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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 MARCH 31, 2001
[ ] 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 305
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 30, 2001: Class A 477,953
Ordinary 8,453,547
---------
Total 8,931,500
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STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
FORM 10Q
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Statements of Income
Three months ended April 1, 2000 and March 31, 2001 .......... 3
Condensed Consolidated Balance Sheets
December 31, 2000 and March 31, 2001 ......................... 4
Condensed Consolidated Statements of Cash Flows
Three months ended April 1, 2000 and March 31, 2001 .......... 5
Notes to Condensed Consolidated Financial Statements ........... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .................................... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..... 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................... 17
SIGNATURES ..................................................... 18
2
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
---------------------------
April 1, March 31,
2000 2001
---------- ----------
Net sales $ 87,775 $ 101,581
Cost of sales 61,171 69,872
---------- ----------
Gross profit 26,604 31,709
Operating expenses:
Sales and marketing 9,022 11,769
General and administrative 4,577 5,631
Amortization 922 1,115
Other operating expense 116 122
---------- ----------
Total operating expenses 14,637 18,637
---------- ----------
Income from operations 11,967 13,072
Interest expense, net 3,365 4,537
Other (income) expense, net (155) (165)
---------- ----------
Income before income taxes 8,757 8,700
Provision for income taxes 3,550 3,500
---------- ----------
Net income $ 5,207 $ 5,200
========== ==========
Net income per share:
Basic $ .58 $ .58
========== ==========
Diluted $ .58 $ .58
========== ==========
Weighted average shares:
Basic 8,924,535 8,931,500
========== ==========
Diluted 8,934,965 8,931,500
========== ==========
See notes to condensed consolidated financial statements.
3
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, MARCH 31,
2000 2001
------------ ---------
ASSETS
Current assets:
Cash $ 4,989 $ 5,583
Accounts, notes and leases receivable, net of allowance for
bad debts of $11,377 and $11,436 in 2000 and 2001, respectively 93,042 100,656
Inventories 160,296 164,801
Prepaid expenses and other current assets 3,005 2,971
Deferred tax assets 4,121 3,971
-------- --------
Total current assets 265,453 277,982
Property, plant and equipment, net of accumulated depreciation of
$36,760 and $38,503 in 2000 and 2001, respectively 106,415 104,869
Other assets, net 20,645 19,676
Cost in excess of fair value of net assets acquired, net of accumulated
amortization of $5,231 and $5,339 in 2000 and 2001, respectively 29,303 28,412
-------- --------
TOTAL ASSETS $421,816 $430,939
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,516 $ 10,129
Accounts payable 11,206 9,230
Other current liabilities 35,853 39,697
-------- --------
Total current liabilities 56,575 59,056
Long-term debt 213,894 218,567
Deferred tax liabilities 26,316 25,473
Other liabilities 11,824 11,684
-------- --------
Total liabilities 308,609 314,780
-------- --------
Commitments and contingent liabilities
Stockholders' equity:
Common stock 9 9
Additional paid-in capital 71,724 71,724
Retained earnings 65,392 70,592
Accumulated other comprehensive income (9,966) (12,214)
Treasury stock, at cost (13,952) (13,952)
-------- --------
Total stockholders' equity 113,207 116,159
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $421,816 $430,939
======== ========
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 1, March 31,
2000 2001
-------- ---------
Cash flows from operating activities:
Net income $ 5,207 $ 5,200
Adjustments to reconcile net income to
cash flows from operating activities:
Depreciation and amortization 2,949 3,523
Deferred tax benefit (398) (348)
Other 12 118
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (4,187) (8,440)
Inventories 1,710 (6,821)
Prepaid expenses and other current assets (958) (169)
Accounts payable 988 (1,871)
Other current liabilities 809 5,055
------- -------
Cash flows from operating activities 6,132 (3,753)
Cash flows from investing activities:
Capital expenditures (2,109) (1,428)
Proceeds from disposals of fixed assets 78 1
Business acquisition, net of cash acquired (2,340)
Changes in other assets 185 112
------- -------
Cash flows from investing activities (4,186) (1,315)
Cash flows from financing activities:
Net borrowings under lines of credit 2,157 7,175
Repayments of long-term debt (433) (1,528)
Proceeds from issuance of stock 186
Purchase of treasury stock (225)
------- -------
Cash flows from financing activities 1,685 5,647
Effect of foreign exchange rate changes on cash 115 15
------- -------
Increase in cash 3,746 594
Cash, beginning of period 4,664 4,989
------- -------
Cash, end of period $ 8,410 $ 5,583
======= =======
Supplemental Cash Flow Information
Interest paid $ 403 $ 2,097
======= =======
Taxes paid $ 3,596 $ 3,155
======= =======
See notes to condensed consolidated financial statements.
