<PAGE>   1
                                                                    Exhibit 13.1



                                                                         BALDWIN
                                                                          [LOGO]
                                                              1997 ANNUAL REPORT




                MUSIC               RETAIL              CONTRACT


               [PHOTO]             [PHOTO]              [PHOTO]


               PRODUCTS            FINANCING           ELECTRONICS

<PAGE>   2



BALDWIN AT A GLANCE


MUSIC PRODUCTS

PRODUCTS
--------------------------------------------------------------------------------
Grand pianos, vertical pianos, comput-erized auto-player piano systems and
digital pianos.

BRAND NAMES
--------------------------------------------------------------------------------
Baldwin(R), Chickering(R) and Wurlitzer(R) acoustic pianos. 

ConcertMaster(R) computerized player piano systems. 

Baldwin Pianovelle(R) digital keyboards.

Markets
--------------------------------------------------------------------------------
North America, Asia, South America and Europe.

Annual Sales
--------------------------------------------------------------------------------
$ 91.0 Million.

Distribution Network
--------------------------------------------------------------------------------
400 independent dealers and 14 Company-owned stores.

PLANT SITES
--------------------------------------------------------------------------------
Greenwood, Mississippi (piano cases and wood components). 

Trumann, Arkansas (vertical pianos).

Conway, Arkansas (grand pianos). 

Juarez, Mexico (keys and actions).

OUTLOOK
--------------------------------------------------------------------------------
Combined, the Baldwin, Chickering and Wurlitzer brands are the best-selling
acoustic pianos in North America; Pianovelle is the fastest-growing digital
piano in the country and ConcertMaster competes as a top-of-the-line auto-player
system. Innovative products, international opportunities and strengthened
marketing are expected to create demand beyond category growth.

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
--------------------------------------------------------------------------------
$ 8.9 Million.

DISTRIBUTION NETWORK
--------------------------------------------------------------------------------
More than 500 dealers.

LOCATION
--------------------------------------------------------------------------------
Loveland, Ohio.

OUTLOOK
--------------------------------------------------------------------------------
Keyboard Acceptance Corporation has been the leading retail financier of
keyboards for almost a century. Loan portfolio grew by 11 percent in 1997,
fueled by aggressive marketing, intro-duction of new services and a healthy
economy. This trend is expected to continue in 1998.

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
--------------------------------------------------------------------------------
$ 35.7 Million.

DISTRIBUTION NETWORK
--------------------------------------------------------------------------------
Internal and independent sales representatives.

PLANT SITE
--------------------------------------------------------------------------------
Fayetteville, Arkansas.

OUTLOOK
--------------------------------------------------------------------------------
Baldwin competes in the highly fragmented $25 billion electronics manufacturing
services industry in North America. Baldwin Contract Electronics' 1997 growth
rate of 15 percent should continue in 1998.

<PAGE>   3
                                                         FINANCIAL HIGHLIGHTS 



<TABLE>
<CAPTION>
($ millions except per share)                      1995         1996          1997
-----------------------------------------------------------------------------------
<S>                                               <C>          <C>          <C>
Net Sales                                        $ 122.6       $ 115.1      $ 143.1(a)
Net Earnings                                         4.0           2.1          4.4(a)
Basic Earnings Per Share                            1.16          0.60         1.30(a)
Long-Term Debt, including current portion           21.9          34.3         28.6
Working Capital                                     34.7          31.5         47.9
Shareholders' Equity                                54.1          56.3         60.8
Debt to Equity Ratio                                0.40          0.61         0.47 
-----------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
        NET SALES                      BASIC EARNINGS PER SHARE                      BOOK VALUE PER SHARE
      ($ millions)                            (dollars)                                    (dollars)
<S>       <C>       <C>                <C>       <C>       <C>                      <C>       <C>       <C>
1995      1996      1997               1995      1996      1997                     1995      1996      1997
----      ----      ----               ----      ----      ----                     ----      ----      ----
122.6     115.1     143.1              1.16      0.60      1.30                     15.85     16.45     17.66

                          128.5(a)                              1.05(a)               
</TABLE>




<TABLE>
<CAPTION>
      MUSIC SALES                   KAC INSTALLMENT PAPER WRITTEN                 CONTRACT ELECTRONICS SALES
     ($ millions)                           ($ millions)                                 ($ millions)
<S>       <C>       <C>                <C>       <C>       <C>                      <C>       <C>       <C>
1995      1996      1997               1995      1996      1997                     1995      1996      1997
----      ----      ----               ----      ----      ----                     ----      ----      ----
79.9      79.8      105.6              69.6      74.2      87.2                     30.7      30.8      35.7

                          91.0(a)

</TABLE>

-------------------------------------------------------------------------------

(a) 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. Without these items, 1997 sales,
    net earnings and basic earnings per share would have been $128.5 million,
    $1.6 million and $1.05, respectively.

----------------------------------------------------------------------------
<PAGE>   4

TO OUR SHAREHOLDERS

[KAREN L. HENDRICKS PICTURED]

AS PROMISED, the pace of positive change at Baldwin accelerated significantly in
1997. Working against the strategic plan we outlined for you a year ago, we have
made substantial progress in modernizing and streamlining our Music business and
laying the foundation needed to accelerate profitable growth in our Retail
Financing and Contract Electronics businesses.

Demand for pianos has increased, and in 1998, as the cost benefits of 1997's
initiatives begin to flow through to our Music business, we anticipate further
progress in improving plant utilization and operating margins. In the coming
year, we will also turn more of our attention to realizing attractive
opportunities for profitable growth in our other two core businesses -- Retail
Financing and Contract Electronics. By achieving a more balanced business mix,
we expect to multiply our growth opportunities and better insulate Baldwin's
earnings against shifts in the business and economic cycles. This is designed to
build additional value for our shareholders in the form of improved earnings
stability.

Before reviewing 1997 with you, I want to recognize the invaluable and tireless
efforts of our employees. They are real professionals one and all, who have
rolled up their sleeves and put their shoulders to the wheel of change. It has

PAGE 2

<PAGE>   5


been an exhilarating, sometimes gut-wrenching, but ultimately satisfying
experience. And while there is certainly more work to be done, we believe you
will be encouraged, as we are, by the significant progress made over the past
year.

In 1997, we laid the essential groundwork needed to improve profits in 1998 and
beyond. During the year, we achieved revenue improvements in each of our core
businesses; negotiated new and more favorable financing arrangements with our
present lender and a new lender; divested non-core businesses; substantially
reduced inventories; improved production turnaround, manufacturing processes,
asset utilization, quality control and engineering support in our music plants;
outsourced transportation of keyboard instruments, dramatically improving
order-to-delivery cycle times to our dealers; created a contract electronics
bonus program to focus management on asset utilization as we grow this business;
added key management personnel in music and contract electronics; and
restructured financing arrangements with our dealers, which improved our balance
sheet and cash flow and enhanced our ability to service, support and supply our
dealer network.

Net sales from operations for 1997 were up 12 percent to $128.5 million,
compared with $115.1 million last year. Total reported 1997 sales of $143.1
million included the one-time impact of our sell-off of consignment inventory,
as we shifted our dealer financing from consignment sales to our new Baldwin
Inventory Finance Program. 


                                                                       PAGE 3


<PAGE>   6


Continuing music operations and contract electronics both achieved double-digit
sales growth, a reflection of a healthy economic climate, more aggressive
marketing strategies and an intense focus on execution. With both of these
businesses demonstrating robust sales potential, we expect sales growth to
continue in the months ahead.

Our Keyboard Acceptance Corporation (KAC), which provides point-of-sale consumer
financing for keyboard instruments, increased its retail financing portfolio by
11 percent this year, while the face value of new financing contracts rose 19
percent versus a year ago. Taken together, KAC and our music business have
historically strengthened each other and will continue to do so in the future,
but there are other growth opportunities as well. While KAC is the domestic
market leader in retail financing of keyboard instruments, we believe there is
still room to grow our financing business beyond the current dealer network. In
late 1997 we also initiated Signature Leasing, to give Baldwin piano customers
another financing option. In the coming year, we expect leasing to continue to
grow as a popular financing tool.

Net earnings for 1997 rose 75 percent to $3.6 million, or $1.05 per share,
excluding the one-time addition of $0.9 million, or 25 cents per share,
attributable primarily to our exit from consignment. Including
consignment-related profits, reported earnings for 1997 were $4.4 million. We
anticipate further improvements in profitability 


PAGE 4

<PAGE>   7

SHAREHOLDER LETTER

throughout 1998, as a result of initiatives involving all three core businesses.
In addition, the impact of efforts begun in 1997 and continuing into 1998 will
generate savings through better supply chain management, manufacturing
efficiencies, and improvements in capacity and asset utilization.

The ongoing strategies we have pursued these past several years have served us
well and remain firmly in place. We will continue to: 1) drive gross margin
improvements in our music and contract electronics plants; 2) focus on
profitable growth in all three core businesses; 3) maintain the pace of
innovation at every level of our organization, and 4) improve asset utilization
via increased throughput and control of working capital. With the changes we
have initiated beginning to yield visible results, the stage is well set to
continue to execute against these successful strategies again in 1998.

If there is one key lesson we revalidated in 1997, it is the power of focus. It
will continue to be our watchword in 1998. For Baldwin, this means focus on
strategy, priorities, execution and our end customers. Making the right choices,
and then working hard to see them executed well, is what we are about. We are
confident that building three strong, resilient businesses will drive profitable
growth and produce enhanced value for our shareholders.



/s/ Karen L. Hendricks

Karen L. Hendricks
Chairman, Chief Executive Officer and President


                                                                        PAGE 5

<PAGE>   8

BALDWIN MUSIC PRODUCTS

         Driven by successful product introductions, aggressive marketing, a
powerful brand name franchise and improved manufacturing efficiencies, Baldwin
Music Products continued to gain sales and earnings momentum, turning in a very
solid performance for the year.

Combined, the Baldwin, Chickering and Wurlitzer brand names are America's
best-selling acoustic pianos, while the Baldwin Pianovelle brand is the nation's
fastest-growing digital piano. In 1997, music product sales from operations
reached $91 million, a strong 14 percent increase over 1996. This put Baldwin
well ahead of the piano industry overall, with the Company's strongest
year-to-year gain since 1988 when Baldwin acquired Wurlitzer. The 14 percent
gain excludes the positive one-time impact of $14.6 million in sales
attributable to the phase-out of dealer consignment sales.

