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 OCTOBER 3, 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 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 October 30, 1998:
Class A 477,953
Ordinary 8,828,972
---------
Total 9,306,925
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 October 3, 1998......................... 3
Condensed Consolidated Statements of Operations
Three months and nine months ended September 27, 1997
and October 3, 1998........................................... 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 27, 1997 and October 3, 1998...... 5
Notes to Condensed Consolidated Financial Statements........... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 16
SIGNATURES..................................................... 17
2
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
December 31, October 3,
1997 1998
------------ ----------
ASSETS
Current assets:
Cash $ 5,271 $ 2,527
Accounts, notes and leases receivable, net of allowance for
bad debts of $7,504 and $7,991 in 1997 and 1998, respectively 47,377 76,872
Inventories 87,954 93,784
Prepaid expenses and other current assets 4,832 2,743
Deferred tax assets 6,188 6,387
--------- ---------
Total current assets 151,622 182,313
Property, plant and equipment, net of accumulated depreciation of
$19,531 and $24,568 in 1997 and 1998, respectively 58,629 59,543
Other assets, net 22,891 21,086
Cost in excess of fair value of net assets acquired, net of accumulated
amortization of $2,734 and $3,510 in 1997 and 1998, respectively 33,566 34,010
--------- ---------
TOTAL ASSETS $ 266,708 $ 296,952
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 3,338 $ 4,956
Accounts payable 5,668 5,997
Other current liabilities 31,423 32,411
--------- ---------
Total current liabilities 40,429 43,364
Long-term debt 112,119 125,724
Deferred taxes 26,279 25,772
Non-current pension liability 12,120 13,821
--------- ---------
Total liabilities 190,947 208,681
Commitments and Contingent Liabilities
Stockholders' equity:
Common stock 9 9
Additional paid in capital 69,206 70,223
Retained earnings 14,492 26,543
Accumulated translation adjustment (6,030) (3,650)
Treasury stock (1,916) (4,854)
--------- ---------
Total stockholders' equity 75,761 88,271
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 266,708 $ 296,952
--------- ---------
--------- ---------
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, October 3, September 27, October 3,
1997 1998 1997 1998
------------- ----------- ------------- -----------
Net sales $ 64,554 $ 68,646 $ 208,055 $ 220,807
Cost of sales 43,308 46,748 140,147 148,333
----------- ----------- ----------- -----------
Gross profit 21,246 21,898 67,908 72,474
Operating Expenses:
Sales and marketing 7,337 8,102 23,881 26,107
General and administrative 4,496 3,810 13,435 12,186
Amortization 952 963 2,905 2,871
Other (income) expense (49) (37) 115 251
----------- ----------- ----------- -----------
Total Operating Expenses 12,736 12,838 40,336 41,415
----------- ----------- ----------- -----------
Earnings from operations 8,510 9,060 27,572 31,059
Interest expense, net 3,542 3,330 9,798 9,057
----------- ----------- ----------- -----------
Income before income taxes 4,968 5,730 17,774 22,002
Provision for income taxes 2,266 2,431 8,168 9,951
----------- ----------- ----------- -----------
Net income $ 2,702 $ 3,299 $ 9,606 $ 12,051
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share:
Basic $ .29 $ .35 $ 1.02 $ 1.29
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted $ .28 $ .35 $ 1.02 $ 1.26
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding:
Basic 9,438,852 9,331,592 9,428,242 9,353,501
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted 9,504,485 9,473,550 9,450,120 9,539,343
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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, October 3,
1997 1998
------------- ----------
Cash flows from operating activities:
Net income $ 9,606 $ 12,051
Adjustments to reconcile net income to
cash flows from operating activities:
Depreciation and amortization 7,926 7,957
Deferred tax benefit (1,728) (1,549)
Other 594 272
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (31,102) (29,413)
Inventories (2,900) (4,332)
Prepaid expense and other current assets (1,181) 417
Accounts payable (902) 222
Accrued expenses 3,766 670
-------- --------
Cash flows from operating activities (15,921) (13,705)
Cash flows from investing activities:
Capital expenditures (3,766) (4,272)
Proceeds from disposals of fixed assets 34 132
Acquisition of business (net of cash acquired) (1,606) --
Changes in other assets (1,322) 2,156
-------- --------
Cash flows from investing activities (6,660) (1,984)
Cash flows from financing activities:
Net borrowings under lines of credit 20,015 15,538
Repayments of long-term debt (664) (713)
Proceeds from issuance of stock 458 1,017
Purchase of treasury stock -- (2,938)
-------- --------
Cash flows from financing activities 19,809 12,904
Effect of foreign exchange rate changes on cash (24) 41
-------- --------
Decrease in cash (2,796) (2,744)
Cash, beginning of period 3,277 5,271
-------- --------
Cash, end of period $ 481 $ 2,527
-------- --------
-------- --------
Supplemental Cash Flow Information
Interest paid $ 7,127 $ 6,794
-------- --------
-------- --------
Taxes paid $ 9,857 $ 12,573
-------- --------
-------- --------
See notes to condensed consolidated financial statements.
