<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 5, 1996
REGISTRATION NO. 333-3667
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SELMER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3931 35-1910745
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
600 INDUSTRIAL PARKWAY
ELKHART, INDIANA 46516
(219) 522-1675
(Address, including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
MICHAEL VICKREY
600 INDUSTRIAL PARKWAY
ELKHART, INDIANA 46516
(219) 522-1675
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
Eric H. Schunk, Esq. Bryant Edwards, Esq.
MILBANK, TWEED, HADLEY & McCLOY LATHAM & WATKINS
601 S. Figueroa Street, 30th Floor 633 W. Fifth Street, Suite 4000
Los Angeles, California 90017 Los Angeles, California 90071
(213) 892-4000 (213) 485-1234
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS BE OFFERING PRICE OFFERING REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (1)(2)(3) FEE (4)
<S> <C> <C> <C> <C>
Ordinary Common Stock, par value
$0.001................................. 5,022,444 $22.00 $110,493,768 $38,102
<FN>
(1) Includes 662,444 shares of Common Stock to be sold upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457.
(3) The shares of Common Stock are not being registered for the purpose of sale
outside the United States.
(4) The Registrant previously paid a filing fee of $29,742 in connection with
this Registration Statement.
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 404(a) of the Securities Act of 1933, as amended, and Item 501
of Regulation S-K
<TABLE>
<CAPTION>
ITEM NO. AND CAPTION IN FORM S-1 CAPTION OR LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Facing Page of Registration Statement; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus; Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Selling Stockholders
8. Plan of Distribution................................. Outside Front Cover Page of Prospectus; Underwriting
9. Description of Securities to be Registered........... Description of Capital Stock
10. Interests of Named Experts and Counsel............... Experts; Legal Matters
11. Information with Respect to the Registrant........... Prospectus Summary; Risk Factors; The Company;
Dividend Policy; Capitalization; Selected
Consolidated Financial Information; Pro Forma
Financial and other Data of the Company;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Principal Stockholders; Description of
Certain Indebtedness; Shares Eligible for Future
Sale
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
</TABLE>
<PAGE>
EXPLANATORY NOTE
The name of the Registrant indicated on the initial page of this
Registration Statement differs from that given in the Prospectus. The name used
in the Prospectus gives effect to an amendment to the Registrant's Certificate
of Incorporation which the Registrant intends to file with the Secretary of
State of Delaware prior to the effective date of this Registration Statement.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 5, 1996
4,360,000 SHARES
STEINWAY MUSICAL INSTRUMENTS, INC.
[LOGO]
ORDINARY COMMON STOCK
-----------
Of the 4,360,000 shares of Ordinary Common Stock offered, 3,488,000 shares
are being offered hereby in the United States and 872,000 shares are being
offered in a concurrent international offering outside the United States. The
initial public offering price and the aggregate underwriting discount per share
will be identical for both offerings. See "Underwriting."
Of the 4,360,000 shares of Ordinary Common Stock offered, 3,600,000 shares
are being sold by the Company and 760,000 shares are being sold by the Selling
Stockholders. See "Principal Stockholders" and "Selling Stockholders." The
Company will not receive any of the proceeds from the sale of the shares being
sold by the Selling Stockholders.
Each share of Ordinary Common Stock entitles its holder to one vote, and
each share of Class A Common Stock of the Company entitles its holder to 98
votes. All of the shares of Class A Common Stock are owned by Kyle Kirkland and
Dana Messina, Chairman of the Board and Chief Executive Officer of the Company,
respectively. Immediately after consummation of the Offering, Messrs. Kirkland
and Messina will possess 84% of the combined voting power of the Class A Common
Stock and Ordinary Common Stock. See "Risk Factors -- Control by Principal
Stockholders."
Prior to this offering, there has been no public market for the Ordinary
Common Stock of the Company. It is currently estimated that the initial public
offering price per share of Ordinary Common Stock will be between $20.00 and
$22.00. For factors to be considered in determining the initial public offering
price, see "Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE ORDINARY COMMON STOCK.
The Ordinary Common Stock has been approved for listing, subject to notice
of issuance, on the New York Stock Exchange under the symbol "LVB."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
<TABLE>
<CAPTION>
PROCEEDS TO
INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT (1) COMPANY (2) STOCKHOLDERS
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total (3)..................... $ $ $ $
</TABLE>
- ----------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated expenses of $600,000 payable by the Company.
(3) The Company and the Selling Stockholders have granted to the U.S.
Underwriters an option for 30 days to purchase up to an additional 529,955
shares at the initial public offering price per share, less the underwriters
discount, solely to cover over-allotments. Additionally, the Company and the
Selling Stockholders have granted the International Underwriters a similar
option with respect to an additional 132,489 shares as part of a concurrent
international offering. If such options are exercised in full, the total
initial public offering price, underwriting discount and proceeds to the
Company will be $ , $ and $ , respectively. See
"Underwriting."
----------------
The shares offered hereby are offered severally by the U.S. Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject orders in whole or in part. It is expected that certificates for
the shares will be ready for delivery in New York, New York on or about
, 1996 against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CS FIRST BOSTON CORPORATION
---------
The date of this Prospectus is , 1996.
<PAGE>
DESCRIPTION OF PHOTOS
Pictures of various instruments manufactured by the Company.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE ORDINARY COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION, INCLUDING
"RISK FACTORS," AND FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED ELSEWHERE
IN THIS PROSPECTUS. EXCEPT AS OTHERWISE SPECIFICALLY NOTED HEREIN, ALL OF THE
SHARE DATA WITH RESPECT TO THE ORDINARY COMMON STOCK AND THE CLASS A COMMON
STOCK (COLLECTIVELY, THE "COMMON STOCK") OF STEINWAY MUSICAL INSTRUMENTS, INC.
(THE "COMPANY") CONTAINED HEREIN GIVES EFFECT TO (I) THE CONVERSION OF THE
CONVERTIBLE PARTICIPATING PREFERRED STOCK INTO SHARES OF THE ORDINARY COMMON
STOCK, (II) THE EXERCISE OF ALL OUTSTANDING WARRANTS TO PURCHASE THE ORDINARY
COMMON STOCK AND (III) THE 2.83-FOR-1 STOCK SPLIT OF ALL OF THE COMPANY'S
OUTSTANDING SHARES OF COMMON STOCK. ALL REFERENCES TO THE COMPANY SHALL INCLUDE
ITS SUBSIDIARIES EXCEPT AS OTHERWISE SPECIFICALLY NOTED HEREIN. EXCEPT AS NOTED,
INFORMATION PRESENTED HEREIN ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION WILL NOT BE EXERCISED.
THE COMPANY
The Company, through its subsidiaries Steinway Musical Properties, Inc.
("Steinway") and The Selmer Company, Inc. ("Selmer"), is one of the world's
leading manufacturers of musical instruments. Steinway produces the highest
quality piano in the world and has one of the most widely recognized and
prestigious brand names. For more than a century, the Steinway concert grand has
been the piano of choice for the world's greatest and most popular pianists,
including artists such as Vladimir Horowitz, George Gershwin and Billy Joel.
More than 90% of all concert piano performances worldwide were on Steinway grand
pianos during the 1995 concert season. Selmer is the leading domestic
manufacturer of band and orchestral instruments and related accessories,
including a complete line of brasswind, woodwind, percussion and stringed
instruments. SELMER PARIS saxophones, BACH trumpets and trombones and LUDWIG
snare drums are considered by many to be the finest such instruments in the
world. In 1995, Selmer's domestic market share was approximately 42% in advanced
and professional band instruments and 25% in beginner instruments. On a pro
forma combined basis for 1995, the Company's net sales were $233.7 million.
Steinway concentrates on the high-end grand piano segment of the industry.
Steinway also offers vertical pianos as well as a mid-priced line of grand and
vertical pianos under the Boston brand name to provide dealers with a broader
product line. Steinway hand crafts its pianos in New York and Germany and sells
them through more than 200 independent piano dealers worldwide and five
Steinway-operated retail showrooms located in New York, New Jersey, London,
Hamburg and Berlin. In 1995, approximately 50% of Steinway's net sales were in
the United States, 37% in Europe and the remaining 13% primarily in Asia.
Selmer has the leading domestic market share in virtually all of its product
lines, with such widely recognized brand names as SELMER PARIS, BACH, GLAESEL,
WILLIAM LEWIS, LUDWIG and MUSSER. Selmer's products are made by highly skilled
craftsmen at manufacturing facilities in Indiana, North Carolina, Ohio and
Illinois, and sold through more than 1,600 independent dealers. Beginner
instruments accounted for 76% of Selmer's unit sales and 53% of instrument
revenues in 1995 with advanced and professional instruments representing the
balance. In 1995, 81% of Selmer's net sales were in the United States.
The Company acquired Selmer in August 1993 from an affiliate of Integrated
Resources, Inc., and Steinway in May 1995 (the "Steinway Acquisition") from John
and Robert Birmingham.
3
<PAGE>
BUSINESS STRATEGY
The Company believes that there are significant opportunities in the
Steinway and Selmer businesses which were not fully pursued by the previous
owners. The Company's strategy is to capitalize on its strong brand names and
leading market positions to grow sales and profitability. On a pro forma
combined basis, the Company's net sales and earnings from operations improved
8.7% and 28.0%, respectively, for 1995 compared to 1994, and 15.1% and 19.4%,
respectively, for the first quarter of 1996 over the comparable period in 1995.
The Company intends to pursue the following strategic opportunities.
CAPITALIZE ON SELMER'S STRONG INDUSTRY DEMAND
The Company believes that the domestic demand for band and orchestral
instruments has increased significantly over the last few years as a result of
strong demographic trends and a heightened overall interest in music. Sales of
Selmer instruments have been generally resistant to macroeconomic cycles and are
strongly correlated to the number of school children in the United States. The
domestic student population is currently the largest it has been over the past
30 years and is expected to grow steadily over the next decade. During the past
two years, Selmer has been unable to manufacture enough instruments to satisfy
the demand for its products. Selmer has recently made investments to improve
production output and expand capacity, including hiring and training of
additional personnel and installation of state-of-the-art equipment. The Company
expects to benefit from increased production in 1996. For the first quarter of
1996, Selmer's net sales were up 17.0% with instrument unit volumes up 8.4%
compared to the first quarter of 1995.
INCREASE STEINWAY'S PENETRATION OF DOMESTIC MARKET
Steinway's share of the domestic grand piano market was approximately 7% in
1995. The Company believes there is a significant opportunity to better
penetrate the domestic market through improved selling and marketing techniques
and better training and selection of dealers. During the past two years,
Steinway has increased its focus on these efforts and has developed several new
initiatives. For example, dealer training material has been redesigned and
customized marketing campaigns have been developed for all dealers. In addition,
each market is reviewed periodically and rated relative to its size and
demographic potential. Underperforming markets are targeted and a comprehensive
plan is developed to improve performance. Largely as a result of these measures,
domestic unit sales of grand pianos increased 11% from 1994 to 1995 and 15% from
the first quarter of 1995 to the comparable period in 1996.
The institutional segment of the U.S. piano market, which includes music
schools, conservatories and universities, currently represents less than 10% of
Steinway's domestic sales. Until recently, many institutions have been reluctant
to purchase new pianos because of the high cost and their limited annual
budgets. The Company estimates that existing institutional pianos have an
average age of approximately 30 years and are, therefore, prime candidates for
replacement. In 1995, Steinway introduced a new marketing initiative, supported
by a unique third-party financing program, which enables institutions to
purchase pianos on a long-term installment basis at attractive financing terms.
The historically high resale value of Steinway pianos allows the third-party
lender to provide this attractive financing program without any obligation on
the part of the Company. The Company believes that this program will
significantly enhance its institutional sales efforts. Since its recent
implementation, the program has helped generate additional institutional sales,
including the sale of over 80 pianos to two major U.S. universities which had
previously been using competitors' pianos.
PURSUE STRATEGIC ACQUISITIONS
The Company believes that the fragmented nature of the music industry
provides significant opportunities for acquisitions to further increase its
growth. The Company considers itself uniquely positioned to make strategic
acquisitions in complementary music-related businesses due to its market
leadership, broad distribution capabilities and history of successful
acquisitions. Several acquisition opportunities have been identified with
candidates that have attractive market shares and growth potential, as well as
4
<PAGE>
other candidates whose manufacturing and distribution systems can be combined
with the Company's systems to achieve operating efficiencies. Currently, the
Company is at various stages of discussions with several potential acquisition
candidates.
EXPLOIT INTERNATIONAL OPPORTUNITIES
The Company believes that Steinway is well positioned to benefit from
further economic recovery in Europe. Since 1992, the number of Steinway grand
pianos sold outside the United States has been relatively flat at approximately
900 units per year. However, for the 15 years prior to 1992, Steinway's foreign
operations sold approximately 1,200 to 1,400 grand pianos annually. The Company
believes this recent decline is primarily due to relatively weak economies in
Europe, particularly in its largest markets of Germany, Switzerland, France and
Italy. The Company believes that it has at least maintained its market share in
its foreign markets throughout this period and expects to benefit significantly
from a recovery of foreign sales to levels which more closely resemble
Steinway's higher historical experience.
In addition, the Company is exploring expansion opportunities for Steinway
beyond its traditional markets of North America and Western Europe. One of the
most attractive opportunities for Steinway lies in its continued expansion into
the Asian piano market. Steinway's current market share in Japan and Korea
combined is less than 1.0%, although these countries are two of the largest
piano markets in the world. Although the Steinway piano has an excellent
reputation in Asia and is the piano of choice in virtually every Japanese
concert venue, Steinway has not historically focused significant selling or
marketing efforts in these markets. The Company is reviewing these important
markets and is taking steps to improve Steinway's local distribution and
marketing capabilities.
Although Selmer's brand names are recognized worldwide, foreign sales have
historically represented less than 20% of Selmer's net sales, due largely to
manufacturing capacity limitations at its present facilities. The Company
believes that the European market presents significant opportunities for growth,
particularly in the professional segment. To target this market, the Company is
aggressively pursuing relationships with new dealers as well as utilizing the
existing Steinway dealer network.
IMPROVE MANUFACTURING EFFICIENCIES
The Company believes that Steinway and Selmer manufacture the highest
quality musical instruments in the world. The manufacturing processes of both
companies require a significant level of hand craftsmanship. A Steinway grand
piano contains more than 12,000 parts. At Selmer, the manufacturing process for
a typical instrument involves thousands of intricate and precise steps. The
Company believes that, over time, portions of the manufacturing processes for
Steinway and Selmer can be simplified or stream-lined to improve productivity
without compromising the quality and integrity of the finished product. The
Company has increased its capital expenditure budget for 1996 and 1997 to
approximately $5.0 million from $4.1 million in 1995 on a pro forma basis. The
majority of this spending is targeted for capacity expansion and manufacturing
quality and productivity improvements.
