,439 15,406
Machinery & equipment 18,966 18,773
Leasehold improvements 692 718
Construction in process 3,364 6,012
- -------------------------------------------
40,807 41,330
Less accumulated
depreciation &
amortization 19,822 18,606
- -------------------------------------------
$20,985 $22,724
===========================================
Depreciation expense was $2.9 million, $2.6 million and $3.1 million for
the years ended December 31, 1999, 1998 and 1997, respectively. See Note 6 for
information regarding the use of property, plant and equipment to secure
borrowings.
(5) DISCONTINUED OPERATIONS
In July, 1999, the Company adopted a formal plan to sell the stock of its Retail
Financing subsidiaries (Retail Financing) and in December 1999, the Company
entered into an agreement with Deutsche Financial Services Corporation (DFS) to
sell all of the outstanding stock of Retail Financing for approximately $35
million, subject to certain closing adjustments. The transaction closed in March
2000. The Company expects to record an after-tax gain of approximately $0.7
million in the first quarter of the year ending December 31, 2000. Net assets of
approximately $22 million relating to the sale have been segregated on the
December 31, 1999 balance sheet. Under the terms of the sales agreement with
DFS, the Company is contingently liable and must repurchase all accounts that
become more than 120 days past due during a two-year period after the sale
closing date. The Company has segregated such accounts on its balance sheet as
"installment receivables retained."
The results of operations for all years presented have been restated for the
discontinued Retail Financing operations.
Net Assets of Discontinued Operations:
1999 1998
- ------------------------------------------------------
Installment receivables
owned $ 2,564 $ 2,163
Holdback on accounts
sold 14,801 13,391
Allowance for doubtful
accounts (476) (482)
- ------------------------------------------------------
Installment receivables,
net 16,889 15,072
Deferred income taxes 62 --
Servicing asset 3,264 2,958
Other assets 4,329 6,441
Liabilities (2,796) (2,829)
- ------------------------------------------------------
Net assets of discontinued
operations $ 21,748 $ 21,642
======================================================
Baldwin Piano & Organ Company 1999 Annual Report
14
<PAGE> 16
Condensed statements of earnings of Discontinued Operations are as follows:
1999 1998 1997
- -------------------------------------------------------
Income on
installment
receivables:
Sold $ 7,366 $ 8,671 $ 7,378
Owned 1,455 1,690 1,249
- -------------------------------------------------------
Total revenue 8,821 10,361 8,627
Expenses:
General and
administrative 3,477 2,878 3,032
Provision for
doubtful accounts 1,536 797 1,162
Other operating
income (expense) 241 (102) 287
- -------------------------------------------------------
Operating profit 4,049 6,584 4,720
Interest expense 1,083 1,133 1,017
- -------------------------------------------------------
Earnings before
income taxes 2,966 5,451 3,703
Income taxes 1,108 1,989 1,363
- -------------------------------------------------------
Net earnings of
discontinued
operations $ 1,858 $ 3,462 $ 2,340
=======================================================
The remainder of this footnote discusses Retail Financing's operations
prior to its sale to DFS. The Company sells certain of its keyboard instruments
to customers on the installment method. Installment receivables are recorded at
the principal amount of the contracts. Interest on the contracts is recorded as
income using the interest method. Installment receivables owned by Retail
Financing are net of unearned interest charges of $0.7 million and $1.0 million
Pat December 31, 1999 and 1998, respectively. 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. The installment contracts are written generally at
fixed rates ranging from 11% to 16% with terms extending over three to five
years. Retail Financing continues to service all installment receivables sold.
Retail Financing sells these receivables, up to $150 million, to an
independent third party. 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.
The buyer of the installment receivables earns interest on the outstanding
principal balance of the contracts based upon a floating interest rate provi-
sion. 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. The interest retained by the buyer for 1999, 1998 and 1997
represented an average interest rate of 6.5%, 6.6% and 6.8% respectively.
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, 1999 and 1998, the balance of installment receivables on
which Retail Financing remains contingently liable, is as follows:
1999 1998
- -------------------------------------------
Principal balance of
installment
receivables sold $128,840 $121,093
Less related holdback 14,801 13,391
- -------------------------------------------
Contingent liability $114,039 $107,702
===========================================
The fair value of the principal balance of installment receivables sold
before related purchase discount is $131.0 million and $123.9 million at
December 31, 1999 and 1998, 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%.
Baldwin Piano & Organ Company 1999 Annual Report
15
<PAGE> 17
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," was adopted on January 1, 1997, and
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 purposes of measuring
impairment, the underlying receivables are stratified based on original interest
rates and estimated maturities. As of December 31, 1999 and 1998, Retail
Financing recorded a servicing asset of $3.2 and $2.9 million, respectively. The
fair value of these assets at December 31, 1999 and 1998 approximates their
carrying value.
(6) LONG-TERM DEBT
Long-term debt consists of the following:
1999 1998
- ---------------------------------------------------
Revolving credit agreement $25,082 $34,317
Term loan 8,500 9,500
Inventory purchase and
consignment agreement 11,765 10,380
- ---------------------------------------------------
45,347 54,197
Less maturities due within
one year included in
current liabilities 12,765 11,380
- ---------------------------------------------------
$32,582 $42,817
===================================================
At December 31, 1999, the Company had a long-term, secured $35 million
revolving Credit Facility expiring on October 1, 2000; however, the Company can
terminate the agreement at any time with 60 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, 1999, the Company had approximately $6.2 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 8.5% and 6.9% at December 31, 1999 and 1998,
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, 1999, the Company was in compliance with the amended
terms of the Credit Facility.