This Division achieved significant market share gains for both acoustic and
digital instruments. On a unit sales basis, Baldwin's acoustic market share rose
from 26 percent to an estimated 28 percent, up for the third straight year. The
two-year-old Pianovelle digital piano line captured an estimated 6 percent share
of this expanding market, moving closer to our year 2000 goal of 10 percent. All
of Baldwin's domestic sales channels -- 400 independent dealers, Company-owned
retail stores, and factory direct sales -- met, or exceeded, 1997 sales targets.


PAGE 6

<PAGE>   9


MUSIC PRODUCTS DIVISION

With the United States accounting for less than 20 percent of the world piano
market, this domestic progress has also energized the Company's international
sales strategy. Baldwin has already developed products designed to appeal
specifically to overseas buyers. In 1998, for the first time in many years,
Baldwin will present its pianos at the Frankfurt Musikmesse in Germany, the
world's largest annual showcase for musical instruments.

Fueling this Division's healthy l997 sales performance was the introduction of
innovative, sales-generating products such as Baldwin's exclusive
ConcertMaster(R) player piano system. Shipments began in the second quarter of
l997. Many families today have the resources and desire to own an elegant
Baldwin grand piano. Now, it can be a useful and satisfying purchase even if no
one in the household plays the piano. The ConcertMaster auto player technology
provides another compelling reason to buy a Baldwin grand -- to both families
and commercial customers such as hotels, restaurants, and lounges. We believe
that up to one in three new grand pianos sold in the United States is now
equipped with some sort of auto-player system. The ConcertMaster competes as a
top-of-the-line unit.

          [Picture of grand piano equipped with Consert Master System]

                BALDWIN CONCERTMASTER COMPUTERIZED PLAYER SYSTEM


                                                                        PAGE 7

<PAGE>   10



Introduction of synchronous manufacturing techniques at all four Baldwin piano
plants continued to impact dramatically on operating efficiency, cycle time and
inventory requirements. By late 1997, the average number of days needed to
fulfill dealer orders for vertical pianos had fallen from 32 to just 18. At the
same time, we reduced our vertical piano inventory by half. In 1998, these
initiatives should result in lower costs, higher gross margins and improved
quality and will be extended to include the Company's grand pianos.

Baldwin undertook several initiatives in 1997 to improve its dealer support
programs. The main initiative was the Baldwin Inventory Finance Program offered
by Baldwin to its dealers in conjunction with Deutsche Financial Services, a
large global commercial finance organization. This program replaced Baldwin's
previous system of consignment, affording dealers more attractive financial
terms, substantially reducing the administrative burdens on Baldwin and giving
our sales force the opportunity to do more selling. More than 78 percent of our
dealers have already chosen Baldwin's new inventory finance program.

Throughout the year, Baldwin's Concert & Artist Division was actively involved
in projects promoting the "Baldwin Sound" through the Company's roster of
celebrated 


PAGE 8

<PAGE>   11


MUSIC PRODUCTS DIVISION

artists from the American classical, pop, and jazz piano worlds. We
also reinforced Baldwin's valued relationships with such prestigious musical
organizations as the Boston Symphony Orchestra, Chicago Symphony Orchestra,
Philadelphia Orchestra, Cincinnati Symphony as well as the world-renowned
Tanglewood Festival Center and John F. Kennedy Center for the Performing Arts.

Yet another source of pride for Baldwin was the early 1998 placement of a 
magnificent ConcertMaster-equipped Baldwin Grand in the family quarters at the 
White House -- a gift to the People of the United States. We believe every home 
deserves a Baldwin.

[Picture of a of Computer]

New Web Site -- An Internet web site has been launched by Baldwin to provide a
convenient way for both web surfers and Baldwin dealers to access information
about the Company and its products. The site may be viewed on any computer that
is equipped to access the Internet. Viewers may also connect to the Baldwin
Pianovelle web site which spotlights the Company's innovative line of digital
pianos.


                   www.baldwinpiano.com or www.pianovelle.com


                                                                        PAGE 9


<PAGE>   12

BALDWIN RETAIL FINANCING

      Keyboard Acceptance Corporation -- Nearly one hundred years ago, Baldwin
recognized that the opportunity to pay over time for such a major purchase as a
piano was a critical element in the consumer's buying decision. That has not
changed, and today Baldwin is the only piano manufacturer that offers in-house
consumer financing.

Baldwin's financing subsidiary, Keyboard Acceptance Corporation (KAC), continued
its growth in 1997 by increasing its outstanding loan portfolio by 11 percent.
The dollar value of new contracts grew by 18 percent as a result of the number
and average value of new contracts written. Over the past five years KAC's
portfolio has grown 75 percent.

No company in the industry knows its dealers and their customers better than
KAC. With a staff that has decades of experience serving the specialized retail
financing needs of the keyboard industry, KAC uses this distinct competitive
advantage to tailor very attractive financing programs, featuring competitive
rates, rent-to-own options, prompt credit approval and other unique dealer
services. KAC's intimate familiarity with the industry has enabled the Company
to forge a unique and mutually beneficial partnership with its dealers, creating
a bond so strong that a number of competitors have abandoned the keyboard
financing niche entirely.


PAGE 10


<PAGE>   13


BALDWIN RETAIL FINANCING


Today the vast majority of KAC's dealers rely on the Company as the primary
credit source for their customers. Many of these dealer relationships have been
built on two or more generations of mutual trust and understanding -- factors
that have played, and will continue to play, a major role in KAC's ongoing
success.

KAC also provides its dealers with the kind of special incentives and local
promotions that drive sales, offering other support services that go well beyond
the industry norm. For example, during 1997 KAC representatives served at more
than 100 major sales events in 25 states. This service allows on-site credit
decisions, helps customers to make financing choices quickly and frees the sales
staff to present products more efficiently. If a creative way can be found to
help a customer obtain the premium product they have always wanted, KAC can do
it. Because KAC's programs have proven so successful, its dealer network has
grown by 40 percent since 1993.

KAC's credit losses have consistently been only a fraction of what the consumer
finance industry as a whole has experienced. When repossessions do occur, KAC
now benefits from its unique ability to resell them at retail, thereby greatly
minimizing any loss, yet providing value to customers.

                       [Picture of a hand holding a pen]

                                                                       PAGE 11

<PAGE>   14


In September 1997, KAC opened the National Piano Repossession Center (NPRC) near
Atlanta, Georgia. The NPRC receives repossessed pianos from all over the
country, reconditions them as needed and sells them in a showroom dedicated
solely to these repossessed instruments. The new center has attracted a steady
stream of eager bargain hunters, many of whom also finance their purchase
through KAC. By eliminating any financial liability for repossessions, the
dealer is free to focus primarily on the sale of new keyboard instruments. This
strategy has substantially enhanced the value dealers place on their
relationship with KAC.

KAC is proud of its long-standing dealer recognition and quality reputation as
the nation's oldest, largest and best known retail finance company exclusively
devoted to serving the keyboard industry. More aggressive marketing,
introduction of new services and a healthy economy helped spur record new
business for KAC in 1997. These same conditions create an exciting future for
KAC and its dealers during 1998.


PAGE 12

<PAGE>   15


BALDWIN RETAIL FINANCING


SIGNATURE LEASING CORPORATION -- Despite the tremendous popularity of consumer
leases for high-ticket purchases, such as boats and automobiles, leasing has
never been broadly available to piano consumers. Baldwin saw this as a major
opportunity and in late 1997 launched Signature Leasing to offer piano buyers
another financing alternative. Early results are encouraging, as dealers and the
Company's own sales force begin to utilize Signature Leasing's potential as a
method to increase piano sales. In 1998, Baldwin will continue to educate both
its sales force and its dealer network about the benefits and selling points of
leasing.


[PICTURE OF A FOUNTAIN PEN AND CONTAINER OF INK]

Signature Leasing -- Signature Leasing is a wholly-owned subsidiary of Baldwin
created to reduce the cash required by the consumer to have one of the Company's
Baldwin, Chickering, Wurlitzer or Pianovelle products. It offers a full range of
proprietary lease programs. Signature Leasing deals exclusively with Baldwin
products and Baldwin's dealers, and is expected to significantly increase their
sales. For those leased keyboard instruments returned at the end of the lease
term, Baldwin has unique refurbishing skills and resources, and a network of
Company stores to profitably sell these renewed instruments.

                                                                       PAGE 13

<PAGE>   16

BALDWIN CONTRACT ELECTRONICS

     WHILE HEIGHTENED BUSINESS COMPETITION on a global scale has made
outsourcing a critical staple of American manufacturing, it has also created
exciting opportunities for technologically proficient, high-quality,
full-service suppliers such as Baldwin Contract Electronics, based in
Fayetteville, Arkansas.

Currently, the North American electronics manufacturing services industry that
serves original equipment manufacturers (OEMs) is a booming $25 billion industry
-- and growing. Yet the sector remains highly fragmented with hundreds of small
players and a few large ones. In this crowded arena, Baldwin is well positioned
for growth.

In 1997, Baldwin's proven reputation for quality, reliability and quick
turnaround increased total sales 15 percent to $35.7 million. New customer sales
accounted for 15 percent of the total. This Division continues to concentrate
its business on higher-margin printed circuit boards and value-added services,
but with focus on asset utilization and operating profitability.

While the manufacture of printed circuit board assemblies still represents
approximately 60 percent of this Division's revenues, Baldwin Contract
Electronics is increasingly providing customers with such higher-margin services
as design, 


PAGE 14

<PAGE>   17

BALDWIN CONTRACT ELECTRONICS


engineering, testing, electromechanical and mechanical assembly, post-production
repair and order fulfillment.

Baldwin has long-standing partnerships with each of its largest customers. In
fact, this Division's 10-year-plus relationship with its top three customers
have grown consistently at an annual compound growth rate of nearly 21 percent
for the last 10 years. Baldwin Contract Electronics has also received numerous
"Outstanding Supplier" awards from its customers, including the 1997 top
supplier award from its largest customer. While this Division continues to build
and strengthen its strategic alliances with core customers, its aggressive
pursuit of "under-outsourced" market segments has already achieved a measure of
success in attracting new business.

In targeting new customers, Baldwin Contract Electronics has set its sights on
the industrial, consumer and business equipment sectors, which have more
recently begun to embrace outsourcing in a major way. Unlike traditional
outsourcing sectors, such as computer and telecommunication manufacturing, where
long-standing outsourcing relationships are already in place, Baldwin Contract
Electronics is targeting those sectors where there is still plenty of room for
outsourcing to grow.

