============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 001-11911 STEINWAY MUSICAL INSTRUMENTS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 35-1910745 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 800 South Street, Suite 425 Waltham, Massachusetts 02453 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (781) 894-9770 and THE SELMER COMPANY, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4432228 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 600 Industrial Parkway, Elkhart, Indiana 46516 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (219) 522-1675 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements during the past 90 days. Yes [X] No [ ] Number of shares of Common Stock issued and outstanding as of April 28, 2000: Class A 477,953 Ordinary 8,436,774 --------- Total 8,914,727 ============================================================================== STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES FORM 10Q INDEX PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: Condensed Consolidated Balance Sheets December 31, 1999 and April 1, 2000.....................................................3 Condensed Consolidated Statements of Operations Three months ended April 3, 1999 and April 1, 2000......................................4 Condensed Consolidated Statements of Cash Flows Three months ended April 3, 1999 and April 1, 2000......................................5 Notes to Condensed Consolidated Financial Statements........................................6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................................................13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................15 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................................................16 SIGNATURES.................................................................................17 2 STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) DECEMBER 31, APRIL 1, 1999 2000 --------------- --------------- ASSETS Current assets: Cash $ 4,664 $ 8,410 Accounts, notes and leases receivable, net of allowance for bad debts of $6,765 and $6,831 in 1999 and 2000, respectively 56,510 60,948 Inventories 102,116 99,951 Prepaid expenses and other current assets 2,605 3,586 Deferred tax assets 6,059 5,950 ----------- ---------- Total current assets 171,954 178,845 Property, plant and equipment, net of accumulated depreciation of $32,602 and $34,105 in 1999 and 2000, respectively 89,510 89,754 Other assets, net 17,308 16,407 Cost in excess of fair value of net assets acquired, net of accumulated amortization of $4,449 and $4,601 in 1999 and 2000, respectively 30,869 30,099 ----------- ---------- TOTAL ASSETS $ 309,641 $ 315,105 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ 7,286 $ 9,683 Accounts payable 6,920 7,850 Other current liabilities 30,753 31,088 ----------- ---------- Total current liabilities 44,959 48,621 Long-term debt 132,794 131,776 Deferred tax liabilities 21,569 20,741 Non-current pension liability 12,117 11,833 ----------- ---------- Total liabilities 211,439 212,971 ----------- ---------- Commitments and contingent liabilities Stockholders' equity: Common stock 9 9 Additional paid in capital 71,031 71,217 Retained earnings 48,488 53,695 Accumulated other comprehensive income (7,857) (9,093) Treasury stock, at cost (13,469) (13,694) ----------- ---------- Total stockholders' equity 98,202 102,134 ----------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 309,641 $ 315,105 =========== ========== See notes to condensed consolidated financial statements. 3 STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) Three Months Ended ------------------------------ April 3, April 1, 1999 2000 -------------- -------------- Net sales $ 83,134 $ 87,775 Cost of sales 55,707 61,171 -------------- -------------- Gross profit 27,427 26,604 Operating expenses: Sales and marketing 10,294 9,022 General and administrative 4,289 4,577 Amortization 968 922 Other operating expense 80 116 -------------- -------------- Total operating expenses 15,631 14,637 -------------- -------------- Income from operations 11,796 11,967 Interest expense, net 2,864 3,365 Other (income) expense, net 49 (155) -------------- -------------- Income before income taxes 8,883 8,757 Provision for income taxes 3,695 3,550 -------------- -------------- Net income $ 5,188 $ 5,207 ============== ============== Net income per share: Basic $ .56 $ .58 ============== ============== Diluted $ .56 $ .58 ============== ============== Weighted average shares: Basic 9,265,163 8,924,535 ============== ============== Diluted 9,337,044 8,934,965 ============== ============== See notes to condensed consolidated financial statements. 