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 SEPTEMBER 27, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-75072
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 02154
(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 October 31, 1997: Class A 477,953
Ordinary 8,974,541
---------
Total 9,452,494
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
FORM 10Q
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets
September 27, 1997 and December 31, 1996. . . . . . . . . . . .3
Condensed Consolidated Statements of Operations
Nine months ended September 27, 1997 and September 28, 1996 . .4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 27, 1997 and September 28, 1996 . .5
Notes to Condensed Consolidated Financial Statements . . . . . . . .6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 27, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
Current assets:
Cash $ 481 $ 3,277
Accounts, notes and leases receivable, net of
allowance for bad debts of $7,984 and
$7,120 in 1997 and 1996, respectively 75,673 45,563
Inventories 84,057 82,950
Prepaid expenses and other current assets 4,974 2,867
Deferred tax asset 5,378 5,696
--------- --------
Total current assets 170,563 140,353
Property, plant and equipment, net of accumulated
depreciation of $18,128 and $13,904 in 1997
and 1996, respectively 58,833 62,101
Other assets, net 23,096 26,291
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $2,521 and
$1,894 in 1997 and 1996, respectively 34,074 36,621
--------- --------
TOTAL ASSETS $ 286,566 $ 265,366
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 3,333 $ 2,354
Accounts payable 5,482 6,453
Other current liabilities 31,240 28,913
--------- --------
Total current liabilities 40,055 37,720
Long-term debt 133,667 116,037
Deferred taxes 26,346 30,003
Non-current pension liability 12,504 13,728
--------- --------
Total liabilities 212,572 197,488
Commitments and Contingencies
Stockholders' equity:
Common stock 9 9
Additional paid in capital 69,187 68,729
Retained earnings 10,398 792
Accumulated translation adjustment (5,600) (1,652)
--------- --------
Total stockholders' equity 73,994 67,878
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 286,566 $ 265,366
--------- --------
--------- --------
See notes to condensed consolidated financial statements.
3
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net sales $ 64,554 $ 61,460 $ 208,055 $ 194,876
Cost of sales 43,308 41,798 140,147 132,527
---------- ---------- ---------- ----------
Gross profit 21,246 19,662 67,908 62,349
Operating Expenses:
Sales and marketing 7,337 6,831 23,881 22,330
General and administrative 4,496 4,255 13,435 12,538
Amortization 952 1,069 2,905 3,374
Other (income) expense (49) 112 115 359
---------- ---------- ---------- ----------
Total Operating Expenses 12,736 12,267 40,336 38,601
---------- ---------- ---------- ----------
Earnings from operations 8,510 7,395 27,572 23,748
Interest expense, net 3,542 4,592 9,798 14,168
---------- ---------- ---------- ----------
Income before income taxes
and extraordinary item 4,968 2,803 17,774 9,580
Provision for income taxes 2,266 1,603 8,168 5,089
---------- ---------- ---------- ----------
Income before extraordinary item 2,702 1,200 9,606 4,491
Extraordinary item - Early extinguishment
of debt (net of tax benefit of $2,640) - 4,368 - 4,368
---------- ---------- ---------- ----------
Net income (loss) $ 2,702 $ (3,168) $ 9,606 $ 123
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) per share:
Income before extraordinary item $ .28 $ .14 $ 1.02 $ .67
Extraordinary item - (.52) - (.65)
---------- ---------- ---------- ----------
Net income (loss) per share $ .28 $ (.38) $ 1.02 $ .02
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common and
common equivalent shares outstanding 9,504,485 8,337,127 9,450,120 6,750,460
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See notes to condensed consolidated financial statements.