                       [Picture of printed circuit board]

PAGE 15


<PAGE>   18


Mirroring the growth of the overall electronics manufacturing services industry,
Division sales have been expanding rapidly, producing a five-year annual growth
rate of 17 percent, with every indication that double-digit growth will continue
through the end of the decade and beyond.

Baldwin's long reputation for quality and craftsmanship, and Baldwin Contract
Electronics' ability to offer customers a full spectrum of outsourced services
gives this Division a powerful competitive edge. By focusing on outsourcing
services aimed at the low-to-medium volume segment of the market, Baldwin
Contract Electronics has achieved a strategic mix of customers that differs
markedly from the industry as a whole, where 70 percent of the business revolves
around such highly competitive areas as computers, peripherals and
communications.

These same fiercely competitive segments account for only 10 percent of this
Division's output, and with good reason. Major opportunities to add value and
achieve higher margins lie elsewhere, in higher value segments such as medical,
industrial, automotive, consumer, instrumentation and other products. And these
are the principal sectors that Baldwin Contract Electronics will pursue in 1998
and beyond.


PAGE 16

<PAGE>   19

BALDWIN CONTRACT ELECTRONICS


This Division's future prospects have been further enhanced by the recent
appointment of a highly-regarded, long-time senior engineering executive in the
contract electronics industry to direct all Baldwin Contract Electronics
operations.

This Division's strategy rests on maintaining a powerful base of large core
customers, adding new higher-margin business and leveraging Baldwin's strong
reputation for quality. This plan positions Baldwin Contract Electronics to
become a significant contributor to Baldwin's profitability in the years ahead.

[PICTURE OF WOMEN EXERCISING ON STAIRMASTER(R) SPORTS/MEDICAL PRODUCT]

Value-added Services -- The engineering and design expertise of Baldwin Contract
Electronics has helped StairMaster(R) Sports/Medical Products, Inc., a leader in
the health and fitness equipment industry, convert the circuit boards used in
its products to surface mount technology. This advancement has allowed for extra
features in StairMaster's products and enhanced product reliability in the
field. Value-added work such as design and testing presents growth opportunities
for Baldwin Contract Electronics.
                                                                       PAGE 17

<PAGE>   20


BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES


DIRECTORS
----------------------------------------------------------------------------

Karen L. Hendricks
Chairman, Chief Executive Officer and President
Baldwin Piano & Organ Company

George E. Castrucci
Management Consultant, Former Chairman
& Chief Executive Officer of Great American Broadcasting Company

William B. Connell
Lead Director of Baldwin Piano & Organ Company 
Chairman of EDB Holdings, Inc.

John H. Gutfreund
President of Gutfreund & Company Inc.
Retired Chairman and Chief Executive Officer of Salomon Brothers, Inc.

Joseph H. Head, Jr.
Chairman of Atkins & Pearce, Inc.

Roger L. Howe
Retired Chairman of U.S. Precision Lens, Inc.


EXECUTIVE OFFICERS
----------------------------------------------------------------------------

Karen L. Hendricks
Chairman, Chief Executive Officer and President

Stephen P. Brock
Executive Vice President and General Manager, Music Division

Ronald P. Geguzys
Executive Vice President and
General Manager, Contract Electronics Division

Randolph R. Marks
Executive Vice President, Piano Operations

Perry H. Schwartz
Executive Vice President and Chief Financial Officer

George C. Huebner
Senior Vice President and
General Manager, Keyboard Acceptance Corporation

Ronald W. Kruse
Corporate Secretary, Vice President and
General Manager, Signature Leasing Company

----------------------------------------------------------------------------

INDEPENDENT AUDITORS' REPORT

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, 1997 and 1996, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Baldwin
Piano & Organ Company and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.


                                                         KPMG PEAT MARWICK LLP
Cincinnati, Ohio
February 23, 1998


PAGE 18

<PAGE>   21

BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
Consolidated Statement of Earnings
Years ended December 31, 1997, 1996 and 1995 
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
                                                                              1997               1996                1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                 <C>                 <C>      
Net sales                                                                 $143,101           $115,070            $122,634
Cost of goods sold                                                         115,052             92,495              96,333
-----------------------------------------------------------------------------------------------------------------------------
         Gross profit                                                       28,049             22,575              26,301
Income on the sale of installment receivables                                7,378              5,811               4,946
Interest income on installment receivables                                   1,249              1,296                 906
Other operating income, net                                                  2,304              3,476               4,010
-----------------------------------------------------------------------------------------------------------------------------
                                                                            38,980             33,158              36,163
Selling, general and administrative                                         29,451             27,186              27,755
-----------------------------------------------------------------------------------------------------------------------------
         Operating profit                                                    9,529              5,972               8,408
Interest expense                                                             2,865              2,868               2,087
-----------------------------------------------------------------------------------------------------------------------------
         Earnings before income taxes                                        6,664              3,104               6,321
Income taxes                                                                 2,215              1,048               2,361
-----------------------------------------------------------------------------------------------------------------------------
         Net earnings                                                     $  4,449           $  2,056            $  3,960
=============================================================================================================================
Basic earnings per share                                                  $   1.30           $    .60            $    1.16
-----------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares                                     3,435              3,421               3,415
-----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share                                                    1.28           $    .59            $   1.15
-----------------------------------------------------------------------------------------------------------------------------
Weighted average number of common and
     common equivalent shares                                                3,483              3,462               3,434
=============================================================================================================================
</TABLE>

 See accompanying Notes to Consolidated Financial Statements.


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 
Years ended December 31, 1997, 1996 and 1995 
(In thousands)

<TABLE>
<CAPTION>
                                              Common       Additional         Retained           Cost of
                                               stock     paid-in capital      earnings       treasury shares       Total
-----------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>           <C>              <C>               <C>              <C>     
Balance, December 31, 1994                     $ 42           $12,001          $44,318           $(6,207)         $50,154
     Net earnings                                --                --            3,960                --            3,960
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995                       42            12,001           48,278            (6,207)          54,114
     Proceeds from exercise of stock options     --               105               --                --              105
     Net earnings                                --                --            2,056                --            2,056
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                       42            12,106           50,334            (6,207)          56,275
     Proceeds from exercise of stock options     --               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
=============================================================================================================================
</TABLE>

See accompanying Notes to Consolidated Financial Statements.


                                                                      PAGE 19
<PAGE>   22


BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996 (In thousands)

<TABLE>
<CAPTION>
Assets                                                                                         1997                1996
----------------------------------------------------------------------------------------------------------------------------
Current assets:
<S>                                                                                          <C>                 <C>     
     Cash                                                                                    $    680            $    774
     Receivables, net                                                                          23,201              13,933
     Inventories                                                                               36,649              54,453
     Deferred income taxes                                                                      2,460               3,533
     Other current assets                                                                       4,423               4,496
----------------------------------------------------------------------------------------------------------------------------
         Total current assets                                                                  67,413              77,189
----------------------------------------------------------------------------------------------------------------------------
Installment receivables, less current portion                                                  16,502              11,435
Property, plant and equipment, net                                                             18,262              16,479
Other assets                                                                                   12,183               6,961
----------------------------------------------------------------------------------------------------------------------------
         Total assets                                                                        $114,360            $112,064
============================================================================================================================
</TABLE>


<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------------
Current liabilities:
<S>                                                                                          <C>                 <C>     
     Current portion of long-term debt                                                       $    900            $ 30,901
     Accounts payable                                                                          10,812               8,915
     Income taxes payable                                                                         575                 154
     Accrued liabilities                                                                        7,221               5,757
----------------------------------------------------------------------------------------------------------------------------
         Total current liabilities                                                             19,508              45,727
----------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current portion                                                           27,650               3,350
Deferred income taxes                                                                             237                  73
Other liabilities                                                                               6,142               6,639
----------------------------------------------------------------------------------------------------------------------------
         Total liabilities                                                                     53,537              55,789
----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
     Common stock (4,205,094 issued shares in 1997 and 4,175,144 issued shares in 1996)            42                  42
     Additional paid-in capital                                                                12,381              12,106
     Retained earnings                                                                         54,783              50,334
----------------------------------------------------------------------------------------------------------------------------
                                                                                               67,206              62,482
     Less cost of treasury shares (760,380 shares in 1997 and 749,748 shares in 1996)          (6,383)             (6,207)
----------------------------------------------------------------------------------------------------------------------------
         Total shareholders' equity                                                            60,823              56,275
----------------------------------------------------------------------------------------------------------------------------
         Total liabilities and shareholders' equity                                          $114,360            $112,064
============================================================================================================================
</TABLE>

See accompanying Notes to Consolidated Financial Statements.


PAGE 20

<PAGE>   23
BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)

<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH                                                   1997               1996                1995
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                <C>                 <C>
Cash flows from operating activities:
     Net earnings                                                       $    4,449         $    2,056          $    3,960
     Adjustments to reconcile net earnings to net cash
         provided by (used in) operating activities:
              Depreciation and amortization                                  3,421              2,204               2,656
              Gain on sale of assets                                            --                 --                (266)
              Provision for doubtful accounts                                1,466              1,250                 965
              Deferred income taxes                                          1,236              1,069               1,760
              Change in assets and liabilities:
                  Trade receivables                                         (7,471)               161                (956)
                  Inventories                                               17,805            (10,516)                315
                  Other current assets                                          73                223              (1,257)
                  Other assets                                              (5,393)               220                  75
                  Accounts payable, accrued and other liabilities            2,890             (3,486)                758
                  Income taxes payable                                         421               (468)               (899)
----------------------------------------------------------------------------------------------------------------------------
                       Net cash provided by (used in) operating activities  18,897             (7,287)              7,111
----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
     Additions to property, plant and equipment                             (4,996)            (3,602)             (3,934)
     Proceeds from sale of assets                                               --                 --                 839
----------------------------------------------------------------------------------------------------------------------------
                       Net cash used in investing activities                (4,996)            (3,602)             (3,095)
----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
     Installment receivables written                                       (87,186)           (74,244)            (69,555)
     Installment receivables liquidated                                      4,474              6,495               4,839
     Proceeds from sale of installment receivables                          74,383             66,523              60,635
     Net borrowing (repayment) on long-term debt                            (5,700)            12,355                 150
     Proceeds from exercise of stock options                                    34                105                  --
----------------------------------------------------------------------------------------------------------------------------
                       Net cash (used in) provided by financing activities (13,995)            11,234              (3,931)
Net (decrease) increase in cash                                                (94)               345                  85
Cash at beginning of year                                                      774                429                 344
----------------------------------------------------------------------------------------------------------------------------
Cash at end of year                                                    $       680        $       774          $      429
============================================================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
----------------------------------------------------------------------------------------------------------------------------
Cash paid during the year for:   Interest                              $     3,018        $     2,781          $    2,161
                                 Income taxes                          $       527        $       595          $    1,584
============================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.


