===============================================================================
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 3, 1999
[ ] 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 April 30, 1999: Class A 477,953
Ordinary 8,770,172
---------
Total 9,248,125
===============================================================================
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, 1998 and April 3, 1999.....................................................3
Condensed Consolidated Statements of Operations
Three months ended April 4, 1998 and April 3, 1999......................................4
Condensed Consolidated Statements of Cash Flows
Three months ended April 4, 1998 and April 3, 1999......................................5
Notes to Condensed Consolidated Financial Statements........................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................15
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, APRIL 3,
1998 1999
------------ -------------
ASSETS
Current assets:
Cash $ 12,460 $ 6,809
Accounts, notes and leases receivable, net of allowance for
bad debts of $7,512 and $7,712 in 1998 and 1999, respectively 52,451 59,746
Inventories 96,527 93,851
Prepaid expenses and other current assets 2,323 2,885
Deferred tax assets 6,620 6,416
------------- -------------
Total current assets 170,381 169,707
Property, plant and equipment, net of accumulated depreciation of
$25,847 and $27,111 in 1998 and 1999, respectively 60,194 88,631
Other assets, net 19,754 19,139
Cost in excess of fair value of net assets acquired, net of accumulated
amortization of $3,728 and $3,862 in 1998 and 1999, respectively 33,598 32,323
------------- -------------
TOTAL ASSETS $ 283,927 $ 309,800
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 5,658 $ 8,238
Accounts payable 6,793 6,308
Other current liabilities 29,792 31,633
------------- -------------
Total current liabilities 42,243 46,179
Long-term debt 111,370 133,480
Deferred tax liabilities 25,146 23,748
Non-current pension liability 13,411 12,593
------------- -------------
Total liabilities 192,170 216,000
------------- -------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock 9 9
Additional paid in capital 70,245 70,321
Retained earnings 31,143 36,331
Accumulated other comprehensive income (3,976) (6,529)
Treasury stock (5,664) (6,332)
------------- -------------
Total stockholders' equity 91,757 93,800
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 283,927 $ 309,800
------------- -------------
------------- -------------
See notes to condensed consolidated financial statements.
3
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
------------------------------
April 4, April 3,
1998 1999
------------- ------------
Net sales $ 79,100 $ 83,134
Cost of sales 53,056 55,707
----------- -----------
Gross profit 26,044 27,427
Operating expenses:
Sales and marketing 9,457 10,294
General and administrative 4,214 4,289
Amortization 951 968
Other operating expense 291 129
----------- -----------
Total operating expenses 14,913 15,680
----------- -----------
Income from operations 11,131 11,747
Other (income) expense:
Interest income (328) (295)
Interest expense 3,166 3,159
----------- -----------
Total other (income) expense, net 2,838 2,864
----------- -----------
Income before income taxes 8,293 8,883
Provision for income taxes 3,826 3,695
----------- -----------
Net income $ 4,467 $ 5,188
----------- -----------
----------- -----------
Net income per share:
Basic $ .48 $ .56
----------- -----------
----------- -----------
Diluted $ .47 $ .56
----------- -----------
----------- -----------
Weighted average shares:
Basic 9,364,979 9,265,163
----------- -----------
----------- -----------
Diluted 9,528,929 9,337,044
----------- -----------
----------- -----------
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
----------------------------
April 4, April 3,
1998 1999
----------- -----------
Cash flows from operating activities:
Net income $ 4,467 $ 5,188
Adjustments to reconcile net income to
cash flows from operating activities:
Depreciation and amortization 2,686 2,802
Deferred tax benefit (516) (481)
Other 79 (33)
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (5,095) (7,966)
Inventories 135 639
Prepaid expense and other current assets (194) (615)
Accounts payable (359) (386)
Accrued expenses 1,408 2,564
----------- -----------
Cash flows from operating activities 2,611 1,712
Cash flows from investing activities:
Capital expenditures (1,039) (31,588)
Proceeds from disposals of fixed assets 82 89
Changes in other assets 791 (428)
----------- -----------
Cash flows from investing activities (166) (31,927)
Cash flows from financing activities:
Net borrowings (repayments)
under lines of credit (243) 3,036
Proceeds from long-term debt 22,500
Repayments of long-term debt (279) (289)
Proceeds from issuance of stock 139 76
Purchase of treasury stock (133) (668)
----------- -----------
Cash flows from financing activities (516) 24,655
Effect of foreign exchange rate changes on cash (19) (91)
----------- -----------
Increase (decrease) in cash 1,910 (5,651)
Cash, beginning of period 5,271 12,460
----------- -----------
Cash, end of period $ 7,181 $ 6,809
----------- -----------
----------- -----------
Supplemental Cash Flow Information
Interest paid $ 142 $ 135
----------- -----------
----------- -----------
Taxes paid $ 3,848 $ 4,690
----------- -----------
----------- -----------
See notes to condensed consolidated financial statements.