5
<PAGE>
THE OFFERING (1)
<TABLE>
<S> <C>
Ordinary Common Stock Offered:
U.S. Offering:
By the Company..........................
2,880,000 shares
By the Selling Stockholders.............
608,000 shares
--------
Total U.S. Offering...................
3,488,000 shares
--------
--------
International Offering:
By the Company..........................
720,000 shares
By the Selling Stockholders.............
152,000 shares
--------
Total International Offering..........
872,000 shares
--------
--------
Total Offering......................
4,360,000 shares
--------
--------
Common Stock to be outstanding after the
Offering...................................
9,079,197 shares of Ordinary Common Stock
477,953 shares of Class A Common Stock
--------
9,557,150 Total shares outstanding
--------
--------
Use of Proceeds.............................
The estimated net proceeds to the Company of
$68.2 million will be used to reduce
indebtedness and for general corporate
purposes.
Proposed NYSE Symbol........................
"LVB"
</TABLE>
- ------------------------
(1) Assumes the Underwriters' over-allotment option is not exercised. If such
over-allotment is exercised, up to an additional 540,000 shares will be
issued and sold by the Company and 122,444 shares will be sold by the
Selling Stockholders.
6
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information gives pro forma effect to (i)
the Steinway Acquisition, (ii) the sale by the Company of Ordinary Common Stock
in the Offering, (iii) a reduction in interest expense as a result of reduced
indebtedness upon application of the net proceeds to the Company of the
Offering, (iv) conversion of the Convertible Participating Preferred Stock into
shares of Ordinary Common Stock and (v) the exercise of all outstanding warrants
to purchase Ordinary Common Stock, in each case as if such transactions had
occurred on January 1, 1995. See "Use of Proceeds," "Capitalization," "Pro Forma
Condensed Consolidated Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Description of
Capital Stock" and the Company's Consolidated Financial Statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED ------------------------------
DECEMBER 31, 1995 APRIL 1, 1995 MARCH 30, 1996
----------------- ------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $233,731 $59,983 $69,049
Gross profit (1)...................... 74,357 19,354 21,720
Earnings from operations.............. 25,761 6,841 8,168
Net income (2)........................ 4,507 1,243 2,642
Net income per share (2).............. 0.49 0.13 0.28
Weighted average common and common
equivalent shares outstanding........ 9,284,763 9,260,000 9,557,150
OTHER FINANCIAL DATA:
EBITDA (1)(3)......................... $37,845 $9,893 $11,036
Interest expense, net................. 12,706 3,184 3,019
Capital expenditures.................. 4,066 1,351 706
Cash flows from: (4)
Operating activities................ 5,626 6,173 1,840
Investing activities................ (106,521) 1,154 (99)
Financing activities................ 104,249 (7,363) (2,242)
MARGINS:
Gross profit (1)...................... 31.8% 32.3% 31.5%
EBITDA (1)(3)......................... 16.2 16.5 16.0
BALANCE SHEET DATA (AT PERIOD END):
Cash.................................. $9,074
Current assets........................ 139,531
Total assets.......................... 266,252
Current liabilities................... 41,356
Total debt............................ 116,035
Stockholders' equity.................. 70,460
</TABLE>
- ------------------------------
(1) Gross profit and EBITDA for the year ended 1995 reflect positive adjustments
of $9,638 relating to purchase accounting adjustments to inventory for the
Steinway Acquisition in 1995.
(2) Pro forma net income for the year ended December 31, 1995 and the three
months ended April 1, 1995 does not include an extraordinary charge of
$4,589 ($0.49 per share) which would have been incurred by the Company in
connection with the reduction in indebtedness upon application of a portion
of the net proceeds to the Company from the Offering had such repayment
occurred on January 1, 1995.
(3) EBITDA represents earnings before depreciation and amortization, net
interest expense, other expenses (including certain management fees and bank
fees) and income tax expense (benefit), adjusted to exclude non-recurring
charges. While EBITDA should not be construed as a substitute for operating
income or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting principles, it is included herein to provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure and working capital requirements which the
Company believes certain investors find to be useful. EBITDA is not
necessarily a measure of the Company's ability to fund its cash needs.
(4) For more information regarding cash flow data, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources" and the Company's Consolidated Financial Statements
included elsewhere in this Prospectus.
7
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PREDECESSOR (1)
---------------------------------
YEAR ENDED
COMPANY
----------------------------------------------------------
PERIOD YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, ----------------------- DECEMBER 31, ----------------------
-------------------- 1/1/93 - 8/11/93 - ---------------------- APRIL 1, MARCH 30,
1991 1992 8/10/93 12/31/93 1994 1995 (2) 1995 1996 (2)
--------- --------- ----------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................... $ 83,232 $ 85,895 $ 57,171 $ 34,339 $ 101,114 $ 189,805 $ 31,880 $ 69,049
Gross profit (3)............ 27,139 29,458 17,955 10,238 31,925 59,856 10,147 21,720
Earnings (loss) from
operations................. 7,993 9,233 5,520 (1,640) 12,472 13,102 4,681 8,107
Net income (loss)........... 766 2,343 1,405 (3,109) 2,922 (2,074) 1,948 1,581
Net income per share........ -- -- -- (2.07) 0.52 (1.36) 0.34 0.27
SUPPLEMENTARY INCOME
STATEMENT DATA: (4)..........
Supplementary net income
before extraordinary item
(5)........................ $ 2,326 $ 2,642
Supplementary net income per
share before extraordinary
item (5)................... $ 0.25 $ 0.28
OTHER FINANCIAL DATA:
EBITDA (3)(6)............... $ 13,128 $ 14,437 $ 8,522 $ 4,597 $ 16,638 $ 30,479 $ 5,500 $ 11,036
Interest expense, net....... 7,165 6,797 4,072 3,028 7,752 14,340 1,608 4,660
Capital expenditures........ 744 720 576 303 1,112 3,162 679 706
Cash flows from: (7)
Operating activities...... 8,952 6,847 (8,565) 15,102 10,973 6,663 6,164 916
Investing activities...... (676) (553) (577) (94,413) (1,202) (107,702) (874) (99)
Financing activities...... (9,845) (5,967) 9,512 78,648 (9,549) 104,365 (4,520) (2,242)
MARGINS:
Gross profit (3)............ 32.6% 34.3% 31.4% 29.8% 31.6% 31.5% 31.8% 31.5%
EBITDA (3)(6)............... 15.8 16.8 14.9 13.4 16.5 16.1 17.3 16.0
BALANCE SHEET DATA (AT PERIOD
END):
Cash........................ $ 473 $ 402 $ 716 $ 53 $ 380 $ 3,706 $ 1,210 $ 2,146
Current assets.............. 54,671 55,712 69,563 56,736 56,265 132,380 55,287 132,603
Total assets................ 85,649 82,785 95,349 88,970 85,524 263,796 84,601 260,370
Current liabilities......... 8,870 9,519 9,907 10,174 13,388 41,767 14,909 41,356
Total debt.................. 60,374 55,024 65,053 71,369 62,057 174,039 57,605 171,647
Partners'/Stockholders'
equity..................... 14,537 16,626 17,999 4,226 7,253 5,828 9,261 6,440
</TABLE>
- ------------------------------
(1) On August 10, 1993, the Company purchased substantially all of the assets
and certain liabilities of The Selmer Company, L.P. (the "Predecessor"), a
wholly-owned subsidiary of Integrated Resources, Inc.
(2) The Company acquired Steinway in May 1995.
(3) Gross profit and EBITDA for the period August 11, 1993 to December 31, 1993
and the years ended 1994 and 1995 reflect positive adjustments of $4,754,
$264 and $9,638, respectively, relating to purchase accounting adjustments
to inventory for the Steinway Acquisition in 1995 and the acquisition of
Selmer in 1993.
(4) As adjusted to give effect to (i) a reduction in interest expense as a
result of reductions in indebtedness upon application of the net proceeds
to the Company of the Offering, (ii) conversion of the Convertible
Participating Preferred Stock into shares of Ordinary Common Stock and
(iii) the exercise of all outstanding warrants to purchase Ordinary Common
Stock, in each case as if all such transactions had occurred on January 1,
1995. See "Use of Proceeds." Supplementary weighted average common and
common equivalent shares reflect the additional shares assumed to be
outstanding to effect the transactions described above.
(5) Supplementary net income for the year ended December 31, 1995 does not
include an extraordinary charge of $4,589 ($0.49 per share) which would
have been incurred by the Company in connection with the reduction in
indebtedness upon application of a portion of the net proceeds to the
Company from the Offering had such repayment occurred on December 31, 1995.
(6) EBITDA represents earnings before depreciation and amortization, net
interest expense, other expenses (including certain management fees and
bank fees) and income tax expense (benefit), adjusted to exclude
non-recurring charges. While EBITDA should not be construed as a substitute
for operating income or a better indicator of liquidity than cash flow from
operating activities, which are determined in accordance with generally
accepted accounting principles, it is included herein to provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure and working capital requirements which
the Company believes certain investors find to be useful. EBITDA is not
necessarily a measure of the Company's ability to fund its cash needs.
(7) For more information regarding cash flow data, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources" and the Company's Consolidated Financial Statements
included elsewhere in this Prospectus.
8
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT").
DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE
MATERIAL SET FORTH UNDER "PROSPECTUS SUMMARY," "RISK FACTORS," "USE OF
PROCEEDS," "BUSINESS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES," "PRO
FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION" AND "SELECTED CONSOLIDATED
FINANCIAL INFORMATION," AS WELL AS WITHIN THIS PROSPECTUS GENERALLY. ALSO,
DOCUMENTS SUBSEQUENTLY FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "COMMISSION") WILL CONTAIN FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF THE RISK FACTORS SET FORTH BELOW AND THE MATTERS SET
FORTH OR INCORPORATED IN THIS PROSPECTUS GENERALLY. THE COMPANY CAUTIONS THE
READER, HOWEVER, THAT THIS LIST OF FACTORS MAY NOT BE EXHAUSTIVE, PARTICULARLY
WITH RESPECT TO FUTURE FILINGS.
PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE RISKS SET FORTH BELOW,
AS WELL AS OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, PRIOR TO MAKING AN
INVESTMENT IN THE ORDINARY COMMON STOCK.
CERTAIN FINANCING CONSIDERATIONS; SUBSTANTIAL LEVEL OF INDEBTEDNESS
The Company has substantial indebtedness and debt service obligations. The
degree to which the Company is leveraged could have important consequences to
holders of Ordinary Common Stock, including without limitation the following:
(i) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, potential acquisitions or general
corporate purposes may be impaired; (ii) a substantial portion of the Company's
consolidated cash flow from operations must be dedicated to the payment of
interest on the indebtedness of the Company; (iii) the covenants and other
restrictions contained in the indenture (the "Indenture") governing the
Company's 11% Senior Subordinated Notes due 2005 and the Company's bank credit
facility (the "Bank Credit Facility") will limit the Company's ability to pay
dividends, borrow additional funds or dispose of assets; and (iv) the Company's
leverage may make it more vulnerable to further economic downturns and may limit
its ability to withstand competitive pressures. See "Capitalization," "Selected
Consolidated Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Certain
Indebtedness."
Based upon current levels of operation, the Company believes that cash flow
from operations, borrowings under the Bank Credit Facility and other sources of
liquidity will be adequate to meet the Company's anticipated requirements for
working capital, capital expenditures, interest payments and scheduled principal
payments. There can be no assurance, however, that the Company's business will
continue to generate cash flow from operations at or above current levels. If
the Company is unable to generate sufficient cash flow from operations in the
future, it may be required to refinance all or a portion of its existing debt,
raise additional funds through the sale of additional equity or debt securities
or assets, or obtain additional financing. There can be no assurance that any
such refinancing would be possible or that any additional financing could be
obtained on terms that are favorable or acceptable to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS ASSOCIATED WITH FOREIGN OPERATIONS
The Company manufactures, markets and distributes its products worldwide. As
a result, the Company's worldwide operations are subject to the risks normally
associated with foreign operations, including, but not limited to, the
disruption of markets, changes in export or import laws, restrictions on
currency exchange, currency exchange rate fluctuations and the modification or
introduction of other governmental policies with potentially adverse effects.
Significant increases in the value of the U.S. dollar and, in the case of
Steinway, the Deutsche Mark relative to currencies of certain foreign markets
could have an adverse effect on the Company's ability to compete in such foreign
markets and on the Company's cash flow from such markets. See "Managements
Discussion and Analysis of Financial Condition and Results of Operations."
9
<PAGE>
RISKS INHERENT IN GROWTH STRATEGY
To expand its markets and diversify its business mix, the Company's business
strategy includes growth through acquisitions. Acquisitions can affect margins
because of increased overhead or expenses related to acquired businesses. There
can be no assurance that the Company will find suitable companies for
acquisition, that future acquisitions will be consummated on acceptable terms or
that any newly acquired companies will be successfully integrated into the
Company's operations. The Company may use Ordinary Common Stock (which could
result in dilution to the purchasers of the Ordinary Common Stock offered
hereby) or may incur additional long-term indebtedness or a combination thereof
for all or a portion of the consideration to be paid in future acquisitions. See
"Business -- Business Strategy."
SENSITIVITY TO ECONOMIC CONDITIONS
Steinway's business, which represented approximately 53% of the Company's
pro forma combined net sales in 1995, is highly sensitive to discretionary
consumer spending. Given the total number of grand pianos sold by Steinway in
any year (2,797 sold in 1995), a decrease in a relatively few number of units
being sold can have a material impact on the Company's business and operating
results. As a result, Steinway's financial performance is linked to general
economic conditions and can be adversely affected by economic downturns. In
1992, sales of Steinway grand pianos declined 24% and Steinway's net sales
declined by 12%, generally due to weaker economies in the United States and
Europe. See "Business -- Products."
COMPETITION
The markets in which the Company operates are competitive. Steinway competes
with companies such as Yamaha, Bechstein, Baldwin, Bosendorfer and Fazioli
Pianoforti SLR that produce and market pianos at the higher price points of the
piano market. Selmer competes with a number of domestic and foreign
manufacturers of musical instruments, including Yamaha, United Musical
Instruments and LeBlanc. There can be no assurance that the Company's products
will continue to compete successfully with other competitors, some of which may
have greater financial resources than the Company and may concentrate such
resources upon efforts to compete in the Company's markets. See "Business --
Competition."