In March, 2000, the Company closed a new, 36 month, secured Credit Facility
with a financial institution. Under the terms of the new Credit Facility, the
Company has an available line of credit based on certain percentages of the
carrying amount of the Company's accounts receivable and inventories, up to a
maximum amount of $40 million. The annual rate of interest under the new Credit
Facility is equal to 2.5% above the Commercial Paper Rate. The proceeds from the
new Credit Facility will be used to refinance the old Credit Facility and
provide working capital.
At December 31, 1999, the Company had $8.5 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, 1999,
the annual rate of interest under the term loan was equal to 1.75 percentage
points over the LIBOR rate. The rate was 8.5% and 7.03% at December 31, 1999 and
1998, respectively. The term loan was repaid in March, 2000 using the proceeds
from the sale of Retail Financing.
Substantially all of the 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, a portion of
the Company's
Baldwin Piano & Organ Company 1999 Annual Report
16
<PAGE> 18
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 installment contracts. The agreement expired in
March 1999. The agreement entitled 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 exceeded 6% or required
Retail Financing to pay interest expense to the extent the floating rate is less
than 6%. Under the swap agreement, Retail Financing paid $34,000 in 1999,
$51,000 in 1998, and $65,000 in 1997. In March 1999, the Company entered into a
two-year zero cost interest rate collar agreement to replace this expired swap
agreement. The collar entitles Retail Financing to receive from a counter party,
on a monthly basis, interest income to the extent the floating rate retained by
the buyer of installment receivables exceeds 6.485% or requires Retail Financing
to pay interest expense to the extent the floating rate is less than 4.82%. In
1999, rates did not exceed 6.485% or fall below 4.82%.
The fair value of Retail Financing's interest rate collar agreement at
December 31, 1999 and the swap agreement at December 31, 1998 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, the Company entered into a two-year interest rate cap
agreement in order to reduce the potential impact of increases in interest
rates on $44 million of floating-rate long-term debt. The agreement entitled 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 1999 and 1998, the Company did not receive
interest income for those years.
Due to the short maturity of the interest rate cap agreement, fair market
value approximates carrying value. The carrying amount of the unamortized
premium was $10,000 and $20,000 at December 31, 1999 and 1998, respectively.
The Company is exposed to credit losses in the event of non-performance by
the counterparties to its collar and cap agreements but has no off-balance sheet
credit risk of accounting loss. The Company anticipates, however, that the
counterparties will be able to fully satisfy their 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 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, 1999 and 1998. 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.
1999 1998
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------
Installment
receivables
retained $5,344 $5,120 $7,031 $6,757
Term loan $8,500 $8,500 $9,500 $9,500
=====================================================================
Baldwin Piano & Organ Company 1999 Annual Report
17
<PAGE> 19
The fair value of installment receivables retained 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.
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:
1999 1998 1997
- -------------------------------------------
Current:
Federal $(1,464) $ (104) $ (407)
State 10 167 (242)
Foreign 1,509 118 113
- -------------------------------------------
55 181 (536)
- -------------------------------------------
Deferred:
Federal (6,181) (1,605) 1,014
State (1,095) (415) 374
- -------------------------------------------
(7,276) (2,020) 1,388
===========================================
$(7,221) $(1,839) $ 852
===========================================
Earnings (loss) from continuing operations before income taxes aggregated
$(23) million, $(5.4) million, and $1.8 million for domestic operations and $6.2
million, $0.8 million, and $1.1 million for foreign operations in 1999, 1998 and
1997, 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:
1999 1998 1997
- ----------------------------------------------------
Computed
expected tax
(benefit) $(5,719) $(1,603) $ 1,007
State income taxes,
net of Federal
tax benefit (716) (164) 87
Favorable settlement
- foreign taxes -- -- (300)
Foreign tax rate
differences (596) (101) --
Other (190) 29 58
- ----------------------------------------------------
$(7,221) $(1,839) $ 852
====================================================
The significant components of deferred income tax expense (benefit) are as
follows:
1999 1998 1997
- -------------------------------------------------------
Reserves for
inventories $ -- $ (154) $ 597
Allowance for
doubtful
accounts (52) 134 894
Nondeductible
accruals 514 304 555
LIFO inventory
decrease (737) (384) (539)
Investments in
affiliated
companies (783) --
Net operating loss
carry forwards (7,448)
Other 447 (1,137) (119)
- -------------------------------------------------------
Deferred tax
expense
(benefit) $(7,276) $(2,020) $ 1,388
=======================================================
Baldwin Piano & Organ Company 1999 Annual Report
18
<PAGE> 20
Components of deferred tax balances as of December 31, 1999 and 1998 are as
follows:
1999 1998
- ------------------------------------------------------
Deferred tax assets:
Accounts receivable,
principally due to
allowance for
doubtful accounts $ 242 $ 190
Inventories,
principally inventory
reserves and LIFO
differences 1,084 347
Nondeductible accruals,
principally due to
accrual for financial
reporting purposes 1,734 2,248
Foreign tax credit carry
forwards 806 403
Valuation allowance (806) (232)
Net operating loss
carry forwards 8,178 730
Other 849 586
- ------------------------------------------------------
Total gross
deferred
tax assets $ 12,087 $ 4,272
- ------------------------------------------------------
Deferred tax liabilities:
Property, plant and
equipment,
principally due to
differences in
depreciation (814) (641)
State income taxes (561) (195)
- ------------------------------------------------------
Total gross
deferred tax liabilities (1,375) (836)
- ------------------------------------------------------
Net deferred tax assets $ 10,712 $ 3,436
======================================================
The Company has approximately $0.8 million in foreign tax credits for which
the utilization is uncertain. The Company has reserved for these credits through
a valuation allowance at December 31, 1999. The net operating loss carry forward
at December 31, 1999 expires in years through 2019.
