Exhibit 99.1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholder
United Musical Instruments Holdings, Inc.
Elkhart, Indiana
We have audited the accompanying consolidated balance sheets of United Musical
Instruments Holdings, Inc. as of December 31, 1999 and 1998 and the related
consolidated statements of income and retained earnings, comprehensive income
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 United Musical
Instruments Holdings, Inc. as of December 31, 1999 and 1998, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Crowe, Chizek and Company LLP
Elkhart, Indiana
February 18, 2000, except for Note 5
as to which the date is March 30, 2000
UNITED MUSICAL INSTRUMENTS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1 9 9 9 1 9 9 8
------- -------
% to % to
Amount Sales Amount Sales
----------- ------ ------------ ------
Sales $63,453,606 100.00% $ 61,939,485 100.00%
Cost of goods sold 42,678,542 67.26 45,204,968 72.98
----------- ------ ------------ ------
GROSS MARGIN 20,775,064 32.74 16,734,517 27.02
Operating expenses 12,463,376 19.64 12,876,840 20.79
----------- ------ ------------ ------
INCOME BEFORE OTHER EXPENSE 8,311,688 13.10 3,857,677 6.23
Other income (expense)
Interest expense (3,745,394) (5.90) (4,232,886) (6.84)
Interest and finance charges 1,517,793 2.39 1,512,286 2.44
Foreign currency transaction
exchange gain (loss) 311,228 .49 (328,623) (.53)
Other income (expense) 89,901 .14 (76,466) (.12)
----------- ------ ------------ ------
(1,826,472) (2.88) (3,125,689) (5.05)
----------- ------ ------------ ------
INCOME FROM OPERATIONS
BEFORE INCOME TAXES 6,485,216 10.22 731,988 1.18
Provision (benefit) for income taxes
(Note 2) 2,493,649 3.93 (509,821) (.82)
----------- ------ ------------ ------
NET INCOME 3,991,567 6.29% 1,241,809 2.00%
====== ======
Retained earnings at
beginning of year 9,453,892 8,212,083
----------- ------------
RETAINED EARNINGS AT
END OF YEAR $13,445,459 $ 9,453,892
=========== ============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
UNITED MUSICAL INSTRUMENTS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
---------- -----------
Net income $3,991,567 $ 1,241,809
Other comprehensive income, net of tax:
Foreign currency translation adjustments 17,338 (70,598)
---------- -----------
Comprehensive income $4,008,905 $ 1,171,211
========== ===========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
UNITED MUSICAL INSTRUMENTS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
----------- -----------
ASSETS
Current assets
Cash $ 890,407 $ 1,349,629
Accounts and notes receivable (after allowance
for doubtful accounts of $2,000,000 in 1999 and 1998) 34,009,808 33,639,008
Inventories (Note 3) 27,728,871 27,290,698
Prepaid expenses 98,893 175,825
Refundable income taxes -- 1,053,362
----------- -----------
Total current assets 62,727,979 63,508,522
Net property, plant and equipment (Note 4) 10,304,210 10,795,628
Other assets
Long-term accounts and notes receivable 2,500,927 2,670,023
Intangible pension asset 491,618 751,900
Other 66,063 90,372
----------- -----------
3,058,608 3,512,295
----------- -----------
$76,090,797 $77,816,445
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Notes payable (Notes 5 and 6) $26,424,390 $32,686,122
Accounts payable 2,147,949 3,260,945
Accrued income taxes 994,800 --
Deferred income taxes 747,000 937,000
Other current liabilities 3,836,704 3,744,071
----------- -----------
Total current liabilities 34,150,843 40,628,138
Noncurrent liabilities
Notes payable (Notes 5 and 6) 26,275,652 25,000,000
Other liabilities 604,147 1,234,616
Deferred income taxes 1,565,000 1,479,000
----------- -----------
28,444,799 27,713,616
Shareholder's equity
Common stock, no par value: 100 shares
authorized and 10 shares outstanding 1,000 1,000
Equity adjustment from foreign currency
translation 48,696 19,799
Retained earnings 13,445,459 9,453,892
----------- -----------
13,495,155 9,474,691
----------- -----------
$76,090,797 $77,816,445
=========== ===========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
UNITED MUSICAL INSTRUMENTS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,991,567 $ 1,241,809
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 1,610,169 1,524,607
Loss on sale of fixed assets 16,250 4,020
Provision for losses on accounts receivable 502,347 3,060,067
Deferred income taxes (104,000) (399,000)
Foreign currency translation exchange (gain) loss (311,228) 328,623
Equity adjustment from foreign currency
translation 28,897 (117,663)
Change in assets and liabilities
Accounts receivable (704,051) (4,973,797)
Inventories (438,113) 2,140,169
Other current assets 1,130,294 (735,448)