CONTROL BY PRINCIPAL STOCKHOLDERS; CONFLICTS OF INTEREST
The Ordinary Common Stock entitles its holders to one vote per share on all
matters submitted generally to a vote of the Company's stockholders, while the
Company's Class A Common Stock entitles its holders to 98 votes per share.
Following the consummation of the Offering, Kyle Kirkland and Dana Messina will
have majority control of the Company through their ownership of 100% of the
Class A Common Stock and therefore will have the ability to control the election
of directors and the results of other matters submitted to a vote of
stockholders. Upon consummation of the Offering, Messrs. Kirkland and Messina
will control 84% of the voting power of the Common Stock even though they own
only 9% of the outstanding shares of Common Stock. Such concentration of
ownership, together with the anti-takeover effects of certain provisions in the
Delaware General Corporation Law and in the Company's Certificate of
Incorporation and Bylaws, may have the effect of delaying or preventing a change
in control of the Company. See "Principal Stockholders" and "Description of
Capital Stock."
Kyle Kirkland and Dana Messina are the principals of Kirkland Messina, Inc.,
a merchant banking firm they founded in 1994. The firm is a licensed
broker-dealer and has participated in numerous financing, leveraged
recapitalization and restructuring transactions. Kirkland Messina, Inc. arranged
the financing and acted as financial advisor to the Company in connection with
the Steinway Acquisition, and has received certain fees for management and
consulting services provided to Selmer and Steinway. See "Management -- Related
Party Agreements."
The business activities of Kirkland Messina, Inc. and its principals may
potentially subject such firm and Messrs. Kirkland and Messina to certain
conflicts of interests. Such conflicts of interest relate to the time and
services the firm and Messrs. Kirkland and Messina will devote the Company's
affairs.
10
<PAGE>
Messrs. Kirkland and Messina and Kirkland Messina, Inc. will resolve all
conflicts of interest in accordance with their fiduciary duties. Under
applicable law, Messrs. Kirkland and Messina, as directors and executive
officers of the Company, owe fiduciary duties to the Company and its
stockholders, which duties include a duty of care and a duty of loyalty. The
duty of loyalty embodies both an affirmative duty to protect the interests of
the Company and an obligation to refrain from conduct that would injure the
Company and its stockholders or deprive them of profit or advantage.
In addition, the Company has entered into agreements with Messrs. Kirkland
and Messina and Kirkland Messina, Inc. which obligate Messrs. Kirkland and
Messina to provide ongoing management and other services to the Company and to
devote such time as reasonably may be required to discharge such obligations.
See "Management -- Employment Contracts."
DEPENDENCE ON COLLECTIVE BARGAINING AGREEMENTS
Substantially all of the Company's hourly employees are represented by
various union locals and are covered by collective bargaining agreements, which
have various expiration dates and must be renegotiated upon expiration. The
Company did experience a two-week work stoppage at one of its Selmer
manufacturing plants in 1994. The Company considers its employee relations to be
generally good. However, there can be no assurance that, upon the expiration of
any of the Company's collective bargaining agreements, the Company will be able
to negotiate new collective bargaining agreements on terms favorable to the
Company or that the Company's business operations will not be interrupted as a
result of labor disputes or difficulties or delays in the process of
renegotiating its collective bargaining agreements. Because the Company has
collective bargaining agreements expiring in November 1996, February 1997 and
September 1997, there can be no assurance that labor relations will not
materially affect the Company's operations. See "Business -- Labor."
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, local and foreign
environmental regulations. Selmer may be responsible for remediation at certain
sites, but Philips Electronics North America Corporation, a previous owner of
Selmer, has agreed to indemnify Selmer for any environmental damages relating to
periods prior to December 29, 1988. No assurance can be given that additional
environmental issues will not arise or that Philips will make its payments under
its indemnity agreement. Any such issues or failure by Philips to pay may have
an adverse effect on the Company's business. See "Business -- Environmental
Matters." To date, Philips has fully performed its obligations under the
indemnity agreement.
DEPENDENCE ON A LIMITED NUMBER OF MANUFACTURING FACILITIES
The Company's current manufacturing operations are concentrated in a limited
number of facilities. Since the Company is heavily dependent on all of its
manufacturing facilities, a disruption of the Company's manufacturing operations
would have a material adverse effect on the Company's business, financial
condition and results of operations. Such disruption could result from various
factors, including human error, government intervention or a natural disaster
such as fire, earthquake, extreme heat or flood.
LIMITATION ON DIVIDENDS
The Company does not anticipate paying any cash dividends in the foreseeable
future. The terms of the Bank Credit Facility and the Indenture restrict the
Company's ability to pay dividends or to make cash distributions on its capital
stock. Any future cash dividends will depend upon, among other things, the
Company's results of operations, financial condition, cash requirements and
other factors. See "Dividend Policy" and "Description of Certain Indebtedness."
DILUTION
Purchasers of the shares of Ordinary Common Stock offered hereby will
experience immediate and substantial dilution in the net tangible book value per
share of the Ordinary Common Stock. After giving effect to the sale by the
Company of 3,600,000 shares of Ordinary Common Stock in the Offering at an
assumed initial public offering price of $21 per share, the pro forma net
tangible book value of the
11
<PAGE>
Company at March 30, 1996 would have been approximately $7.1 million, or $0.75
per share. This represents an immediate net tangible book value dilution of
$20.25 per share to investors purchasing shares in the Offering. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES
Sales of a substantial number of shares of Ordinary Common Stock in the
public market after the Offering, or the perception that such sales could occur,
could adversely affect the market price of the Ordinary Common Stock and the
Company's ability to raise capital through a subsequent offering of securities.
Of the 9,557,150 shares of Common Stock to be outstanding after the Offering,
the 4,360,000 shares to be sold in the Offering will be available for resale in
the public market without restriction immediately following the Offering if held
by holders who are not "affiliates" of the Company (as defined in the Securities
Act). The Company expects that approximately 4.7 million of the remaining
5,197,150 shares will be subject to 180-day lock-up agreements with the
Underwriters, and will thereafter be available for resale subject to the
quantity and manner of sale limitations of Rule 144 under the Securities Act. In
addition, certain holders of shares of the Common Stock have the right to
require the Company to register such shares for resale under the Securities Act.
In the event that additional shares of Ordinary Common Stock are registered as a
result of the exercise of such registration rights, the prevailing market price
for the Ordinary Common Stock and the Company's ability to raise additional
capital could be adversely affected. See "Underwriting" and "Sales Eligible for
Future Sale." Pursuant to its Certificate of Incorporation, the Company has the
authority to issue additional shares of Common Stock and shares of one or more
series of voting preferred stock. The issuance of such shares could result in
the dilution of the voting power of the shares of Ordinary Common Stock
purchased in the Offering. See "Description of Capital Stock."
ABSENCE OF PUBLIC MARKET
Prior to the Offering, there has been no public market for the Ordinary
Common Stock. Although the Ordinary Common Stock has been approved for listing,
subject to notice of issuance, on the New York Stock Exchange ("NYSE"), there
can be no assurance as to the development or liquidity of any trading market for
the Ordinary Common Stock or that investors in the Ordinary Common Stock will be
able to resell their shares at or above the initial public offering price. The
initial public offering price for the shares of Ordinary Common Stock will be
determined through negotiations between the Company and the Underwriters, and
may not be indicative of the market price of the Ordinary Common Stock after the
Offering. See "Underwriting."
12
<PAGE>
THE COMPANY
The Company, through its subsidiaries Steinway and Selmer, is one of the
world's leading manufacturers of musical instruments. Steinway produces the
highest quality piano in the world and has one of the most widely recognized and
prestigious brand names. For more than a century, the Steinway concert grand has
been the piano of choice for the world's greatest and most popular pianists,
including artists such as Vladimir Horowitz, George Gershwin and Billy Joel.
More than 90% of all concert piano performances worldwide were on Steinway grand
pianos during the 1995 concert season. Selmer is the leading domestic
manufacturer of band and orchestral instruments and related accessories,
including a complete line of brasswind, woodwind, percussion and stringed
instruments. SELMER PARIS saxophones, BACH trumpets and trombones and LUDWIG
snare drums are considered by many to be the finest such instruments in the
world. In 1995, Selmer's domestic market share was approximately 42% in advanced
and professional band instruments and 25% in beginner instruments.
The Company was incorporated in the state of Delaware in 1993, and changed
its name from Selmer Industries, Inc. to Steinway Musical Instruments, Inc. in
July 1996. The Company acquired Selmer in August 1993 and Steinway in May 1995.
The Company's executive offices are located at 600 Industrial Parkway, Elkhart,
Indiana, and its telephone number at that address is (219) 522-1675.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,600,000 shares of
Ordinary Common Stock offered by the Company hereby are estimated to be $68.2
million ($78.8 million if the Underwriters' over-allotment is exercised in full)
based on an assumed initial public offering price of $21, after deducting the
underwriting discounts and commissions and estimated expenses of the Offering.
The net proceeds of the Offering to the Company will be used to repay
approximately $9.7 million of borrowings under the Bank Credit Facility (with a
current interest rate of approximately 9.0%), $44.5 million of 11.00% Senior
Secured Notes due 2000, and $10.0 million of 10.92% Senior Secured Notes due
2000 and to pay prepayment premiums on such indebtedness of approximately $4.0
million. See "Description of Certain Indebtedness." Pending such uses, the net
proceeds of the Offering to the Company will be invested in short-term,
investment grade securities or interest bearing accounts. The Company intends to
use the remaining net proceeds, if any after the repayment of existing
indebtedness, for general corporate purposes. The Company will not receive any
of the proceeds from the sale of Ordinary Common Stock by the Selling
Stockholders.
DIVIDEND POLICY
The Company has no plans to pay dividends on the Common Stock. The Company
presently intends to retain earnings to reduce outstanding indebtedness and to
fund the growth of the Company's business. The payment of any future dividends
will be determined by the Board of Directors in light of conditions then
existing, including the Company's results of operations, financial condition,
cash requirements, restrictions in financing agreements, business conditions and
other factors.
The Company is restricted by the terms of its outstanding debt and financing
agreements from paying cash dividends on its Common Stock, and may in the future
enter into loan or other agreements that restrict the payment of cash dividends
on the Common Stock. See "Description of Certain Indebtedness."
13
<PAGE>
DILUTION
The net tangible book deficiency of the Company at March 30, 1996 (assuming
the conversion of all outstanding shares of Convertible Participating Preferred
Stock into shares of Ordinary Common Stock and the exercise of all outstanding
warrants to purchase shares of Ordinary Common Stock) was approximately $(56.9)
million, or $(9.55) per share of Common Stock. Net tangible book deficiency per
share is equal to the Company's total assets excluding goodwill, trademarks and
other intangible assets less its total liabilities, divided by the number of
shares of Common Stock outstanding immediately prior to the Offering. After
giving effect to the sale by the Company of 3,600,000 shares of Ordinary Common
Stock in the Offering at an assumed initial public offering price of $21 per
share, the pro forma net tangible book value of the Company at March 30, 1996
would have been approximately $7.1 million, or $0.75 per share. This represents
an immediate net tangible book value dilution of $20.25 per share to investors
purchasing shares in the Offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $ 21.00
Net tangible book deficiency at March 30, 1996.............. (9.55)
Increase in net tangible book value per share attributable
to the Offering............................................ 10.30
---------
Pro forma net tangible book value per share after the
Offering..................................................... 0.75
---------
Dilution per share to new investors........................... $ 20.25
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 30, 1996,
the difference between the number of shares of Common Stock held by the existing
stockholders and the pro forma historical net book value of the assets and
liabilities contributed by the existing stockholders, in the aggregate and on a
per share basis (assuming the conversion of all outstanding shares of Cumulative
Participating Preferred Stock into shares of Ordinary Common Stock and the
exercise of all outstanding warrants to purchase the Company's Ordinary Common
Stock), and the number of shares of Ordinary Common Stock purchased by the
investors in the Offering and the consideration paid, in the aggregate and on a
per share basis, by the investors purchasing shares of Ordinary Common Stock in
the Offering (assuming the sale of 3,600,000 shares of Ordinary Common Stock by
the Company and after deducting underwriting discount and estimated Offering
expenses):
<TABLE>
<CAPTION>
SHARES ACQUIRED AMOUNT CONTRIBUTED AVERAGE
------------------------ --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 5,957,150 62.3% $ 7,965,000 10.5% $ 1.38
New investors.......................... 3,600,000 37.7 68,200,000 89.5% $ 18.94
----------- ----- -------------- -----
Total.............................. 9,557,150 100.0% $ 76,165,000 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</TABLE>
- ------------------------
(1) The sale of shares by the Selling Stockholders in the Offering will reduce
the number of shares held by existing stockholders to 5,197,150 shares, or
54.4% of the total Common Stock outstanding after the Offering, and will
increase the number of shares held by new investors to 4,360,000 shares, or
45.6% (49.1% if the Underwriters' over-allotment option is exercised in
full) of the total number of shares of Common Stock outstanding after the
Offering.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
30, 1996 and such capitalization as adjusted to give effect to the conversion of
the Convertible Participating Preferred Stock into shares of Ordinary Common
Stock, the exercise of all outstanding warrants to purchase Ordinary Common
Stock, the sale by the Company of 3,600,000 shares of Ordinary Common Stock in
the Offering and a reduction in indebtedness upon application of the net
proceeds of the Offering to the Company. This table should be read in
conjunction with the Pro Forma Condensed Consolidated Financial Information, the
Selected Consolidated Financial Information, and the Financial Statements of the
Company and the Notes thereto contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 30, 1996
------------------------
ACTUAL AS ADJUSTED
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash................................................................ $ 2,146 $ 9,074
----------- -----------
----------- -----------
Long-term debt, including current portion:
Senior debt....................................................... $ 2,722 $ --
11.00% Senior Secured Notes due 2000 (1).......................... 43,194 --
10.92% Senior Secured Notes due 2000 (1).......................... 9,696 --
11.00% Senior Subordinated Notes due 2005......................... 110,000 110,000
Notes payable and other indebtedness.............................. 6,035 6,035
----------- -----------
Total long-term debt............................................ 171,647 116,035
----------- -----------
Stockholders' equity:
Capital stock..................................................... 1 9
Additional paid-in capital (2).................................... 7,964 76,156
Retained earnings (1)............................................. (679) (4,859)
Accumulated translation adjustment................................ (846) (846)
----------- -----------
Total stockholders' equity (1)(2)............................... 6,440 70,460
----------- -----------
Total capitalization................................................ $ 178,087 $ 186,495
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) In connection with the reduction in indebtedness upon application of a
portion of the net proceeds to the Company from the Offering, the Company
will incur prepayment penalties estimated to approximate $4.0 million which,
together with the write-off of related deferred offering costs and debt
discounts, would have resulted in an extraordinary charge, net of tax, of
approximately $4.2 million at March 31, 1996.