                                                                         PAGE 21
<PAGE>   24

BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
     The accompanying consolidated financial statements include the accounts of
Baldwin Piano & Organ Company and all of its subsidiaries (Company). All
material intercompany balances and transactions have been eliminated. 

REVENUE RECOGNITION
     Prior to mid 1997, the Company shipped keyboard instruments to a majority
of its dealers on a consignment basis and retained title to each consigned
instrument until it was sold by the dealer. Under consignment, sales are
recorded when the dealer sells an instrument to one of its customers. Starting
in June 1997, the Company phased out its consignment program. For dealers not in
consignment, title is transferred at the time of shipment to the dealer and the
Company recognizes a sale at that time.
     While the Company was shipping on consignment, a monthly display fee was
charged on all consigned inventory held by dealers longer than ninety days. This
display fee, on an annual basis, ranged from 10.5% to 15.5% of the selling price
of such inventory to the dealer. Display fee income comprises 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. 

INSTALLMENT RECEIVABLES
     Installment receivables are recorded at the principal amount of the
contracts. Interest on the contracts is recorded as income using the interest
method.
     The Company's wholly-owned finance subsidiary (Finance) maintains an
agreement with an unconsolidated, qualifying special purpose entity to sell
substantially all of its installment receivable contracts up to a maximum
outstanding principal amount of $150 million. The buyer of the installment
receivables earns interest on the outstanding principal balance of the contracts
based upon a floating interest rate provision. Finance continues to
contractually service all installment receivables sold. Over the lives of the
contracts, the spread between the actual yield on the installment contracts sold
and the amount retained by the buyer under the floating rate provision is
remitted to Finance as a servicing fee. This amount is recorded in the
Consolidated Statements of Earnings as "Income on the sale of installment
receivables". 

ALLOWANCE FOR DOUBTFUL ACCOUNTS
     An allowance for losses on receivables is provided through a charge to
operations based on estimates of possible losses. Accounts deemed to be
uncollectible are charged and recoveries credited to the allowance for doubtful
accounts. 

INVENTORIES
     Inventories are stated at the lower of cost or market. Cost is determined
using the last-in first-out (LIFO) method for a substantial portion of
inventories. Cost for the remaining portion is determined using the first-in
first-out (FIFO) method. 

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:

<TABLE>
<CAPTION>
                Description                        Years
                -----------------------------------------
                <S>                               <C>
                Buildings                         25 - 35
                Building equipment                   5
                Machinery and equipment            3 - 10
</TABLE>

     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.


PAGE 22
<PAGE>   25
OTHER ASSETS
     Other assets consists primarily of goodwill and institutional and display
inventory. Goodwill, which represents the excess of purchase price over the fair
value of the net assets acquired, is amortized on a straight line basis over the
expected periods to be benefited, generally 40 years. The Company evaluates
long-lived assets, including goodwill and other intangibles, based on fair
values or projected undiscounted cash flows whenever significant events or
changes in circumstances occur which indicate the carrying amount may not be
recoverable. 

TAXES ON INCOME
     Deferred income taxes reflect the future tax consequences of differences
between the tax base of assets and liabilities and their financial reporting
amounts at each balance sheet date, based upon enacted income tax laws and tax
rates. Income tax expense or benefit is provided based on earnings reported in
the financial statements. The provision for income tax expense or benefit
differs from the amounts of income taxes currently payable because certain items
of income and expense included in the consolidated financial statements are
recognized in different time periods by taxing authorities. 

STOCK OPTION PLANS
     Prior to January, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the date of
the grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of the grant.
Alternatively, SFAS 123 also allows entities to continue to apply the provisions
of APB 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS 123 had been applied. The Company
has elected to continue to apply the provisions of APB 25 and provide the pro
forma disclosure provisions of SFAS 123. 

RETIREMENT PLANS
     Defined contribution and defined benefit plans cover substantially all
hourly and salaried employees located in the United States. 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
     Financial statements of foreign subsidiaries, where the local currency is
the functional currency, are translated into U.S. dollars at the current
exchange rates except inventories, sales, cost of goods sold and expenses which
are translated at average exchange rates during each reporting period.
Adjustments resulting from the translation of financial statements are recorded
in the results of operations. 

DERIVATIVE FINANCIAL INSTRUMENTS
     Premiums paid for purchased interest rate cap agreements are amortized to
interest expense over the term of the caps. Unamortized premiums are included in
other assets in the Consolidated Balance Sheets. Amounts receivable under cap
agreements are accounted for as a reduction of interest expense. The Company has
an interest rate swap agreement to adjust the interest sensitivity of long-term,
fixed rate installment receivables. Net interest income (expense) resulting from
the differential between exchanging floating and fixed-rate swap interest
payments is recorded on an accrual basis as an adjustment to the interest income
of the associated asset. The Company does not hold or issue derivative financial
instruments for trading purposes. 

EARNINGS PER SHARE
     Effective December 31, 1997, the Company adopted SFAS No. 128 "Earnings Per
Share" which simplifies the standards for computing earnings per share.
Quarterly earnings per share have been restated to reflect the adoption,
however, there was no material impact on the Company's previously reported
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.


                                                                         PAGE 23
<PAGE>   26

TRANSFER AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
     Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
was adopted on January 1, 1997 and provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS 125 requires an entity that sells installment receivables with
contractual servicing rights retained to allocate the previous carrying amount
between the assets sold and any retained interest based on their relative fair
values at the date of transfer. The resulting servicing rights are amortized in
proportion to, and over the period of, estimated net servicing revenues.
Servicing rights are assessed for impairment periodically based on fair value of
estimated future cash flows using discount rates that approximates current
market conditions and expected future prepayment rates, with any impairment
recognized through a valuation allowance. For purposes of measuring impairment,
the underlying receivables are stratified based on original interest rates and
estimated maturities. 

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 effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Future events could affect these
estimates. 

RECLASSIFICATIONS
     Certain prior year amounts have been reclassified to conform with current
year financial presentation.

(2) RECEIVABLES
    Receivables consist of the following (In thousands):

<TABLE>
<CAPTION>
                                                            1997           1996
--------------------------------------------------------------------------------
<S>                                                    <C>            <C>      
Trade                                                  $  14,770       $  9,693
Installment - owned                                       13,447          8,814
Holdback on installment accounts sold                     12,586          9,841
Other                                                        438            558
--------------------------------------------------------------------------------
                                                          41,241         28,906
Less allowance for doubtful accounts                       1,538          3,538
--------------------------------------------------------------------------------
              Net receivables                             39,703         25,368
Less noncurrent portion                                   16,502         11,435
--------------------------------------------------------------------------------
              Net current receivables                  $  23,201       $ 13,933
================================================================================
</TABLE>

      In the normal course of business, the Company extends credit to various
dealers where certain concentrations of credit risk exist. These concentrations
of credit risk may be similarly affected by changes in economic or other
conditions and may, accordingly, impact the Company's overall credit risk.
However, management believes that consolidated trade accounts receivable are
well diversified, thereby reducing potential material credit risk, and that the
allowance for doubtful accounts is adequate to absorb estimated losses as of
December 31, 1997 and 1996.
       Installment receivables owned by Finance are net of unearned interest
charges of $0.7 million and $1.3 million at December 31, 1997 and 1996,
respectively. See Note 5 for additional information on installment receivables
and Note 6 for information regarding the use of receivables to secure
borrowings.


PAGE 24
<PAGE>   27

(3) INVENTORIES
    Inventories consist of the following (In thousands):

<TABLE>
<CAPTION>
                                                            1997           1996
--------------------------------------------------------------------------------
<S>                                                    <C>            <C>      
FIFO cost:    Raw materials                            $  18,406      $  15,540
              Work-in-process                              8,865          8,257
              Finished goods                              19,306         43,623
--------------------------------------------------------------------------------
                                                          46,577         67,420
Less revaluation to LIFO                                  (9,928)       (12,967)
--------------------------------------------------------------------------------
                                                       $  36,649      $  54,453
================================================================================
</TABLE>

     At December 31, 1997 and 1996, approximately 68% and 76%, respectively, of
the Company's inventories were valued on the LIFO method.
     Net earnings for 1997 are approximately $1.8 million greater than would
have been reported had the FIFO method been used. Of that amount approximately
$0.9 million was attributable to the phase-out of the Company's consignment
inventory program. Net earnings for 1996 and 1995 are approximately $0.6 million
and $0.8 million, respectively, less than would have been reported had the FIFO
method been used.
     During 1997 the liquidation of LIFO inventory layers carried at lower costs
prevailing in prior years as compared with the current cost of inventories
decreased cost of sales and, therefore, increased earnings before income taxes
by approximately $5.6 million, offset by the effect of inflation in the current
year 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 (In thousands):

<TABLE>
<CAPTION>
                                                            1997           1996
--------------------------------------------------------------------------------
<S>                                                  <C>            <C>        
Land                                                   $     414      $     414
Buildings and building equipment                          14,462         13,013
Machinery and equipment                                   19,265         18,552
Leasehold improvements                                       549            544
--------------------------------------------------------------------------------
                                                          34,690         32,523
Less accumulated
       depreciation and amortization                      16,428         16,044
--------------------------------------------------------------------------------
                                                       $  18,262      $  16,479
================================================================================
</TABLE>

See Note 6 for information regarding the use of property, plant and equipment to
secure borrowings.