Intangible pension asset 260,282 82,100
Other assets 24,309 (15,755)
Accounts payable and accrued expenses (25,563) 2,172,176
Other liabilities (630,469) 113,939
------------ ------------
Net cash from operating activities 5,350,631 4,425,847
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,140,001) (1,555,832)
Proceeds from sale of equipment 5,000 3,000
------------ ------------
Net cash from investing activities (1,135,001) (1,552,832)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (15,274,852) (5,719,772)
Proceeds from issuance of debt 10,600,000 3,500,000
------------ ------------
Net cash from financing activities (4,674,852) (2,219,772)
------------ ------------
Net change in cash (459,222) 653,243
Cash at beginning of year 1,349,629 696,386
------------ ------------
CASH AT END OF YEAR $ 890,407 $ 1,349,629
============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 3,835,827 $ 4,160,902
Income taxes 549,487 619,433
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
UNITED MUSICAL INSTRUMENTS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS: The Company is a holding company for its wholly owned subsidiary,
United Musical Instruments USA, Inc., which manufacturers musical instruments
and sells to distributors and retailers worldwide. The Company maintains cash at
local banks and at times may be in excess of FDIC insurance limits.
BASIS OF PRESENTATION: United Musical Instruments Holdings, Inc. is a
wholly-owned subsidiary of BIM Holding AG. These financial statements present
only the financial position, results of operations and cash flows of United
Musical Instruments Holdings, Inc. and its subsidiaries.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of United Musical Instruments Holdings, Inc. and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: In preparing
financial statements, management must make estimates and assumptions. These
estimates and assumptions affect the amounts reported for assets, liabilities,
revenue, and expenses, as well as affecting the disclosures provided. Future
results could differ from the current estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company establishes an allowance for
doubtful accounts based on historical expense and estimates regarding
collectibility of accounts receivable. Should future actual bad debts exceed
management's current estimates, significant losses could occur. At December 31,
1999, no estimate can be made of the amount of loss, or range of loss, that is
reasonably possible should bad debts exceed management's estimates.
INVENTORIES: Domestic inventories are stated at the lower of cost (last-in,
first-out method) or market. Foreign inventories are stated at the lower of cost
(first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT: Assets are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets.
ACCOUNTING FOR INCOME TAXES: The Company records income tax expense based on the
amount of taxes due on its tax return plus deferred taxes computed based on the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities, using enacted tax rates.
FOREIGN CURRENCY TRANSLATION: The Company translates all assets and liabilities
to U.S. dollars using the exchange rates in effect at the balance sheet date.
Results of operations are translated using the average exchange rates during the
period. Resulting translation adjustments are recorded as a separate component
of shareholder's equity.
UNITED MUSICAL INSTRUMENTS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
COMPREHENSIVE INCOME: Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", became effective for the first time in 1998.
Comprehensive income is a broad term which includes net income and other
elements of comprehensive income, which includes foreign currency translation
adjustments. Comprehensive income is reported in the financial statements as a
separate component in the Consolidated Statements of Comprehensive Income.
NOTE 2 - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
1999 1998
----------- -----------
Current income taxes
Federal $ 2,148,408 $ (154,576)
State 449,241 43,755
----------- -----------
2,597,649 (110,821)
Deferred income taxes (104,000) (399,000)
----------- -----------
Total expense attributable to operations 2,493,649 (509,821)
Deferred expense allocated to foreign currency
translation adjustments 11,559 (47,065)
----------- -----------
$ 2,505,208 $ (556,886)
=========== ===========
Deferred tax assets and liabilities are comprised of the following:
1999 1998
----------- -----------
Deferred tax liabilities $ 3,482,000 $ 3,519,000
Deferred tax assets 1,170,000 1,103,000
No valuation allowance was provided on deferred tax assets.