5
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 1999
(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 April 4, 1998 and April 3, 1999 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, 1998, 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, 1998. The results of operations for the three
months ended April 3, 1999 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 - Basic income per share is computed using the weighted
average number of shares outstanding during each period. Diluted income per
share reflects the effect of the Company's outstanding options using the
treasury stock method. A reconciliation of the weighted average shares used
for the basic and diluted computations for the three months ended April 4,
1998 and April 3, 1999 is as follows:
1998 1999
---- ----
Weighted average shares for basic income per share 9,364,979 9,265,163
Dilutive effect of stock options 163,950 71,881
--------- ---------
Weighted average shares for diluted income per share 9,528,929 9,337,044
--------- ---------
--------- ---------
COMPREHENSIVE INCOME - Other comprehensive income includes foreign currency
translation adjustments. Total comprehensive income for the three months ended
April 4, 1998 and April 3, 1999 is as follows:
1998 1999
---- ----
Net income $ 4,467 $ 5,188
Other comprehensive income (672) (2,553)
--------- ---------
Total comprehensive income $ 3,795 $ 2,635
--------- ---------
--------- ---------
6
(3) INVENTORIES
Inventories consist of the following:
December 31, April 3,
1998 1999
------------ ------------
Raw materials $ 15,266 $ 15,350
Work in process 35,010 33,943
Finished goods 46,251 44,558
------------ ------------
Total $ 96,527 $ 93,851
------------ ------------
------------ ------------
(4) COMMITMENTS AND CONTINGENT LIABILITIES
Certain environmental matters are pending against a subsidiary of the
Company, which might result in monetary damages, the amount of which, if any,
cannot be determined at the present time. Philips Electronics, a previous owner
of a subsidiary of the Company, has agreed to hold the Company harmless from any
financial liability arising from these environmental matters which were pending
as of December 29, 1988. Management believes that these matters will not have a
material adverse impact on the Company's results of operations or financial
condition.