4 STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Three Months Ended ----------------------------- April 3, April 1, 1999 2000 -------------- -------------- Cash flows from operating activities: Net income $ 5,188 $ 5,207 Adjustments to reconcile net income to cash flows from operating activities: Depreciation and amortization 2,802 2,949 Deferred tax benefit (481) (398) Other (33) 12 Changes in operating assets and liabilities: Accounts, notes and leases receivable (7,966) (4,187) Inventories 639 1,710 Prepaid expense and other current assets (615) (958) Accounts payable (386) 988 Other current liabilities 2,564 809 -------------- -------------- Cash flows from operating activities 1,712 6,132 Cash flows from investing activities: Capital expenditures (31,588) (2,109) Proceeds from disposals of fixed assets 89 78 Business acquisition, net of cash acquired (2,340) Changes in other assets (428) 185 -------------- -------------- Cash flows from investing activities (31,927) (4,186) Cash flows from financing activities: Net borrowings under lines of credit 3,036 2,157 Proceeds from long-term debt 22,500 Repayments of long-term debt (289) (433) Proceeds from issuance of stock 76 186 Purchase of treasury stock (668) (225) -------------- -------------- Cash flows from financing activities 24,655 1,685 Effect of foreign exchange rate changes on cash (91) 115 -------------- -------------- Increase (decrease) in cash (5,651) 3,746 Cash, beginning of period 12,460 4,664 -------------- -------------- Cash, end of period $ 6,809 $ 8,410 ============== ============== Supplemental Cash Flow Information Interest paid $ 135 $ 403 ============== ============== Taxes paid $ 4,690 $ 3,596 ============== ============== See notes to condensed consolidated financial statements. 5 STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 1, 2000 (IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED) (1) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of Steinway Musical Instruments, Inc. and subsidiaries (the "Company") for the three months ended April 3, 1999 and April 1, 2000 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 1999, and include all adjustments which are of a normal and recurring nature, necessary for the fair presentation of financial position, results of operations and cash flows for the interim period. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. The results of operations for the three months ended April 1, 2000 are not necessarily indicative of the results that may be expected for the entire year. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of the Company include the accounts of all of its direct and indirect wholly owned subsidiaries, including The Selmer Company, Inc. ("Selmer") and The Steinway Piano Company, Inc. ("Steinway"). Significant intercompany balances have been eliminated in consolidation. RECLASSIFICATIONS - Certain reclassifications of 1999 amounts have been made to conform to the 2000 financial statement presentation. INCOME PER SHARE - Basic income per share is computed using the weighted average number of shares outstanding during each period. Diluted income per share reflects the effect of the Company's outstanding options using the treasury stock method. A reconciliation of the weighted average shares used for the basic and diluted computations for the three month periods ended April 3, 1999 and April 1, 2000 is as follows: Three months ended ------------------- 1999 2000 ---- ---- Weighted average shares: For basic income per share 9,265,163 8,924,535 Dilutive effect of stock options 71,881 10,430 --------- --------- For diluted income per share 9,337,044 8,934,965 ========= ========= 6 COMPREHENSIVE INCOME - Other comprehensive income (loss) is comprised of foreign currency translation adjustments. Total comprehensive income for the three month periods ended April 3, 1999 and April 1, 2000 is as follows: Three months ended ------------------ 1999 2000 ---- ---- Net income $ 5,188 $ 5,207 Other comprehensive loss (2,553) (1,236) -------- -------- Total comprehensive income $ 2,635 $ 3,971 ======== ======== (3) INVENTORIES Inventories consist of the following: December 31, April 1, 1999 2000 -------------- -------------- Raw materials $ 15,791 $ 13,294 Work in process 37,921 39,159 Finished goods 48,404 47,498 ---------- ---------- Total $ 102,116 $ 99,951 ========== ========== (4) OTHER (INCOME) EXPENSE, NET Other (income) expense, net consists of the following: Three months ended ------------------------------ April 3, April 1, 1999 2000 -------------- -------------- West 57th Building income $ - $ (1,163) West 57th Building expenses 814 Foreign exchange loss, net 129 295 Miscellaneous (80) (101) --------- --------- Other (income) expense, net $ 49 $ (155) ========= ========= (5) COMMITMENTS AND CONTINGENT LIABILITIES Certain environmental matters are pending against a subsidiary of the Company, which might result in monetary damages, the amount of which, if any, cannot be determined at the present time. Philips Electronics, a previous owner of a subsidiary of the Company, has agreed to hold the Company harmless from any financial liability arising from these environmental matters which were pending as of December 29, 1988. Management believes that these matters will not have a material adverse impact on the Company's results of operations or financial condition. 