Income tax expense differs from expense at statutory rates due to the tax effect
of foreign operations.
The Company's deferred tax liabilities result primarily from temporary tax and
financial differences in inventories and depreciation of property, plant and
equipment. The deferred tax assets result primarily from temporary tax and
financial differences in certain accrued expenses.
UNITED MUSICAL INSTRUMENTS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 3 - INVENTORIES
Inventories at December 31, 1999 and 1998 consist of the following:
1999 1998
----------- -----------
Raw materials $ 3,704,855 $ 3,118,810
Work in process 10,848,442 12,091,026
Finished goods 16,348,445 16,067,099
----------- -----------
Total inventories at FIFO 30,901,742 31,276,935
LIFO reserve 3,172,871 3,986,237
----------- -----------
$27,728,871 $27,290,698
=========== ===========
The effect of determining cost of inventories by the LIFO method as compared
with the FIFO method was to increase net income by approximately $448,000 and
$359,000 for the years ended December 31, 1999 and 1998, respectively.
NOTE 4 - NET PROPERTY, PLANT AND EQUIPMENT
Net property, plant and equipment consists of the following at December 31, 1999
and 1998:
1999 1998
----------- -----------
Land $ 171,000 $ 171,000
Buildings and improvements 6,496,561 6,472,971
Machinery and equipment 11,836,131 10,735,266
Office equipment 4,472,658 3,827,124
Construction in progress 427,495 1,208,256
----------- -----------
23,403,845 22,414,617
Accumulated depreciation 13,099,635 11,618,989
----------- -----------
$10,304,210 $10,795,628
=========== ===========
UNITED MUSICAL INSTRUMENTS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 5 - NOTES PAYABLE
The Company has revolving credit agreements with Forenings Sparbanken AB,
Sweden. The agreements provide for maximum borrowings of $41,500,744 (45,255,319
in 1998), which are subject to certain limitations and consist of various
short-term notes. Interest is at 1.1% over the London Interbank Offered Rate
(LIBOR). The agreements are secured by substantially all of the assets of the
Company. The outstanding balance under this agreement was $41,500,744 and
$45,255,319 at December 31, 1999 and 1998, respectively. On March 30, 2000 and
December 31, 1998, the Company amended the loan agreement with Forenings
Sparbanken AB which extended the maturity date on $25,000,000 of the notes until
March 2001 and 2000, respectively. Accordingly, the current and long-term notes
payable on the December 31, 1999 and 1998 balance sheets reflect these
modifications.
The Company has an $11,000,000 demand line of credit agreement with Bank One,
Indiana, N.A., Elkhart, Indiana at December 31, 1999. Interest accrues at LIBOR
rate plus an applicable spread, and the agreement is secured by accounts
receivable, inventory and equipment. The outstanding balance under this
agreement was $9,000,000 at December 31, 1999.
The Company had a $10,000,000 demand line of credit agreement with National City
Bank, South Bend, Indiana at December 31, 1998. Interest was at 2.5% over LIBOR
rate (bank's prime rate in 1997) and the agreement was secured by accounts
receivable, inventory and equipment. The outstanding balance under this
agreement was $9,500,000 at December 31, 1998.
Additionally, notes payable at December 31, 1999 and 1998 include other
short-term notes payable to foreign lending institutions totaling $624,424 and
$1,064,033, respectively. Interest rates on these notes varied between 2.85% to
6.75%. The agreements are secured by substantially all assets of one of the
Company's subsidiaries.