5
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(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 1, 2000 and March 31, 2001 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,
2000, 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, 2000 and Reports on Form 8-K filed
with the Securities and Exchange Commission during 2000. The results of
operations for the three months ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the entire year.
On September 15, 2000, the Company completed the acquisition of United
Musical Instruments Holdings, Inc. ("UMI") pursuant to a stock purchase
agreement dated as of July 20, 2000. The acquisition, which had an aggregate
purchase price of approximately $84 million, was accounted for as a purchase.
(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 Steinway Piano Company, Inc. ("Steinway"), The
Selmer Company, Inc. ("Selmer"), and UMI. Significant intercompany balances have
been eliminated in consolidation.
INCOME PER COMMON SHARE - Basic income per share is computed using the
weighted average number of common shares outstanding during each period. Diluted
income per common share reflects the effect of the Company's outstanding options
using the treasury stock method, except when such items would be antidilutive. A
reconciliation of the weighted average shares used for the basic and diluted
computations for the three month periods ended April 1, 2000 and March 31, 2001
is as follows:
Three months ended
------------------------
2000 2001
--------- ---------
Weighted average shares:
For basic income per share 8,924,535 8,931,500
Dilutive effect of stock options 10,430 --
--------- ---------
For diluted income per share 8,934,965 8,931,500
========= =========
6
COMPREHENSIVE INCOME - Other comprehensive income (loss) is comprised of
foreign currency translation adjustments and additional minimum pension
liabilities. Total comprehensive income for the three month periods ended April
1, 2000 and March 31, 2001 is as follows:
Three months ended
-----------------------
2000 2001
--------- ---------
Net income $ 5,207 $ 5,200
Other comprehensive income (loss) (1,236) (2,248)
------- -------
Total comprehensive income $ 3,971 $ 2,952
======= =======
NEW ACCOUNTING PRONOUNCEMENTS -- On January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), which establishes accounting and
reporting standards for derivative instruments. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on the
balance sheet at fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative is
designated as a cash flow hedge, the effective portions of changes in the fair
value of the derivative are recorded in other comprehensive income and are
recognized in the income statement when the hedged item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges are
recognized in earnings.
The Company uses derivative instruments to manage exposures to foreign
exchange rate fluctuations. The Company's objectives for holding derivatives are
to minimize the risks using the most effective methods to eliminate or reduce
the impacts of these exposures. The Company monitors its foreign currency
exposures daily to maximize the overall effectiveness of its foreign currency
hedge positions. Principal currencies hedged include the Euro, British pound and
Japanese yen. Options and forwards used to hedge a portion of forecasted
international intercompany revenue for up to one year in the future are
designated as cash flow hedging instruments. Forwards and options not designated
as hedging instruments under SFAS 133 are also used to hedge the impact of the
variability in exchange rates on accounts receivable and payable balances.
For options designated as cash flow hedges, changes in the time value are
excluded from the assessment of hedge effectiveness. Hedge ineffectiveness,
determined in accordance with SFAS 133, had no impact on earnings for the three
months ended March 31, 2001 as the Company did not have any forecasted
transactions. For the three months ended March 31, 2001, other income included a
net foreign currency gain of $24 for forwards instruments not designated as
hedging instruments.
7
(3) INVENTORIES
Inventories consist of the following:
December 31, March 31,
2000 2001
------------ ---------
Raw materials $ 20,961 $ 21,252
Work in process 53,711 53,652
Finished goods 85,624 89,897
-------- --------
Total $160,296 $164,801
======== ========
(4) OTHER (INCOME) EXPENSE, NET
Other (income) expense, net consists of the following:
Three months ended
-----------------------
April 1, March 31,
2000 2001
------- ---------
West 57th Building income $(1,163) $(1,163)
West 57th Building expenses 814 814
Foreign exchange loss, net 295 334
Miscellaneous (101) (150)
------- -------
Other (income) expense, net $ (155) $ (165)
======= =======
(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.