4
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
----------------------------
September 27, September 28,
1997 1996
------------- -------------
Cash flows from operating activities
Net income $ 9,606 $ 123
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 7,926 8,317
Deferred tax benefit (1,728) (1,666)
Early extinguishment of debt - 4,368
Other 594 827
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (31,102) (26,888)
Inventories (2,900) 425
Prepaid expense and other current assets (1,181) 143
Accounts payable (902) (3,031)
Accrued expenses 3,766 211
-------- -------
Net cash flows from operating activities (15,921) (17,171)
Cash flows from investing activities
Capital expenditures (3,766) (2,765)
Proceeds from disposals of fixed assets 34 16
Acquisition of business (net of cash acquired) (1,606) -
Changes in other assets (1,322) (113)
-------- -------
Net cash flows from investing activities (6,660) (2,862)
Cash flows from financing activities
Net borrowings under line of credit agreements 20,015 15,704
Net repayments of long-term debt (664) (59,943)
Proceeds from issuance of stock 458 61,022
-------- -------
Net cash flows from financing activities 19,809 16,783
Effect of foreign exchange rate changes on cash (24) (141)
-------- -------
Decrease in cash (2,796) (3,391)
Cash, beginning of period 3,277 3,706
-------- -------
Cash, end of period $ 481 $ 315
-------- -------
-------- -------
Supplemental Cash Flow Information
Interest paid $ 7,127 $ 11,368
-------- -------
-------- -------
Taxes paid $ 9,857 $ 8,698
-------- -------
-------- -------
See notes to condensed consolidated financial statements.
5
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Steinway
Musical Instruments, Inc. and subsidiaries (the "Company") for the nine
months ended September 27, 1997 and September 28, 1996 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, 1996, 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, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996. The results of operations for the nine
months ended September 27, 1997 are not necessarily indicative of the results
which 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 1996 amounts have been
made to conform to the financial statement classification adopted in 1997.
INCOME PER SHARE - Income per share as presented on the face on the
statements of operations represent primary earnings per share. Dual
presentation of primary and fully diluted earnings per share has not been
made because the differences are insignificant.
NEW ACCOUNTING PRONOUNCEMENTS - During the first quarter of 1997, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". The adoption of this standard had no effect
on the Company's results of operation, financial position or cash flows.
The Company plans to adopt SFAS No. 128, "Earnings per Share", as of
December 31, 1997. At that time, the Company will be required to change the
method currently used to calculate earnings per share and to restate all
prior periods. The new requirements will include a calculation of basic
earnings per share, from which the dilutive effect of stock options will be
excluded. Proforma basic earnings per share for the quarter ended September
27, 1997 would reflect an increase of $.01 per share. Proforma basic
earnings per share would not differ from the reported earnings per share for
all other periods presented. A calculation of diluted earnings per share will
also be required; however, this is not expected to differ materially from the
Company's reported primary earnings per share.
6
The Company plans to adopt SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," in fiscal 1998. Both Statements will require
additional disclosure, but will not have a material effect on the Company's
results of operations or financial position. SFAS No. 130 will require the
Company to report comprehensive income in its financial statements. SFAS No.
131 specifies revised guidelines for determining operating segments and the
type and level of information to be disclosed.
(3) COMMITMENTS AND CONTINGENCIES
Certain environmental matters are pending against 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 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.
(4) 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:
Nine Months Ended
September 27, December 31, September 27, September 28
1997 1996 1997 1996
------------- ------------ ------------- ------------
Current assets $ 167,506 $ 140,335
Total assets 283,144 265,348
Current liabilities 43,482 37,673
Stockholder's equity 74,528 68,718
Total revenues $ 206,010 $ 194,876
Gross profit 67,420 62,349
Net income 9,758 (319)
(5) 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 due 2005 and available cash
balances of the Company. Selmer's payment obligations under the Senior
Subordinated 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").
7
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.