(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 3, April 4, April 3,
1998 1999 1998 1999
------------ -------- -------- -------
Current assets $ 167,938 $166,937
Total assets 280,991 306,531
Current liabilities 53,712 58,890
Stockholder's equity 97,080 99,767
Total revenues $78,126 $82,388
Gross profit 25,711 27,188
Net income 4,471 5,240
7
(6) SEGMENT INFORMATION
The Company has identified two distinct and reportable segments: the piano
segment and the band and orchestral instrument segment. These segments were
selected based upon the way in which management oversees and evaluates the
results of each operation. The following tables present information about the
Company's operating segments for the three months ended April 4, 1998 and April
3, 1999:
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
Net income 227 284 266 777 1,244 40 1,284 2,406 4,467
1999 Piano Segment Band and Orchestral Segment
------------------------------------ ---------------------------- Other & Consol
US Germany Other Total US Other Total Elim Total
-------- ------- ------ ------ ------- ------ ------- ------ -------
Revenues from external
customers $26,068 $8,996 $4,455 $39,519 $42,689 $926 $43,615 $ - $83,134
Net income 732 323 245 1,300 1,174 18 1,192 2,696 5,188
(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 (the "Notes") due 2005 and
available cash balances of the Company. Selmer's payment obligations under the
Notes are fully and unconditionally guaranteed on a joint and several basis by
the Company as Parent (the "Guarantor Parent"), and by Steinway 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 3, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ----------- ----------- ----------- -----------
ASSETS
Current assets:
Cash $ - $ 6,350 $ 1,957 $ 1,057 $ (2,555) $ 6,809
Accounts, notes and leases
receivable, net 45,549 5,411 8,786 59,746
Inventories 33,118 34,702 27,030 (999) 93,851
Prepaid expenses and other current
current assets 225 1,965 300 395 2,885
Deferred tax assets 1,050 2,819 3,520 (973) 6,416
----------- ----------- ----------- ----------- ----------- -----------
Total current assets 225 88,032 45,189 40,788 (4,527) 169,707
Property, plant and equipment, net 105 14,361 58,937 15,228 88,631
Investment in subsidiaries 71,143 169,387 56,147 (296,677) -
Other assets, net 613 873 12,362 6,604 (1,313) 19,139
Cost in excess of fair value
of net assets acquired, net 9,299 11,083 11,941 32,323
----------- ----------- ----------- ----------- ----------- -----------
TOTAL ASSETS $ 72,086 $ 281,952 $ 183,718 $ 74,561 $(302,517) $ 309,800
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current
portion of long-term debt $ - $ - $ - $ 8,238 $ - $ 8,238
Accounts payable 144 2,572 2,038 1,554 6,308
Other current liabilities (12,372) 13,051 23,444 9,877 (2,367) 31,633
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities (12,228) 15,623 25,482 19,669 (2,367) 46,179
Long-term debt 29 110,000 25,026 980 (2,555) 133,480
Intercompany 20,652 68,072 (90,894) 2,170 -
Deferred tax liabilities 2,161 9,570 12,017 23,748
Non-current pension liability 102 12,593 (102) 12,593
----------- ----------- ----------- ----------- ----------- -----------
Total Liabilities 8,453 195,958 (30,816) 47,429 (5,024) 216,000
Stockholders' Equity 63,633 85,994 214,534 27,132 (297,493) 93,800
----------- ----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 72,086 $ 281,952 $ 183,718 $ 74,561 $ (302,517) $ 309,800
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
9
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED APRIL 3, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ ------------ -----------
Net sales $ $ 42,308 $ 28,471 $ 14,773 $ (2,418) $ 83,134
Cost of sales 29,800 18,781 9,467 (2,341) 55,707
----------- ----------- ----------- ------------ ------------ -----------
Gross profit - 12,508 9,690 5,306 (77) 27,427
Operating expenses:
Sales and marketing 4,269 3,815 2,231 (21) 10,294
General and administrative 721 1,327 1,085 1,156 4,289
Amortization 115 518 335 968
Other operating (income) expense (596) (40) 585 159 21 129
----------- ----------- ----------- ------------ ------------ -----------
Total operating expenses 125 5,671 6,003 3,881 - 15,680
----------- ----------- ----------- ------------ ------------ -----------
Income (loss) from operations (125) 6,837 3,687 1,425 (77) 11,747
Other (income) expense:
Interest income (210) (4,138) (18) 4,071 (295)