                                                                         PAGE 25
<PAGE>   28

(5) DISCLOSURE REGARDING FINANCE SUBSIDIARY
     The Company sells certain of its keyboard instruments to customers on the
installment method. The Company has a continuing agreement to sell all of its
installment receivables to Finance. Also, Finance purchases installment
receivables for music products from independent retail dealers.
     In 1997, Finance amended its agreement with an independent entity to sell
substantially all of its installment receivable contracts up to a maximum
outstanding principal amount of $150 million. Certain installment receivables
are not eligible for sale and are retained by Finance. Finance continues to
service all installment receivables sold.
     At the time of each installment receivable sale, Finance 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
provision. Over the duration of the contracts, the difference between the actual
yield on the installment contracts sold and the amount retained by the buyer
under the floating interest rate provision is remitted to Finance as a service
fee. This amount is recorded in the Consolidated Statement of Earnings as
"Income on the sale of installment receivables."
     The installment contracts are written generally at fixed rates ranging from
12% to 16% with terms extending over three to five years. The interest retained
by the buyer for 1997, 1996 and 1995 represented an average interest rate of
6.8%, 6.8% and 7.1%, respectively.
     Under the sale agreements, Finance 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. Finance is
responsible for all credit losses associated with the sold receivables.
     At December 31, 1997 and 1996, the balance of installment receivables on
which Finance remains contingently liable, is as follows (In thousands):

<TABLE>
<CAPTION>
                                                            1997           1996
--------------------------------------------------------------------------------
<S>                                                    <C>           <C>       
Principal balance of installment receivables sold      $ 102,011     $   94,777
Less related holdback                                     12,586          9,841
--------------------------------------------------------------------------------
Contingent liability                                   $  89,425     $   84,936
================================================================================
</TABLE>

     The fair value of the principal balance of installment receivables sold
before related purchase discount is $105.0 million and $97.8 million at December
31, 1997 and 1996, respectively. The fair value is determined as the present
value of expected future cash flows discounted at a rate the Company believes a
purchaser would require as a rate of return, approximately 12%. The carrying
amount of the purchase discount on accounts sold is included in Note 2 under the
indicated caption.
     Each installment receivable is secured by the keyboard instrument financed
by the receivable. Prior to the fourth quarter of 1997, in the event of
repossession of the instrument because of nonpayment, the dealer originally
selling the instrument bore some risk of the bad debt loss, but had the right to
sell the repossessed product. This dealer risk was borne in the form of a
potential liability to the Company. This is referred to as recourse. In that
fourth quarter, Finance initiated a program of acquiring receivables without
such recourse, and the Company began selling repossessed pianos through its own
retail stores, primarily through a repossession center located in the Atlanta
metropolitan area.
     Also under the covenants of the Company's debt agreements, Finance can only
pay dividends or repurchase its own stock to the extent its net worth exceeds
$4.0 million. During 1996 Finance declared and paid a dividend of $2.0 million.
No dividends were declared in 1997.
     With the adoption of SFAS No. 125 on January 1, 1997, the Company at
December 31, 1997 has recorded a servicing asset of $2.8 million which is
included in other assets in the Consolidated Balance Sheets. At December 31,
1997, the Company has also recorded a liability for $1.4 million representing
the estimated recourse obligation associated with the sale of installment
receivables, resulting in a gain of $1.4 million in 1997. The fair value of
these assets and liabilities at December 31, 1997 approximates their carrying
value.


PAGE 26
<PAGE>   29

     Condensed balance sheets of Finance are as follows (In thousands):

<TABLE>
<CAPTION>
                                                            1997           1996
ASSETS
--------------------------------------------------------------------------------
<S>                                                    <C>           <C>       
Installment receivables owned                          $  12,810     $    8,814
Holdback on accounts sold                                 12,586          9,841
Allowance for doubtful accounts                             (518)          (310)
--------------------------------------------------------------------------------
       Installment receivables, net                       24,878         18,345
Deferred income taxes                                        807            634
Servicing asset                                            2,785             --
Other assets                                               3,736          3,507
--------------------------------------------------------------------------------
       Total assets                                    $  32,206     $   22,486
================================================================================


LIABILITIES AND SHAREHOLDER'S EQUITY
--------------------------------------------------------------------------------
Recourse obligation                                    $   1,368     $       --
Other liabilities                                          3,669          3,563
Due to parent                                             20,315         14,409
Shareholder's equity                                       6,854          4,514
--------------------------------------------------------------------------------
       Total liabilities and shareholder's equity      $  32,206     $   22,486
================================================================================
</TABLE>


     Condensed statements of earnings of Finance are as follows (In thousands):

<TABLE>
<CAPTION>
                                              1997          1996           1995
--------------------------------------------------------------------------------
<S>                                       <C>            <C>            <C>
Income on installment receivables:
       Sold                               $  7,378       $ 5,782        $ 4,921
       Owned                                 1,249         1,296            906
Other operating income                         287           285            332
--------------------------------------------------------------------------------
       Total revenue                         8,914         7,363          6,159
Expenses:
       General and administrative            3,032         2,873          2,431
       Provision for doubtful accounts       1,162           854            120
--------------------------------------------------------------------------------
       Operating profit                      4,720         3,636          3,608
Interest expense                             1,017           419              3
--------------------------------------------------------------------------------
       Earnings before income taxes          3,703         3,217          3,605
Income taxes                                 1,363         1,223          1,442
--------------------------------------------------------------------------------
       Net earnings                       $  2,340       $ 1,994        $ 2,163
================================================================================
</TABLE>

See Note 7 for information regarding derivative financial instruments.

                                                                         PAGE 27
<PAGE>   30

(6) LONG-TERM DEBT
    Long-term debt consists of the following (In thousands):

<TABLE>
<CAPTION>
                                                            1997           1996
--------------------------------------------------------------------------------
<S>                                                    <C>             <C>     
Revolving credit agreement                             $  25,200      $  30,001
Term loan                                                  3,350          4,250
--------------------------------------------------------------------------------
                                                          28,550         34,251
Less maturities due within one year
     included in current liabilities                         900         30,901
--------------------------------------------------------------------------------
                                                       $  27,650      $   3,350
================================================================================
</TABLE>

     On October 16, 1997, the Company replaced its short-term $50 million
revolving line of credit with a long-term, secured $40 million revolving Credit
Facility expiring on October 1, 2000; however, the Company can terminate the
agreement at any time with sixty days' notice. Under the Credit Facility, the
lenders have made available a line of credit based upon certain percentages of
the carrying value of the Company's inventories and accounts receivable. At
December 31, 1997, the Company had approximately $8.4 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 7.5% at December 31, 1997 and 7.3% under the
previous revolver at December 31, 1996.
     The financial covenants of the Credit Facility agreement require the
Company to maintain certain financial ratios and tangible net worth within
defined amounts. As of December 31, 1997, the Company was in compliance with the
terms of the Credit Facility.
     Substantially all of the tangible assets of the Company and its
subsidiaries are pledged as collateral under the various debt agreements.
     The Company has $3.4 million outstanding on a secured term loan, payable in
monthly installments of $75,000 through January 31, 1999 with a final payment of
$2.3 million due on February 28, 1999. The annual rate of interest under the
term loan is a fixed rate of 7.1%.
     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, Finance 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 entitles Finance to
receive from a counterparty, on a monthly basis, interest income to the extent
the floating rate retained by the buyer of installment receivables exceeds 6% or
requires Finance to pay interest expense to the extent the floating rate is less
than 6%. Under the swap agreement, Finance paid $65,000 in 1997, paid $87,000 in
1996 and received $14,000 in 1995.
     The fair value of Finance's interest rate swap agreement at December 31,
1997 and 1996 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 November 1997 and December 1996, the Company entered into two-year
interest rate cap agreements in order to reduce the potential impact of
increases in interest rates on $20 million and $44 million respectively, of
floating-rate long-term debt. The agreements entitle the Company to receive from
the counterparty, on a monthly basis, interest income to the extent the
one-month commercial paper rate exceeds 12%. As the commercial paper rate did
not exceed 12% in 1997 and 1996, the Company did not receive interest income for
those years.
     Due to the short maturity of the interest rate cap agreements, fair market
value approximates carrying value. The carrying amount of the unamortized
premiums was $10,000 and $14,000 at December 31, 1997 and 1996, respectively.
     The Company and Finance are exposed to credit losses in the event of
nonperformance by the counterparties to its interest rate swap and cap
agreements but have no off-balance sheet credit risk of accounting loss. The
Company and Finance anticipate, however, that the counterparties will be able to
fully satisfy their obligations under the contracts. The Company and Finance do
not obtain collateral or other security to support financial instruments subject
to credit risk but monitor the credit standing of the counterparties.

PAGE 28
<PAGE>   31

(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, 1997 and 1996. Statement
of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair
Value of Financial Instruments", defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties.

<TABLE>
<CAPTION>
(In thousands)                             1997                     1996
--------------------------------------------------------------------------------
                                    Carrying    Fair         Carrying     Fair
                                     Amount     Value         Amount      Value
--------------------------------------------------------------------------------
<S>                                <C>        <C>             <C>       <C>    
Installment receivables owned      $ 13,447   $ 13,195       $ 8,814    $ 8,508
Term loan                          $  3,350   $  3,328       $ 4,250    $ 4,206
================================================================================
</TABLE>

     The carrying amounts shown in the table above are included in Notes 2 and 6
under the indicated captions.
     The fair value of installment receivables owned is determined as the
present value of expected future cash flows discounted at a rate the Company
believes a purchaser would require as a rate of return, approximately 12%. The
fair value of the term loan is estimated by discounting the future cash flows at
rates currently offered for similar debt instruments of comparable maturities.
     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 Finance 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 (In
thousands):

<TABLE>
<CAPTION>
                                              1997          1996           1995
--------------------------------------------------------------------------------
<S>                                      <C>            <C>            <C>     
Current:      Federal                    $     736      $   (410)      $    544
              State                            151           (73)            91
              Foreign                          113           222            232
--------------------------------------------------------------------------------
                                             1,000          (261)           867
--------------------------------------------------------------------------------
Deferred:     Federal                          860         1,123          1,295
              State                            355           186            199
--------------------------------------------------------------------------------
                                             1,215         1,309          1,494
--------------------------------------------------------------------------------
                                         $   2,215      $  1,048       $  2,361
================================================================================
</TABLE>

     Earnings before income taxes aggregated $5.6 million, $2.1 million and $5.7
million for domestic operations and $1.1 million, $1.0 million and $0.6 million
for foreign operations in 1997, 1996 and 1995, 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 (In
thousands):

