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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 APRIL 4, 1998
[ ] 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 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 April 30, 1998: Class A 477,953
Ordinary 8,894,741
---------
Total 9,372,694
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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 Balance Sheets
December 31, 1997 and April 4, 1998....................... 3
Condensed Consolidated Statements of Operations
Three months ended March 29, 1997 and April 4, 1998....... 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 29, 1997 and April 4, 1998....... 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............................... 14
SIGNATURES..................................................... 15
2
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, APRIL 4,
1997 1998
------------ --------
ASSETS
Current assets:
Cash $ 5,271 $ 7,181
Accounts, notes and leases receivable, net of
allowance for bad debts of $7,504
and $7,916 in 1997 and 1998, respectively 47,377 52,203
Inventories 87,954 87,159
Prepaid expenses and other current assets 4,832 4,792
Deferred tax asset 6,188 6,126
-------- --------
Total current assets 151,622 157,461
Property, plant and equipment, net of accumulated
depreciation of $19,531 and $21,075 in
1997 and 1998, respectively 58,629 57,638
Other assets, net 22,891 21,551
Cost in excess of fair value of net assets
acquired, net of accumulated amortization
of $2,734 and $2,938 in 1997 and 1998,
respectively 33,566 33,001
-------- --------
TOTAL ASSETS $266,708 $269,651
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of
long-term debt $ 3,338 $ 3,008
Accounts payable 5,668 5,293
Other current liabilities 31,423 32,531
-------- --------
Total current liabilities 40,429 40,832
Long-term debt 112,119 111,786
Deferred taxes 26,279 25,441
Non-current pension liability 12,120 12,030
-------- --------
Total liabilities 190,947 190,089
Commitments and Contingent Liabilities
Stockholders' equity:
Common stock 9 9
Additional paid in capital 69,206 69,345
Retained earnings 14,492 18,959
Accumulated translation adjustment (6,030) (6,702)
Treasury stock (1,916) (2,049)
-------- --------
Total stockholders' equity 75,761 79,562
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 266,708 $ 269,651
-------- --------
-------- --------
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
------------------------
March 29, April 4,
1997 1998
---------- ---------
Net sales $ 73,726 $ 79,100
Cost of sales 50,105 53,056
---------- ---------
Gross profit 23,621 26,044
Operating Expenses:
Sales and marketing 8,821 9,457
General and administrative 4,253 4,214
Amortization 984 951
Other expense 154 291
---------- ---------
Total Operating Expenses 14,212 14,913
---------- ---------
Earnings from operations 9,409 11,131
Interest expense, net 3,039 2,838
---------- ---------
Income before income taxes 6,370 8,293
Provision for income taxes 2,932 3,826
---------- ---------
Net income $ 3,438 $ 4,467
---------- ---------
---------- ---------
Net income per share:
Basic $ .36 $ .48
---------- ---------
---------- ---------
Diluted $ .36 $ .47
---------- ---------
---------- ---------
Weighted average shares outstanding:
Basic 9,422,937 9,364,979
---------- ---------
---------- ---------
Diluted 9,422,937 9,528,929
---------- ---------
---------- ---------
See notes to condensed consolidated financial statements.
4
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended
------------------------
March 29, April 4,
1997 1998
---------- ---------
Cash flows from operating activities:
Net income $ 3,438 $ 4,467
Adjustments to reconcile net income to
cash flows from operating activities:
Depreciation and amortization 2,687 2,686
Deferred tax benefit (576) (516)
Other 196 79
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (4,446) (5,095)
Inventories 419 135
Prepaid expense and other current assets (41) (194)
Accounts payable (553) (359)
Accrued expenses 2,424 1,408
---------- ---------
Cash flows from operating activities 3,548 2,611
Cash flows from investing activities:
Capital expenditures (849) (1,039)
Proceeds from disposals of fixed assets 33 82
Acquisition of business (net of cash acquired) (1,606) -
Changes in other assets (1,819) 791
---------- ---------
Cash flows from investing activities (4,241) (166)
Cash flows from financing activities:
Net borrowings (repayments)
under lines of credit 492 (243)
Repayments of long-term debt (231) (279)
Proceeds from issuance of stock - 139
Purchase of treasury stock - (133)
---------- ---------
Cash flows from financing activities 261 (516)
Effect of foreign exchange rate changes on cash - (19)
---------- ---------
Increase (decrease) in cash (432) 1,910
Cash, beginning of period 3,277 5,271
---------- ---------
Cash, end of period $ 2,845 $ 7,181
---------- ---------
---------- ---------
Supplemental Cash Flow Information
Interest paid $ 171 $ 142
---------- ---------
---------- ---------
Taxes paid $ 1,742 $ 3,848
---------- ---------
---------- ---------
See notes to condensed consolidated financial statements.