(10) ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following:
1999 1998
- -----------------------------------------
Accrued liabilities:
Compensation
and benefits $1,147 $1,739
Other 2,246 2,556
- -----------------------------------------
$3,393 $4,295
=========================================
Other liabilities:
Deferred
compensation $1,265 $1,398
Postretirement and
postemployment 195 511
Other 708 1,156
- -----------------------------------------
$2,168 $3,065
=========================================
(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:
1999 1998 1997
- -----------------------------------------------
Defined contribution
401(k) $ 517 $ 696 $ 681
Deferred
compensation 136 163 200
Defined benefit 270 266 340
- -----------------------------------------------
$ 923 $1,125 $1,221
===============================================
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
Baldwin Piano & Organ Company 1999 Annual Report
19
<PAGE> 21
obligations, Federal agency obligations, mortgages, corporate bonds and notes,
and common stocks.
Net pension expense for plans included the following components:
Year Ended December 31,
-----------------------
1999 1998 1997
- -----------------------------------------------
Service cost $ 149 $ 160 $ 157
Interest cost 253 240 226
Return on plan assets (216) (222) (282)
Net amortization and
deferral 84 88 239
- -----------------------------------------------
Net periodic pension
expense $ 270 $ 266 $ 340
===============================================
The following table shows reconciliations of
pension plan obligations and assets:
Year Ended December 31,
-----------------------
1999 1998
- -------------------------------------------------
Beginning benefit obligation $ 3,853 $ 3,477
Service cost 149 160
Interest cost 253 240
Benefits paid (116) (100)
Actuarial loss (gain) (589) 76
- -------------------------------------------------
Ending benefit obligation $ 3,550 $ 3,853
=================================================
Beginning fair value of
plan assets $ 2,930 $ 2,568
Actual return on plan assets 216 222
Company contributions 360 340
Benefits paid (116) (100)
Plan expense payments (48) (100)
- -------------------------------------------------
Ending fair value of
plan assets $ 3,342 $ 2,930
=================================================
Funded status of the plan $ (208) $ (923)
Unrecognized actuarial loss
(gain) (228) 336
Unrecognized prior service
cost 431 485
Unrecognized transition
obligation 18 25
Additional minimum liability 0 (99)
- -------------------------------------------------
Prepaid (Accrued) pension
liability $ 13 $ (176)
=================================================
The weighted average rate assumptions used in determining pension costs and
the benefit obligations were:
1999 1998 1997
- ------------------------------------------------
Discount rate 7.8% 6.8% 7.0%
Long-term rate of
return on plan
assets 9.0% 9.0% 8.0%
================================================
(12) SHAREHOLDERS' EQUITY
At December 31, 1999 and 1998, the Company had 14,000,000 shares of $.01 per
value common stock authorized and 4,220,694 shares issued. The Company held
767,868 shares shares in treasury at December 31, 1999 and 1998.
The Company maintains an incentive stock option plan. Under this plan,
options for 300,000 shares of common stock may be granted to key managerial
personnel of the Company. In 1998 the Company adopted an 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, 1999, there were 89,550 additional shares available for
grant under the incentive stock option plan, and 126,000 additional shares
available for grant under the 1998 Omnibus Plan. The per share weighted-average
fair value of stock options granted during 1999, 1998 and 1997 was $4.99, $7.03,
and $6.26, respectively, on the date of the grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1999 -
expected dividend yield of 0%, expected volatility of 32.12%, risk-free interest
rate of 6.9%, and an expected life of 6.5 years; 1998 - expected dividend yield
of 0%, expected volatility of 32.3%, risk-free interest rate of 5.21%,
Baldwin Piano & Organ Company 1999 Annual Report
20
<PAGE> 22
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.
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 (loss) from continuing operations, 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):
1999 1998 1997
- -------------------------------------------------------------
Net earnings (loss)
from continuing
operations:
As reported $ (9,601) $ (2,725) $ 2,109
Pro forma (9,813) (2,926) 1,871
Basic earnings (loss)
per share:
As reported $ (2.78) $ (.79) $ .62
Pro forma (2.84) (.85) .54
Diluted earnings (loss)
per share:
As reported $ (2.78) $ (.79) $ .61
Pro forma (2.84) (.85) .54
=============================================================
Pro forma net earnings reflect only options granted in 1999, 1998 and 1997.