7 (6) SUMMARIZED FINANCIAL INFORMATION The Company is a holding company whose only material asset consists of its investment in its wholly owned subsidiary, Selmer. Summarized financial information for Selmer and its subsidiaries is as follows: Three Months Ended December 31, April 1, April 3, April 1, 1999 2000 1999 2000 --------------- --------------- --------------- --------------- Current assets $ 169,295 $ 175,859 Total assets 306,516 311,668 Current liabilities 58,569 64,983 Stockholder's equity 110,811 114,841 Total revenues $ 82,388 $ 86,854 Gross profit 27,188 26,382 Net income 5,240 5,266 (7) SEGMENT INFORMATION The Company has identified two distinct and reportable segments: the piano segment and the band and orchestral instrument segment. These segments were selected based upon the way in which management oversees and evaluates the results of each operation. The following tables present information about the Company's operating segments for the three month periods ended April 3, 1999 and April 1, 2000: THREE MONTHS ENDED 1999 Piano Segment Band and Orchestral Segment Other & Consol ------------------------------------ ------------------------------ US Germany Other Total US Other Total Elim Total -------- ------- ------- ----- -------- ------ ------ ----- ----- Revenues from external customers $26,068 $8,996 $4,455 $39,519 $42,689 $926 $43,615 $ - $83,134 Net income 732 323 245 1,300 1,174 18 1,192 2,696 5,188 THREE MONTHS ENDED 2000 Piano Segment Band and Orchestral Segment Other & Consol ------------------------------------ ------------------------------ US Germany Other Total US Other Total Elim Total -------- ------- ------- ----- -------- ------ ------ ----- ----- Revenues from external customers $30,184 $9,447 $4,558 $44,189 $42,502 $1,084 $43,586 $ - $87,775 Net income (loss) 758 348 284 1,390 1,010 (9) 1,001 2,816 5,207 8 (8) SUMMARY OF MERGER AND GUARANTEES The acquisition of Steinway in May 1995 was funded by Selmer's issuance of $105 million of 11% Senior Subordinated Notes (the "Notes") due 2005 and available cash balances of the Company. Selmer's payment obligations under the Notes are fully and unconditionally guaranteed on a joint and several basis by the Company as Parent (the "Guarantor Parent"), and by Steinway and certain direct and indirect wholly-owned subsidiaries of the Company, each a "Guarantor" (the "Guarantor Subsidiaries"). These subsidiaries, together with the operating divisions of Selmer, represent all of the operations of the Company conducted in the United States. The remaining subsidiaries, which do not guarantee the Notes, represent foreign operations (the "Non Guarantor Subsidiaries"). The following condensed consolidating supplementary data illustrates the composition of the combined Guarantors. Separate complete financial statements of the respective Guarantors would not provide additional material information which would be useful in assessing the financial composition of the Guarantors. No single Guarantor has any significant legal restrictions on the ability of investors or creditors to obtain access to its assets in event of default on the Guarantee other than its subordination to senior indebtedness. Investments in subsidiaries are accounted for by the parent on the cost method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are therefore not reflected in the parent's investment accounts and earnings. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. 9 STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS APRIL 1, 2000 (IN THOUSANDS) (UNAUDITED) Non Guarantor Issuer Guarantor Guarantor Parent Of Notes Subsidiaries Subsidiaries Eliminations Consolidated ----------- ----------- ----------- ----------- ------------ ------------ ASSETS Current assets: Cash $ - $ 7,568 $ 341 $ 1,777 $ (1,276) $ 8,410 Accounts, notes and leases receivable, net 45,462 5,098 10,388 60,948 Inventories 35,542 39,108 26,399 (1,098) 99,951 Prepaid expenses and other current assets 386 2,143 214 843 3,586 Deferred tax assets 560 2,751 3,612 (973) 5,950 --------- --------- --------- --------- --------- --------- Total current assets 386 91,275 47,512 43,019 (3,347) 178,845 Property, plant and equipment, net 92 13,507 61,820 14,335 