5
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 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 nine months
ended September 27, 1997 and October 3, 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 nine months ended October 3, 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 for the three and nine month periods ended September 27, 1997 and
October 3, 1998 is as follows:
Three months ended Nine months ended
--------------------------- ---------------------------
1997 1998 1997 1998
----------- ---------- ----------- -----------
Weighted average shares for basic 9,438,852 9,331,592 9,428,242 9,353,501
Dilutive effect of stock options 65,633 141,958 21,878 185,842
--------- --------- --------- ---------
Weighted average shares for diluted 9,504,485 9,473,550 9,450,120 9,539,343
--------- --------- --------- ---------
--------- --------- --------- ---------
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 nine
months of 1997 and 1998 was $5,658 and $14,431, respectively.
6
In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits", which the Company will be required to adopt in 1998. SFAS 132 will
require additional disclosure concerning changes in the Company's pension
obligations and assets and eliminates certain other disclosures no longer
considered useful. Adoption will not have any effect on reported results of
operations or financial position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company is currently evaluating the effect of
adopting SFAS 133 on the consolidated financial statements.
(3) INVENTORIES
Inventories consist of the following:
December 31, October 3,
1997 1998
------------ ----------
Raw materials $11,944 $14,080
Work in process 35,309 37,339
Finished goods 40,701 42,365
------- -------
Total $87,954 $93,784
------- -------
------- -------
(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.
7
(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:
Nine Months Ended
December 31, October 3, September 27, October 3,
1997 1998 1997 1998
------------ ---------- ------------- ----------
Current assets $ 149,022 $ 179,343
Total assets 263,725 293,522
Current liabilities 46,664 54,553
Stockholder's equity 78,302 92,611
Total sales $ 206,010 $ 218,871
Gross profit 67,420 71,806
Net income 9,758 11,929
(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 and nine months ended September 27, 1997 and October 3,
1998:
THREE MONTHS ENDED 1997 Piano Segment Band and Orchestral Segment
------------------------------------------ ------------------------------- Other & Consol
US Germany Other Total US Other Total Elim Total
-- ------- ----- ----- -- ----- ----- ---- -----
Revenues from external
customers $ 20,232 $ 9,048 $ 3,845 $ 33,125 $ 30,293 $ 1,136 $ 31,429 $ -- $ 64,554
Segment net income (loss) (323) 449 226 352 (5) 41 36 2,314 2,702
THREE MONTHS ENDED 1998 Piano Segment Band and Orchestral Segment
------------------------------------- ---------------------------- Other & Consol
US Germany Other Total US Other Total Elim Total
-- ------- ----- ----- -- ----- ----- ---- -----
Revenues from external
customers $24,095 $ 7,943 $ 3,653 $35,691 $31,731 $ 1,224 $32,955 $ -- $68,646
Segment net income 491 144 236 871 18 16 34 2,394 3,299
NINE MONTHS ENDED 1997 Piano Segment Band and Orchestral Segment
------------------------------------------ ------------------------------ Other & Consol
US Germany Other Total US Other Total Elim Total
-- ------- ----- ----- -- ----- ----- ---- -----
Revenues from external
customers $ 61,521 $ 29,108 $ 8,525 $ 99,154 $106,211 $ 2,690 $108,901 $ -- $208,055
Segment net income (loss) (628) 615 338 325 2,277 120 2,397 6,884 9,606
NINE MONTHS ENDED 1998 Piano Segment Band and Orchestral Segment
----------------------------------------- ------------------------------ Other & Consol
US Germany Other Total US Other Total Elim Total
-- ------- ----- ----- -- ----- ----- ---- -----
Revenues from external
customers $ 74,696 $ 25,601 $ 11,598 $111,895 $105,769 $ 3,143 $108,912 $ -- $220,807
Segment net income 1,554 685 673 2,912 1,707 57 1,764 7,375 12,051
8
(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.