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.
A summary of the activity of the stock option plans follows (In thousands,
except per share data):
Shares Weighted
subject average
to per share
option option price
- -----------------------------------------------
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
Options granted 60 7.66
Options exercised 0 --
Options expired (102) 13.54
- ---------------------------------------------
Balance, December 31, 1999 423 $12.66
=============================================
At December 31, 1999, the range of exercise prices was $7.63 - $17.25, and
weighted-average remaining contractual life of outstanding options was seven
years.
At December 31, 1999 and 1998, the number of options exercisable was 307,410
and 301,410, respectively, and the weighted-average exercise price of those
options was $13.20 and $13.19, 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
Baldwin Piano & Organ Company 1999 Annual Report
21
<PAGE> 23
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.
(13) EARNINGS PER SHARE FROM CONTINUING OPERATIONS
(In thousands, except per share data):
<TABLE>
<CAPTION>
Net earnings Shares Per share
1999 (Numerator) (Denominator) amount
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings (loss) per share:
Net earnings available to common shareholders $ (9,601) 3,455 $ (2.78)
Effect of dilutive securities stock options -- -- --
- -----------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Earnings available to common stockholders and
assumed conversions $ (9,601) 3,455 $ (2.78)
=========================================================================================
1998
- -----------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Net earnings available to common shareholders $ (2,725) 3,450 $ (.79)
Effect of dilutive securities stock options -- 40 --
- -----------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Earnings available to common stockholders and
assumed conversions $ (2,725) 3,490 $ (.79)
=========================================================================================
1997
- -----------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings available to common shareholders $ 2,109 3,435 $ .62
Effect of dilutive securities stock options -- 48 --
- -----------------------------------------------------------------------------------------
Diluted earnings per share:
Earnings available to common stockholders and
assumed conversions $ 2,109 3,483 $ .61
=========================================================================================
</TABLE>
Baldwin Piano & Organ Company 1999 Annual Report
22
<PAGE> 24
Options to purchase 50,600 shares of common stock were outstanding in 1997,
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.
(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, 1999 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, 1999, require rental payments of $2.2 million, $2.1 million, $1.8
million, $1.6 million and $1.4 million for the years 2000 through 2004,
respectively, and $4.1 million for years thereafter. Lease expense for all
operating leases was $2.2 million, $1.6 million, and $1.9 million for 1999, 1998
and 1997, respectively.
(15) SEGMENT INFORMATION
The Company operates in two segments, Music and related and Contract
Electronics.
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.
The Contract Electronics segment assembles printed circuit boards and
electromechanical devices for original equipment manufacturers (OEMs) outside
the music industry.
1999 1998 1997*
- --------------------------------------------------------------
Music & related $ 79,315 $ 91,567 $ 107,492
Contract Electronics 44,974 42,723 35,609
- --------------------------------------------------------------
Sales and other
revenue $ 124,289 $ 134,290 $ 143,101
=============================================================
Music & related $ (5,089) $ 4,269 $ 10,478
Contract Electronics (1,162) 56 1,374
Corporate G&A &
Other
Unallocated (7,052) (6,884) (7,043)
- --------------------------------------------------------------
Operating profit
(loss) $ (13,303) $ (2,559) $ 4,809
=============================================================
Music & related $ 65,890 $ 74,549 $ 53,096
Contract Electronics 19,154 24,701 23,581
Discontinued
Operations 21,748 21,642 19,615
Corporate G&A 21,200 14,040 13,031
- --------------------------------------------------------------
Identifiable
assets $ 127,992 $ 134,932 $ 109,323
=============================================================
Music & related $ 1,696 $ 1,618 $ 2,230
Contract Electronics 618 762 721
Discontinued
Operations 39 40 34
Corporate G&A 863 467 436
- --------------------------------------------------------------
Depreciation &
amortization $ 3,216 $ 2,887 $ 3,421
=============================================================
Music & related $ 1,999 $ 7,764 $ 3,705
Contract Electronics 103 175 1,132
Discontinued
Operations 0 65 52
Corporate G&A 44 371 107
- --------------------------------------------------------------
Capital additions $ 2,146 $ 8,375 $ 4,996
=============================================================
*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 Company uses the LIFO method of valuing Music and related products
inventory and the FIFO method for Contract Electronics inventory.