8
(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, March 31, April 1, March 31,
2000 2001 2000 2001
------------ --------- -------- ---------
Current assets $264,198 $277,594
Total assets 420,150 430,245
Current liabilities 73,550 78,479
Stockholder's equity 126,820 129,913
Total revenues $ 86,854 $101,581
Gross profit 26,382 31,709
Net income 5,266 5,341
(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 1, 2000 and
March 31, 2001:
THREE MONTHS ENDED 2000 Piano Segment Band and Orchestral Segment
----------------------------------------- --------------------------------
Other Consol
U.S. Germany Other Total U.S. 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
THREE MONTHS ENDED 2001 Piano Segment Band and Orchestral Segment
----------------------------------------- --------------------------------
Other Consol
U.S. Germany Other Total U.S. Other Total & Elim Total
------- ------- ------ ------- ------- ------- ------- ------- -------
Revenues from external
customers $29,327 $9,347 $6,222 $44,896 $55,410 $ 1,275 $56,685 $ -- $101,581
Net income (loss) 574 656 875 2,105 226 (14) 212 2,883 5,200
(8) SUBSEQUENT EVENT
On April 19, 2001, the Company completed a $150.0 million senior note
offering at 8.75%. The proceeds of the offering will be used to redeem all of
the existing 11% Senior Subordinated Notes (the "Notes"), with the balance
paying down the revolving credit facility. The early retirement of the Notes,
scheduled for redemption on June 1, 2001 at 102.75% of the principal amount,
will generate an extraordinary charge of approximately $3.5 million, net of tax,
in the second quarter.
9
(9) SUMMARY OF 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, UMI 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 recorded 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.
10
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- -------- ------------ ------------ ------------ ------------
Net sales $ -- $38,920 $47,791 $17,609 $(2,739) $101,581
Cost of sales 28,706 32,889 10,985 (2,708) 69,872
------- ------- ------- ------- ------- --------
Gross profit -- 10,214 14,902 6,624 (31) 31,709
Operating expenses:
Sales and marketing 3,399 5,995 2,389 (14) 11,769
General and administrative 989 1,314 2,184 1,144 5,631
Amortization 69 768 278 1,115
Other operating (income) expense (729) 133 475 229 14 122
------- ------- ------- ------- ------- --------
Total operating expenses 260 4,915 9,422 4,040 -- 18,637
------- ------- ------- ------- ------- --------
Income (loss) from operations (260) 5,299 5,480 2,584 (31) 13,072
Interest (income) expense, net 5,581 (1,157) 113 4,537
Other (income) expense, net (199) 34 (165)
------- ------- ------- ------- ------- --------
Income (loss) before income taxes (260) (282) 6,836 2,437 (31) 8,700
Provision for (benefit of) income (119) 214 2,487 942 (24) 3,500
taxes
------- ------- ------- ------- ------- --------
Net income (loss) $ (141) $ (496) $ 4,349 $ 1,495 $ (7) $ 5,200
======= ======= ======= ======= ======= ========
11
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2001
(IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent Of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- -------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash $ -- $ 427 $ 1,087 $ 4,069 $ -- $ 5,583
Accounts, notes and leases
receivable, net 44,058 47,479 9,119 100,656
Inventories 46,312 95,418 24,401 (1,330) 164,801
Prepaid expenses and other
current assets 255 1,757 428 531 2,971
Deferred tax assets 2,398 2,922 3,344 (4,693) 3,971
--------- --------- --------- --------- --------- ---------
Total current assets 255 94,952 147,334 41,464 (6,023) 277,982
Property, plant and equipment, net 133 12,558 78,857 13,321 104,869
Investment in subsidiaries 71,143 195,906 56,147 (323,196) --
Other assets, net 613 607 15,937 3,797 (1,278) 19,676
Cost in excess of fair value
of net assets acquired, net 8,758 10,470 9,184 28,412
--------- --------- --------- --------- --------- ---------
TOTAL ASSETS $ 72,144 $ 312,781 $ 308,745 $ 67,766 $(330,497) $ 430,939
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of
long-term debt $ -- $ -- $ 5,600 $ 4,529 $ -- $ 10,129
Accounts payable 2 2,942 4,916 1,370 9,230
Other current liabilities (19,419) 6,467 47,413 10,900 (5,664) 39,697