5
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 4, 1998
(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
three months ended March 29, 1997 and April 4, 1998 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, 1997, 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, 1997. The results of operations for the three months ended April
4, 1998 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.
INCOME PER SHARE - The Company has computed income per share in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". Previously reported income per share did not differ from
that computed using SFAS 128.
A reconciliation of weighted average shares used for the basic and
diluted computations is as follows:
1997 1998
--------- ---------
Weighted average shares for basic 9,422,937 9,364,979
Dilutive effect of stock options - 163,950
--------- ---------
Weighted average shares for diluted 9,422,937 9,528,929
--------- ---------
--------- ---------
NEW ACCOUNTING PRONOUNCEMENTS - During the first quarter of 1998, the
Company adopted SFAS No. 130, "Reporting Comprehensive Income". The only item
that the Company currently records as other comprehensive income is the change
in cumulative translation adjustment resulting from changes in exchange rates
and the effect of those changes upon translation of the financial statements of
the Company's foreign operations. Comprehensive net income for the first
quarter of 1997 and 1998 was $768 and $3,795, respectively.
6
(3) INVENTORIES
Inventories consist of the following:
December 31, April 4,
1997 1998
------------- ----------
Raw materials $ 11,944 $ 12,937
Work in process 35,309 34,232
Finished goods 40,701 39,990
------------- ----------
Total $ 87,954 $ 87,159
------------- ----------
------------- ----------
(4) COMMITMENTS AND CONTINGENT LIABILITIES
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.
(5) 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 4, March 29, April 4
1997 1998 1997 1998
------------- ---------- --------- ---------
Current assets $ 149,022 $ 154,530
Total assets 263,725 266,334
Current liabilities 46,664 50,057
Stockholder's equity 78,302 82,101
Total revenues $ 73,035 $ 78,126
Gross profit 23,520 25,711
Net income 3,530 4,471
7
(6) SEGMENT INFORMATION
The Company has adopted the provisions of SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information". SFAS 131 requires
that a company disclose segmented information about its businesses based upon
the way in which management oversees and evaluates the results of such
businesses. Consistent with this approach, the Company has identified two
distinct and reportable segments: the piano segment and the band and orchestral
instrument segment.
The following tables present information about the Company's operating segments
for the three months ended March 29, 1997 and April 4, 1998:
1997 Piano Segment Band and Orchestral Segment Other & Consol
------------------------------- --------------------------
US Germany Other Total US Other Total Elim Total
-- ------- ----- ------ ------- ----- ------ ------ -----
Revenues from external
customers $19,860 $10,522 $1,683 $32,065 $40,895 $766 $41,661 $ -- $73,726
Segment net income (loss) (358) (13) 2 (369) 1,489 54 1,543 2,264 3,438
1998 Piano Segment Band and Orchestral Segment Other & Consol
------------------------------- --------------------------
US Germany Other Total US Other Total Elim Total
-- ------- ----- ------ ------- ----- ------ ------ -----
Revenues from external
customers $24,295 $8,615 $4,310 $37,220 $40,900 $980 $41,880 $ - $79,100
Segment net income 227 284 266 777 1,244 40 1,284 2,406 4,467
(7) 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").