Baldwin Piano & Organ Company 1999 Annual Report
23
<PAGE> 25
(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, 1999 and 1998 are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
1999 First Second Third Fourth Year
====================================================================================================================
<S> <C> <C> <C> <C> <C>
Net sales $ 30,514 $ 28,544 $ 29,106 $ 36,125 $ 124,289
- --------------------------------------------------------------------------------------------------------------------
Gross profit 2,629 3,736 (1,927) (1,051) 3,387
- --------------------------------------------------------------------------------------------------------------------
Net earnings (loss) from Continuing
operations $ (2,408) $ (2,132) $ (1,776) $ (3,285) $ (9,601)
- --------------------------------------------------------------------------------------------------------------------
Discontinued Operations:
Income from operations of Retail Financing
to be disposed of 567 770 154 367 1,858
- --------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Earnings (loss) from continuing operations (.69) (.61) (.51) (.95) (2.78)
Earnings from discontinued operations .16 .22 .04 .11 .54
----------- ----------- ----------- ----------- -----------
$ (.53) $ (.39) $ (.47) $ (.84) $ (2.24)
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Earnings (loss) from continuing operations (.69) (.61) (.51) (.95) (2.78)
Earnings from discontinued operations .16 .22 .04 .11 .54
----------- ----------- ----------- ----------- -----------
$ (.53) $ (.39) $ (.47) $ (.84) $ (2.24)
- --------------------------------------------------------------------------------------------------------------------
<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 (loss) from Continuing
operations $ (237) $ (350) $ (579) $ (1,559) $ (2,725)
- --------------------------------------------------------------------------------------------------------------------
Discontinued Operations:
Income from operations of Retail Financing
to be disposed of 607 522 672 1,661 3,462
- --------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Earnings (loss) from continuing operations (.06) (.10) (.16) (.45) (.79)
Earnings from discontinued operations .17 .15 .19 .48 1.00
----------- ----------- ----------- ----------- -----------
$ .11 $ .05 $ .03 $ .03 $ .21
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Earnings (loss) from continuing operations (.06) (.10) (.16) (.45) (.79)
Earnings from discontinued operations .17 .15 .19 .48 1.00
----------- ----------- ----------- ----------- -----------
$ .11 $ .05 $ .03 $ .03 $ .21
====================================================================================================================
</TABLE>
Baldwin Piano & Organ Company 1999 Annual Report
24
<PAGE> 26
FIVE YEAR SUMMARY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Earnings Statement Data: 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 124,289 $ 134,290 $ 143,101 $ 115,070 $ 122,634
Cost of goods sold 120,902 113,970 115,052 92,495 96,333
- ----------------------------------------------------------------------------------------------------------
Gross profit 3,387 20,320 28,049 22,575 26,301
Other operating income, net 6,896 1,369 2,017 3,220 3,703
- ----------------------------------------------------------------------------------------------------------
Gross profit & other operating revenue 10,283 21,689 30,066 25,795 30,004
Selling, general and administrative 23,586 24,248 25,257 23,459 25,204
- ----------------------------------------------------------------------------------------------------------
Operating profit (13,303) (2,559) 4,809 2,336 4,800
Interest expense 3,519 2,005 1,848 2,449 2,084
- ----------------------------------------------------------------------------------------------------------
Earnings (loss)before income taxes
and discontinued Operations (16,822) (4,564) 2,961 (113) 2,716
Income taxes (7,221) (1,839) 852 (175) 919
- ----------------------------------------------------------------------------------------------------------
Net earnings (loss) before
discontinued operations $ (9,601) $ (2,725) $ 2,109 $ 62 $ 1,797
Discontinued operations:
Income from operations of Retail
Financing to be Disposed of
(net of income taxes of $1,108
in 1999, $1,989 in 1998, $1,363
in 1997, $1,223 in 1996 and
$1,442 in 1995) 1,858 3,462 2,340 1,994 2,163
--------- --------- --------- --------- ---------
Net earnings (loss) $ (7,743) $ 737 $ 4,449 $ 2,056 $ 3,960
==========================================================================================================
Basic earnings per share
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing
operations (2.78) (.79) .62 .02 .53
Earnings from discontinued
operations .54 1.00 .68 .58 .63
--------- --------- --------- --------- ---------
Net earnings (loss) $ (2.24) $ .21 $ 1.30 $ .60 $ 1.16
- ----------------------------------------------------------------------------------------------------------
Diluted earnings per share
Earnings (loss) from continuing
operations (2.78) (.79) .61 .02 .52
Earnings from discontinued operations .54 1.00 .67 .57 .63
--------- --------- --------- --------- ---------
Net earnings (loss) $ (2.24) $ .21 $ 1.28 $ .59 $ 1.15
- ----------------------------------------------------------------------------------------------------------
Balance Sheet Data (at December 31): 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Working capital $ 52,544 $ 53,609 $ 47,905 $ 31,462 $ 34,703
- ----------------------------------------------------------------------------------------------------------
Total assets of continuing operations 106,244 113,290 89,708 96,058 83,714
- ----------------------------------------------------------------------------------------------------------
Net assets of discontinued operations 21,748 21,642 19,615 12,443 13,760
- ----------------------------------------------------------------------------------------------------------
Current portion of long-term debt 12,765 11,380 900 30,901 17,646
- ----------------------------------------------------------------------------------------------------------
Long-term debt, less current portion 32,582 42,817 27,650 3,350 4,250
- ----------------------------------------------------------------------------------------------------------
Shareholders' equity 53,688 61,275 60,823 56,275 54,114
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Baldwin Piano & Organ Company 1999 Annual Report
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 1999 COMPARED TO 1998
1999 continued to be a challenging year for Baldwin... one of transition and
change. The Company consolidated its grand piano operations in Trumann,
Arkansas, during the first half of 1999. The Company recognized an after tax
charge of $930 thousand or 26 cents per share for restructuring and other
non-recurring costs associated with the grand piano consolidation during the
first quarter 1999. The annual savings of the grand piano assembly consolidation
will result in annual cost savings after tax of approximately $1.3 million or 38
cents per share.