8
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash $ - $ (1,376) $ 1,196 $ 661 $ - $ 481
Accounts, notes and leases receivable, net 58,903 8,573 8,197 75,673
Inventories 29,624 31,723 23,273 (563) 84,057
Prepaid expenses and other current assets 789 1,436 1,111 1,638 4,974
Deferred tax asset 700 2,024 3,627 (973) 5,378
--------- ---------- ---------- --------- ---------- ----------
Total current assets 789 89,287 44,627 37,396 (1,536) 170,563
Property, plant and equipment, net 97 15,045 26,906 16,785 58,833
Investment in subsidiaries 71,143 168,557 30,698 (270,398) -
Other assets, net 613 1,842 14,267 7,687 (1,313) 23,096
Cost in excess of fair value
of net assets acquired, net 9,705 11,544 12,825 34,074
--------- ---------- ---------- --------- ---------- ----------
TOTAL ASSETS $ 72,642 $ 284,436 $ 128,042 $ 74,693 $(273,247) $ 286,566
--------- ---------- ---------- --------- ---------- ----------
--------- ---------- ---------- --------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current
portion of long-term debt $ - $ - $ - $ 3,333 $ - $ 3,333
Accounts payable 73 2,353 1,630 1,426 5,482
Other current liabilities (3,605) 15,033 11,343 10,052 (1,583) 31,240
--------- ---------- ---------- --------- ---------- ----------
Total current liabilities (3,532) 17,386 12,973 14,811 (1,583) 40,055
Long-term debt 172 119,853 11,259 2,383 133,667
Intercompany 6,915 62,156 (71,074) 2,003 -
Deferred taxes 1,165 10,936 14,245 26,346
Non-current pension liability 721 12,504 (721) 12,504
--------- ---------- ---------- --------- ---------- ----------
Total liabilities 3,555 201,281 (35,906) 45,946 (2,304) 212,572
Stockholders' equity 69,087 83,155 163,948 28,747 (270,943) 73,994
--------- ---------- ---------- --------- ---------- ----------
Total $ 72,642 $ 284,436 $ 128,042 $ 74,693 $(273,247) $ 286,566
--------- ---------- ---------- --------- ---------- ----------
--------- ---------- ---------- --------- ---------- ----------
9
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------ ------------ ------------
Net sales $ - $ 105,054 $ 67,474 $ 40,323 $ (4,796) $ 208,055
Cost of sales 70,807 46,388 27,654 (4,702) 140,147
--------- ---------- ------------ ------------ ------------ ------------
Gross profit - 34,247 21,086 12,669 (94) 67,908
Operating expenses:
Sales and marketing 9,938 8,668 5,358 (83) 23,881
General and administrative 1,958 4,985 2,973 3,519 13,435
Amortization 344 1,553 1,008 2,905
Other (income) expense (1,624) 38 1,302 316 83 115
--------- ---------- ------------ ------------ ------------ ------------
Total operating expenses 334 15,305 14,496 10,201 - 40,336
--------- ---------- ------------ ------------ ------------ ------------
Earnings (loss) from operations (334) 18,942 6,590 2,468 (94) 27,572
Interest (income) expense:
Interest income (227) (11,623) (123) 11,616 (357)
Interest expense 14,473 6,913 385 (11,616) 10,155
--------- ---------- ------------ ------------ ------------ ------------
Interest expense, net - 14,246 (4,710) 262 - 9,798
--------- ---------- ------------ ------------ ------------ ------------
Income (loss) before income taxes (334) 4,696 11,300 2,206 (94) 17,774
Provision for (benefit of) income taxes (160) 2,380 4,833 1,133 (18) 8,168
--------- ---------- ------------ ------------ ------------ ------------
Net income (loss) $ (174) $ 2,316 $ 6,467 $ 1,073 $ (76) $ 9,606
--------- ---------- ------------ ------------ ------------ ------------
--------- ---------- ------------ ------------ ------------ ------------
10
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
-------- --------- ------------ ------------ ------------ ------------
Cash flows from operating activities
Net income (loss) $ (174) $ 2,316 $ 6,467 $ 1,073 $ (76) $ 9,606
Adjustments to reconcile net income (loss)
to cash flows from operating activities:
Depreciation and amortization 20 2,354 3,454 2,098 7,926
Deferred tax benefit (769) (959) (1,728)
Other 265 101 228 594
Changes in operating assets and liabilities:
Accounts, notes and leases receivable 25 (29,384) (2,502) 759 (31,102)
Inventories (13) 5,083 (5,315) (2,749) 94 (2,900)
Prepaid expense and other current assets (562) 24 (222) (421) (1,181)
Accounts payable 35 (396) (944) 403 (902)
Accrued expenses (4,402) 4,733 2,862 591 (18) 3,766
-------- --------- ------------ ------------ ------------ ------------
Net cash flows from operating activities (5,071) (15,005) 3,132 1,023 - (15,921)
Cash flows from investing activities
Capital expenditures (35) (2,027) (970) (734) (3,766)
Proceeds from disposals of fixed assets 1 9 24 34
Acquisition of business (net of