NOTE 6 - INSTALLMENT NOTES PAYABLE
Installment notes payable at December 31, 1999 and 1998 consisted of the
following:
1999 1998
----------- ----------
Note payable to Bank One, Indiana, N.A., Elkhart, Indiana, payable in
monthly installments of $36,500 including interest through December 2004,
interest accrued at LIBOR rate plus an applicable spread; secured by
accounts receivable, inventory and equipment. $ 1,574,874 $ --
Prime rate note payable to National City Bank, South Bend, Indiana, payable
in monthly installments of $41,035 including interest through June 2003;
secured by accounts receivable, inventory and equipment; refinanced during
1999 -- 1,835,710
NOTE 6 - INSTALLMENT NOTES PAYABLE (Continued)
1999 1998
----------- ----------
Prime rate note payable to National City Bank, South Bend, Indiana, payable
in monthly installments of $35,800 through January 1999; secured by
computer equipment. $ -- $ 23,274
----------- ----------
1,574,874 1,858,984
Current maturities 299,222 1,858,984
----------- ----------
$ 1,275,652 $ --
=========== ==========
The notes payable (Note 5) and installment notes payable with Bank One, Indiana,
N.A. are subject to various loan covenants relating to certain financial ratios.
At December 31, 1999, the Company was in compliance these covenants.
Principal payments on installments notes are due as follows:
2000 $299,222
2001 329,721
2002 362,843
2003 399,291
2004 183,797
NOTE 7 - PENSION PLAN
The Company has a defined benefit pension plan covering substantially all hourly
employees covered by the collective bargaining agreement at the Eastlake, Ohio,
facility. Effective December 31, 1998, the Company has elected the disclosure
requirements of Statement of Financial Accounting Standards No. 132, Employer's
Disclosures about Pension and Other Postretirement Benefits.
Information regarding the Company's defined benefit plan at December 31, 1999
and 1998, is shown below:
1999 1998
----------- -----------
Projected benefit obligation $(4,203,815) $(4,560,659)
Plan assets at market value 3,875,320 3,620,634
----------- -----------
Funded status (328,495) (940,025)
NOTE 7 - PENSION PLAN (Continued)
1999 1998
-------- --------
Net prepaid pension cost recognized
in the balance sheet $163,123 $124,462
Benefit cost 226,012 228,694
Employer contributions 264,673 265,156
Benefits paid 285,842 268,318
Assumptions used:
Discount rate 8.00% 7.00%
Expected return on plan assets 8.50% 8.50%
Rate of compensation increase 7.50% 7.50%
There are no participant contributions under the plan.
NOTE 8 - PROFIT SHARING PLAN
The Company has a profit sharing plan containing Internal Revenue Code Section
401(k) provisions. The plan covers substantially all employees not covered by
the collective bargaining agreement. The Company is required to contribute a
certain percentage of employee contributions. Additional contributions are
discretionary. The expense for the years ended December 31, 1999 and 1998 was
$221,955 and $249,571, respectively.
NOTE 9 - ENVIRONMENTAL REMEDIATION LIABILITIES
At December 31, 1999 and 1998, the Company is involved in environmental
remediation projects at their Eastlake, Ohio and Nogales, Arizona locations.
The Company has complied with substantially all provisions of consent agreements
with the Arizona Department of Environmental Quality and the City of Nogales,
relative to the remediation performed at their Nogales location and with the
United States Environmental Protection Agency relative to remediation performed
at their Eastlake location. The Company has on-going testing and reporting
requirements at each location.
The estimated remaining cost of these remediation projects is approximately
$331,000 and $310,000 and is included in other current liabilities at December
31, 1999 and 1998, respectively. It is the opinion of management that no
material additional costs will be incurred, based on current testing results and
their assumptions about future testing results at each location. This estimate
may change depending on actual results of future testing. At December 31, 1999,
no estimate can be made of the amount of loss, or range of loss, that is
reasonably possible should actual environmental costs exceed management's
estimates.
UNITED MUSICAL INSTRUMENTS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 10 - PENDING LITIGATION
The Company is a party to various legal proceedings. In management's opinion,
the Company has adequate legal defenses and management does not believe that
they will materially affect the Company's operations or financial position.
NOTE 11 - SELF-INSURANCE
The Company is responsible for health costs of substantially all of its
employees. The Company has a stop loss policy for claims of individual
employees. At December 31, 1999 and 1998 management has estimated the amount of
pending claims on these dates. Future operating results could be affected should
actual claims differ from management's current estimate.