89,754 Investment in subsidiaries 71,143 169,387 56,147 (296,677) - Other assets, net 613 664 11,157 5,053 (1,080) 16,407 Cost in excess of fair value of net assets acquired, net 9,029 10,776 10,294 30,099 --------- --------- --------- --------- --------- --------- TOTAL ASSETS $ 72,234 $ 283,862 $ 187,412 $ 72,701 $(301,104) $ 315,105 ========= ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ - $ - $ 456 $ 9,227 $ - $ 9,683 Accounts payable 15 2,779 3,755 1,301 7,850 Other current liabilities (15,933) 9,773 30,263 9,261 (2,276) 31,088 --------- --------- --------- --------- --------- --------- Total current liabilities (15,918) 12,552 34,474 19,789 (2,276) 48,621 Long-term debt 216 110,000 22,650 186 (1,276) 131,776 Intercompany 31,079 74,190 (110,528) 5,259 - Deferred tax liabilities 2,440 9,049 9,252 20,741 Non-current pension liability 11,833 11,833 --------- --------- --------- --------- --------- --------- Total liabilities 15,377 199,182 (44,355) 46,319 (3,552) 212,971 Stockholders' equity 56,857 84,680 231,767 26,382 (297,552) 102,134 --------- --------- --------- --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,234 $ 283,862 $ 187,412 $ 72,701 $(301,104) $ 315,105 ========= ========= ========= ========= ========= ========= 10 STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS THREE MONTHS ENDED APRIL 1, 2000 (IN THOUSANDS) (UNAUDITED) Non Guarantor Issuer Guarantor Guarantor Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated ----------- ----------- ----------- ------------ ------------ ----------- Net sales $ - $ 41,826 $ 33,135 $ 15,981 $ (3,167) $ 87,775 Cost of sales 30,868 22,976 10,406 (3,079) 61,171 ----------- ----------- ----------- ------------ ------------ ----------- Gross profit - 10,958 10,159 5,575 (88) 26,604 Operating expenses: Sales and marketing 2,841 3,744 2,441 (4) 9,022 General and administrative 776 1,377 1,275 1,149 4,577 Amortization 69 556 297 922 Other operating (income) expense (614) (67) 504 289 4 116 ---------- ----------- ----------- ------------ ------------ ----------- Total operating expenses 162 4,220 6,079 4,176 - 14,637 ----------- ----------- ----------- ------------ ------------ ----------- Income (loss) from operations (162) 6,738 4,080 1,399 (88) 11,967 Interest (income) expense, net 4,888 (1,666) 143 3,365 Other (income) expense, net (120) (35) (155) ----------- ----------- ----------- ------------ ------------ ----------- Income (loss) before income taxes (162) 1,850 5,866 1,291 (88) 8,757 Provision for (benefit of) income taxes (71) 887 2,155 625 (46) 3,550 ----------- ----------- ----------- ------------ ------------ ----------- Net income (loss) $ (91) $ 963 $ 3,711 $ 666 $ (42) $ 5,207 =========== =========== =========== ============ ============ =========== 11 STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS THREE MONTHS ENDED APRIL 1, 2000 (IN THOUSANDS) (UNAUDITED) Non Guarantor Issuer Guarantor Guarantor Parent Of Notes Subsidiaries Subsidiaries Eliminations Consolidated ---------- ----------- ----------- ----------- ------------ ------------- Cash flows from operating activities: Net income (loss) $ (91) $ 963 $ 3,711 $ 666 $ (42) $ 5,207 Adjustments to reconcile net income (loss) to cash flows from operating activities: Depreciation and amortization 12 702 1,574 661 2,949 Deferred tax benefit (202) (196) (398) Other 65 4 (57) 12 Changes in operating assets and liabilities: Accounts, notes and leases receivable (4,500) 262 51 (4,187) Inventories 6,001 (3,241) (1,138) 88 1,710 Prepaid expense and other current assets 101 (679) 82 (462) (958) Accounts payable (173) 229 805 127 988 Other current liabilities (2,632) 1,896 1,279 312 (46) 809 ------- ------- ------- ------- -------- ------- Cash flows from operating activities (2,783) 4,677 4,274 (36) -- 6,132 Cash flows from investing activities: Capital expenditures (1) (1,204) (799) (105) (2,109) Proceeds from disposals of fixed assets 78 78 Business acquisition, net of cash acquired (2,340) (2,340) Changes in other assets 207 (22) 185 ------- ------- ------- ------- -------- ------- Cash flows from investing activities (1) (997) (799) (2,389) -- (4,186) Cash flows from financing activities: Net borrowings (repayments) under lines of credit 12 (382) 2,849 (322) 2,157 Repayments of long-term debt (240) (193) (433) Proceeds from issuance of stock 186 186 Purchase of treasury stock (225) (225) Intercompany transactions 2,811 2,013 (5,103) 279 -- ------- ------- ------- ------- -------- ------- Cash flows from financing activities 2,784 2,013 (5,725) 2,935 (322) 1,685 Effect of exchange rate changes on cash 115 115 Increase (decrease) in cash -- 5,693 (2,250) 625 (322) 3,746 Cash, beginning of period 1,875 2,591 1,152 (954) 4,664 ------- ------- ------- ------- -------- ------- Cash, end of