(2) As adjusted to reflect proceeds to the Company from the Offering and
exercise of warrants which are estimated to be net of underwriting discounts
and commissions and estimated Offering expenses totaling approximately $7.4
million.
15
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated financial information for the
fiscal year ended December 31, 1995 and the three months ended April 1, 1995
present the Company's unaudited pro forma consolidated statements of operations
as if the Steinway Acquisition, the conversion of the Convertible Participating
Preferred Stock into shares of Ordinary Common Stock and the exercise of all
outstanding warrants to purchase Ordinary Common Stock had occurred as of
January 1, 1995. The unaudited supplementary pro forma consolidated statements
of operations for the periods discussed above and for the three months ended
March 30, 1996 give effect to the transactions described above and to a
reduction in interest expense as a result of reductions in indebtedness upon the
application of the net proceeds to the Company of the Offering, as if the
Offering had occurred as of January 1, 1995. The supplementary pro forma balance
sheet data as of March 30, 1996 gives effect to (i) the reduction in
indebtedness upon application of the net proceeds of the Offering, (ii) the
conversion of the Convertible Participating Preferred Stock into shares of
Ordinary Common Stock, and (iii) the exercise of all outstanding warrants to
purchase Ordinary Common Stock, as if all such transactions had occurred on
March 30, 1996. The pro forma and supplementary pro forma adjustments are based
upon available information and certain assumptions that management of the
Company believes are reasonable. The pro forma and supplementary pro forma
financial information does not purport to represent the results of operations of
the Company which actually would have occurred had the Steinway Acquisition and
the Offering been consummated on January 1, 1995. See "Use of Proceeds,"
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Description of Capital Stock" and the Company's
Consolidated Financial Statements.
The pro forma financial data should be read in conjunction with the
financial statements of the Company and Notes thereto contained elsewhere in
this Prospectus.
16
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SUPPLEMENTARY SUPPLEMENTARY
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA
SELMER STEINWAY ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- ---------- -------------- ----------- ---------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.............. $ 108,907 $ 124,824 $ -- $ 233,731 $ -- $ 233,731
Cost of sales.......... 75,116 92,739 (8,481)(1) 159,374 159,374
---------- ---------- ------- ----------- ---------------
Gross profit....... 33,791 32,085 8,481 74,357 74,357
Operating expenses..... 19,445 28,486 907(2) 48,838 (242)(5) 48,596
---------- ---------- ------- ----------- ------- ---------------
Earnings from
operations............ 14,346 3,599 7,574 25,519 242 25,761
Other (income) expense:
Other income......... (561) (161) (722) (722)
Interest expense..... 9,150 7,235 3,861(3) 20,246 (6,818)(6) 13,428
---------- ---------- ------- ----------- ------- ---------------
Other expense,
net............... 8,589 7,074 3,861 19,524 (6,818) 12,706
---------- ---------- ------- ----------- ------- ---------------
Income (loss) before
income taxes.......... 5,757 (3,475) 3,713 5,995 7,060 13,055
Provision for income
taxes................. 2,559 466 2,863(4) 5,888 2,660(4) 8,548
---------- ---------- ------- ----------- ------- ---------------
Net income (loss)
(7)............... $ 3,198 $ (3,941) $ 850 $ 107 $ 4,400 $ 4,507
---------- ---------- ------- ----------- ------- ---------------
---------- ---------- ------- ----------- ------- ---------------
Net income per share
(7)................... $ 0.02 $ 0.49
Weighted average common
and common equivalent
shares outstanding
(8)................... 5,684,763 9,284,763
OTHER FINANCIAL DATA:
EBITDA (9)............. $ 17,492 $ 19,792 $ 561(2) $ 37,845 $ 37,845
Capital expenditures... 1,679 2,387 4,066 4,066
Cash flows from: (10)
Operating
activities.......... 4,200 444 (2,899) 1,745 3,881 5,626
Investing
activities.......... (107,333) 812 -- (106,521) -- (106,521)
Financing
activities.......... 103,467 782 -- 104,249 -- 104,249
MARGINS:
Gross profit........... 31.0% 25.7% 31.8% 31.8%
EBITDA (9)............. 16.1 15.9 16.2 16.2
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Statements of
Operations.
17
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 1, 1995
<TABLE>
<CAPTION>
SUPPLEMENTARY SUPPLEMENTARY
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA
SELMER STEINWAY ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
----------- ----------- -------------- ----------- ---------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................ $ 31,880 $ 28,103 $ -- $ 59,983 $ -- $ 59,983
Cost of sales............ 21,733 18,210 686(1) 40,629 40,629
----------- ----------- ------- ----------- ---------------
Gross profit......... 10,147 9,893 (686) 19,354 19,354
Operating expenses....... 5,466 6,564 544(2) 12,574 (61)(5) 12,513
----------- ----------- ------- ----------- ------- ---------------
Earnings (loss) from
operations.............. 4,681 3,329 (1,230) 6,780 61 6,841
Other (income) expense:
Other income........... (104) (90) -- (194) -- (194)
Interest expense....... 1,712 920 2,333(3) 4,965 (1,587)(6) 3,378
----------- ----------- ------- ----------- ------- ---------------
Other expense, net... 1,608 830 2,333 4,771 (1,587) 3,184
----------- ----------- ------- ----------- ------- ---------------
Income (loss) before
income taxes............ 3,073 2,499 (3,563) 2,009 1,648 3,657
Provision (benefit) for
income taxes............ 1,125 1,564 (896)(4) 1,793 621(4) 2,414
----------- ----------- ------- ----------- ------- ---------------
Net income (loss)
(7)................. $ 1,948 $ 935 $ (2,667) $ 216 $ 1,027 $ 1,243
----------- ----------- ------- ----------- ------- ---------------
----------- ----------- ------- ----------- ------- ---------------
Net income per share
(7)..................... $ 0.04 $ 0.13
Weighted average common
and common equivalent
shares outstanding
(8)..................... 5,660,000 9,260,000
OTHER FINANCIAL DATA:
EBITDA (9)............... $ 5,500 $ 4,059 $ 334(2) $ 9,893 $ 9,893
Capital expenditures..... 679 672 1,351 1,351
Cash flows from: (10)
Operating activities... 6,164 866 (1,755) 5,275 898 6,173
Investing activities... (874) 2,028 -- 1,154 -- 1,154
Financing activities... (4,520) (2,843) -- (7,363) -- (7,363)
MARGINS:
Gross profit............. 31.8% 35.2% 32.3% 32.3%
EBITDA (9)............... 17.3 14.4 16.5 16.5
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Statements of
Operations.
18
<PAGE>
SUPPLEMENTARY PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 30, 1996
<TABLE>
<CAPTION>
SUPPLEMENTARY SUPPLEMENTARY
HISTORICAL PRO FORMA PRO FORMA
COMPANY ADJUSTMENTS COMBINED
------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $ 69,049 $ -- $ 69,049
Cost of sales................................... 47,329 -- 47,329
------------- --------------- ---------------
Gross profit................................ 21,720 -- 21,720
Operating expenses.............................. 13,613 (61)(5) 13,552
------------- --------------- ---------------
Earnings from operations........................ 8,107 61 8,168
Other (income) expense:
Other income.................................. (131) (131)
Interest expense.............................. 4,791 (1,641)(6) 3,150
------------- --------------- ---------------
Other expense, net.......................... 4,660 (1,641) 3,019
------------- --------------- ---------------
Income before income taxes...................... 3,447 1,702 5,149
Provision for income taxes...................... 1,866 641(4) 2,507
------------- --------------- ---------------
Net income.................................. $ 1,581 $ 1,061 $ 2,642
------------- --------------- ---------------
------------- --------------- ---------------
Net income per share............................ $ 0.27 $ 0.28
Weighted average common and common equivalent
shares outstanding (8)......................... 5,957,150 9,557,150(8)
OTHER FINANCIAL DATA:
EBITDA (9)...................................... $ 11,036 $ 11,036
Capital expenditures............................ 706 706
Cash flows from: (10)
Operating activities.......................... 916 924 1,840
Investing activities.......................... (99) -- (99)
Financing activities.......................... (2,242) -- (2,242)
MARGINS:
Gross profit.................................... 31.5% 31.5%
EBITDA (9)...................................... 16.0 16.0
BALANCE SHEET DATA (AT PERIOD END):
Cash............................................ $ 2,146 $ 6,928 $ 9,074
Current assets.................................. 132,603 6,928 139,531
Total assets.................................... 260,370 5,388 266,252
Current liabilities............................. 41,356 41,356
Total debt...................................... 171,647 (55,612) 116,035
Stockholders' equity............................ 6,440 63,664 70,460
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Statements of
Operations.
19
<PAGE>
NOTES TO PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(1) To reflect adjustments to cost of sales for the following:
<TABLE>
<CAPTION>
THREE MONTHS
TWELVE MONTHS ENDED ENDED APRIL 1,
DECEMBER 31, 1995 1995
------------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Increase in inventory value upon application of purchase
accounting not reflective of future inventory costs..... $ (9,638)
Increased depreciation from write-up of plant and
equipment............................................... 782 $ 474
Increased value of piano bank disposals.................. 375 212
------- -------
$ (8,481) $ 686
------- -------
------- -------
</TABLE>
(2) To reflect adjustments to Steinway's operating expenses for the following:
<TABLE>
<CAPTION>
THREE MONTHS
TWELVE MONTHS ENDED ENDED APRIL 1,
DECEMBER 31, 1995 1995
------------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Additional amortization expense, net..................... $ 1,343 $ 805
Additional depreciation expense.......................... 125 73
Net administrative costs of Steinway eliminated as a
result of the Steinway Acquisition (primarily comprised
of salaries and benefits paid to former owners of
Steinway discontinued upon Steinway's acquisition)...... (561) (334)
------- -------
$ 907 $ 544
------- -------
------- -------
</TABLE>
(3) To reflect additional interest expense, net.
(4) To reflect the tax effect of pro forma or supplementary pro forma
adjustments.
(5) To reflect a reduction in amortization of deferred financing costs related
to indebtedness to be retired upon application of the net proceeds of the
Offering to the Company.
(6) To reflect a reduction in interest expense as a result of the reduction in
indebtedness upon application of the net proceeds of the Offering to the
Company.
(7) Supplementary net income for the year ended December 31, 1995 does not
include an extraordinary charge of $4,589 ($0.49 per share) which would have
been incurred by the Company in connection with the reduction in
indebtedness upon application of a portion of the net proceeds to the
Company from the Offering had such repayment occurred on December 31, 1995.
(8) As adjusted, to reflect (i) the conversion of the Convertible Participating
Preferred Stock into shares of Ordinary Common Stock, (ii) the exercise of
all outstanding warrants to purchase Ordinary Common Stock and (iii) the
sale by the Company of 3,600,000 shares of Ordinary Common Stock in the
Offering.
(9) EBITDA represents earnings before depreciation and amortization, net
interest expense, other expenses (including certain management fees and bank
fees) and income tax expense (benefit), adjusted to exclude non-recurring
charges. While EBITDA should not be construed as a substitute for operating
income or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting principles, it is included herein to provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure and working capital requirements which the
Company believes certain investors find to be useful. EBITDA is not
necessarily a measure of the Company's ability to fund its cash needs.
(10) For more information regarding cash flow data, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources" and the Company's Consolidated Financial Statements
included elsewhere in this Prospectus.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial information
for the Company. The selected historical balance sheet data as of December 31,
1991, 1992, August 10, 1993, and December 31, 1993, 1994 and 1995, and the
selected operating data for the fiscal years ended December 31, 1991 and 1992,
the period January 1, 1993 through August 10, 1993, the period August 11, 1993
through December 31, 1993, and the fiscal years ended December 31, 1994 and 1995
are derived from the audited financial statements of the Company. The selected
historical financial data as of and for the three month periods ended April 1,
1995 and March 30, 1996 are unaudited but, in the opinion of management, include
all adjustments (consisting of only normal recurring adjustments) necessary for
the fair presentation of the financial data for such periods. The results for
such interim periods are not necessarily indicative of the results for the full
fiscal year. The table should be read in conjunction with the Consolidated
Financial Statements of the Company, including the Notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR (1)
-------------------------------
YEAR ENDED
COMPANY
------------------------
YEAR ENDED
PERIOD DECEMBER
DECEMBER 31, ---------------------- 31,
-------------------- 1/1/93 - 8/11/93 - -----------
1991 1992 8/10/93 12/31/93 1994
--------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...................................................... $ 83,232 $ 85,895 $ 57,171 $ 34,339 $ 101,114
Cost of sales.................................................. 56,093 56,437 39,216 28,855 69,453
--------- --------- --------- ----------- -----------
Gross profit (3)............................................... 27,139 29,458 17,955 5,484 31,661
Operating expenses:
Sales and marketing.......................................... 9,325 9,772 6,570 4,116 11,328
Provision for doubtful accounts.............................. 1,800 1,600 919 157 655
General and administrative................................... 5,103 5,522 3,121 2,158 5,435
Amortization................................................. 2,498 2,512 1,527 409 1,067
Other expense................................................ 420 819 298 284 704
--------- --------- --------- ----------- -----------
Total operating expenses....................................... 19,146 20,225 12,435 7,124 19,189
--------- --------- --------- ----------- -----------
Earnings (loss) from operations................................ 7,993 9,233 5,520 (1,640) 12,472
Other (income) expense:
Other income, principally interest and late charges.......... (1,238) (829) (360) (226) (503)
Interest and amortization of debt discount................... 8,403 7,626 4,432 3,254 8,255
--------- --------- --------- ----------- -----------
Other expense, net............................................. 7,165 6,797 4,072 3,028 7,752
--------- --------- --------- ----------- -----------
Income (loss) before income taxes.............................. 828 2,436 1,448 (4,668) 4,720
Provision (benefit) for income taxes........................... 62 93 43 (1,559) 1,798
--------- --------- --------- ----------- -----------
Net income (loss) before extraordinary item.................... $ 766 $ 2,343 $ 1,405 $ (3,109) $ 2,922
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Net income (loss) before extraordinary item per share.......... -- -- -- $ (2.07) $ 0.52
Weighted average common and common equivalent shares
outstanding................................................... -- -- -- 1,499,900 5,660,000
SUPPLEMENTARY INCOME STATEMENT DATA: (4)
Supplementary net income before extraordinary item...........
Supplementary extraordinary item -- early extinguishment of
debt, net of tax (5)........................................