Interest expense 4,901 2,206 123 (4,071) 3,159
----------- ----------- ----------- ------------ ------------ -----------
Total other (income) expense, net - 4,691 (1,932) 105 - 2,864
----------- ----------- ----------- ------------ ------------ -----------
Income (loss) before income taxes (125) 2,146 5,619 1,320 (77) 8,883
Provision for (benefit of)
income taxes (58) 988 2,123 678 (36) 3,695
----------- ----------- ----------- ------------ ------------ -----------
Net income (loss) $ (67) $ 1,158 $ 3,496 $ 642 $ (41) $ 5,188
----------- ----------- ----------- ------------ ------------ -----------
----------- ----------- ----------- ------------ ------------ -----------
10
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED APRIL 3, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Non
Guarantor Issuer Guarantor Guarantor
Parent Of Notes Subsidiaries Subsidiaries Eliminations Consolidated
---------- ----------- ----------- ----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ (67) $ 1,158 $ 3,496 $ 642 $ (41) $ 5,188
Adjustments to reconcile net income
(loss) to cash flows from
operating activities:
Depreciation and amortization 10 840 1,230 722 2,802
Deferred tax benefit (222) (259) (481)
Other 25 1 (59) (33)
Changes in operating assets and
liabilities:
Accounts, notes and leases
receivable (8,540) (55) 629 (7,966)
Inventories 5,480 (2,717) (2,201) 77 639
Prepaid expense and other
current assets (101) (479) 107 (142) - (615)
Accounts payable 144 867 (1,578) 181 - (386)
Accrued expenses (1,418) 2,265 1,246 507 (36) 2,564
---------- ----------- ----------- ----------- ----------- -----------
Cash flows from operating activities (1,432) 1,616 1,508 20 - 1,712
Cash flows from investing activities:
Capital expenditures (16) (217) (31,288) (67) (31,588)
Proceeds from disposals of fixed assets 89 89
Changes in other assets 315 (743) (428)
---------- ----------- ----------- ----------- ----------- -----------
Cash flows from investing activities (16) 98 (32,031) 22 - (31,927)
Cash flows from financing activities:
Net borrowings (repayments) under
lines of credit (206) 2,761 3,036 (2,555) 3,036
Proceeds from long-term debt 22,500 22,500
Repayments of long-term debt (289) (289)
Proceeds from issuance of stock 76 76
Purchase of treasury stock (668) (668)
Intercompany dividends 1,095 3,000 (4,095) -
Intercompany 2,246 543 (3,829) 1,040 -
---------- ----------- ----------- ----------- ----------- -----------
Cash flows from financing activities 1,448 1,638 24,432 (308) (2,555) 24,655
Effect of exchange rate changes on cash (91) (91)
Increase (decrease) in cash - 3,352 (6,091) (357) (2,555) (5,651)
Cash, beginning of period 2,998 8,048 1,414 12,460
---------- ----------- ----------- ----------- ----------- -----------
Cash, end of period $ - $ 6,350 $ 1,957 $ 1,057 $ (2,555) $ 6,809
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
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, 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, 1998 and its Final Prospectus filed in August 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 3, 1999 COMPARED TO THREE MONTHS ENDED APRIL 4, 1998
NET SALES - Net sales increased $4.0 million (5%) to $83.1 million in
the first quarter of 1999. Domestic sales growth of 8% offset a decline in
foreign shipments, which continue to be affected by the weak demand in Asia and
Europe. Piano sales increased $2.3 million (6%) in 1999 on an overall unit
increase of 7%. Unit volume increased 5% for Steinway grand pianos and 11% for
the Boston line. Band and orchestral instrument sales increased $1.7 million
(4%) in the first quarter of 1999. Overall instrument units were up over 3%, led
by increases of 3% and 10% in the band and stringed instrument categories,
respectively.
GROSS PROFIT - Consistent with the increase in sales, gross profit
increased by $1.4 million (5%) to $27.4 million in the first quarter of 1999.
Gross margins increased slightly to 33.0% in 1999 compared to 32.9% in 1998.
This improvement is primarily due to an increase in piano margins from 35.4% in
1998 to 36.6% in 1999. A favorable yen exchange rate, slightly offset by a shift
in the mix of Boston sales toward verticals, contributed to the increase. Band
and orchestral instrument margins were negatively impacted by higher
manufacturing costs coupled with a shift toward student band instruments,
resulting in a decline in margins from 30.7% in 1998 to 29.8% in 1999.