<TABLE>
<CAPTION>
                                              1997          1996           1995
--------------------------------------------------------------------------------
<S>                                       <C>            <C>            <C>    
Computed expected tax                     $  2,262       $ 1,055        $ 2,149
State income taxes, net of
     Federal tax benefit                       195            75            191
Favorable settlement - foreign taxes          (300)           --             --
Other                                           58           (82)            21
--------------------------------------------------------------------------------
                                          $  2,215       $ 1,048        $ 2,361
================================================================================
</TABLE>

                                                                         PAGE 29
<PAGE>   32

The significant components of deferred income tax expense (benefit) are as
follows (In thousands):

<TABLE>
<CAPTION>
                                              1997          1996           1995
--------------------------------------------------------------------------------
<S>                                       <C>           <C>            <C>     
Reserves for inventories                   $  (597)      $   983        $   502
Allowance for doubtful accounts               (655)          133            432
Nondeductible accruals                        (566)          337            557
LIFO inventory decrease                        539          (648)          (268)
Other                                           64           504            271
--------------------------------------------------------------------------------
Deferred tax expense (benefit)             $(1,215)      $ 1,309        $ 1,494
================================================================================
</TABLE>

Components of deferred tax balances as of December 31, 1997 and 1996 are as
follows (In thousands):

<TABLE>
<CAPTION>
                                                            1997           1996
--------------------------------------------------------------------------------
<S>                                                     <C>            <C>
Deferred tax assets:
       Accounts receivable, principally due to
              allowance for doubtful accounts           $  1,232       $  1,887
       Nondeductible accruals,
              principally due to accrual for
                    financial reporting purposes           2,565          3,124
       Other                                                 361            341
--------------------------------------------------------------------------------
              Total gross deferred tax assets              4,158          5,352
--------------------------------------------------------------------------------
Deferred tax liabilities:
       Inventories, principally due to differences in LIFO  (191)          (131)
       Property, plant and equipment, principally
              due to differences in depreciation          (1,260)        (1,258)
       Investments in affiliated companies, principally
              due to undistributed income of affiliated
              companies                                     (262)          (263)
       State income taxes                                   (222)          (240)
--------------------------------------------------------------------------------
              Total gross deferred
                    tax liabilities                       (1,935)        (1,892)
--------------------------------------------------------------------------------
              Net deferred tax assets                   $  2,223       $  3,460
================================================================================
</TABLE>

     In the opinion of management, no valuation allowance related to deferred
tax assets was required at December 31, 1997. Based on the Company's historical
and current pre-tax earnings, management believes it is more likely than not
that the Company will realize the benefit of recorded deferred tax assets. There
can be no assurance, however, that the Company will generate any earnings or any
specific level of continued earnings.

PAGE 30
<PAGE>   33

(10) ACCRUED AND OTHER LIABILITIES
     Accrued and other liabilities consist of the following (In thousands):

<TABLE>
<CAPTION>
                                                            1997           1996
--------------------------------------------------------------------------------
<S>                                                     <C>            <C>
Accrued liabilities:
       Reserve for installment receivables sold
            with recourse                               $  1,810       $  1,407
       Compensation and benefits                           2,204          2,046
       Other                                               3,207          2,304
--------------------------------------------------------------------------------
                                                        $  7,221       $  5,757
================================================================================


Other liabilities:
       Postretirement and postemployment                $    683       $  1,918
       Deferred compensation                               1,735          2,052
       Recourse obligation                                 1,368             --
       Other                                               2,356          2,669
--------------------------------------------------------------------------------
                                                        $  6,142       $  6,639
================================================================================
</TABLE>

(11) RETIREMENT PLANS
     The Company maintains retirement plans under Section 401(k) of the Internal
Revenue Code. Under these plans, the Company makes an annual contribution up to
3% of compensation paid to all covered employees. To the extent employees
contribute up to 6% of their compensation, the Company will match a portion of
each dollar contributed. The Company also maintains a deferred compensation plan
for certain key employees and a defined benefit plan for certain hourly
employees. The cost of providing these retirement benefits is as follows (In
thousands):

<TABLE>
<CAPTION>
                                              1997          1996           1995
--------------------------------------------------------------------------------
<S>                                       <C>           <C>            <C>     
Defined contribution 401(k)                $   681       $   742        $   744
Deferred compensation                          200           147             83
Defined benefit                                340           240            231
--------------------------------------------------------------------------------
                                           $ 1,221       $ 1,129        $ 1,058
================================================================================
</TABLE>

     Benefits to employees under the defined benefit plan are based upon their
years of credited service. Contributions to the plan are designed to fund the
plan's current service cost on a current basis and initial prior service cost
over 30 years. Plan assets consist primarily of U.S. government obligations,
Federal agency obligations, mortgages, corporate bonds and notes, and common
stocks.

                                                                         PAGE 31
<PAGE>   34

The following table sets forth the defined benefit plan's funded status as
of December 31, 1997 and 1996 (In thousands):

<TABLE>
<CAPTION>
                                                            1997           1996
--------------------------------------------------------------------------------
<S>                                                      <C>           <C>
Actuarial present value of benefit obligations:
     Vested benefit obligation                           $ 2,372       $  2,152
--------------------------------------------------------------------------------
     Accumulated benefit obligation                        2,377          2,164
--------------------------------------------------------------------------------

     Plan assets at fair value                             2,261          1,971
     Projected benefit obligation for service
          rendered to date                                 3,054          2,873
--------------------------------------------------------------------------------
     Plan assets less than projected benefit obligation     (793)          (902)
     Unamortized prior service cost                          593            647
     Unrecognized net loss                                    71            189
     Unrecognized transition obligation                       39             46
     Adjustment required to recognize minimum liability     (260)          (173)
--------------------------------------------------------------------------------
     Pension costs accrued at year end                   $  (350)      $   (193)
================================================================================
</TABLE>

Net pension cost included the following components (In thousands):

<TABLE>
<CAPTION>
                                              1997          1996           1995
--------------------------------------------------------------------------------
<S>                                         <C>            <C>           <C>
Service cost benefits earned during 
  period                                    $  181        $  131         $  122
Interest cost on projected 
  benefit obligation                           259           174            171
Return on plan assets                         (162)         (196)          (114)
Net amortization and deferral                   62           131             52
--------------------------------------------------------------------------------
     Net periodic pension cost              $  340        $  240         $  231
================================================================================

Actuarial assumptions:
     Weighted average discount rate           7.5%          7.5%           7.5%
     Rate of return on assets                 8.0%          8.0%           8.0%
================================================================================
</TABLE>

(12) SHAREHOLDERS' EQUITY
     At December 31, 1997 and 1996, the Company had 14,000,000 shares of $.01
per value common stock authorized and 4,205,094 and 4,175,144 shares issued,
respectively. The Company held 760,380 shares and 749,748 shares in treasury at
December 31, 1997 and 1996, respectively.
     The Company maintains two qualified incentive stock option plans. Under
these plans, options for 450,000 shares of common stock may be granted to key
managerial personnel of the Company. The Company has also granted 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, 1997, there were 64,000 additional shares available for
grant under the plans. The per share weighted-average fair value of stock
options granted during 1997, 1996 and 1995 was $6.26, $6.29 and $5.53,
respectively, on the date of the grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: 1997 - expected dividend
yield of 0%, expected volatility of 32.4%, risk-free interest rate of 5.62%, and
an expected life of 7 years; 1996 - expected dividend yield of 0%, expected
volatility of 31.6%, risk-free interest rate of 6.32%, and an expected life of 7
years; 1995 - expected dividend yield of 0%, expected volatility of 31.6%,
risk-free interest rate of 5.52%, and an expected life of 7 years.
     The Company applies APB 25 in accounting for its plans and, accordingly, no
compensation cost has been recognized for its stock options in the consolidated
financial statements. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS 123, the Company's
net earnings, basic earnings per share and diluted earnings per share would have
been reduced to the pro forma amounts indicated below (In thousands, except
earnings per share):

PAGE 32
<PAGE>   35

<TABLE>
<CAPTION>
                                              1997          1996           1995
--------------------------------------------------------------------------------
<S>                                       <C>           <C>            <C>
Net earnings:
     As reported                          $  4,449      $  2,056       $  3,960
     Pro forma                               4,211         1,874          3,916
Basic earnings per share:
     As reported                          $   1.30      $    .60       $   1.16
     Pro forma                                1.23           .55           1.15
Diluted earnings per share:
     As reported                          $   1.28      $    .59       $   1.15
     Pro forma                                1.21           .54           1.14
================================================================================
</TABLE>

     Pro forma net earnings reflect only options granted in 1997, 1996 and 1995.
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):

<TABLE>
<CAPTION> 
                                                 Shares     Weighted average
                                                 subject       per share
                                                to option     option price
--------------------------------------------------------------------------------
<S>                                                <C>          <C>    
Balance, December 31, 1995                         286          $ 12.56
      Options granted                              177            13.21
      Options exercised                            (10)           10.21
      Options expired                              (42)           11.44
--------------------------------------------------------------------------------
Balance, December 31, 1996                         411          $ 13.00
      Options granted                               72            13.46
      Options exercised                            (17)           12.07
      Options expired                              (53)           12.20
--------------------------------------------------------------------------------
Balance, December 31, 1997                         413          $ 13.10
================================================================================
</TABLE>

     At December 31, 1997, the range of exercise prices was $8.63 - $17.25, and
weighted-average remaining contractual life of outstanding options was 7.4
years.
     At December 31, 1997 and 1996, the number of options exercisable was
232,000 and 189,300, respectively, and the weighted-average exercise price of
those options was $13.02 and $12.87, respectively.
     The Company has 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 have a ten year life
and may be exercised 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.

                                                                         PAGE 33
<PAGE>   36

(13) EARNINGS PER SHARE
     (In thousands, except per share data):

<TABLE>
<CAPTION>
                                                NET                        PER
                                             EARNINGS       SHARES        SHARE
1997                                        (NUMERATOR)  (DENOMINATOR)    AMOUNT
--------------------------------------------------------------------------------
<S>                                           <C>           <C>         <C>
Basic earnings per share:
     Net earnings available to common
     shareholders                             $ 4,449         3,435     $  1.30
Effect of dilutive securities stock options         0            48
--------------------------------------------------------------------------------
Diluted earnings per share:
     Earnings available to common
     stockholders and assumed conversions     $ 4,449         3,483     $  1.28
================================================================================

1996
--------------------------------------------------------------------------------
Basic earnings per share:
     Net earnings available to common
     shareholders                             $ 2,056         3,421     $   .60
Effect of dilutive securities stock options         0            41
--------------------------------------------------------------------------------
Diluted earnings per share:
     Earnings available to common
     stockholders and assumed conversions     $ 2,056         3,462     $   .59
================================================================================

1995
--------------------------------------------------------------------------------
Basic earnings per share:
     Net earnings available to common
     shareholders                             $ 3,960         3,415     $  1.16
Effect of dilutive securities stock options         0            19
--------------------------------------------------------------------------------
Diluted earnings per share:
     Earnings available to common
     stockholders and assumed conversions     $ 3,960         3,434     $  1.15
================================================================================
</TABLE>

     Options to purchase 50,600, 61,500 and 71,500 shares of common stock were
outstanding in 1997, 1996 and 1995, respectively, but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of common shares.