period $ -- $ 7,568 $ 341 $ 1,777 $ (1,276) $ 8,410 ======= ======= ======= ======= ======== ======= 12 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Company, through its Steinway and Selmer subsidiaries, is one of the world's leading manufacturers of musical instruments. Certain statements contained in the following Discussion and Analysis of Financial Condition and Results of Operations are "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties, including, but not limited to, changes in general economic conditions, increased competition, exchange rate fluctuations, and the availability of production capacity and qualified workers which could cause actual results to differ materially from those indicated herein. Further information on these risk factors is included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and its Final Prospectus filed in August 1996. RESULTS OF OPERATIONS THREE MONTHS ENDED APRIL 1, 2000 COMPARED TO THREE MONTHS ENDED APRIL 3, 1999 NET SALES - Net sales increased $4.6 million (6%) to $87.8 million in the first quarter of 2000. This growth occurred in the piano segment where piano sales increased $4.7 million (12%) over the prior year period. Overall piano shipments increased 7%, with domestic shipments increasing 13%. Band and orchestral instrument sales remained flat against the prior year period despite a slight increase in unit shipments. This increase was offset by a decrease in average selling prices attributable to a change in the volume incentive program offered to band dealers. Rebate programs previously offered to these dealers, the cost of which was included in operating expenses, were replaced with price discount programs. GROSS PROFIT - Gross profit decreased by $0.8 million (3%) to $26.6 million in the first quarter of 2000. Gross margins decreased from 33.0% in 1999 to 30.3% in 2000. Piano margins decreased from 36.6% in 1999 to 34.3% in 2000 primarily due to a yen driven cost increase in the Boston line. Lower average selling prices and production inefficiencies adversely affected band instrument margins causing a decline from 29.8% in 1999 to 26.2% in 2000. OPERATING EXPENSES - Operating expenses decreased by $1.0 million (6%) to $14.6 million in the first quarter of 2000. This decrease was primarily due to the replacement of rebate programs, which generated $0.9 million of expense in the prior year period, with price discount programs. Expenses as a percentage of sales decreased from 18.8% in 1999 to 16.7% in 2000. OTHER EXPENSE, NET - Other expenses increased by $0.3 million (10%) to $3.2 million in the first quarter of 2000. An increase in net interest expense of $0.5 million, primarily relating to the West 57th Building term loan, was offset by $0.4 million of income generated by the leasing of that property. Net foreign currency exchange losses also increased by $0.2 million in 2000. 13 INCOME TAXES - The Company's effective tax rate improved slightly from 41.6% in 1999 to 40.5% in 2000 primarily due to increased absorption of foreign tax credits. LIQUIDITY AND CAPITAL RESOURCES The Company has relied primarily upon cash provided by operations, supplemented as necessary by seasonal borrowings under its working capital line, to finance its operations, repay long-term indebtedness and fund capital expenditures. Cash provided by operations in the first quarter was $1.7 million in 1999 and $6.1 million in 2000. A decrease in net working capital requirements of $4.1 million contributed to the increase. The Company acquired the building that includes the Steinway Hall retail showroom in New York City in the first quarter of 1999 for $30.8 million. Additional capital expenditures of $0.8 million and $2.1 million in the first quarter of 1999 and 2000, respectively, were primarily used for the purchase of new machinery and building improvements. The Company expects to maintain this level of capital spending in the future as it continues to modernize its equipment and renovate its facilities in order to improve its production efficiency. In January 2000, the Company's subsidiary, Steinway & Sons, acquired Pianohaus Karl Lang, located in Munich, Germany, for approximately $2.3 million. Pianohaus Karl Lang is Germany's largest retail piano store and is expected to strengthen Steinway's foreign distribution network. The Company's domestic, seasonal borrowing requirements are accommodated through a committed, revolving credit facility with a domestic lender (the "Credit Facility"). The Credit Facility provides the Company with a potential borrowing capacity of up to $60 million, based on eligible accounts receivable and inventory balances. The Credit Facility bears interest at the Eurodollar rate plus 1.25% and expires April 1, 2004. As of April 1, 2000, no amounts were