9
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
OCTOBER 3, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash $ -- $ 250 $ 1,499 $ 778 $ -- $ 2,527
Accounts, notes and leases
receivable, net -- 62,584 7,092 7,196 -- 76,872
Inventories -- 33,441 32,316 28,910 (883) 93,784
Prepaid expenses and other current
assets 100 1,344 756 543 -- 2,743
Deferred tax assets -- 1,060 2,420 3,880 (973) 6,387
--------- --------- --------- --------- --------- ---------
Total current assets 100 98,679 44,083 41,307 (1,856) 182,313
Property, plant and equipment, net 103 15,161 27,489 16,790 -- 59,543
Investment in subsidiaries 71,143 168,557 56,147 -- (295,847) --
Other assets, net 613 1,930 12,500 7,356 (1,313) 21,086
Cost in excess of fair value
of net assets acquired, net -- 9,435 11,236 13,339 -- 34,010
--------- --------- --------- --------- --------- ---------
TOTAL ASSETS $ 71,959 $ 293,762 $ 151,455 $ 78,792 $(299,016) $ 296,952
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current
portion of long-term debt $ -- $ -- $ -- $ 4,956 $ -- $ 4,956
Accounts payable 62 2,322 1,975 1,638 -- 5,997
Other current liabilities (11,403) 14,494 20,694 10,028 (1,402) 32,411
--------- --------- --------- --------- --------- ---------
Total current liabilities (11,341) 16,816 22,669 16,622 (1,402) 43,364
Long-term debt 185 121,431 2,565 1,543 -- 125,724
Intercompany 17,899 67,798 (88,064) 2,367 -- --
Deferred taxes -- 1,787 10,034 13,951 -- 25,772
Non-current pension liability -- 995 -- 13,821 (995) 13,821
--------- --------- --------- --------- --------- ---------
Total liabilities 6,743 208,827 (52,796) 48,304 (2,397) 208,681
Stockholders' equity 65,216 84,935 204,251 30,488 (296,619) 88,271
--------- --------- --------- --------- --------- ---------
Total $ 71,959 $ 293,762 $ 151,455 $ 78,792 $(299,016) $ 296,952
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
10
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED OCTOBER 3, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
---------- ----------- ------------ ------------ ------------ ------------
Net sales $ -- $ 105,164 $ 82,610 $ 40,342 $ (7,309) $ 220,807
Cost of sales -- 73,112 55,576 26,661 (7,016) 148,333
--------- --------- --------- --------- --------- ---------
Gross profit -- 32,052 27,034 13,681 (293) 72,474
Operating expenses:
Sales and marketing -- 9,854 10,361 5,984 (92) 26,107
General and administrative 2,037 3,994 3,059 3,096 -- 12,186
Amortization -- 344 1,556 971 -- 2,871
Other (income) expense (1,912) 37 1,598 436 92 251
--------- --------- --------- --------- --------- ---------
Total operating expenses 125 14,229 16,574 10,487 -- 41,415
--------- --------- --------- --------- --------- ---------
Earnings (loss) from operations (125) 17,823 10,460 3,194 (293) 31,059
Interest (income) expense:
Interest income (197) (508) (11,921) (37) 11,915 (748)
Interest expense -- 14,710 6,689 321 (11,915) 9,805
--------- --------- --------- --------- --------- ---------
Interest expense, net (197) 14,202 (5,232) 284 -- 9,057
--------- --------- --------- --------- --------- ---------
Income before income taxes 72 3,621 15,692 2,910 (293) 22,002
Provision for income taxes 35 1,825 6,654 1,495 (58) 9,951
--------- --------- --------- --------- --------- ---------
Net income $ 37 $ 1,796 $ 9,038 $ 1,415 $ (235) $ 12,051
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
11
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 3, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent Of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- -------- ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income $ 37 $ 1,796 $ 9,038 $ 1,415 $ (235) $ 12,051
Adjustments to reconcile net income
to cash flows from operating activities:
Depreciation and amortization 27 2,499 3,398 2,033 -- 7,957
Deferred tax benefit -- -- (707) (842) -- (1,549)
Other -- 135 136 1 -- 272
Changes in operating assets and
liabilities:
Accounts, notes and leases
receivable -- (29,008) (1,052) 647 -- (29,413)