cash acquired) (1,730) 124 (1,606)
Changes in other assets (11) (7) (67) (1,237) (1,322)
-------- --------- ------------ ------------ ------------ ------------
Net cash flows from investing activities (1,776) (2,033) (904) (1,947) - (6,660)
Cash flows from financing activities
Net borrowings under line of
credit agreements 37 9,853 8,821 1,304 20,015
Repayments of long-term debt (664) (664)
Proceeds from sale of stock 458 458
Intercompany dividend 7,203 (7,203) -
Intercompany 6,334 (1,044) (4,870) (420) -
-------- --------- ------------ ------------ ------------ ------------
Net cash flows from financing activities 6,829 16,012 (3,252) 220 - 19,809
Effect of exchange rate changes on cash - - - (24) - (24)
Decrease in cash (18) (1,026) (1,024) (728) - (2,796)
Cash, beginning of period 18 (350) 2,220 1,389 3,277
-------- --------- ------------ ------------ ------------ ------------
Cash, end of period $ - $ (1,376) $ 1,196 $ 661 $ - $ 481
-------- --------- ------------ ------------ ------------ ------------
-------- --------- ------------ ------------ ------------ ------------
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS) (UNAUDITED)
INTRODUCTION
The Company, through its subsidiaries Steinway and Selmer, is one of the
world's leading manufacturers of musical instruments. In January 1997, the
Company acquired Emerson Musical Instruments, Inc. ("Emerson"), a
manufacturer of flutes and piccolos, for approximately $2.0 million,
including assumed liabilities. The acquisition has been accounted for as a
purchase for financial reporting purposes. In February 1997, the Company
formed a new wholly-owned subsidiary, Steinway & Sons Japan Ltd. ("SJL"), to
increase its distribution of pianos in Japan.
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, exchange rate
fluctuations, and the availability of production capacity 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, 1996 and its Final Prospectus
filed in August, 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 27, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 28, 1996
NET SALES - Net sales increased by $3.1 million (5.0%) to $64.6 million
in the third quarter of 1997. Band instrument unit shipments, with Emerson
included, were down slightly from the prior year. However, realization of
price increases, as well as a favorable mix of instruments, resulted in a
$1.6 million (5.2%) overall increase. Piano sales increased $1.5 million
(4.9%) over the previous year. Worldwide unit growth of 19% was fueled by a
44% increase in the Boston piano line. This volume improvement was partially
offset by a $2.5 million decrease relating to the translation of foreign
sales into U.S. dollars.
GROSS PROFIT - Consistent with the increase in sales, gross profit
increased by $1.6 million (8.1%) to $21.2 million in the third quarter of
1997. Gross margins increased to 32.9% for the third quarter of 1997 compared
to 32.0% in 1996. This improvement reflects continued manufacturing
efficiencies throughout U.S. production facilities combined with a reduction
in the cost of the Boston piano line caused by the decrease in the value of
the yen.
OPERATING EXPENSES - Operating expenses increased by $0.5 million (3.8%)
to $12.7 million in the third quarter of 1997. Essentially all of the
increase relates to Emerson and SJL operating costs. Expenses decreased as a
percentage of sales from 20.0% in 1996 to 19.7% in 1997.
EARNINGS FROM OPERATIONS - Earnings from operations increased by $1.1
million (15.1%) to $8.5 million in the third quarter of 1997. These improved
earnings resulted from increased sales combined with improved gross profit
margins and firm control over operating expenses.
12
NET INTEREST EXPENSE - Net interest expense decreased by $1.1 million
(22.9%) to $3.5 million in the third quarter of 1997. This decrease
represents the savings realized from the retirement of the Company's Senior
Secured Notes in September 1996.
NINE MONTHS ENDED SEPTEMBER 27, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 28, 1996
NET SALES - Net sales increased by $13.2 million (6.8%) to $208.1
million in the first nine months of 1997. Band instrument sales increased
$9.4 million (9.5%) over the prior year, including $2.1 million associated
with Emerson. Unit shipments improved nearly 6%, with the balance of the
sales increase reflecting general price increases. Piano sales increased
$3.8 million (4.0%) over the previous year. Unit increases of 18% in piano
shipments, led by the 37% improvement in the Boston piano line, were offset
by a $5.3 million decrease relating to the translation of foreign sales into
U.S. dollars.