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
APRIL 4, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- -------- ------------ ------------ ------------ -------------
ASSETS
Current assets:
Cash $ - $ 4,455 $ 1,480 $ 1,246 $ - $ 7,181
Accounts, notes and leases receivable, net - 39,432 6,415 6,356 - 52,203
Inventories - 34,581 30,280 22,921 (623) 87,159
Prepaid expenses and other current assets 777 1,527 647 1,841 - 4,792
Deferred tax asset - 1,060 2,420 3,619 (973) 6,126
--------- ---------- ----------- ---------- ----------- -----------
Total current assets 777 81,055 41,242 35,983 (1,596) 157,461
Property, plant and equipment, net 85 15,105 26,992 15,456 - 57,638
Investment in subsidiaries 71,143 168,557 56,147 - (295,847) -
Other assets, net 613 1,848 13,384 7,019 (1,313) 21,551
Cost in excess of fair value
of net assets acquired, net - 9,570 11,390 12,041 - 33,001
--------- ---------- ----------- ---------- ----------- -----------
TOTAL ASSETS $ 72,618 $ 276,135 $ 149,155 $ 70,499 $(298,756) $ 269,651
--------- ---------- ----------- ---------- ----------- -----------
--------- ---------- ----------- ---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current
portion of long-term debt $ - $ - $ - $ 3,008 $ - $ 3,008
Accounts payable 75 2,401 1,538 1,279 - 5,293
Other current liabilities (9,430) 15,512 17,227 10,536 (1,314) 32,531
--------- ---------- ----------- ---------- ----------- -----------
Total current liabilities (9,355) 17,913 18,765 14,823 (1,314) 40,832
Long-term debt 68 106,427 3,505 1,786 - 111,786
Intercompany 14,862 64,597 (81,549) 2,090 - -
Deferred taxes - 1,787 10,495 13,159 - 25,441
Non-current pension liability - 995 - 12,030 (995) 12,030
--------- ---------- ----------- ---------- ----------- -----------
Total liabilities 5,575 191,719 (48,784) 43,888 (2,309) 190,089
Stockholders' equity 67,043 84,416 197,939 26,611 (296,447) 79,562
--------- -------- ------------ ------------ ------------ -------------
Total $ 72,618 $ 276,135 $ 149,155 $ 70,499 $(298,756) $ 269,651
--------- ---------- ----------- ---------- ----------- -----------
--------- ---------- ----------- ---------- ----------- -----------
9
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED APRIL 4, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- -------- ------------ ------------ ------------ -------------
Net sales $ - $ 40,431 $ 26,666 $ 13,905 $ (1,902) $ 79,100
Cost of sales - 28,052 17,946 8,927 (1,869) 53,056
--------- ---------- ----------- ---------- ----------- -----------
Gross profit - 12,379 8,720 4,978 (33) 26,044
Operating expenses:
Sales and marketing - 3,860 3,537 2,094 (34) 9,457
General and administrative 710 1,375 1,040 1,089 - 4,214
Amortization - 115 518 318 - 951
Other (income) expense (581) (27) 684 181 34 291
--------- ---------- ----------- ---------- ----------- -----------
Total operating expenses 129 5,323 5,779 3,682 - 14,913
--------- ---------- ----------- ---------- ----------- -----------
Earnings (loss) from operations (129) 7,056 2,941 1,296 (33) 11,131
Interest (income) expense:
Interest income - (301) (3,955) (24) 3,952 (328)
Interest expense - 4,783 2,230 105 (3,952) 3,166
--------- ---------- ----------- ---------- ----------- -----------
Interest expense, net - 4,482 (1,725) 81 - 2,838
--------- ---------- ----------- ---------- ----------- -----------
Income (loss) before income taxes (129) 2,574 4,666 1,215 (33) 8,293
Provision for (benefit of) income taxes (66) 1,297 1,940 625 30 3,826
--------- ---------- ----------- ---------- ----------- -----------
Net income (loss) $ (63) $ 1,277 $ 2,726 $ 590 $ (63) $ 4,467
--------- ---------- ----------- ---------- ----------- -----------
--------- ---------- ----------- ---------- ----------- -----------
10
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED APRIL 4, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- -------- ------------ ------------ ------------ -------------
Cash flows from operating activities:
Net income (loss) $ (63) $ 1,277 $ 2,726 $ 590 $ (63) $ 4,467
Adjustments to reconcile net income (loss)
to cash flows from operating activities:
Depreciation and amortization 8 833 1,176 669 - 2,686
Deferred tax benefit - - (246) (270) - (516)
Other - 45 55 (21) - 79
Changes in operating assets and liabilities:
Accounts, notes and leases receivable - (5,816) (294) 1,015 - (5,095)
Inventories - 3,306 (1,578) (1,626) 33 135
Prepaid expense and other current assets (90) 77 (290) 109 - (194)
Accounts payable (254) 548 (576) (77) - (359)
Accrued expenses (2,787) 1,864 2,102 199 30 1,408
--------- ---------- ----------- ---------- ----------- -----------
Cash flows from operating activities (3,186) 2,134 3,075 588 - 2,611
Cash flows from investing activities:
Capital expenditures (2) (510) (463) (64) - (1,039)
Proceeds from disposals of fixed assets - - - 82 - 82
Changes in other assets (3) 594 - 200 - 791
--------- ---------- ----------- ---------- ----------- -----------
Cash flows from investing activities (5) 84 (463) 218 - (166)
Cash flows from financing activities:
Net borrowings (repayments) under
lines of credit 18 (1,320) 1,302 (243) - (243)
Repayments of long-term debt - - - (279) - (279)
Proceeds from sale of stock 139 - - - - 139
Purchase of treasury stock (133) - - - - (133)
Intercompany dividend - - 800 (800) - -