--------- --------- --------- --------- --------- ---------
Total current liabilities (19,417) 9,409 57,929 16,799 (5,664) 59,056
Long-term debt 46 134,566 83,955 218,567
Intercompany 35,510 84,218 (124,832) 5,104 --
Deferred tax liabilities 4,805 14,304 6,364 25,473
Other liabilities 1,304 11,062 (682) 11,684
--------- --------- --------- --------- --------- ---------
Total liabilities 16,139 232,998 32,660 39,329 (6,346) 314,780
Stockholders' equity 56,005 79,783 276,085 28,437 (324,151) 116,159
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 72,144 $ 312,781 $ 308,745 $ 67,766 $(330,497) $ 430,939
========= ========= ========= ========= ========= =========
12
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent Of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- -------- ------------ ------------ ------------ ------------
Cash flows from operating
activities:
Net income (loss) $ (141) $ (496) $ 4,349 $ 1,495 $ (7) $ 5,200
Adjustments to reconcile
net income (loss) to
cash flows from operating
activities:
Depreciation and amortization 10 604 2,261 648 3,523
Deferred tax benefit (175) (173) (348)
Other 25 74 19 118
Changes in operating assets
and liabilities:
Accounts, notes and
leases receivable (5,898) (3,163) 621 (8,440)
Inventories 2,167 (7,899) (1,120) 31 (6,821)
Prepaid expenses and
other current assets (38) (17) 110 (224) (169)
Accounts payable (140) 344 (1,782) (293) (1,871)
Other current liabilities (2,234) 4,521 2,164 628 (24) 5,055
-------- -------- -------- -------- -------- --------
Cash flows from operating
activities (2,543) 1,250 (4,061) 1,601 -- (3,753)
Cash flows from investing
activities:
Capital expenditures (52) (643) (453) (280) (1,428)
Proceeds from disposals
of fixed assets 1 1
Changes in other assets 112 112
-------- -------- -------- -------- -------- --------
Cash flows from investing
activities (52) (531) (452) (280) -- (1,315)
Cash flows from financing
activities:
Net borrowings (repayments)
under lines of credit (139) (4,053) 10,594 773 7,175
Repayments of long-term debt (1,348) (180) (1,528)
Intercompany transactions 2,734 3,497 (6,044) (187) --
-------- -------- -------- -------- -------- --------
Cash flows from financing
activities 2,595 (556) 3,202 406 5,647
Effect of exchange rate changes
on cash 15 15
-------- -------- -------- -------- -------- --------
Increase (decrease) in cash -- 163 (1,311) 1,742 594
Cash, beginning of period 264 2,398 2,327 4,989
-------- -------- -------- -------- -------- --------
Cash, end of period $ -- $ 427 $ 1,087 $ 4,069 $ -- $ 5,583
======== ======== ======== ======== ======== ========
13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
INTRODUCTION
The Company, through its operating subsidiaries, is one of the world's
leading manufacturers of musical instruments. Effective September 15, 2000, the
Company completed the acquisition of United Musical Instruments Holdings, Inc.
("UMI") through its wholly-owned subsidiary, Selmer. The acquisition of UMI was
accounted for as a purchase for financial reporting purposes. The aggregate
purchase price approximated $84.0 million. The financial statements of the
Company as of and for the three months ended March 31, 2001 include the effects
of the acquisition and the results of operations for UMI.
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, 2000 and its Final Prospectus filed in
August 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED APRIL 1, 2000
NET SALES -- Net sales increased $13.8 million (16%) to $101.6 million in
the first quarter of 2001. Piano sales increased $0.7 million (2%) as a 10%
increase in Steinway shipments offset a 44% decrease in Boston shipments.
Domestic Steinway shipments rose 5% and shipments to Europe and Asia increased
14% over the prior year period. With the addition of UMI, band and orchestral
instrument sales increased $13.1 million (30%) on an overall unit sales increase
of 25%.
GROSS PROFIT -- Gross profit increased by $5.1 million (19%) to $31.7
million. Gross margins increased from 30.3% in 2000 to 31.2% in 2001. Piano
margins increased from 34.3% in 2000 to 36.3% in 2001 primarily as a result of
the higher proportion of Steinway units sold. Band and orchestral instrument
margins increased slightly from 26.2% in 2000 to 27.2% in 2001.