During 1999, the Company reduced headcount by 209 people or 12.5% to 1,586
people. These reductions in headcount resulted from efficiencies gained from the
grand piano consolidation (95 people) and other consolidation and automation
activities mainly at the Company's manufacturing sites. Most of people
reductions, excluding grand piano assembly consolidation, resulted from
attrition and retirements; however, during the third quarter 1999, the Company
recognized one-time after tax severance costs of $242 thousand or 7 cents per
share. The annual savings of people reductions, excluding the savings from grand
piano assembly consolidation as discussed above, will result in annual after tax
savings of approximately $2.4 million or 70 cents per share, 50% of which was
recognized during 1999.
During the third quarter, the Company sold its Juarez, Mexico facility for $7.2
million resulting in a one-time after tax gain of $3.6 million or $1.04 per
share. As a result of the implementation of synchronous manufacturing
techniques, the Company was able to sell its Juarez facility and move its
operations to a leased facility in Juarez with a 50% reduction in space. Also,
during the third quarter 1999, the Company closely scrutinized its inventory and
recognized a one-time after tax charge of $1.1 million or 32 cents per share to
revalue certain inventories. And, during 1999, the Company announced the sale of
its Retail Finance subsidiaries for approximately $35.0 million, which closed on
March 10, 2000.
The Music Division's challenges have been significant. During
1998, as a result of the Asian economic crisis, the Music Division faced a surge
of low-priced Asian imports. The Company responded during 1998 with a defensive
spending program which offered incentives. As a result of these incentives and a
slow down in the Company's fourth quarter 1998 Music's sales, both the Company
and its dealers began 1999 with approximately $18.0 million more finished goods
than normal. This overstock of inventory resulted in: (a) lower sales in 1999 as
the dealers worked off their excess inventories and (b) significant unfavorable
manufacturing costs as the Company reduced its production to reduce its
inventory during a period of slow sales. The Company estimates that the lower
sales and production adversely impacted 1999 profit by approximately $7.0
million after tax or $2.00 per share. Late in 1999, the Music Division's
inventories, sales and production returned to pre-Asian economic crisis levels.
In early 2000, the Company successfully increased selling prices on many of its
acoustical products.
Net sales of $124.3 million were lower by $10.0 million (7.4%) primarily as a
result of overstocked dealer piano inventories. Sales from the Music Division of
$79.3 million were lower by $12.3 million (13.4%), offset in part by an increase
of $2.3 million (5%) in Contract Electronics sales to $45.0 million. Had the
Company's dealers inventories been at normal levels at the beginning of 1999,
the Company believes that 1999 sales would have been approximately equal to 1998
sales.
Net losses from continuing operations of $9.6 million or $2.78 per share were
$6.9 million or $1.99 worse than the prior year. The sum of 1999 one-time items
previously mentioned produced income of approximately $1.3 million or 38 cents
per share, primarily due to the gain on the sale of
Baldwin Piano & Organ Company 1999 Annual Report
26
<PAGE> 28
the Company's Juarez facility, offset in part by the various other charges. The
single largest contributor to the lower results was the overstock of Music
finished goods, which the Company estimates adversely impacted results by $7.0
million or $2.00 per share. The remaining adverse difference of $1.2 million or
37 cents per share was caused by higher interest expense of 28 cents per share
resulting from higher debt levels due to higher inventory during most of 1999
and due to operating losses.
1999 Income from the discontinued Retail Finance operations of $1.9 million or
54 cents per share was lower by $1.6 million or 46 cents per share compared to
1998 as a result of: (1) application of FASB No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," of $1.0
million or 28 cents per share; (2) lower spreads on installment receivables sold
of $0.5 million or 15 cents per share, due to increases in interest rates; and
(3) increases in operating expenses and provisions for bad debts of $0.6 million
or 16 cents per share. These were offset in part by income from growth in the
portfolio of $0.4 million or 13 cents per share. The portfolio increased 11% to
an average outstanding balance of $133.8 million. The Company completed the sale
of its Retail Finance subsidiaries to Deutsche Financial Services on March 10,
2000 for gross proceeds of approximately $35.0 million. The Company expects to
recognize an after-tax gain of 20 cents per share in the first quarter 2000.
Deutsche Financial Services is a financially strong strategic buyer with
extensive knowledge of the piano business. They are in an excellent position to
maintain KAC's long-term dealer relationships and continue the high quality
service that Baldwin dealers have come to expect. Based on Baldwin's strong
relationship with DFS, DFS's relationship with piano dealers, including
Baldwin's, and other sources of available financing to piano consumers, the
Company expects that the sale of Retail Financing will have no adverse impact on
its piano business.
1998 COMPARED TO 1997
1998 was also 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, the result was both lower sales and margins
on vertical pianos. Contract Electronics achieved sales growth of 20%, but
profits were lower. 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, thereby increasing
the number of contracts sold.
Net sales in 1998, 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 losses from continuing operations for 1998, excluding 1997's impact of $0.9
million related to the one-time phase-out of consignment, was $2.7 million or
$0.79 cents per share, down from income of $1,209 million or $0.37 cents per
share in 1997. The Music Division's profits in 1998 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-
Baldwin Piano & Organ Company 1999 Annual Report
27
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
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 lower (or $0.06 per share) than the amount that would have been
reported had the first-in, first-out (FIFO) method been used.