GROSS PROFIT - Consistent with the increase in sales, gross profit
increased by $5.5 million (8.9%) to $67.9 million in the first nine months of
1997. Gross margins increased to 32.6% in 1997 compared to 32.0% in 1996,
reflecting continued improvement in manufacturing efficiencies throughout
U.S. production facilities. The favorable yen to dollar exchange rate, which
has reduced the cost of the Boston piano line, has also contributed to the
improvement.
OPERATING EXPENSES - Operating expenses increased by $1.7 million (4.5%)
to $40.3 million in the first nine months of 1997. Approximately $1.0
million of new expenses associated with Emerson and SJL are included in 1997
operating expenses. Remaining operating expenses have increased 1.9% over
1996 levels. Expenses decreased as a percentage of sales from 19.8% in 1996
to 19.4% in 1997.
EARNINGS FROM OPERATIONS - Earnings from operations increased by $3.8
million (16.1%) to $27.6 million in the first nine months of 1997. This
increase has resulted from increased sales combined with improved gross
profit margins and firm control over operating expenses.
NET INTEREST EXPENSE - Net interest expense decreased by $4.4 million
(30.8%) to $9.8 million in the first nine months of 1997 reflecting the $4.3
million savings realized from the retirement of the Company's Senior Secured
Notes in September 1996.
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 required for operations in the first nine months was $15.9 million
in 1997 and $17.2 million in 1996. The decrease in cash required for
operations in 1997 resulted from $4.4 million of additional cash earnings
from operations offset by $3.2 million of additional net working capital
requirements.
The Company's investing activities used $1.6 million of cash to acquire
Emerson in January 1997. Capital expenditures were $3.8 million and $2.8
million for the first nine months of 1997 and 1996, respectively. These
capital expenditures were mainly used for the purchase of new machinery and
building improvements. The Company expects to increase its level of capital
expenditures in the future as it continues to modernize, expand and renovate
its equipment and facilities.
13
The Company's domestic, seasonal borrowing requirements are accommodated
through a committed, revolving credit facility with a domestic bank (the
"Facility"). The Facility provides the Company with a potential borrowing
capacity of up to $60 million, based on eligible accounts receivable and
inventory balances. As of September 27, 1997, $21.3 million was outstanding,
with additional availability of approximately $38.0 million. Open account
loans with foreign banks also provide for borrowings by Steinway's foreign
subsidiaries of up to 20 million Deutsche marks.
The Company's long-term financing consists primarily of $110 million of
Senior Subordinated Notes. The Company's debt agreements contain restrictive
covenants that place certain restrictions on the Company, including
restrictions to the Company's ability to incur additional indebtedness, to
make investments in other entities, or to pay cash dividends.
In August 1997, the Company issued 29,557 shares of the Company's common
stock under the Employee Stock Purchase Plan. Proceeds from the sale of
stock under the plan were $458.
Management believes that cash on hand, together with cash flow
anticipated from operations and available borrowings under the Facility, will
be adequate to meet debt service requirements, fund continuing capital
requirements and satisfy working capital and general corporate needs through
1997.
NEW ACCOUNTING PRONOUNCEMENTS
During the first quarter of 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". The
adoption of this standard had no effect on the Company's results of
operation, financial position or cash flows.
The Company plans to adopt SFAS No. 128, "Earnings per Share", as of
December 31, 1997. At that time, the Company will be required to change the
method currently used to calculate earnings per share and to restate all
prior periods. The new requirements will include a calculation of basic
earnings per share, from which the dilutive effect of stock options will be
excluded. Proforma basic earnings per share for the quarter ended September
27, 1997 would reflect an increase of $.01 per share. Proforma basic
earnings per share would not differ from the reported earnings per share for
all other periods presented. A calculation of diluted earnings per share will
also be required; however, this is not expected to differ materially from the
Company's reported primary earnings per share.
The Company plans to adopt SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," in fiscal 1998. Both Statements will require
additional disclosure, but will not have a material effect on the Company's
results of operations or financial position. SFAS No. 130 will require the
Company to report comprehensive income in its financial statements. SFAS No.
131 specifies revised guidelines for determining operating segments and the
type and level of information to be disclosed.
14
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1. Steinway Musical Instruments, Inc. - Financial Data
Schedule
Exhibit 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
September 27, 1997.
15
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
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: November 7, 1997