OPERATING EXPENSES - Overall operating expenses increased by $4.0
million (27%) to $18.6 million in the first quarter. Excluding $3.3 million
of UMI operating expense in the current year period, expenses increased 5%
primarily due to the timing of certain trade show and advertising expenses
incurred in the first quarter of 2001.
14
OTHER EXPENSE, NET -- Other expenses, primarily interest expense, increased
by $1.2 million (36%) to $4.4 million. Higher average outstanding debt balances
resulting from increased inventory levels and the additional debt associated
with the acquisition of UMI contributed to the increased expense.
INCOME TAXES - The Company's effective tax rate decreased slightly from
40.5% in 2000 to 40.2% in 2001.
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 three months of 2000 was $6.1
million. Cash used in operations was $3.8 million in 2001. This change is due
primarily to an increase in inventory balances in the current year period and
the acquisition of UMI. A decline in Boston piano shipments has led to a
temporary buildup in inventory of this product.
Capital expenditures of $2.1 million and $1.4 million in the first three
months of 2000 and 2001, respectively, were used primarily 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.
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, which was amended and restated to
accommodate the acquisition of UMI, provides the Company with a potential
borrowing capacity of up to $120 million, based on eligible accounts receivable
and inventory balances. The Credit Facility bears interest at average 30-day
LIBOR plus 1.75% and expires on September 14, 2008. As of March 31, 2001,
revolving credit loans outstanding were $49.5 million and additional
availability was approximately $60.8 million. Open account loans with foreign
banks also provide for borrowings by Steinway's foreign subsidiaries of up to 39
million Deutsche marks ($17.5 million at the March 31, 2001 exchange rate).
The Company's long-term financing consists primarily of $110.0 million of
Senior Subordinated Notes (the "Notes") and $64.6 million of term loans
outstanding under the Credit Facility. On April 19, 2001, the Company completed
a $150.0 million senior note offering at 8.75%. The proceeds of the offering
will be used to redeem all of the Notes, with the balance paying down the Credit
Facility. The early retirement of the Notes, scheduled for redemption on June 1,
2001 at 102.75% of the principal amount, will generate an extraordinary charge
of approximately $3.5 million, net of tax, in the second quarter. 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.
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 existing debt service requirements, fund continuing capital
requirements and satisfy working capital and general corporate needs through
2001.
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NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), which establishes accounting and reporting standards for
derivative instruments. All derivatives, whether designated in hedging
relationships or not, are required to be recorded on the balance sheet at fair
value. If the derivative is designated as a fair value hedge, the changes in the
fair value of the derivative and of the hedged item attributable to the hedged
risk are recognized in earnings. If the derivative is designated as a cash flow
hedge, the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in earnings.
The Company uses derivative instruments to manage exposures to foreign
exchange rate fluctuations. The Company's objectives for holding derivatives are
to minimize the risks using the most effective methods to eliminate or reduce
the impacts of these exposures. The Company monitors its foreign currency
exposures daily to maximize the overall effectiveness of its foreign currency
hedge positions. Principal currencies hedged include the Euro, British pound and
Japanese yen. Options and forwards used to hedge a portion of forecasted
international intercompany revenue for up to one year in the future are
designated as cash flow hedging instruments. Forwards and options not designated
as hedging instruments under SFAS 133 are also used to hedge the impact of the
variability in exchange rates on accounts receivable and payable balances.
For options designated as cash flow hedges, changes in the time value are
excluded from the assessment of hedge effectiveness. Hedge ineffectiveness,
determined in accordance with SFAS 133, had no impact on earnings for the three
months ended March 31, 2001 as the Company did not have any forecasted
transactions. For the three months ended March 31, 2001, other income included a
net foreign currency gain of $24 for forwards instruments not designated as
hedging instruments.
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, 2000.
The Company's revolving loans and term loans bear interest at rates that
fluctuate with changes in the Libor rate. Substantially all of the Company's
long-term debt, except the term loans referred to above, is at fixed interest
rates. Accordingly, the Company's interest expense on its revolving loans and
term loans 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, 2000.
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PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended March 31, 2001.
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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 14, 2001
18