(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 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 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, 1997 the Company was obligated under non-cancelable
operating leases for real and personal property which are subject to certain
renewal and purchase options. Noncancellable operating leases in effect at
December 31, 1997, require rental payments of $1.4 million, $0.8 million, $0.6
million, $0.5 million and $0.2 million for the years 1998 through 2002,
respectively, and $0.1 million for years thereafter. Lease expense for all
operating leases was $1.9 million, $2.3 million and $1.3 million for 1997, 1996
and 1995, respectively.

PAGE 34
<PAGE>   37

(15) SEGMENT INFORMATION
     A summary of operations by major segment follows (In thousands):

<TABLE>
<CAPTION>
                                              1997          1996           1995
--------------------------------------------------------------------------------
<S>                                     <C>           <C>            <C>       
Music                                   $  107,362     $  82,941      $  85,085
Contract furniture and music                 2,147         4,455         10,565
--------------------------------------------------------------------------------
Music and other segment                    109,509        87,396         95,650
Electronic contracting                      35,609        30,894         30,687
Finance                                      8,914         7,363          6,159
--------------------------------------------------------------------------------
     Sales and other revenue            $  154,032     $ 125,653      $ 132,496
================================================================================

Music and other segment                 $    7,339     $   5,339      $   6,674
Electronic contracting                       1,374         1,421          1,690
Finance                                      4,720         3,636          3,608
Unallocated corporate                       (3,904)       (4,424)        (3,564)
--------------------------------------------------------------------------------
     Operating profit                   $    9,529     $   5,972      $   8,408
================================================================================

Music and other segment                 $   58,573     $  69,671      $  62,988
Electronic contracting                      23,581        19,907         15,609
Finance                                     32,206        22,486         22,832
--------------------------------------------------------------------------------
     Identifiable assets                $  114,360     $ 112,064      $ 101,429
================================================================================

Music and other segment                 $    2,509     $   1,640      $   1,948
Electronic contracting                         678           416            334
--------------------------------------------------------------------------------
     Depreciation                       $    3,187     $   2,056      $   2,282
================================================================================

Music and other segment                 $    3,886     $   1,816      $   3,770
Electronic contracting                       1,110         1,786            164
--------------------------------------------------------------------------------
     Capital additions                  $    4,996     $   3,602      $   3,934
================================================================================
</TABLE>

     The amounts reflected as "Sales and other revenue" in the above table are
included in the "Net sales", "Income on the sale of installment receivables",
"Interest income on installment receivables" and "Other operating income, net"
captions of the Consolidated Statement of Earnings.
     The music and other segment includes a broad range of acoustic and
electronic instruments serving a broad consumer base. Music products 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 electronic contracting segment assembles printed circuit boards and
electromechanical devices for original equipment manufacturers (OEMs) outside
the music industry.
     The Finance segment provides point-of-sale consumer financing through
keyboard product dealers located throughout the United States.
     The Company uses the LIFO method of valuing music products inventory and
the FIFO method for electronic contracting inventory.
     In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 establishes standards for
reporting information about operating segments. The adoption of SFAS No. 131
will have no impact on the Company's consolidated results of operations,
financial position or cash flows.

                                                                         PAGE 35
<PAGE>   38

(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
     Quarterly financial data for the years ended December 31, 1997 and 1996 are
as follows (In thousands, except per share data):

<TABLE>
<CAPTION>
1997                          First       Second         Third       Fourth       Year
========================================================================================
<S>                       <C>          <C>           <C>          <C>         <C>      
Net sales                  $ 27,309     $ 42,404      $ 33,915     $ 39,473   $ 143,101
----------------------------------------------------------------------------------------
Gross profit                  4,776        8,153         7,376        7,744      28,049
----------------------------------------------------------------------------------------
Net earnings                    246        1,642         1,059        1,502       4,449
----------------------------------------------------------------------------------------
Basic earnings per share        .07          .48           .31          .44        1.30
----------------------------------------------------------------------------------------
Diluted earnings per share      .07          .47           .30          .42        1.28
========================================================================================

1996                          First       Second         Third       Fourth       Year
========================================================================================

Net sales                  $ 27,147     $ 26,139      $ 26,508     $ 35,276   $ 115,070
----------------------------------------------------------------------------------------
Gross profit                  5,275        5,920         4,965        6,415      22,575
----------------------------------------------------------------------------------------
Net earnings                    684          750           192          430       2,056
----------------------------------------------------------------------------------------
Basic earnings per share        .20          .22           .06          .13         .60
----------------------------------------------------------------------------------------
Diluted earnings per share      .20          .22           .06          .12         .59
========================================================================================
</TABLE>


PAGE 36
<PAGE>   39

BALDWIN PIANO & ORGAN COMPANY AND SUBSIDIARIES
FIVE-YEAR SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Earnings Statement Data:

<TABLE>
<CAPTION>
                                                                 1997         1996         1995         1994         1993
--------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>          <C>          <C>         <C>           <C>      
Net sales                                                   $ 143,101    $ 115,070    $ 122,634   $  122,347    $ 120,658
Cost of goods sold                                            115,052       92,495       96,333       96,559       89,563
--------------------------------------------------------------------------------------------------------------------------
     Gross profit                                              28,049       22,575       26,301       25,788       31,095
Income on the sale of installment receivables                   7,378        5,811        4,946        4,828        5,646
Interest income on installment receivables                      1,249        1,296          906          735          600
Other operating income, net                                     2,304        3,476        4,010        4,482        4,984
--------------------------------------------------------------------------------------------------------------------------
     Gross profit and other operating revenue                  38,980       33,158       36,163       35,833       42,325
Selling, general and administrative                            29,451       27,186       27,755       33,173       29,808
--------------------------------------------------------------------------------------------------------------------------
     Operating profit                                           9,529        5,972        8,408        2,660       12,517
Interest expense                                                2,865        2,868        2,087        2,101        2,232
--------------------------------------------------------------------------------------------------------------------------
     Earnings before income taxes and
         cumulative effect of changes in
         accounting principles                                  6,664        3,104        6,321          559       10,285
Income taxes                                                    2,215        1,048        2,361          214        4,120
--------------------------------------------------------------------------------------------------------------------------
     Earnings before cumulative effect of
         changes in accounting principles                       4,449        2,056        3,960          345        6,165
Cumulative effect of changes in accounting for
     postretirement and postemployment benefits                    --           --           --           --       (1,604)
--------------------------------------------------------------------------------------------------------------------------
     Net earnings                                           $   4,449    $   2,056    $  3,960    $      345    $   4,561
==========================================================================================================================
Earnings per share:
     Before cumulative effect of changes in
         accounting principles                              $    1.30    $     .60    $    1.16   $       .10   $    1.81
     Cumulative effect of changes in accounting for
         postretirement and postemployment benefits                --           --           --           --         (.47)
--------------------------------------------------------------------------------------------------------------------------
     Basic earnings per share                               $    1.30    $     .60    $    1.16   $       .10   $    1.34
--------------------------------------------------------------------------------------------------------------------------
     Diluted earnings per share                             $    1.28    $     .59    $    1.15   $       .10   $    1.32
==========================================================================================================================

Balance Sheet Data (at December 31):
                                                                 1997         1996         1995         1994         1993
--------------------------------------------------------------------------------------------------------------------------
Working capital                                             $  47,905    $  31,462    $  34,703   $   35,759    $  35,941
--------------------------------------------------------------------------------------------------------------------------
Total assets                                                  114,360      112,064      101,429       97,460       89,928
--------------------------------------------------------------------------------------------------------------------------
Current portion of long-term debt                                 900       30,901       17,646       16,746       11,299
--------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current portion                           27,650        3,350        4,250        5,000        4,384
--------------------------------------------------------------------------------------------------------------------------
Shareholders' equity                                           60,823       56,275       54,114       50,154       49,892
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

Certain prior year amounts have been reclassified to conform with current year
financial statement presentation.

                                                                         PAGE 37
<PAGE>   40

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

1997 COMPARED TO 1996
     During 1997 the Company phased out its consignment inventory program. Under
the Company's historical consignment inventory program, Company pianos in the
dealer's possession remained part of the Company's inventory until actually sold
by the dealer. In 1997 the Company, in conjunction with a third party, provided
a more attractive floor plan to its dealers to finance the dealers' purchase of
products from the Company. As a result, most dealers opted out of the existing
consignment program and the Company inventory in each of these dealers'
possession was immediately sold to the dealers. This transfer of title was a
sale to the dealer and created a large, one-time, increase in Baldwin's sales.
     Net sales for 1997 increased 24% to $143.1 million from $115.1 million for
the same period in 1996. The increase in sales included $14.6 million related to
the one-time phase-out of consignment. This occurred also in spite of the loss
of $2.3 million in contract furniture sales, a business exited in 1996.
     Measured before the impact of the phase-out of consignment, sales for the
Company's core acoustic and digital music businesses rose $12.2 million (18%)
over 1996. This increase is due to improved piano quality, innovative new
products, a healthy economic climate and new marketing programs. Additionally,
sales for the Company's contract electronics business increased $4.7 million
(15%) over 1996, mainly as a result of new customers.
     Net earnings for 1997 more than doubled, to $4.4 million ($1.30 per share)
compared to $2.1 million ($.60 per share) in 1996. Without the impact of
discontinuing consignment sales and other events, net earnings for 1997 would
have been $3.6 million ($1.05 per share). Previous year's net earnings were
negatively impacted by strategic initiatives designed to enhance future
competitiveness.
     The Company values a substantial portion of its inventory on the last-in,
first-out (LIFO) method. The 1997 gross profit is $1.8 million greater than the
amount that would have been reported had the first-in, first-out (FIFO) method
been used, and $3.4 million greater due to the inventory LIFO decrement.
     Income on the sale of installment receivables increased $1.6 million from
1996, while interest income on installment receivables remained at the same
level as in 1996. This increase is primarily the result of the effect of the
required adoption of SFAS 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and is to be applied prospectively. SFAS 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. The Company has
recorded a servicing asset of $2.8 million, while recording an estimated
recourse obligation of $1.4 million.
     Prior to the fourth quarter of 1997, in the event of repossession of an
instrument financed by the Company's wholly-owned subsidiary (Finance), the
dealer originally selling the instrument bore some risk of the bad debt loss,
but had the right to sell the repossessed product. This dealer risk was borne in
the form of a potential liability to the Company. This is referred to as
recourse. In that fourth quarter, Finance initiated a program of acquiring
receivables without such recourse, and the Company began selling repossessed
pianos through its own retail stores, primarily through a repossession center
located in the Atlanta metropolitan area.
     Other operating income decreased in 1997 by $1.2 million primarily due to
lower floor plan income resulting from the phase-out of the consignment
inventory program.
     Selling, general and administrative expenses increased by $2.3 million from
1996. Of that amount approximately $0.9 million was attributable to one time
items, and $1.4 million relates to higher advertising and promotional spending,
increased investor relations activity and acquisition related matters.