Supplementary net income (loss)..............................
Supplementary net income per share before extraordinary
item........................................................
Supplementary extraordinary item per share -- early
extinguishment of debt, net of tax (5)......................
Supplementary net income (loss) per share....................
Supplementary weighted average common and common equivalent
shares outstanding:.........................................
OTHER FINANCIAL DATA:
Gross profit (3)............................................... $ 27,139 $ 29,458 $ 17,955 $ 10,238 $ 31,925
EBITDA (3)(6).................................................. 13,128 14,437 8,522 4,597 16,638
Capital expenditures........................................... 744 720 576 303 1,112
Cash flows from: (7)
Operating activities......................................... 8,952 6,847 (8,565) 15,102 10,973
Investing activities......................................... (676) (553) (577) (94,413) (1,202)
Financing activities......................................... (9,845) (5,967) 9,512 78,648 (9,549)
MARGINS:
Gross profit (3)............................................... 32.6% 34.3% 31.4% 29.8% 31.6%
EBITDA (3)(6).................................................. 15.8 16.8 14.9 13.4 16.5
<CAPTION>
THREE MONTHS
ENDED
------------------------
APRIL 1, MARCH 30,
1995 (2) 1995 1996 (2)
------------ ----------- -----------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...................................................... $ 189,805 $ 31,880 $ 69,049
Cost of sales.................................................. 139,587 21,733 47,329
------------ ----------- -----------
Gross profit (3)............................................... 50,218 10,147 21,720
Operating expenses:
Sales and marketing.......................................... 21,001 3,570 8,272
Provision for doubtful accounts.............................. 797 250 229
General and administrative................................... 11,612 1,251 3,931
Amortization................................................. 3,041 282 1,100
Other expense................................................ 665 113 81
------------ ----------- -----------
Total operating expenses....................................... 37,116 5,466 13,613
------------ ----------- -----------
Earnings (loss) from operations................................ 13,102 4,681 8,107
Other (income) expense:
Other income, principally interest and late charges.......... (583) (104) (131)
Interest and amortization of debt discount................... 14,923 1,712 4,791
------------ ----------- -----------
Other expense, net............................................. 14,340 1,608 4,660
------------ ----------- -----------
Income (loss) before income taxes.............................. (1,238) 3,073 3,447
Provision (benefit) for income taxes........................... 836 1,125 1,866
------------ ----------- -----------
Net income (loss) before extraordinary item.................... $ (2,074) $ 1,948 $ 1,581
------------ ----------- -----------
------------ ----------- -----------
Net income (loss) before extraordinary item per share.......... $ (1.36) $ 0.34 $ 0.27
Weighted average common and common equivalent shares
outstanding................................................... 1,524,663 5,660,000 5,957,150
SUPPLEMENTARY INCOME STATEMENT DATA: (4)
Supplementary net income before extraordinary item........... $ 2,326 $ 2,642
Supplementary extraordinary item -- early extinguishment of
debt, net of tax (5)........................................ (4,589) --
------------ -----------
Supplementary net income (loss).............................. $ (2,263) $ 2,642
------------ -----------
------------ -----------
Supplementary net income per share before extraordinary
item........................................................ $ 0.25 $ 0.28
Supplementary extraordinary item per share -- early
extinguishment of debt, net of tax (5)...................... (0.49) --
------------ -----------
Supplementary net income (loss) per share.................... $ (0.24) $ 0.28
------------ -----------
------------ -----------
Supplementary weighted average common and common equivalent
shares outstanding:......................................... 9,284,763 9,557,150
OTHER FINANCIAL DATA:
Gross profit (3)............................................... $ 59,856 $ 10,147 $ 21,720
EBITDA (3)(6).................................................. 30,479 5,500 11,036
Capital expenditures........................................... 3,162 679 706
Cash flows from: (7)
Operating activities......................................... 6,663 6,164 916
Investing activities......................................... (107,702) (874) (99 )
Financing activities......................................... 104,365 (4,520) (2,242 )
MARGINS:
Gross profit (3)............................................... 31.5% 31.8% 31.5 %
EBITDA (3)(6).................................................. 16.1 17.3 16.0
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR (1)
-------------------------------
YEAR ENDED
COMPANY
------------------------
YEAR ENDED
PERIOD DECEMBER
DECEMBER 31, ---------------------- 31,
-------------------- 1/1/93 - 8/11/93 - -----------
1991 1992 8/10/93 12/31/93 1994
--------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Cash........................................................... $ 473 $ 402 $ 716 $ 53 $ 380
Current assets................................................. 54,671 55,712 69,563 56,736 56,265
Total assets................................................... 85,649 82,785 95,349 88,970 85,524
Current liabilities............................................ 8,870 9,519 9,907 10,174 13,388
Total debt..................................................... 60,374 55,024 65,053 71,369 62,057
Partners'/Stockholders' equity................................. 14,537 16,626 17,999 4,226 7,253
<CAPTION>
THREE MONTHS
ENDED
------------------------
APRIL 1, MARCH 30,
1995 (2) 1995 1996 (2)
------------ ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Cash........................................................... $ 3,706 $ 1,210 $ 2,146
Current assets................................................. 132,380 55,287 132,603
Total assets................................................... 263,796 84,601 260,370
Current liabilities............................................ 41,767 14,909 41,356
Total debt..................................................... 174,039 57,605 171,647
Partners'/Stockholders' equity................................. 5,828 9,261 6,440
</TABLE>
- ------------------------------
(1) On August 10, 1993, the Company purchased substantially all of the assets
and certain liabilities of the Predecessor.
(2) The Company acquired Steinway in May 1995.
(3) Gross profit and EBITDA under the captions "Other Financial Data" and
"Margins" for the period August 11, 1993 to December 31, 1993 and the years
ended 1994 and 1995 reflect positive adjustments of $4,754, $264 and $9,638,
respectively, relating to purchase accounting adjustments to inventory for
the acquisition of Selmer in 1993 and the Steinway Acquisition in 1995.
(4) As adjusted to give effect to (i) a reduction in interest expense as a
result of reductions in indebtedness upon application of the net proceeds to
the Company of the Offering, (ii) conversion of the Convertible
Participating Preferred Stock into shares of Ordinary Common Stock and (iii)
the exercise of all outstanding warrants to purchase Ordinary Common Stock,
in each case as if all such transactions had occurred on January 1, 1995.
See "Use of Proceeds." Supplementary weighted average common and common
equivalent shares reflect the additional shares assumed to be outstanding to
effect the transactions described above.
(5) In connection with the reduction in indebtedness upon application of the net
proceeds to the Company from the Offering, the Company will incur prepayment
penalties estimated to approximate $4.0 million which, together with the
write-off of related deferred offering costs and debt discounts, would have
resulted in an extraordinary charge, net of tax, of approximately $4,589
during the year ended December 31, 1995.
(6) EBITDA represents earnings before depreciation and amortization, net
interest expense, other expenses (including certain management fees and bank
fees) and income tax expense (benefit), adjusted to exclude non-recurring
charges. While EBITDA should not be construed as a substitute for operating
income or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting principles, it is included herein to provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure and working capital requirements which the
Company believes certain investors find to be useful. EBITDA is not
necessarily a measure of the Company's ability to fund its cash needs.
(7) For more information regarding cash flow data, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources" and the Company's Consolidated Financial Statements
included elsewhere in this Prospectus.
22
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF STEINWAY
The following table sets forth selected consolidated financial information
for Steinway. The selected historical balance sheet data as of and for each of
the five years in the period ended June 30, 1994 are derived from the audited
financial statements of Steinway. The selected historical financial data as of
and for the nine month periods ended March 31, 1994 and 1995 are unaudited but,
in the opinion of management, include all adjustments (consisting of only normal
recurring adjustments) necessary for the fair presentation of the financial data
for such periods. The results for such interim periods are not necessarily
indicative of the results for the full fiscal year. The table should be read in
conjunction with the Consolidated Financial Statements of Steinway, including
the Notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, ------------------------
----------------------------------------------------- MARCH 31, MARCH 31,
1990 1991 1992 1993 1994 1994 1995
--------- --------- --------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................... $ 92,037 $ 98,816 $ 89,240 $ 89,714 $ 101,896 $ 77,724 $ 93,539
Gross profit........................ 33,673 35,586 30,759 26,139 31,636 24,178 31,000
Operating income.................... 10,096 9,124 4,556 1,919 8,795 7,334 12,304
Income (loss) from continuing
operations......................... 3,077 2,753 (2,930) (3,009) 2,487 1,940 4,430
Net income (loss) (1)............... 3,618 2,825 (10,335) (3,009) 3,115 1,940 4,430
OTHER DATA:
EBITDA (2).......................... $ 13,500 $ 13,535 $ 9,591 $ 6,067 $ 13,068 $ 10,243 $ 15,205
Non-recurring charges (3)........... 1,861 2,319 2,532 2,047 1,658 1,244 1,115
Interest expense, net............... 3,448 3,186 3,307 4,390 3,842 3,048 2,664
Depreciation and amortization (4)... 1,669 2,099 2,675 2,695 2,664 1,944 2,017
Capital expenditures (5)............ 2,451 1,889 1,936 1,237 1,145 838 1,569
Steinway grand pianos sold (in
units)............................. 3,558 3,282 2,648 2,245 2,569 2,027 2,248
CASH FLOWS FROM: (6)
Operating activities................ 5,684 2,104 (5,417) 3,829 8,437 7,485 5,119
Investing activities................ (3,375) (4,280) 899 8,058 (3,436) (2,118) 508
Financing activities................ (1,894) (2,024) 4,097 (10,856) (5,354) (5,345) (6,595)
MARGINS:
Gross profit........................ 36.6% 36.0% 34.5% 29.1% 31.0% 31.1% 33.1%
EBITDA (2).......................... 14.7 13.7 10.7 6.8 12.8 16.3 16.3
BALANCE SHEET DATA (AT PERIOD END):
Cash................................ $ 1,110 $ 664 $ 564 $ 1,606 $ 1,396 $ 1,197 $ 1,080
Current assets...................... 68,306 70,120 73,300 56,259 58,760 55,466 61,459
Total assets........................ 85,701 87,832 91,784 72,677 76,019 72,467 79,445
Current liabilities................. 30,327 32,078 45,602 31,896 32,969 27,280 29,034
Total debt.......................... 47,919 49,576 55,353 44,397 38,468 39,058 32,934
Redeemable equity................... 3,614 4,227 1,471 1,000 270 1,092 510
Stockholders' equity................ 9,066 10,606 3,690 767 4,935 2,741 9,696
</TABLE>
- ------------------------------
(1) Net loss for the fiscal year ended June 30, 1992 includes loss from
discontinued operations of $7,405 as a result of Steinway's September 14,
1992 disposition of its Gemeinhardt Company, Inc. subsidiary.
(2) EBITDA represents earnings before depreciation and amortization, net
interest expense, other expenses (including certain management fees and bank
fees) and income tax expense (benefit), adjusted to exclude non-recurring
charges and charges related to previous ownership, which were eliminated.
While EBITDA should not be construed as a substitute for operating income or
a better indicator of liquidity than cash flow from operating activities,
which are determined in accordance with generally accepted accounting
principles, it is included herein to provide additional information with
respect to the ability of the Company to meet its future debt service,
capital expenditure and working capital requirements which management
believes certain investors find to be a useful tool for measuring the
ability to service debt. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs.
(3) Non-recurring charges represent certain costs and expenses primarily
consisting of certain executive compensation and benefits and office related
expenses of Steinway which, as a result of the Steinway Acquisition, have
been eliminated.
(4) Depreciation and amortization for the fiscal year ended June 30, 1994
excludes approximately $563 of amortization of deferred financing costs
written off pursuant to a debt refinancing effected in April 1994.
(5) Capital expenditures of Steinway exclude expenditures for additions to the
Concert and Artist Piano Bank. See "Business -- Sales and Marketing."
(6) For more information regarding cash flow data, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources" and the Company's Consolidated Financial Statements
included elsewhere in this Prospectus.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion provides an assessment of the results of operations
and liquidity and capital resources for the Company and should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Prospectus. All references to years are
to fiscal years, and all note references are to the accompanying Notes to the
Company's Consolidated Financial Statements. The Company's fiscal year ends on
December 31 and, prior to the Steinway Acquisition, Steinway's fiscal year ended
on June 30.
THE COMPANY
OVERVIEW
The Company, through its subsidiaries Steinway and Selmer, is one of the
world's leading manufacturers of musical instruments. On a pro forma combined
basis, the Company's net sales and earnings from operations improved 8.7% and
28.0%, respectively, for 1995 compared to 1994. The Company believes that these
operating performance improvements have resulted from implementation of the
Company's strategy to capitalize on its strong brand names and leading market
positions.
Steinway's piano sales are influenced by general economic conditions in the
United States and Europe, demographic trends and general interest in music and
the arts. Steinway's operating results are primarily influenced by grand piano
sales. Given the total number of grand pianos sold by Steinway in any year
(2,797 sold in 1995), a decrease in a relatively few number of units being sold
can have a material impact on the Company's business and operating results.
Domestic grand piano unit sales have increased 42.3% from 1992 to 1995, largely
attributable to the economic recovery in the United States as well as increased
selling and marketing efforts. Grand piano unit sales to international markets
have decreased by 3.5% over the same period primarily as a result of the
weakness of the European economies. In 1995, approximately 50% of Steinway's net
sales were in the United States, 37% in Europe and the remaining 13% primarily
in Asia.
Selmer is the largest domestic manufacturer of band and orchestral
instruments and related accessories, including a complete line of brasswind,
woodwind, percussion and stringed instruments used by student, amateur and
professional musicians. Beginner instruments accounted for 76% of Selmer's units
sales and 53% of instrument revenues in 1995 with advanced and professional
instruments representing the balance.
Sales of student instruments are influenced primarily by trends in school
enrollment and general interest in music and the arts. The school instrument
business is generally resistant to macroeconomic cycles and strongly correlated
to the number of school children in the United States, which is expected to grow
steadily over the next ten years.
Selmer's instrument unit sales have grown an average of 4% a year, and net
sales have grown an average of 9% a year, since 1993. This unit and net sales
growth is the result of management's efforts to improve Selmer's manufacturing
and sales capabilities as well as an increase in student enrollment and the
level of interest in music. In addition, management has increased production to
meet the increasing demand for its products.
Although the Company cannot accurately predict the precise effect of
inflation on its operations, it does not believe that inflation has had a
material effect on net sales or results of operations in recent years. Net sales
to customers outside the United States represent approximately 38% of
consolidated net sales, with Steinway's net sales accounting for over 77% of
these international sales. A significant portion of Steinway's net international
sales originate from its German manufacturing facility, resulting in net sales,
cost of sales and related operating expenses denominated in Deutsche Marks.