Intercompany 3,167 1,523 (5,147) 457 - -
--------- ---------- ----------- ---------- ----------- -----------
Cash flows from financing activities 3,191 203 (3,045) (865) - (516)
Effect of exchange rate changes on cash - - - (19) - (19)
Increase (decrease) in cash - 2,421 (433) (78) - 1,910
Cash, beginning of period - 2,034 1,913 1,324 - 5,271
--------- ---------- ----------- ---------- ----------- -----------
Cash, end of period $ - $ 4,455 $ 1,480 $ 1,246 $ - $ 7,181
--------- ---------- ----------- ---------- ----------- -----------
--------- ---------- ----------- ---------- ----------- -----------
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
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, 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, 1997
and its Final Prospectus filed in August, 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 4, 1998 COMPARED TO THREE MONTHS ENDED MARCH 29, 1997
NET SALES - Net sales increased $5.4 million (7%) to $79.1 million in
the first quarter of 1998. Virtually all of this increase was generated in
the piano segment where strong domestic retail sales, continued growth of the
Boston line, and improved foreign shipments combined for a sales increase of
$5.2 million (16%). Total piano shipments increased 18% overall, with Boston
and Steinway shipments increasing nearly 30% and 7%, respectively. Band and
orchestral instrument sales remained essentially flat for the first quarter
of 1998. The introduction of a new student saxophone caused certain
manufacturing inefficiencies commonly encountered in product changeovers and
contributed to a decline in band instrument shipments. In addition, the
Company's yen based competitors used the weakness in their currency to gain a
significant pricing advantage in certain product categories. While these
factors contributed to a 3% decrease in total instrument shipments, string
and percussion shipments increased 15% for the quarter.
GROSS PROFIT - Consistent with the increase in sales, gross profit
increased by $2.4 million (10%) to $26.0 million in the first quarter of 1998.
Gross margins increased to 32.9% in 1998 compared to 32.0% in 1997. This
improvement is primarily due to an increase in piano margins from 31.4% in 1997
to 35.4% in 1998. Extremely strong retail piano sales combined with yen driven
cost reductions in the Boston piano line contributed to the increase. Band and
orchestral instrument margins were negatively impacted by the manufacturing
inefficiencies experienced with the introduction of the student saxophone,
resulting in a decline in margins from 32.5% in 1997 to 30.7% in 1998.
OPERATING EXPENSES - Operating expenses increased by $0.7 million (5%) to
$14.9 million in the first quarter of 1998. Expenses decreased as a percentage
of sales from 19.3% in 1997 to 18.9% in 1998.
12
EARNINGS FROM OPERATIONS - Earnings from operations increased by $1.7
million (18%) to $11.1 million in the first quarter of 1998. These improved
earnings resulted from increased sales combined with improved gross profit
margins and firm control over operating expenses.
NET INTEREST EXPENSE - Net interest expense decreased $0.2 million in the
first quarter of 1998 to $2.8 million. Lower outstanding balances on the
Company's lines of credit contributed to the reduction.
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 $3.5 million in 1997
and $2.6 million in 1998. The decrease in cash provided by operations in 1998
resulted from $1.0 million of additional cash earnings from operations offset by
$1.9 million of additional net working capital requirements for increased
receivables associated with higher sales and lower accrued expense balances.
Capital expenditures were $0.8 million and $1.0 million for the first
quarter of 1997 and 1998, 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
modernizes its equipment and renovates its facilities in order to expand its
production capacity and piano restoration services.
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 April 4, 1998, no amounts were outstanding and
availability was approximately $58.6 million. Open account loans with foreign
banks also provide for borrowings by Steinway's foreign subsidiaries of up to 25
million deutsche marks ($13,525 at the April 4, 1998 exchange rate).
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 the first quarter of 1998, the Company repurchased 6,000 shares of its
common stock at a cost of $133.
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 1998.
13
NEW ACCOUNTING PRONOUNCEMENTS
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". The only item that the Company currently
records as other comprehensive income is the change in cumulative translation
adjustment resulting from changes in exchange rates and the effect of those
changes upon translation of the financial statements of the Company's foreign
operations. Comprehensive net income for the first quarter of 1997 and 1998 was
$768 and $3,795, respectively.
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit 27.1. Steinway Musical Instruments, Inc. - Financial Data
Schedule
Exhibit 27.2 The Selmer Company, Inc. - Financial Data Schedule
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended April 4, 1998.
14
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: May 15, 1998
15