All other changes in net earnings ($0.04 per share unfavorable) are primarily
due to higher interest expenses.
Income from discontinued operations of $3.5 million or $1.00 per share was
better than the prior year results of $2.3 million or 68 cents per share.
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 of future period earnings as a
result of SFAS No. 125 will be less than that experienced during 1998 and 1997.
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 and 1999 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 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 the floating interest rates on a substantial
portion of the Company's indebtedness.
In November 1997 and December 1998 the Company entered into two-year interest
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, 1999, the Company has
Baldwin Piano & Organ Company 1999 Annual Report
28
<PAGE> 30
outstanding indebtedness of $45.4 million. Net proceeds from the sale of the
Company's Retail Finance subsidiaries of $32.5 million will be used to reduce
outstanding indebtedness by $21.5 million and certain trade payables by $11.0
million. The Company believes that cash flow will be sufficient to support
operations based on cash provided from operations, available borrowings and
proceeds from the sale of its Retail Finance subsidiary.
In March, 2000, the Company closed a New, 36 month, secured Credit Facility with
a financial institution. Under the terms of the New Credit Facility, the Company
has an available line of credit based on certain percentages of the carrying
amount of the Company's accounts receivable and inventories, up to a maximum
amount of $40 million. The annual rate of interest under the New Credit Facility
is equal to 2.5% above the Commercial Paper Rate. The proceeds from the New
Credit Facility will be used to refinance the Old Credit Facility and provide
working capital.
On October 16, 1997, the Company replaced its prior short-term $50 million
revolving line of credit with a long-term, secured $35 million revolving Credit
Facility (Old) expiring on October 1, 2000; however, the Company can terminate
the agreement at any time with sixty days' notice without penalty. Under the Old
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 Old 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, 1999, the rate under the Old Credit Facility was 8.5% and the Company had
approximately $6.2 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.
The next three paragraphs are information related to Retail Financing's
operations prior to the sale to DFS. 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.
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 an uncollectible
receivables.
Capital expenditures amounted to $2.1 million, $8.4 million, and $5.0 million
for 1999, 1998 and 1997, respectively. As of December 31, 1999,
Baldwin Piano & Organ Company 1999 Annual Report
29
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
the Company had less than $1.0 million in outstanding capital commitments. The
Company expects 2000 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 the commodity price of wood used in the manufacturing process.
At December 31, 1999, the carrying value and estimated fair value of Company's
debt totaled $45.4 million. All of the Company's debt at December 31, 1999, 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.
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 could have recognized a date using
"00" as the year 1900 rather than the year 2000, which would result in
miscalculations or system failures. The Company experienced no problems as a
result of the Year 2000 problem at the turning of the millennium with its system
or equipment. Further, the Company was not affected by any Year 2000 problems
resulting from failure of its customers', suppliers' or utility providers'
systems or equipment.
The Company's major computer systems consist of third-party software. The
conclusion of the Company's research was that the latest existing releases of
this software contained 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. The Company implemented third-party releases
that it believed were Year 2000 compliant for all of its software. The Company
spent approximately $0.5 million on these releases during 1998, and an
additional $0.1 million during 1999, which amounts were planned expenditures
irrespective of any Year 2000 issues. The Company thoroughly tested its software
for compliance. Costs of addressing potential problems did not have a material
adverse impact on the Company's financial position, results of operations or
cash flows.
The Company's compliance plan included review of Year 2000 readiness of its
major manufacturing equipment, products, suppliers, and customers. The Company
had no Electronic Date Interchange (EDI) interfaces with either its customers or
vendors.
Baldwin Piano & Organ Company 1999 Annual Report
30
<PAGE> 32
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, and (vi) a shift in strength of the
overall U.S. economy thereby possibly reducing durable goods purchases.
Baldwin Piano & Organ Company 1999 Annual Report
31
<PAGE> 33
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; Lansing, Michigan
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 29, 2000, 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>
1999 1998
Common Stock Price Range High Low High Low
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $11 1/2 $ 7 1/2 $ 17 $ 15 1/2
Second Quarter 9 5/8 7 1/8 16 7/8 14 7/8
Third Quarter 9 1/4 6 15 3/4 10 3/4
Fourth Quarter 9 1/4 7 11 3/4 8 1/2
</TABLE>
BALDWIN
<PAGE> 1
Exhibit 22.1
SUBSIDIARIES OF REGISTRANT
Jurisdiction of
Name Incorporation
---- -------------
The Wurlitzer Company Delaware
Baldwin Trading 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
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-53809, 333-65947, and 333-3775 of Baldwin Piano & Organ Company on Form S-8
of our reports dated March 13, 2000, appearing in and incorporated by
reference in this Annual Report on Form 10-K of Baldwin Piano & Organ Company
for the year ended December 31, 1999.
Deloitte & Touche LLP
Cincinnati Ohio
March 30, 2000
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Baldwin Piano & Organ Company:
We consent to the incorporation by reference in each of the registration
statements (File Nos. 33-53809, 333-65947 and 333-3775) on Form S-8 of Baldwin
Piano & Organ Company of our report dated February 23, 1998, relating to the
consolidated statements of earnings, shareholders' equity and cash flows for
the year ended December 31, 1997, and the related schedule, which report appears
in the December 31, 1999 annual report on Form 10-K of Baldwin Piano &
Organ Company.