OPERATING EXPENSES - Operating expenses increased by $0.8 million (5%)
to $15.7 million in the first quarter of 1999. Expenses as a percentage of sales
remained at 18.9% in both periods.
INCOME FROM OPERATIONS - Income from operations increased by $0.6
million (5%) to $11.7 million in the first quarter of 1999. These improved
earnings resulted from increased sales combined with improved gross profit
margins and firm control over operating expenses.
12
OTHER (INCOME) EXPENSE - Other (income) expense remained virtually
unchanged at $2.8 million in both periods.
INCOME TAXES - The Company's effective tax rate was 46.1% and 41.6% in
the first quarter of 1998 and 1999, respectively. The lower effective tax rate
is due to a shift in the geographical distribution of foreign income away from
jurisdictions with higher tax rates, combined with certain tax saving strategies
that increased the utilization of foreign tax credits.
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 $2.6 million in
1998 and $1.7 million in 1999. The decrease in cash provided by operations in
1999 resulted from $0.7 million of additional cash earnings from operations
offset by $1.6 million of additional net working capital requirements. The
additional working capital requirements resulted from increased receivables
associated with higher sales offset partially by higher accrued expense
balances.
During the first quarter of 1999, the Company acquired the Steinway
Hall building located on West 57th Street in New York City for approximately
$30.8 million. Funds for the acquisition were provided from cash on hand and a
new $22.5 million mortgage loan provided by the Company's existing lender. This
loan, which has a five year term, is due in monthly installments of $0.2 million
based on a twenty-five year amortization, and bears interest at the 30-day Libor
rate plus 1.5%.
Additional capital expenditures of $1.0 million and $0.8 million in the
first quarter of 1998 and 1999, respectively, were primarily 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 its equipment and renovate its facilities in order to improve its
production efficiency.
The Company's domestic, seasonal borrowing requirements are
accommodated through a committed, revolving credit facility with a domestic bank
(the "Credit Facility"). The Credit Facility provides the Company with a
potential borrowing capacity of up to $60 million, based on eligible accounts
receivable and inventory balances. The Credit Facility, as amended on April 1,
1999, bears interest at the Eurodollar rate plus 1.25% and expires April 1,
2004. As of April 3, 1999, no amounts were outstanding and availability was
approximately $59.2 million. Open account loans with foreign banks also provide
for borrowings by Steinway's foreign subsidiaries of up to 25 million Deutsche
marks ($13.8 million at the April 3, 1999 exchange rate).
The Company's long-term financing consists primarily of $110 million of
Senior Subordinated Notes and the $22.5 million mortgage loan. 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 1999, the Company repurchased 30,400 shares of its
common stock at a cost of $0.7 million.
13
Management believes that cash on hand, together with cash flow
anticipated from operations and available borrowings under the Credit Facility,
will be adequate to meet debt service requirements, fund continuing capital
requirements and satisfy working capital and general corporate needs through
1999.
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 this issue will not affect their functionality.
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 focused its Year 2000 review in the following areas:
(1) information technology ("IT") systems such as hardware and software; (2)
non-IT systems such as manufacturing, distribution and facility equipment
containing embedded microprocessors; and (3) the readiness of third-parties such
as suppliers and customers. An inventory of all IT and non-IT systems has been
taken and efforts are underway to insure that the appropriate testing and
remediation or replacement occurs.
Virtually all of the Company's critical manufacturing and accounting
information systems have been tested for Year 2000 compliance. Many of the
critical information systems were replaced over the past two years with Year
2000 compliant programs in the normal course of business. The Company intends to
replace or upgrade non-compliant IT hardware and software systems by the end of
the third quarter of 1999.