1996 COMPARED TO 1995
     While market share in the Company's core acoustic piano business increased
in 1996, net earnings were $2.1 million compared to $4.0 million for 1995 and
gross profit decreased from $26.3 million to $22.6 million. Net earnings and
gross profit for 1996 were negatively impacted by strategic initiatives designed
to enhance future competitiveness, including the Company's decision to exit its
non-strategic church organ, contract music and furniture businesses. Earnings
and gross profit were also impacted somewhat by lower profit margins due to a
change in mix of sales in both music products and electronic contracting
businesses. 1996 results included increased interest expense due to higher
inventory and a charge to record the one-time costs of a salaried workforce
reduction. 1996 net earnings were favorably impacted by reductions of 3% in
selling, general and administrative expenses.
     Net sales for 1996 totaled $115.1 million compared to $122.6 million of
1995. Contract music and furniture sales declined by $6.1 million (58%) due to
the Company's decision to exit from these non-strategic businesses. In 1995, the

PAGE 38
<PAGE>   41

Company consolidated the Baldwin and Wurlitzer dealer networks in order to allow
dealers to offer both Baldwin and Wurlitzer products. Net sales from the music
products segment were slightly lower in 1996 versus the previous year due to the
impact of this strategic consolidation. While sales declined 2% for the year,
second half 1996 sales represent an 8% improvement over second half 1995. Within
the music products segment, digital piano sales dramatically improved 37% from
1995 resulting from the successful launch of the new Baldwin Pianovelle product
line. Electronic contracting sales were about equal to 1995.
     The Company values a substantial portion of its inventory on the last-in,
first-out (LIFO) method. The 1996 gross profit is $1.0 million less than the
amount that would have been reported had the first-in, first-out (FIFO) method
been used.
     Income on the sale of installment receivables and interest income on
installment receivables increased by $0.9 million and $0.4 million,
respectively, from 1995. These together account for 21% increase and is
primarily the result of growth in the installment receivable portfolio of 8%
complemented by lower interest rates. See "Liquidity and Capital Resources".
     Other operating income decreased due primarily to a non-recurring gain on
sale of fixed assets in 1995 of $0.3 million.
     Selling, general and administrative expenses decreased by $0.9 million due
primarily to the 1995 decisions to transition Baldwin's retail locations in
Chicago to a wholesale dealer and the strategic consolidation of the Baldwin and
Wurlitzer dealer networks that resulted in less support staff. This was
partially offset by a one-time charge in 1996 due to a salaried workforce
reduction.
     The provision for doubtful accounts increased in 1996 primarily as a result
of the growth in the dollar value of contracts sold by Finance.
     Interest expense increased by $0.8 million in 1996 resulting from higher
debt levels necessary for pipeline inventories for the new ConcertMaster
autoplayer, the Pianovelle digital piano line and additional purchases of
imported Wurlitzer grand pianos. In addition, several electronic contracting
customers delayed deliveries of orders throughout the year, which resulted in
higher inventories of finished products. During the fourth quarter of 1996, the
Company reduced its inventories by $7.8 million.

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.
     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 of fixed interest rates on
installment receivables contracts and floating interest rates on a substantial
portion of indebtedness. Additionally the buyer of the installment receivables
earns interest on the outstanding principal balance of the contracts based upon
a floating interest rate provision.
     The Company can partially offset the effect of interest rate changes by
increasing interest rates on its new installment receivable contracts. In
November 1997 and December 1996, the Company entered into two-year interest rate
cap agreements in order to reduce the potential impact of increases in interest
rates on $20 million and $44 million, respectively, of floating-rate long-term
debt. The agreements entitle the Company to receive from the counterparty, on a
monthly basis, interest income to the extent the one-month commercial paper rate
exceeds 12%. 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 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 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
     The Company requires significant working capital to support its operations.
Under Baldwin's traditional consignment inventory program, inventory levels
would increase during each year to support its high fourth quarter seasonal
sales demand. During 1997 the Company phased out its consignment inventory
program (see Results of Operations, above). This phase-out accounted for a large
portion of the decrease in inventory and the increase in current receivables

                                                                         PAGE 39
<PAGE>   42

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

that occurred in 1997. Also during 1997, installment receivables increased as a
result of a larger portfolio for installment contracts.
     On October 16, 1997, the Company replaced its short-term $50 million
revolving line of credit with a long-term, secured $40 million revolving Credit
Facility expiring on October 1, 2000; however the Company can terminate the
agreement at any time with sixty days' notice. Under the Credit Facility, the
lenders have made available a line of credit based upon certain percentages of
the carrying value of the Company's inventories and accounts receivable. The
annual rate of interest under the Credit Facility is equal to 1.5 percentage
points above LIBOR, or under certain specified circumstances, 0.5 percentage
points per annum above the Prime Rate. At December 31, 1997, the rate under the
Credit Facility was 7.5% and the Company had approximately $8.4 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.
     In October, 1997, the Company's finance subsidiary (Finance) 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 Finance. Finance continues to service all installment receivables
sold. At the time of each installment receivable sale, Finance 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 Finance as a service
fee. In February 1994, Finance 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 contacts.
     Proceeds from the sale of installment receivables amounted to $74.4 million
for 1997, $66.5 million for 1996 and $60.6 million for 1995. This increase in
1997 compared to 1996 and 1995 is largely the result of an increase in the
volume of new installment contracts written at traditional keyboard dealers and
at Company sponsored "event sales".
     Under the sale agreements, Finance is required to repurchase accounts that
become more that 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. Finance is
responsible for all credit losses associated with the sold receivables. Finance
remains contingently liable on approximately $89.4 million of installment
receivables sold. The Company believes an adequate allowance has been provided
for any uncollectible receivables.
     Capital expenditures amounted to $5.0 million, $3.6 million and $3.9
million for 1997, 1996 and 1995, respectively. As of December 31, 1997, the
Company had $1.2 million in outstanding capital commitments.

YEAR 2000
     The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Company's major computer systems consist
of third-party software. The conclusion of the Company's research is that the
latest existing releases of this software contain the necessary changes to
correct any significant year 2000 problems. As a matter of ongoing policy, in
order to assure continuing contractual vendor support, the Company promptly
installs and implements new releases of third-party software.
     The year 2000 problem is a result of computer programs being written using
two digits (rather than four) to define the applicable year. Any of the
Company's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000, which would result in
miscalculations or system failures.
     Based on preliminary information, costs of addressing potential problems
are not currently expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods.
However, if the Company, its customers or vendors are unable to resolve such
processing issues in a timely manner, it could result in a material financial
risk. Accordingly, the Company plans to devote the necessary resources to
resolve all significant year 2000 issues in a timely manner. 


PAGE 40
<PAGE>   43
BALDWIN
[LOGO]
SHAREHOLDER INFORMATION

HOME OFFICE
--------------------------------------------------------------------------------
422 Wards Corner Road, Loveland, Ohio 45140-8390  (513) 576-4500   
e-mail: baldwin@bpao.com 
web sites: www.baldwinpiano.com and www.pianovelle.com

MANUFACTURING LOCATIONS
--------------------------------------------------------------------------------
Conway, Fayetteville and Trumann, Arkansas; Greenwood, Mississippi; Juarez, 
Mexico

RETAIL LOCATIONS
--------------------------------------------------------------------------------
Company Owned Outlets:
Atlanta, Georgia; Cincinnati, Ohio; Indianapolis and Fort Wayne, Indiana; 
Louisville and Lexington, Kentucky
Independent Keyboard Dealers (400)

REGISTRAR AND TRANSFER AGENT
--------------------------------------------------------------------------------
The Provident Bank, One East Fourth Street, Cincinnati, Ohio 45202

AUDITORS
--------------------------------------------------------------------------------
KPMG Peat Marwick 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, 422 Wards Corner Road, Loveland, OH 45140-8390.

MARKET AND DIVIDEND INFORMATION
--------------------------------------------------------------------------------
The Company's common stock is listed on the Nasdaq National Market under the
symbol BPAO. As of March 20, 1998, the number of outstanding shares of the
Company's common stock was 3,445,710 and the approximate number of record
holders of such shares was 114. The Company has paid no dividends since its
inception and intends to continue its policy of retaining earnings to finance
future growth.

<TABLE>
<CAPTION>
                                           1997                     1996
Common Stock Price Range             High         Low         High         Low
--------------------------------------------------------------------------------
<S>                                    <C>         <C>       <C>         <C>   
First Quarter                       $ 14        $ 11-1/2     $ 14-1/2   $ 12-1/4
Second Quarter                        14-1/2      12-3/4       15-1/2     12-3/4
Third Quarter                         18          13-1/4       16-1/2     14-1/2
Fourth Quarter                        19-15/16    15-5/8       16-1/4     11


--------------------------------------------------------------------------------
</TABLE>


<PAGE>   44
                                    BALDWIN
                                     [LOGO]
                422 WARDS CORNER ROAD, LOVELAND, OHIO 45140-8390
                     (513) 576-4500 e-mail: baldwin@bpao.com
                         web sites: www.baldwinpiano.com
                               www.pianovelle.com