Inventories (29) 4,446 (3,911) (5,131) 293 (4,332)
Prepaid expense and other current
assets 301 260 (399) 255 -- 417
Accounts payable (267) 469 (139) 159 -- 222
Accrued expenses (4,760) 846 5,569 (927) (58) 670
-------- -------- -------- -------- -------- --------
Cash flows from operating activities (4,691) (18,557) 11,933 (2,390) -- (13,705)
Cash flows from investing activities:
Capital expenditures (10) (2,053) (1,847) (362) -- (4,272)
Proceeds from disposals of fixed assets -- -- -- 132 -- 132
Changes in other assets 283 418 -- 1,455 -- 2,156
-------- -------- -------- -------- -------- --------
Cash flows from investing activities 273 (1,635) (1,847) 1,225 -- (1,984)
Cash flows from financing activities:
Net borrowings under lines of credit 135 13,684 362 1,357 -- 15,538
Repayments of long-term debt -- -- -- (713) -- (713)
Proceeds from sale of stock 1,017 -- -- -- -- 1,017
Purchase of treasury stock (2,938) -- -- -- -- (2,938)
Intercompany dividend -- -- 800 (800) -- --
Intercompany 6,204 4,724 (11,662) 734 -- --
-------- -------- -------- -------- -------- --------
Cash flows from financing activities 4,418 18,408 (10,500) 578 -- 12,904
Effect of exchange rate changes on cash -- -- -- 41 -- 41
Decrease in cash -- (1,784) (414) (546) -- (2,744)
Cash, beginning of period -- 2,034 1,913 1,324 -- 5,271
-------- -------- -------- -------- -------- --------
Cash, end of period $ -- $ 250 $ 1,499 $ 778 $ -- $ 2,527
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
12
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, increased competition, 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 OCTOBER 3, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 27,
1997
NET SALES--Net sales increased $4.1 million (6%) to $68.6 million in the
third quarter of 1998. Piano sales increased $2.6 million (8%) for the quarter.
Overall unit volume increased 10% for Steinway and 5% for the Boston line
despite declines in foreign shipments. Band and orchestral instrument sales
increased $1.5 million (5%) for the third quarter of 1998 on a 2% increase in
unit shipments. Improved domestic delivery of student brass instruments offset
continued weak demand in foreign markets.
GROSS PROFIT--Gross profit increased by $0.7 million (3%) to $21.9 million
in the third quarter of 1998. Gross margins decreased from 32.9% in 1997 to
31.9% in 1998. Band and orchestral instrument margins continued to be negatively
impacted by higher than planned production costs associated with the new student
saxophone. This, coupled with a shift in product mix from professional to
student instruments, resulted in a gross margin decline to 29.4% from 32.2% in
the third quarter of 1997. Piano margins, which increased from 33.5% in 1997 to
34.2% in 1998, have been primarily affected by yen driven cost reductions in the
Boston piano line.
OPERATING EXPENSES--Operating expenses increased by $0.1 million (1%) to
$12.8 million in the third quarter of 1998. Expenses decreased as a percentage
of sales from 19.7% in 1997 to 18.7% in 1998.
EARNINGS FROM OPERATIONS--Earnings from operations increased by $0.6
million (6%) to $9.1 million in the third quarter of 1998. These improved
earnings resulted from increased sales combined with firm control over operating
expenses.
NET INTEREST EXPENSE--Net interest expense decreased $0.2 million in the
third quarter of 1998 to $3.3 million. Lower outstanding balances on the
Company's lines of credit accounted for the decrease.
13
NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 27,
1997
NET SALES--Net sales increased $12.7 million (6%) to $220.8 million in the
first nine months of 1998. Strong domestic demand for pianos helped offset a
more competitive environment for band instruments. Piano sales increased $12.7
million (13%) to $111.9 million in 1998 on unit increases of 13% for Steinway
and 19% for Boston. Band and orchestral instrument sales remained flat at $108.9
million on a 3% decrease in unit shipments.