While currency translation has affected international net sales, cost of sales
and related operating expenses, it has not had a material impact on operating
income. The Company utilizes financial instruments such as forward exchange
contracts and currency options to reduce the impact of exchange rate
fluctuations on firm and
24
<PAGE>
anticipated cash flow exposures and certain assets and liabilities denominated
in currencies other than the functional currency. The Company does not purchase
currency related financial instruments for purposes other than exchange rate
risk management.
RESULTS OF OPERATIONS
The results of operations for the period beginning January 1, 1993 and
ending August 10, 1993, during which the Company was owned by an affiliate of
Integrated Resources, Inc., and for the period beginning August 11, 1993 and
ending December 31, 1993, during which the Company was owned by its current
owners, have been combined for comparative purposes.
On May 25, 1995, the Company acquired Steinway for approximately $104.0
million. The Steinway Acquisition was effected pursuant to a Merger Agreement
dated as of April 11, 1995. The Steinway Acquisition is being accounted for as a
purchase for financial reporting purposes. The Consolidated Financial Statements
of the Company as of and for the year ending December 31, 1995 include the
effects of the Steinway Acquisition as well as the results of operations for
Steinway for the period May 25, 1995 to December 31, 1995.
The following table is derived from the Company's Consolidated Statements of
Operations for the periods indicated and presents the results of operations as a
percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------------------------
------------------------------------- APRIL 1, APRIL 1, 1995 MARCH 30,
1993 1994 1995 1995 PRO FORMA 1996
----------- ----------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (1)....................... 69.2 68.4 68.5 68.2 67.7 68.5
----- ----- ----- ----- ----- -----
Gross profit (1)...................... 30.8 31.6 31.5 31.8 32.3 31.5
Total operating expenses................ 21.4 19.0 19.6 17.1 21.0 19.7
----- ----- ----- ----- ----- -----
Earnings from operations (1).......... 9.4% 12.6% 11.9% 14.7% 11.3% 11.7%
</TABLE>
- ------------------------
(1) Gross profit and earnings from operations for the years ended 1993, 1994 and
1995 reflect positive adjustments of $4,754, $264 and $9,638, respectively,
relating to purchase accounting adjustments to inventory for the acquisition
of Selmer in 1993 and the Steinway Acquisition in 1995.
THREE MONTHS ENDED MARCH 30, 1996 COMPARED TO THREE MONTHS ENDED APRIL 1,
1995
NET SALES -- Net sales increased by $37.2 million (116.6%) to $69.0 million
in the first quarter of 1996. The Steinway Acquisition contributed $31.8 million
in net sales to the first quarter of 1996. Selmer's net sales increased $5.4
million (17.0%) with instrument unit growth of 8.4% representing $2.3 million of
the increase. The balance of the sales increase relates to price realization. On
a pro forma basis, net sales increased $9.1 million (15.1%) reflecting strong
growth at Selmer and increased contribution from Steinway, primarily as a result
of a 15% increase in domestic unit sales of grand pianos.
GROSS PROFIT -- Gross profit increased by $11.6 million (114.1%) to $21.7
million in the first quarter of 1996. Steinway contributed $9.6 million of gross
profit. On a pro forma basis, gross profit improved $2.4 million (12.2%), with
gross profit margins declining from 32.3% to 31.5% due to product mix changes.
OPERATING EXPENSES -- Operating expenses increased by $8.1 million (149.0%)
to $13.6 million in the first quarter of 1996. Steinway operating expenses were
$7.6 million for the quarter. On a pro forma basis, operating expenses increased
$1.0 million (8.3%); however, operating expenses as a percentage of net sales
decreased from 21.0% to 19.7%.
EARNINGS FROM OPERATIONS -- Earnings from operations increased by $3.4
million (73.2%) to $8.1 million in the first quarter of 1996. Steinway
contributed $2.0 million of operating income during the period. On a pro forma
basis, earnings from operations increased $1.3 million (19.6%), primarily due to
earnings on the increased net sales and a decrease in operating expenses as a
percentage of sales.
25
<PAGE>
NET INTEREST EXPENSE -- Net interest expense increased by $3.1 million
(189.8%) to $4.7 million in the first quarter of 1996 primarily due to higher
outstanding long-term debt balances relating to the Steinway Acquisition. On a
pro forma basis, net interest expense decreased $.1 million (2.3%), primarily
due to lower outstanding debt balances.
1995 COMPARED TO 1994
NET SALES -- Net sales increased by $88.7 million (87.7%) to $189.8 million
in 1995. Steinway's net sales contributed $80.9 million during the period May
25, 1995 to December 31, 1995. Selmer's net sales increased $7.8 million (7.7%)
as compared to 1994. Modest instrument unit growth contributed $2.0 million. The
remaining increase can be attributed to price realization in most divisions.
GROSS PROFIT -- Gross profit increased by $27.9 million (87.5%) to $59.9
million in 1995 after positive adjustments of $9.6 million and $0.3 million in
1995 and 1994, respectively, relating to purchase accounting adjustments to
inventory. Selmer gross profits increased by $1.9 million (5.8%) to $33.8
million. Steinway contributed $26.1 million of gross profit. Gross profit as a
percentage of net sales remained essentially unchanged.
OPERATING EXPENSES -- Operating expenses increased by $17.9 million (93.4%)
to $37.1 million in 1995. Steinway operating expenses were $17.7 million for the
period. Selmer operating expenses increased $0.2 million (1.3%) to $19.4
million, but decreased as a percentage of net sales from 19.0% in 1994 to 17.9%
in 1995.
EARNINGS FROM OPERATIONS -- Earnings from operations (excluding charges
incurred by the Company in the amounts of $9.6 million and $0.2 million in 1995
and 1994, respectively, relating to the purchase accounting adjustments to
inventory) increased by $10.0 million (78.6%) to $22.7 million. Steinway
operating income was $8.4 million for the period. Selmer operating income
increased by $1.6 million (12.6%) to $14.3 million, primarily due to the
earnings on the increased sales and minimal increases in operating expenses.
NET INTEREST EXPENSE -- Net interest expense increased by $6.6 million
(85.0%) to $14.3 million in 1995 due to the higher outstanding long-term debt
relating to the Steinway Acquisition.
1994 COMPARED TO 1993
NET SALES -- Net sales increased by $9.6 million (10.5%) to $101.1 million
in 1994. Virtually all of Selmer's product lines increased due to strong
industry demand. Instrument unit volume increases, ranging from 4.4% for band
instruments to 11.5% for acoustic percussion instruments, represented $4.5
million of the increase. The balance of the sales increase was primarily
attributable to price realization.
GROSS PROFIT -- Gross profit increased by $3.7 million (13.1%) to $31.9
million in 1994, after positive adjustments of $0.2 million and $4.8 million in
1994 and 1993, respectively, relating to purchase accounting adjustments to
inventory. Gross profit as a percentage of net sales increased from 30.8% in
1993 to 31.6% in 1994. The increase resulted primarily from overall price
appreciation exceeding cost increases.
OPERATING EXPENSES -- Operating expenses decreased $0.4 million (1.9%) to
$19.2 million in 1994. This decrease was attributable to a $0.9 million
reduction in amortization expenses due to the higher amortization expense
incurred prior to the acquisition of Selmer in 1993. The provision for doubtful
accounts was reduced by $0.4 million in 1994. These decreases were offset by an
increase in sales and marketing expenses of $0.6 million (6.0%), to $11.3
million relating to incentive programs directly associated with customer
purchases.
EARNINGS FROM OPERATIONS -- Earnings from operations (excluding charges
incurred by the Company in the amounts of $0.2 million and $4.8 million in 1994
and 1993, respectively, relating to the purchase accounting adjustments to
inventory) increased $4.1 million (47.5%) to $12.7 million as a result of the
increased sales for the year.
26
<PAGE>
NET INTEREST EXPENSE -- Net interest expense increased by $0.7 million
(9.2%) to $7.8 million in 1994 due to higher outstanding debt balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily upon cash provided by operations,
supplemented as necessary by seasonal borrowings under its Bank Credit Facility,
to finance its operations, repay long-term indebtedness and fund capital
expenditures.
The Company has financed its major acquisitions through the issuance of
long-term debt and stock. Cash provided from the issuance of $110.0 million of
Senior Subordinated Notes funded the Steinway Acquisition in 1995. Cash provided
from the issuance of $55.0 million of Senior Secured Notes, $5.0 million of
Subordinated Notes, and $5.0 million of Common Stock funded the Selmer
acquisition in 1993. The balance of the financing for the Selmer acquisition was
funded by borrowings under the Company's Bank Credit Facility.
Cash provided by operations was $6.7 million in 1995, $11.0 million in 1994
and $6.5 million for the combined periods in 1993. The decrease in cash provided
by operations in 1995 is primarily due to $7.4 million invested in increased
accounts receivable, inventories and prepaid assets, offset by an additional
$3.1 million of cash earnings from operations. The increase in cash provided by
operations in 1994 as compared to 1993 is primarily attributable to $3.1 million
provided from changes in inventory and current liability balances and an
additional $1.4 million provided by cash earnings from operations.
The Company's investing activities used cash of $102.8 million in 1995 and
$94.1 million in 1993 to acquire Steinway and Selmer, respectively.
Capital expenditures in 1995, 1994 and 1993 were $3.2 million, $1.1 million
and $0.9 million, respectively. These capital expenditures were used primarily
for the purchase of new machinery and building improvements. The Company expects
to increase its level of capital expenditures to approximately $5.0 million in
each of 1996 and 1997 in order to modernize, expand and renovate its facilities.
Like most of its competitors, Selmer sells band instruments almost entirely
on credit. These programs create large working capital requirements during the
year when band instrument receivable balances reach highs of approximately $50.0
million in August and September, and lows of approximately $20.0 million in
January and February. The financing programs, intended to assist dealers with
the seasonality inherent in the industry and to facilitate the rent-to-own
programs offered to students by many retailers, also allow Selmer to match its
production and delivery schedules. Selmer offers the following two forms of
financing to qualified band instrument dealers:
(i) RECEIVABLE DATING: Purchases made from January through September
have payment due in October. Purchases made from October through December
have payment due in January. Customers are offered discounts for early
payment.
(ii) NOTE RECEIVABLE FINANCING: Qualified dealers may convert open
accounts to a note payable to Selmer. The note program is offered in January
and October, and coincides with the receivable dating program. The note
receivable is secured by dealer inventories and receivables. The majority of
Selmer's notes receivable are purchased by a third-party financial
institution, on a full recourse basis. Selmer's current arrangement, which
allows the financial institution to purchase, at its option, up to an
aggregate of $15.0 million of notes receivable per year, expires in 1997.
Net notes receivable sales generated approximately $13.0 million and $12.0
million in cash in 1995 and 1994, respectively.
Unlike many of its competitors in the piano industry, Steinway does not
provide extended financing arrangements to its dealers. To facilitate long-term
financing required by some dealers, Steinway has arranged for financing through
a third-party provider which generally involves no guarantee by Steinway.
The Bank Credit Facility was restated on May 25, 1995, and provides the
Company with a potential borrowing capacity of up to $60.0 million, based on
eligible accounts receivable and inventory. Borrowings are secured by a first
lien on the Company's domestic inventory, receivables, a first lien on
27
<PAGE>
Steinway's fixed assets and a second lien on Selmer's fixed assets. As of March
30, 1996, $2.7 million was outstanding, and availability was approximately $51.7
million. The Bank Credit Facility bears interest, at the option of the Company,
at (i) the higher of the prime rate or the federal funds rate plus 0.5% on any
day, plus 1.5%, or (ii) the Eurodollar rate plus 3.0%, and expires March 31,
2000. Open account loans with foreign banks also provide for borrowings by
Steinway's foreign subsidiaries of up to 20 million Deutsche Marks
(approximately $13.1 million as of the date hereof).
At March 30, 1996, the Company's outstanding long-term indebtedness amounted
to $171.6 million. Such long-term indebtedness consists of $110 million of
11.00% Senior Subordinated Notes due 2005, $43.2 million of 11.00% Senior
Secured Notes due 2000, $9.7 million of 10.92% Senior Secured Notes due 2000,
and $6.0 million of notes payable to foreign banks. Cash interest paid during
the three months ended April 1, 1995 and March 30, 1996 was $271,000 and
$189,000, respectively, and during fiscal 1993, 1994 and 1995 was $6.5 million,
$8.0 million and $13.4 million, respectively. The net proceeds of the Offering
will be used to repay and defease the 11.00% Senior Secured Notes due 2000 and
the 10.92% Senior Secured Notes due 2000. See "Use of Proceeds." The Company's
debt agreements contain restrictive covenants that place certain restrictions on
the Company, including restrictions to the Company's ability to make investments
in other entities or to pay cash dividends. See "Description of Certain
Indebtedness."
The Company believes that cash on hand, together with cash flow anticipated
from operations and available borrowings under the Bank Credit Facility, will be
adequate to meet debt service requirements, fund continuing capital requirements
and satisfy working capital and general corporate needs through the next twelve
months.
The Company may need to raise additional funds through public or private
debt or equity financing in order to take advantage of opportunities that may
become available to the Company, including more rapid expansion and acquisition
of businesses or products.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which the Company adopted effective January 1996. SFAS No. 121 is not
expected to have a material effect on the Company's net income or financial
position. In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply Accounting Principles Board ("APB") Opinion No. 25 which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company adopted SFAS No. 123 effective January 1, 1996 and intends to
account for employee stock-based compensation arrangements under APB Opinion No.
25.
STEINWAY
RESULTS OF OPERATIONS
The following table is derived from Steinway's Statements of Operations for
the periods indicated and presents the results of operations as a percentage of
net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE NINE MONTHS ENDED
30, --------------------------
------------------------ MARCH 31, MARCH 31,
1993 1994 1994 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................... 70.9 69.0 68.9 66.9
----- ----- ----- -----
Gross profit......................................... 29.1 31.0 31.1 33.1
Operating expenses..................................... 27.0 22.4 21.7 20.0
Operating income..................................... 2.1% 8.6% 9.4% 13.2%
</TABLE>
28
<PAGE>
NINE MONTHS ENDED MARCH 31, 1995 COMPARED TO NINE MONTHS ENDED MARCH 31,
1994
NET SALES -- Net sales increased by $15.8 million (20.3%) to $93.5 million
for the nine months ended March 31, 1995. Steinway's strong recovery continued
through the nine months ended March 31, 1995. This increase was principally
attributable to an 8.9% increase in units sold. In addition, sales were
favorably affected by increases in selling prices of approximately 5.0%, both at
the wholesale and retail levels. The strengthening of the Deutsche Mark relative
to the dollar likewise positively affected sales, contributing $4.4 million to
the overall increase.
