Sunday, June 09, 2002

Baldwin now just a fading note

Creditors, former shareholders sue, saying ex-directors wrecked company

By Mike Boyer,
The Cincinnati Enquirer

        A year after Baldwin Piano & Organ Co. sought bankruptcy reorganization, little remains in Cincinnati of the 140-year-old piano-making icon.

Baldwin pianos are now manufactured by the Gibson Musical Instrument Co.
        The company's corporate office in Deerfield Township, which employed fewer than three dozen, was closed after Baldwin was acquired by the Gibson Musical Instrument Co., and those functions were merged with Gibson's offices in Nashville, Tenn.

        Baldwin's retail presence, which consisted of five outlets in Greater Cincinnati, is now represented by Seta Music, a dealership opened last month on Kenwood Road by former Baldwin sales executive Frank Seta.

        The company's name has even been removed from its filing in U.S. Bankruptcy Court here after sale of the name and other assets to Gibson last fall. For bankruptcy purposes, the company is known as Dwight's Piano Co., a reference to Dwight H. Baldwin, the piano teacher who started the business in downtown Cincinnati in 1862.

        That hasn't stopped former shareholders and unsecured creditors from forming an unusual alliance. They are bringing a lawsuit in bankruptcy court seeking damages from former Baldwin chairwoman Karen Hendricks and six other former directors, saying they wrecked the company.

        “The principal allegations of this action are that the director defendants ignored numerous direct warnings and "red flags' about the company's deteriorating financial situation from other directors, outside auditors, employees and retail dealers and “then failed to undertake an informed and independent investigation, and published misleading public statements and filings, while continuing to blindly follow the lead of (Mrs.) Hendricks,” the lawsuit says.

        The lawsuit further maintains that Mrs. Hendricks put her interests above those of the company by persuading the board to extend and revise her employment agreement, including a more than $1 million bonus if she was able to sell a portion of the company.

        Mrs. Hendricks, who retired, left the company in early 2001 shortly before the company sought Chapter 11 protection and was never paid the bonus.

        She said there's no basis for the lawsuit.

        “We had a strong board, with seasoned board members, and a strong board process,” she said.

        “The decisions we made were based on the data we had at the time and were the best decisions we could have made,” she said.

        The suit also names former directors Joseph Head Jr., George Castrucci, Roger L. Howe, William B. Connell, John H. Gutfreund and James T. Heffernan, as well as unnamed “John Doe” directors.

        Attempts to reach the other directors named in the suit for comment were unsuccessful.

        Richard Harrison, who was part of a leveraged buyout of Baldwin in the early 1980s, quit Baldwin's board in 1996 when other directors refused to fire Mrs. Hendricks. “It's too late to save the company, but it's not too late for this type of action,” he said.

        “I've been asking since 1996 when the board didn't do something. I still can't answer that question.”

        The real target of the lawsuit is about $40 million in liability insurance that the company carried on its officers and directors.

        With the sale of Baldwin's operating assets, including its two Arkansas manufacturing plants, to Gibson in November, the company's only remaining assets were claims against former officers and directors and so-called avoidance actions. Those included payments made by the company shortly before the bankruptcy filing May 31, 2001, which could become part of the bankruptcy estate, said Timothy Hurley, Baldwin's bankruptcy lawyer.

        Richard Robinson, Orlando lawyer for Baldwin's unsecured creditors' committee, said the group is still exploring the avoidance actions but thinks that the lawsuit against the former directors represents the largest potential recovery for the creditors and shareholders.

        “We believe the claims are good,” he said. “We're optimistic, although we don't know what the claims are worth. We think it will be significant.”

        The unsecured creditors and shareholders have retained Cincinnati lawyer Rick Wayne of the Strauss & Troy law firm to handle the lawsuit. Mr. Wayne specializes in shareholder class-action lawsuits.

        To bolster its case, the shareholder group retained a forensic accounting firm to examine Baldwin's financial records. The group is led by Florida investor Kenneth Pavia, a longtime critic of Mrs. Hendricks who succeeded her as chairman.

        Mr. Pavia didn't return a phone call, but the lawsuit says annual sales forecasts were the underpinnings of the company's business plans.

        “In early 1996, Baldwin's outside auditors alerted the board that management's aggressive sales forecasts were causing a significant inventory buildup,” the suit says.

        “This could (and did in fact) lead to materially overstated assets, understated operating expense and overstated earnings through at least fiscal 2000, culminating in insolvency and a massive inventory write-off.”

        Bob Jones, a piano industry executive, succeeded Mrs. Hendricks as CEO a year ago, shortly before the company sought Chapter 11 bankruptcy protection. He said one of the biggest problems the business faced was excess inventory — estimated at almost $40 million — about twice as much as a company Baldwin's size would normally carry.

        Through most of last summer, Mr. Jones — who rejoined his former employer Samick, a Korean piano maker — and others struggled to keep Baldwin afloat while it tried to work out a way to repay creditors. The largest was GE Capital Corp., Baldwin's secured lender, which was owed about $26 million.

        In the end, Mr. Hurley, Baldwin's bankruptcy lawyer, said the Sept. 11 terrorist attacks made a sale of the business almost inevitable. Baldwin typically sold about 20,000 pianos annually, but half of those occurred in the last four months of the year. In the wake of Sept. 11, sales of big-ticket items such as pianos came to a standstill.

        During an all-day auction Oct. 15, GE Capital, which continued to fund Baldwin's operations in bankruptcy, acquired Baldwin's assets for $17 million and then resold the company to Gibson for an undisclosed price.

        Henry Juszkiewicz, Gibson's CEO, who revived the guitar maker's fortunes after acquiring it in 1986, said he hoped to do the same thing with Baldwin.

        Brian Majeski of Music Trades, an industry publication, said it's still too early to know how successful Gibson will be.

        “They've had some interesting promotional ideas, which have raised the visibility of the brand,” he said. Those include a recent W.C. Handy music festival in Memphis that featured Baldwin pianos.

        One of Gibson's first moves was dropping about 200 of Baldwin's smaller dealers, some of whom were critics of Mrs. Hendricks' management. They had to be willing to commit to buying at least $300,000 in pianos annually.

        Bill Dollarhide, a Pensacola, Fla., dealer, said smaller stores like his couldn't afford to carry that much inventory.

        Mr. Dollarhide said he bears no bitterness toward Gibson.

        “I wish them the best of luck,” he said. He recently agreed to become a dealer for Baldwin rival Steinway & Sons.


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