KPMG LLP
Cincinnati, Ohio
March 30, 2000
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,705
<SECURITIES> 0
<RECEIVABLES> 17,946
<ALLOWANCES> 699
<INVENTORY> 38,786
<CURRENT-ASSETS> 65,006
<PP&E> 40,807
<DEPRECIATION> 19,822
<TOTAL-ASSETS> 127,992
<CURRENT-LIABILITIES> 39,554
<BONDS> 32,562
0
0
<COMMON> 42
<OTHER-SE> 53,646
<TOTAL-LIABILITY-AND-EQUITY> 127,992
<SALES> 124,289
<TOTAL-REVENUES> 131,185
<CGS> 120,902
<TOTAL-COSTS> 120,902
<OTHER-EXPENSES> 23,195
<LOSS-PROVISION> 391
<INTEREST-EXPENSE> 3,519
<INCOME-PRETAX> (16,822)
<INCOME-TAX> (7,221)
<INCOME-CONTINUING> (9,601)
<DISCONTINUED> 1,858
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,743)
<EPS-BASIC> (2.24)
<EPS-DILUTED> (2.24)
</TABLE>
<PAGE> 1
Exhibit 99.4
Contacts: Duane Kimble Ken Di Paola or Joel Pomerantz
Baldwin Piano The Dilenschneider Group
(513) 754-4647 (212) 922-0900
BALDWIN REPORTS 1999 FINANCIAL RESULTS
FOURTH-QUARTER SALES RETURN TO NORMAL LEVELS
MASON, OHIO, March 13, 2000--Baldwin Piano & Organ Company (NASDAQ:BPAO)
today reported results of operations for the fourth quarter and 12 months ended
December 31, 1999. Earlier today, Baldwin announced that it completed the sale
of its two wholly owned retail financing units, recording an after-tax gain of
$700,000, or 20 cents per share. Results for the business units that were sold
appear as discontinued operations in the company's financial statements.
For the fourth quarter, Baldwin reported a net loss of $2,918,000, or
84 cents per share, on sales of $36.1 million. Last year the company reported
fourth-quarter net income of $102,000, or 3 cents per share, on sales of $36.2
million. For all of 1999, Baldwin reported a net loss of $7,743,000, or $2.24
cents per share, on sales of $124.3 million, compared with 1998 net income of
$737,000, or 21 cents per share, on sales of $134.3 million.
The reported fourth-quarter loss includes net income from the Retail
Finance subsidiary (discontinued operations) of $367,000, or 11 cents per share,
versus $1,661,000, or 48 cents per share, for the same period a year ago. These
discontinued operations contributed $1,858,000, or 54 cents per share, to net
income in 1999, versus $3,462,000, or $1.00 per share, in 1998.
Karen L. Hendricks, chairman, president, and chief executive officer of
Baldwin said, "The year 1999 was one of repeated challenges. The Asian financial
crisis triggered an enormous flood of low-priced Asian piano imports into the
U.S. in 1998. But for Baldwin, the full impact of the crisis was not truly felt
until 1999, when many Baldwin dealers began the year with large overstocks of
pianos. This seriously disrupted our traditional reorder cycle, resulting in
sharply lower Music Division sales, a situation that dragged on well into the
second half of 1999."
-more-
<PAGE> 2
-2-
"The dramatic cutbacks in production needed to compensate for the inventory
buildup sharply increased unabsorbed manufacturing overhead, which, together
with lower music sales, were the key contributors to Baldwin's losses in 1999.
We would attribute nearly all of Baldwin's operating loss to these two factors."
Ms. Hendricks added, "As expected, sales of music products returned to
normal levels in the fourth quarter. Music sales for the quarter rose to $25.6
million, up from $17.9 million in the third quarter and $25.1 million a year
ago. Inventories are again at normal seasonal levels and the benefits associated
with grand piano consolidation and the new process start-ups in polyester finish
and piano plates will contribute to improved performance this year. The demand
for pianos remains solid, and will likely continue strong, as long as the U.S.
economy remains healthy and interest rates stay at reasonable levels. Looking
ahead, we feel we have an aggressive but realistic business plan that is clearly
focused on returning stability and profitability to the company in 2000."
At Contract Electronics, 1999 sales grew five percent to $45.0 million,
up from $42.7 million in 1998. Demand from new and existing customers remains
strong. However, to ensure the many operational changes made in 1999 resulted in
sustained improvement, management will continue to pursue a strategy of
controlled growth in the five percent range.
Baldwin Piano & Organ Company has marketed music products for over 138
years. Baldwin, maker of America's best selling pianos, also manufactures
electronic and electro-mechanical components for Original Equipment
Manufacturers.
# # #
Note: In addition to reflecting Baldwin's former Retail Financing
subsidiaries as discontinued operations in the company's financial
statements, the attached schedules include a December 31, 1999
consolidated summary balance sheet and an unaudited pro forma schedule
illustrating the impact of the sale on Baldwin's balance sheet going
forward.
"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.