GROSS PROFIT -- Gross profit for the nine months ended March 31, 1995
increased by $6.8 million (28.2%) to $31.0 million, and gross profit margins
improved to 33.1% from 31.1% for the comparable period in 1994. These
improvements reflect both the sales volume increase and improved absorption of
production overhead as activity in the manufacturing plants continued to
increase to meet higher demand.
OPERATING EXPENSES -- Selling, general and administrative ("SG&A") expenses
increased by $1.9 million (11.0%) to $18.7 million for the nine months ended
March 31, 1995. The balance is consistent with the higher level of sales
activity. The strengthening of the Deutsche Mark accounted for $0.8 million of
this increase. As a percentage of sales, SG&A expenses decreased to 20.0% from
21.7% .
OPERATING INCOME -- The increase in sales volume, improved production
efficiency and continued cost containment resulted in an increase in operating
income of $5.0 million (67.8%) to $12.3 million for the nine month period ended
March 31, 1995.
NET INTEREST EXPENSE -- Net interest expense decreased by $0.4 million
(12.6%) to $2.7 million principally due to Steinway's reduction in amounts
outstanding under its revolving credit lines with cash generated by operations.
FISCAL YEAR JUNE 30, 1994 COMPARED TO FISCAL YEAR JUNE 30, 1993
NET SALES -- Net sales increased by $12.2 million (13.6%) to $101.9 million
in fiscal 1994. The continued economic recovery in the United States and, to a
lesser extent, Europe contributed to an increase in unit sales of 17.6%. This
volume increase was somewhat offset by a weakening in the value of the Deutsche
Mark which resulted in a decrease of $3.2 million in sales.
GROSS PROFIT -- In fiscal 1994, gross profit improved by $5.5 million
(21.0%) to $31.6 million. The gross margin improved to 31.0% from 29.1% in
fiscal 1993. These performance indicators, which substantially exceed the
improvement at the sales level, reflect the positive impact of cost reduction
programs implemented in fiscal 1992 and fiscal 1993 as well as the increased
manufacturing efficiency associated with the higher production volume.
OPERATING EXPENSES -- SG&A expenses (which in 1993 included a pension
curtailment gain of $1.1 million and restructuring charges of $0.8 million)
decreased by $1.4 million (5.7%) in fiscal 1994. Approximately one-half of this
decrease is attributable to the weakening of the Deutsche Mark. The balance
resulted from reductions implemented during the year.
OPERATING INCOME -- The impact of cost reduction programs implemented during
fiscal 1992 and fiscal 1993, as well as the continued economic recovery,
contributed to a tremendous improvement in operating profits, which increased by
$6.9 million (358%) to $8.8 million in fiscal 1994. These improved results were
achieved even as unit sales remained well below traditional levels. The total
grand piano unit sales for fiscal 1994 of 2,572 was only 76.3% of Steinway's
30-year average of 3,011.
NET INTEREST EXPENSE -- Net interest expense decreased by $0.5 million
(12.5%) to $3.8 million in fiscal 1994 principally due to Steinway's reduction
in amounts outstanding under its revolving credit lines with cash generated by
operations.
29
<PAGE>
BUSINESS
GENERAL
The Company, through its subsidiaries Steinway and Selmer, is one of the
world's leading manufacturers of musical instruments. Steinway produces the
highest quality piano in the world and has one of the most widely recognized and
prestigious brand names. For more than a century, the Steinway concert grand has
been the piano of choice for the world's greatest and most popular pianists,
including artists such as Vladimir Horowitz, George Gershwin and Billy Joel.
More than 90% of all concert piano performances worldwide were on Steinway grand
pianos during the 1995 concert season. Selmer is the leading domestic
manufacturer of band and orchestral instruments and related accessories,
including a complete line of brasswind, woodwind, percussion and stringed
instruments. SELMER PARIS saxophones, BACH trumpets and trombones and LUDWIG
snare drums are considered by many to be the finest such instruments in the
world. In 1995, Selmer's domestic market share was approximately 42% in advanced
and professional band instruments and 25% in beginner instruments.
Steinway concentrates on the high-end grand piano segment of the industry.
Steinway also offers vertical pianos as well as a mid-priced line of grand and
vertical pianos under the Boston brand name to provide dealers with a broader
product line. Steinway hand crafts its pianos in New York and Germany and sells
them through more than 200 independent piano dealers worldwide and five
Steinway-operated retail showrooms located in New York, New Jersey, London,
Hamburg and Berlin. In 1995, approximately 50% of Steinway's net sales were in
the United States, 37% in Europe and the remaining 13% primarily in Asia.
Selmer has the leading domestic market share in virtually all of its product
lines, with such widely recognized brand names as SELMER PARIS, BACH, GLAESEL,
WILLIAM LEWIS, LUDWIG and MUSSER. Selmer's products are made by highly skilled
craftsmen at manufacturing facilities in Indiana, North Carolina, Ohio and
Illinois, and sold through more than 1,600 independent dealers. Beginner
instruments accounted for 76% of Selmer's unit sales and 53% of instrument
revenues in 1995 with advanced and professional instruments representing the
balance. In 1995, 81% of Selmer's net sales were in the United States.
The Company acquired Selmer in August 1993 from an affiliate of Integrated
Resources, Inc., and Steinway in May 1995 from John and Robert Birmingham.
HISTORY
STEINWAY. Steinway & Sons was founded in 1853 by Henry Engelhard Steinway
and his three sons. Steinway's superior instruments and aggressive marketing
efforts resulted in rapid expansion. By 1860, Steinway was the world's largest
piano manufacturer with 350 employees and a weekly production of thirty square
and five grand pianos. In 1875, the Steinways established a showroom and concert
hall in London and, in 1880, a factory in Hamburg, Germany. In 1928, Steinway's
current foreign manufacturing facility was opened in Hamburg.
Steinway's global success and fame was symbolized by the 1925 opening of a
new Steinway Hall on West 57th Street in New York. In 1972, the Steinway family
sold their piano business to an affiliate of the Columbia Broadcasting System
television network ("CBS"), but remained intimately involved with the management
of the operations. In 1985, CBS sold Steinway to John and Robert Birmingham. In
May 1995, the Company acquired Steinway from the Birmingham brothers.
SELMER. In 1885, Henri Selmer, a renowned French clarinetist, founded Henri
Selmer et Cie ("Selmer Paris"), a French musical instrument manufacturer.
Alexander Selmer, Henri's brother, began to use clarinets manufactured by Selmer
Paris in symphony performances throughout France and America. After receiving
many inquiries and requests for the clarinets, Alexander opened a retail shop in
New York to sell musical instruments. Alexander returned to Paris and left the
American Selmer concern to an employee, George Bundy. Mr. Bundy directed the
firm until his death in 1951 and grew Selmer into a leading manufacturer and
importer of musical instruments and related merchandise.
30
<PAGE>
Through a number of selected acquisitions and internal growth, Selmer has
expanded into a full-line musical instrument manufacturer. In 1978, Selmer
acquired Glaesel Stringed Instrument Service, Inc., a manufacturer and
distributor of violins, cellos and stringed basses. In 1981, Selmer acquired
Ludwig Industries, a leading drum manufacturer, and Musser, its orchestral
percussion division. In 1993, the Company purchased Selmer's assets from an
affiliate of Integrated Resources, Inc. In 1995, Selmer acquired the assets of
William Lewis & Son, a manufacturer of orchestral stringed instruments, from
Gemeinhardt Company, Incorporated.
BUSINESS STRATEGY
The Company believes that there are significant opportunities in the
Steinway and Selmer businesses which were not fully pursued by the previous
owners. The Company's strategy is to capitalize on its strong brand names and
leading market positions to grow sales and profitability. On a pro forma
combined basis, the Company's net sales and earnings from operations improved
8.7% and 28.0%, respectively, for 1995 compared to 1994, and 15.1% and 19.4%,
respectively, for the first quarter of 1996 over the comparable period in 1995.
The Company intends to pursue the following strategic opportunities.
CAPITALIZE ON SELMER'S STRONG INDUSTRY DEMAND
The Company believes that the domestic demand for band and orchestral
instruments has increased significantly over the last few years as a result of
strong demographic trends and a heightened overall interest in music. Sales of
Selmer instruments have been generally resistant to macroeconomic cycles and are
strongly correlated to the number of school children in the United States. The
domestic student population is currently the largest it has been over the past
30 years and is expected to grow steadily over the next decade. During the past
two years, Selmer has been unable to manufacture enough instruments to satisfy
the demand for its products. Selmer has recently made investments to improve
production output and expand capacity, including hiring and training of
additional personnel and installation of state-of-the-art equipment. The Company
expects to benefit from increased production in 1996. For the first quarter of
1996, Selmer's net sales were up 17.0% with instrument unit volumes up 8.4%
compared to the first quarter of 1995.
INCREASE STEINWAY'S PENETRATION OF DOMESTIC MARKET
Steinway's share of the domestic grand piano market was approximately 7% in
1995. The Company believes there is a significant opportunity to better
penetrate the domestic market through improved selling and marketing techniques
and better training and selection of dealers. During the past two years,
Steinway has increased its focus on these efforts and has developed several new
initiatives. For example, dealer training material has been redesigned and
customized marketing campaigns have been developed for all dealers. In addition,
each market is reviewed periodically and rated relative to its size and
demographic potential. Underperforming markets are targeted and a comprehensive
plan is developed to improve performance. Largely as a result of these measures,
domestic unit sales of grand pianos increased 11% from 1994 to 1995 and 15% from
the first quarter of 1995 to the comparable period in 1996.
The institutional segment of the U.S. piano market, which includes music
schools, conservatories and universities, currently represents less than 10% of
Steinway's domestic sales. Until recently, many institutions have been reluctant
to purchase new pianos because of the high cost and their limited annual
budgets. The Company estimates that existing institutional pianos have an
average age of approximately 30 years and are, therefore, prime candidates for
replacement. In 1995, Steinway introduced a new marketing initiative, supported
by a unique third-party financing program, which enables institutions to
purchase pianos on a long-term installment basis at attractive financing terms.
The historically high resale value of Steinway pianos allows the third-party
lender to provide this attractive financing program without any obligation on
the part of the Company. The Company believes that this program will
significantly enhance its institutional sales efforts. Since its recent
implementation, the program has helped generate additional institutional sales,
including the sale of over 80 pianos to two major U.S. universities which had
previously been using competitors' pianos.
31
<PAGE>
PURSUE STRATEGIC ACQUISITIONS
The Company believes that the fragmented nature of the music industry
provides significant opportunities for acquisitions to further increase its
growth. The Company considers itself uniquely positioned to make strategic
acquisitions in complementary music-related businesses due to its market
leadership, broad distribution capabilities and history of successful
acquisitions. Several acquisition opportunities have been identified with
candidates that have attractive market shares and growth potential, as well as
other candidates whose manufacturing and distribution systems can be combined
with the Company's systems to achieve operating efficiencies. Currently, the
Company is at various stages of discussions with several potential acquisition
candidates.
EXPLOIT INTERNATIONAL OPPORTUNITIES
The Company believes that Steinway is well positioned to benefit from
further economic recovery in Europe. Since 1992, the number of Steinway grand
pianos sold outside the United States has been relatively flat at approximately
900 units per year. However, for the 15 years prior to 1992, Steinway's foreign
operations sold approximately 1,200 to 1,400 grand pianos annually. The Company
believes this recent decline is primarily due to relatively weak economies in
Europe, particularly in its largest markets of Germany, Switzerland, France and
Italy. The Company believes that it has at least maintained its market share in
its foreign markets throughout this period and expects to benefit significantly
from a recovery of foreign sales to levels which more closely resemble
Steinway's higher historical experience.
In addition, the Company is exploring expansion opportunities for Steinway
beyond its traditional markets of North America and Western Europe. One of the
most attractive opportunities for Steinway lies in its continued expansion into
the Asian piano market. Steinway's current market share in Japan and Korea
combined is less than 1.0%, although these countries are two of the largest
piano markets in the world. Although the Steinway piano has an excellent
reputation in Asia and is the piano of choice in virtually every Japanese
concert venue, Steinway has not historically focused significant selling or
marketing efforts in these markets. The Company is reviewing these important
markets and is taking steps to improve Steinway's local distribution and
marketing capabilities.
Although Selmer's brand names are recognized worldwide, foreign sales have
historically represented less than 20% of Selmer's net sales, due largely to
manufacturing capacity limitations at its present facilities. The Company
believes that the European market presents significant opportunities for growth,
particularly in the professional segment. To target this market, the Company is
aggressively pursuing relationships with new dealers as well as utilizing the
existing Steinway dealer network.
IMPROVE MANUFACTURING EFFICIENCIES
The Company believes that Steinway and Selmer manufacture the highest
quality musical instruments in the world. The manufacturing processes of both
companies require a significant level of hand craftsmanship. A Steinway grand
piano contains more than 12,000 parts. At Selmer, the manufacturing process for
a typical instrument involves thousands of intricate and precise steps. The
Company believes that, over time, portions of the manufacturing processes for
Steinway and Selmer can be simplified or stream-lined to improve productivity
without compromising the quality and integrity of the finished product. The
Company has increased its capital expenditure budget for 1996 and 1997 to
approximately $5.0 million from $4.1 million in 1995 on a pro forma basis. The
majority of this spending is targeted for capacity expansion and manufacturing
quality and productivity improvements.
PRODUCTS
STEINWAY. Steinway concentrates on the high-end grand piano segment of the
industry. Steinway also offers vertical pianos as well as a mid-priced line of
grand and vertical pianos under the Boston brand name to provide dealers with a
broader product line. Steinway pianos differ from all others in design
specifications, materials used and assembly process. All of Steinway's patented
designs and innovations, referred to in the piano industry as "The Steinway
System," contribute to the unique sound and quality of the Steinway piano.
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GRAND PIANOS. Grand pianos historically have accounted for the bulk of
Steinway's production. Steinway offers eight models of the grand piano that
range in length from 155 cm (5'1") for a baby grand to 274 cm (9') for the
largest concert-style piano. The smaller grands are sold to both individual and
institutional customers, while the concert grands are sold primarily to
institutions. Grand pianos are at the premium end of the piano market in terms
of quality and price, with the Steinway grands dominating the high end of the
market with retail prices generally ranging from $27,600 to $101,200 in the
United States.