outstanding and additional availability was approximately $60 million. Open account loans with foreign banks also provide for borrowings by Steinway's foreign subsidiaries of up to 30 million Deutsche marks ($14.7 million at the April 1, 2000 exchange rate). The Company's long-term financing consists primarily of $110 million of Senior Subordinated Notes and $21.6 million outstanding on a real estate term loan. The Company's debt agreements contain restrictive covenants that place certain restrictions on the Company, including restrictions on the Company's ability to incur additional indebtedness, to make investments in other entities, or to pay cash dividends. Beginning on June 1, 2000, the Senior Subordinated Notes may be redeemed at the Company's option, in whole or in part, at 104.125% of the principal amount plus accrued and unpaid interest thereon to the applicable redemption date. During the first quarter of 2000, the Company repurchased 11,700 shares of its common stock at a cost of $0.2 million. The Company has undertaken a major initiative to effect fundamental changes in its band instrument manufacturing operations in 2000. New three-year contracts with the unions representing Selmer's employees were completed at the end of the first quarter. The project to implement the contract changes is expected to take up to twenty-four months to complete and will require an investment of approximately $2.0 million in 2000. While there will be certain short-term expenses and production 14 disruption associated with this project, the long-term benefits are expected to be improved production flow, efficiency and quality. Management believes that cash on hand, together with cash flows anticipated from operations and available borrowings under the Credit Facility, will be adequate to meet debt service requirements, fund continuing capital requirements and satisfy working capital and general corporate needs through 2000. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board released Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. This statement requires that all derivatives be recognized at fair value in the balance sheet, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. The statement will be effective for the Company in fiscal 2001. Management is currently evaluating the effect of adopting SFAS No. 133 on the consolidated financial statements. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk associated with changes in foreign currency exchange rates and interest rates. The Company mitigates its foreign currency exchange rate risk by maintaining foreign currency cash balances and holding forward foreign currency contracts. These contracts are used as a hedge against intercompany transactions and are not used for trading or speculative purposes. The fair value of the forward foreign currency exchange contracts is sensitive to changes in foreign currency exchange rates. The impact of an adverse change in foreign currency exchange rates would not be materially different than that disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The Company's Credit Facility and real estate term loan bear interest at rates that fluctuate with changes in the Eurodollar rate and the Libor rate, respectively. Substantially all of the Company's long-term debt, except the term loan referred to above, is at fixed interest rates. Accordingly, the Company's interest expense on its Credit Facility and real estate term loan and the fair value of its fixed long-term debt is sensitive to changes in market interest rates. The effect of an adverse change in market interest rates on the Company's interest expense and the fair value of its long-term debt would not be materially different than that disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 15 PART II OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT # DESCRIPTION --------- ----------- 27.1. Steinway Musical Instruments, Inc. - Financial Data Schedule 27.2 The Selmer Company, Inc. - Financial Data Schedule (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended April 1, 2000. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. STEINWAY MUSICAL INSTRUMENTS, INC. /s/ Dana D. Messina --------------------------------------------------- Dana D. Messina Director, President and Chief Executive Officer /s/ Dennis M. Hanson --------------------------------------------------- Dennis M. Hanson Senior Executive Vice President and Chief Financial Officer THE SELMER COMPANY, INC. /s/ Thomas T. Burzycki --------------------------------------------------- Thomas T. Burzycki Director, President and Chief Executive Officer /s/ Michael R. Vickrey --------------------------------------------------- Michael R. Vickrey Executive Vice President and Chief Financial Officer Date: May 16, 2000 17