GROSS PROFIT--Consistent with the increase in sales, gross profit
increased by $4.6 million (7%) to $72.5 million in the first nine months of
1998. Gross margins increased to 32.8% in 1998 compared to 32.6% in 1997. Piano
margins, which increased from 32.8% in 1997 to 35.0% in 1998, were positively
affected by extremely strong retail piano sales combined with yen driven cost
reductions in the Boston piano line. Band and orchestral instrument margins were
negatively impacted by the manufacturing inefficiencies experienced with the
introduction of the new student saxophone, resulting in a decline in margins
from 32.5% in 1997 to 30.6% in 1998.
OPERATING EXPENSES--Operating expenses increased by $1.1 million (3%) to
$41.4 million in the first nine months of 1998. Expenses decreased as a
percentage of sales from 19.4% in 1997 to 18.8% in 1998.
EARNINGS FROM OPERATIONS--Earnings from operations increased by $3.5
million (13%) to $31.1 million in the first nine months 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 $0.7 million in the
first nine months of 1998 to $9.1 million. Lower outstanding balances on the
Company's lines of credit accounted for 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 used in operations in the first nine months decreased $2.2 million
from $15.9 million in 1997 to $13.7 million in 1998. Increased cash earnings
from operations of $2.4 million in 1998 contributed to the reduction.
Capital expenditures were $3.8 million and $4.3 million for the first nine
months 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.
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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 October 3, 1998, $14.2 million was outstanding, with
additional availability of approximately $45.0 million. Open account loans with
foreign banks also provide for borrowings by Steinway's foreign subsidiaries of
up to 25 million Deutsche marks ($15,188 at the October 3, 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.
The Company repurchased 114,700 shares of its common stock at a cost of
$2,938 during the first nine months 1998, of which 73,700 shares were
repurchased during the third quarter at a cost of $1,780.
YEAR 2000 COMPLIANCE -- The Year 2000 issue is the result of computer
programs being written using two digits rather than four digits to define the
applicable year. Computer programs and hardware that are date sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000. The
Company's products, which are finely crafted instruments, do not contain
software programs and, therefore, their functionality will not be affected by
this issue. However, it could cause some disruptions of internal operations,
including, among other things, a temporary inability to process transactions
or engage in normal business activities.
The Company has identified the following operational areas in its Year
2000 compliance review: (1) information systems hardware and software; (2)
manufacturing, distribution and facility equipment containing embedded
microprocessors; and (3) third-party relationships. The Company has replaced
many of its accounting and manufacturing information systems in the normal
course of operations over the past two years with Year 2000 compliant
programs. Other hardware and software systems and equipment that are
identified as not being Year 2000 compliant will be replaced or upgraded in a
timely manner. In addition, the Company is communicating with major suppliers
to determine the extent to which the Company may be vulnerable if a supplier
fails to correct their own Year 2000 issue. The Company anticipates
completing its Year 2000 compliance review during fiscal 1999. At that point,
the Company will develop a contingency plan addressing those areas determined
not to be compliant.
Based on its review to date, the Company believes the Year 2000 problem
will not pose significant internal operational problems. Potential risks
include (1) general failure of infrastructure systems, such as power, heat
and water, (2) the inability of principal suppliers to be Year 2000 ready,
which could result in delays of raw material deliveries from such suppliers,
and (3) disruption of the distribution channel, including ports and
transportation vendors. Any of these risks could adversely affect the
Company's ability to produce and deliver its products in a timely manner. The
Company believes that these risks will be mitigated since its operations are
geographically dispersed and rely on a large supplier base.
The Company does not expect the costs associated with its Year 2000
compliance to be material. Modifications to many of the Company's information
technology systems have been performed by internal staff with the associated
costs incorporated into the normal operating expenses. Less than $1 million
has been spent on new systems to date and future costs are not anticipated to
be material to its financial position or results of operations either in the
aggregate or in any given year.
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.
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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 nine months of 1997 and 1998
was $5,658 and $14,431, respectively.
In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits", which the Company will be required to adopt in 1998. SFAS 132 will
require additional disclosure concerning changes in the Company's pension
obligations and assets and eliminates certain other disclosures no longer
considered useful. Adoption will not have any effect on reported results of
operations or financial position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company is currently evaluating the effect of
adopting SFAS 133 on the consolidated financial statements.
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
October 3, 1998.
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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
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 16, 1998
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