Preliminary testing of non-IT systems and equipment indicates that many
of these systems rely on time intervals rather than dates in their operation.
The Company is contacting the manufacturers of the non-IT equipment used in
production to obtain assurances as to whether the manufacturers' systems are
Year 2000 compliant. Testing and remediation of these systems will continue
throughout 1999.
The Company has communicated with major suppliers and customers to
determine the extent to which the Company may be vulnerable if a supplier fails
to correct their own Year 2000 issue. Most suppliers and customers who have
replied to our inquiries indicated that they expect to be Year 2000 compliant on
a timely basis. There can be no assurance, however, that third parties will
address the Year 2000 issue in a timely manner.
Based on its review to date, the Company believes the Year 2000 problem
will not pose significant internal operational disruptions. Events beyond the
Company's reasonable control could adversely affect the Company's ability to
produce and deliver its products in a timely manner. These events could include
failure of infrastructure systems, including power, heat and water; disruptions
in distribution channels; or the inability of suppliers and customers to engage
in normal business activities. In the third quarter of 1999, the Company will
develop a contingency plan based on the magnitude and probability that
operational disruptions may still occur on January 1, 2000. The Company
currently believes that the risk of disruption will be minimal since its
operations are geographically dispersed and rely on a large supplier and
customer base.
The Company does not expect the costs associated with its Year 2000
compliance to be material. Internal employees, whose salaries and wages are
included in normal operating expenses, have modified many of the Company's
information technology systems. Less than $1 million has been spent to date and
future costs are not anticipated to be material to its financial position or
results of operations.
14
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. This statement requires that all derivatives be recognized at fair
value in the balance sheet, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
The statement will be effective for the Company in fiscal 2000. Management is
currently evaluating the effect of adopting SFAS No. 133 on the consolidated
financial statements.
During the first quarter of 1999, the Company adopted the provisions of
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires external and
internal indirect costs of developing or obtaining internal-use software to be
capitalized as a long-lived asset and also requires training costs included in
the purchase price of computer software and costs associated with research and
development to be expensed as incurred. The adoption of SOP 98-1 did not have a
material effect on the consolidated financial statements.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is subject to market risk associated with changes in
foreign currency exchange rates and interest rates. The Company mitigates its
foreign currency exchange rate risk by holding forward foreign currency
contracts. These contracts are used as a hedge against intercompany transactions
and are not used for trading or speculative purposes. The fair value of the
forward foreign currency exchange contracts is sensitive to changes in foreign
currency exchange rates. The impact of an adverse change in foreign currency
exchange rates would not be materially different than that disclosed in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
The Company's Credit Facility and mortgage loan bear interest at rates
that fluctuate with changes in the Eurodollar rate and the Libor rate,
respectively. Substantially all of the Company's long-term debt, except the
mortgage loan referred to above, is at fixed interest rates. Accordingly, the
Company's interest expense on its Credit Facility and mortgage loan and the fair
value of its fixed long-term debt is sensitive to changes in market interest
rates. The effect of an adverse change in market interest rates on the Company's
interest expense and the fair value of its long-term debt would not be
materially different than that disclosed in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
15
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
- ------- -----------
4.1 Fourth Amendment and Agreement, dated as of April 1, 1999, to the
Existing Credit Agreement, by and among The Selmer Company, Inc.,
Steinway, Inc., Steinway Musical Instruments, Inc., Boston Piano
Company, Inc., The SMI Trust, S&B Retail, Inc., Emerson Musical
Instruments, Inc., The Steinway Piano Company, Inc. and BNY
Financial Corporation
27.1. Steinway Musical Instruments, Inc. - Financial Data Schedule
27.2. The Selmer Company, Inc. - Financial Data Schedule
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended
April 3, 1999:
ITEM # DESCRIPTION FILING DATE
------ ----------- -----------
2, 7 A report announcing the acquisition of Steinway Hall March 30, 1999
16
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 18, 1999
17