In 1995, Steinway sold 2,797 grand pianos, with 1,912 units shipped from its
New York facility and 885 units shipped from its Hamburg facility. The following
table shows the Steinway grand piano units sold per year for the past five
years.
HISTORICAL STEINWAY GRAND PIANO UNIT SALES FOR YEARS 1991-1995
<TABLE>
<CAPTION>
CALENDAR
YEAR NEW YORK HAMBURG TOTAL
- ----------- ----------- ----------- ---------
<S> <C> <C> <C>
1991 1,550 1,438 2,988
1992 1,344 917 2,261
1993 1,631 887 2,518
1994 1,798 953 2,751
1995 1,912 885 2,797
</TABLE>
VERTICAL PIANOS. Steinway produces vertical pianos primarily to offer its
dealers a complete line of pianos and to satisfy the needs of institutions and
other customers who are constrained by space limitations but unwilling to
compromise on quality. Steinway's four models of vertical pianos range in height
from 114 cm (45") to 132 cm (52").
THE BOSTON PIANO LINE. In October 1991, Steinway introduced the Boston
piano, a complete line of grand and vertical pianos designed by Steinway and
manufactured by a Japanese manufacturer to provide Steinway dealers with pianos
priced in the high end of the middle range of the piano market. The line
provides dealers with an opportunity to realize better margins in the mid-market
price range while capturing sales that would have otherwise gone to a
competitor. The product line increases Steinway's business with its dealers,
making Steinway the dealers' primary supplier in many instances. Furthermore,
because historically 75% of Steinway customers have previously owned a piano,
the Boston piano is expected to provide an entry-level product for future
Steinway grand piano customers. The Boston line is comprised of nine upright and
grand piano models, with retail prices ranging from $4,995 to $33,310.
SERVICES. Steinway provides restoration services and sells piano parts from
its New York, London, Berlin and Hamburg locations. Steinway also provides
tuning and regulating services. Restoration, repair, tuning and regulating
services are important because they lead to potential new customers. In 1995,
restoration services and piano parts accounted for approximately 7% of revenue,
with gross margins of approximately 29%. As a result of the quality of its
restorations and repairs, the demand for restoration of existing Steinways has
increased.
SELMER. Selmer produces and distributes a wide variety of musical
instruments and related products through its four operating divisions.
SELMER DIVISION manufactures brasswind and woodwind instruments, including
clarinets, flutes, piccolos, trumpets, cornets, trombones, saxophones, oboes and
bassoons. The division also manufactures mouthpieces and distributes accessories
such as oils, lubricants, polishes, stands, batons, sax straps, mutes and reeds.
The division's products are manufactured under the SELMER, BACH, BUNDY and
SIGNET brand names and are sold to student, amateur and professional musicians.
Products sold to professional musicians are often customized to meet specific
design options or sound characteristics. The Company believes that
specialization of products helps Selmer maintain a competitive edge in quality
and product design.
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Selmer owns the exclusive U.S. distribution rights for SELMER PARIS
products. The SELMER PARIS saxophone is generally considered to be one of the
best in the world. SELMER PARIS, in turn, has exclusive distribution rights to
Selmer's woodwind and brasswind products in France. Selmer expects to renew the
99 year SELMER PARIS distribution rights agreement when it expires in 1998.
SELMER PARIS products represented approximately 7% of Selmer's net sales in
1995. While the extension of these distribution rights is expected, the Company
believes that the failure to extend such rights would not have a material
adverse effect on Selmer's operating results.
LUDWIG/MUSSER DIVISION manufactures acoustical and tuned percussion
instruments, including outfit drums, marching drums, concert drums, marimbas,
xylophones, vibraphones, orchestra bells, chimes, mallets and accessories. This
division manufactures its products in Monroe, North Carolina and La Grange,
Illinois under the LUDWIG and MUSSER brand names. LUDWIG is considered a leading
brand name in drums and MUSSER has the dominant market share of tuned percussion
products.
GLAESEL/WILLIAM LEWIS DIVISION manufactures and distributes stringed
instruments, including violins, violas, cellos and basses, and accessories such
as bridges, covers, mutes, pads, chin rests, rosins, strings, bows, cases and
instrument care products. Components are primarily imported from several
European and Asian suppliers and are assembled at the factory in Cleveland,
Ohio.
VINCENT BACH INTERNATIONAL, LTD. ("VBI"), located in London, England, is a
wholly-owned subsidiary of Selmer. VBI distributes Selmer's products, in
addition to other products that do not compete directly with Selmer's products,
in the United Kingdom. Selmer also exports products to Europe and other parts of
the world under its trademark name of VINCENT BACH INTERNATIONAL.
CUSTOMERS
STEINWAY. Steinway's core customer base consists of professional artists
and amateur pianists, as well as institutions such as concert halls,
conservatories, colleges, universities and music schools. Customers purchase
Steinway pianos either through one of the Company's five retail stores or
through independently owned dealerships. Over 90% of Steinway piano sales in the
United States are to individuals. In other countries, sales to individuals are a
smaller percentage and represent an opportunity for further market penetration.
For example, sales to individuals represent less than 60% of sales in Germany.
Steinway pianos primarily are purchased by affluent individuals with incomes in
excess of $100,000 per year. The typical customer is over 45 years old and has a
serious interest in music. Steinway's largest dealer accounted for approximately
8% of sales in 1995, while the top 15 accounts represented 28% of sales.
The Company believes there is a significant opportunity to better penetrate
the domestic market through improved selling and marketing techniques and better
training and selection of dealers. During the past two years, Steinway has
increased its focus on these efforts and has developed several new initiatives.
For example, dealer training material has been redesigned and customized
marketing campaigns have been developed for all dealers. In addition, each
market is reviewed periodically and rated relative to its size and demographic
potential. Underperforming markets are targeted and a comprehensive plan is
developed to improve performance. For example, the Chicago market was targeted
for a remedial action plan in 1993 that included increased promotional
activities and a change in dealer location. Largely as a result of these
measures, Chicago's sales volume doubled by 1995.
SELMER. Historically, a majority of Selmer's net sales has been to students
in elementary and high school. Traditionally, students join school bands or
orchestras at age 10 or 11 and learn on beginner level instruments. After
several years, they progress to an advanced or professional level instrument. In
addition, certain large instruments typically are purchased directly by school
systems. Selmer also sells to professional players. Selmer's customers include
over 1,600 musical instrument dealers. Selmer's largest customer accounted for
approximately 4% of sales in 1995, while the top 15 accounts represented
approximately 26% of sales.
34
<PAGE>
SALES AND MARKETING
STEINWAY. Steinway distributes its products primarily on a wholesale basis
through over 200 select dealers and distributors around the globe. The New York
manufacturing facility supplies dealers in North and Latin America, while the
Hamburg plant manufactures pianos for sale through dealers and distributors in
Europe, Africa and Asia. The New York manufacturing facility manufactured
approximately 67% of Steinway pianos sold in 1995.
Steinway operates five retail stores in New York, New Jersey, London,
Hamburg and Berlin. Steinway's West 57th Street store in New York City, known as
Steinway Hall, is one of the largest and most famous piano stores in the world.
In 1995, approximately 90% of Steinway unit sales were sold on a wholesale
basis, with the remaining 10% being sold directly by Steinway at one of its five
company-owned retail locations. According to industry statistics, Steinway's
domestic market share of the grand piano market was approximately 7% in 1995.
Dealers are attracted to Steinway for several reasons. A Steinway dealership
carries with it an elevated status because the dealer represents the best piano
available in the industry. Further, Steinway pianos attract premium customers
and command higher profit margins than the instruments of other manufacturers.
The Company believes that a Steinway dealership tends to be the most profitable
in any given market. Steinway's "Partnership Program" provides a mutual
commitment between Steinway and its dealers. Dealers are assigned significant
exclusive sales territories, provided extensive sales training and unique
pre-scripted promotional materials. In turn, dealers must carry a representative
level of inventory, support Steinway's concert and artist activities and
actively promote Steinway as the world's premier piano.
NORTH AND LATIN AMERICA: Steinway pianos are sold by dealers in 45
states across the United States. The major markets for Steinway pianos are
in and around major metropolitan areas. The two largest regions in terms of
sales are California and New York, which together accounted for
approximately 29% of domestic wholesale revenue in 1995. Recognizing that
the emerging markets in Latin America may continue to grow, Steinway has
recently added dealers in Brazil and Argentina.
EUROPE: Germany, Switzerland, France, the United Kingdom and Italy
account for the greatest percentage of sales outside the Americas. Steinway
grand pianos are also sold in other European countries. As in the United
States, Steinway is widely recognized in Europe as the highest quality piano
and dominates the top segment of the market. The largest European markets
for Steinway pianos in 1995 were Germany and Switzerland.
ASIA: Japan and Korea are two of the largest piano markets in the
world. The largest market for Steinway pianos in Asia today is Japan, where
Steinway recently positioned a full-time employee to head the Asian
marketing efforts. Steinway grand pianos are also sold in most other East
Asian countries, many of which may present attractive growth opportunities.
STEINWAY ARTISTS. The most effective form of marketing for Steinway is the
endorsement by world class pianists who voluntarily select the Steinway piano.
Unlike many of its competitors, Steinway does not pay artists to endorse its
instruments. Indeed, to become a "Steinway Artist" a pianist must not only meet
certain performance and professional criteria, he or she must first own a
Steinway piano. The Steinway Artist roster currently exceeds over 1,000 of the
world's finest pianists. Steinway Artists play only on a Steinway. In turn, they
have access to the Piano Bank described below. For years Steinway has
successfully used artist endorsements to form marketing programs. Those ongoing
programs have helped solidify brand-name recognition by the general public as
well as clearly demonstrate that Steinway pianos surpass all other brands in
quality. In addition, various promotional events have been organized to maintain
and strengthen public awareness of the superiority of the Steinway piano.
THE CONCERT AND ARTIST PIANO BANK. Virtually all major venues throughout
the world own a Steinway piano. However, to ensure all pianists, and especially
Steinway Artists, have a broad selection of
35
<PAGE>
instruments to meet each individual's touch and tonal preferences, Steinway
maintains the famed Concert and Artist Piano Bank (the "Piano Bank"). The Piano
Bank includes approximately 330 instruments worldwide. Of these instruments,
approximately 275 are located in the United States. In New York City, the
Steinway concert department has approximately 86 concert grands available for
various occasions. The balance of the domestic-based pianos are leased to
dealers around the country who actively support the Steinway Artists program. In
addition to promoting Steinway's name in the music industry, the Piano Bank
provides Steinway with feedback on the quality and performance of the
instruments from its most critical customer, the professional pianist. Since the
average age of the instruments in the Piano Bank is approximately 3.3 years,
Steinway receives continuous feedback on recently produced instruments.
Generally, the Piano Bank instruments are sold after five years and are replaced
with new pianos.
INSTITUTIONAL SALES. Many musical institutions and music teachers have
chosen to endorse Steinway pianos. For example, The Juilliard School in New York
uses Steinway pianos exclusively and currently has more than 200 of these pianos
in use. Nevertheless, in the United States, such sales to institutions
historically have represented only a small percentage of Steinway's business.
Colleges and universities have been reluctant to purchase new pianos because of
the high cost and their limited annual budgets. The Company estimates that
existing institutional pianos have an average age of approximately 30 years and
are, therefore, prime candidates for replacement. In 1995, Steinway introduced a
new marketing initiative, supported by a unique third-party financing program
with Banc One Leasing Corporation, which enables institutions to purchase pianos
on a long-term installment basis at attractive financing terms. The historically
high resale value of Steinway pianos allows the third-party lender to provide
this attractive financing program without any obligation on the part of the
Company. The Company believes that this program will significantly enhance its
institutional sales efforts. Since its recent implementation, the program has
helped generate additional institutional sales, including the sale of over 80
pianos to two major U.S. universities which had previously been using
competitors' pianos.
LIMITED EDITIONS. In 1993 Steinway introduced its first limited edition of
280 pianos commemorating its 140th anniversary. These pianos featured unique
case designs and finishes. The success of the anniversary edition lead to the
production of a second limited edition of 146 pianos in 1995 featuring historic
Steinway case designs and decals. Both limited editions were sold out in a
matter of days, providing premium margin sales for Steinway and further product
differentiation for its dealers. Steinway intends to introduce similar limited
editions in the future at appropriate time intervals.
DISTRIBUTION, SALES AND MARKETING OF THE BOSTON PIANO LINE. The Boston
piano line is targeted toward the high end of the mid-market segment of the
market. The line was introduced to provide a broader product offering for
dealers and provide an entry-level product for future Steinway grand piano
customers, since historically 75% of Steinway customers have previously owned a
piano. With certain limited exceptions, Steinway allows only Steinway dealers to
carry the Boston piano line and thus ensures that the pianos will be marketed as
a complementary product line. Increased traffic generated by the Boston piano
creates current and future customers for Steinway. The introduction of a lower-
priced alternative has not negatively impacted the sales of other Steinway
pianos. The Boston piano line profits from the "spillover" effect created by the
marketing efforts supporting Steinway's main product lines.
SELMER. Selmer has 18 domestic district sales managers who, in addition to
their retail music distribution responsibilities, form relationships with high
school and college band directors within their territories. Each sales manager
is required to make scheduled calls to educators and professionals. The local
dealer or distributor is typically responsible for making direct selling efforts
to an individual school and is often a designated supplier for such school.
School band and orchestra directors refer students to the designated dealer for
the purchase of instruments. Students are normally offered rent-to-own
arrangements with payments averaging from $20 to $40 a month over a one- to
two-year period. Typically only larger instruments such as tubas and stringed
basses are purchased by schools.
36
<PAGE>
Selmer supports dealers through incentive programs, advertising and
promotional activities. Trade shows, print media, direct mail and personal sales
calls are the primary methods of reaching customers. Selmer actively advertises
in consumer trade magazines. In addition, Selmer executives attend several trade
shows a year, including the two largest in Anaheim, California and Frankfurt,
Germany. Selmer also provides educational materials and up-to-date instrument
catalogs to educators in the band, orchestral and percussion fields.
In 1995, Selmer's domestic market share was approximately 42% in advanced
and professional band instruments and 25% in beginner instruments.
MUSICAL INSTRUMENT INDUSTRY
PIANOS. In 1995, approximately 50% of Steinway's total sales were in the
United States and 37% were in Europe. The Company believes that the high-end
niche of the piano market occupied by Steinway is stable in the United States
and Western Europe, and significant growth is possible in both Asia and Latin
America.
The Company believes that since piano sales tend to follow general economic
trends, an upswing in the piano industry can be expected to occur as the general
economy continues to improve. The Company further believes that the high end of
the grand piano market generally lags behind the rest of the market in both the
downturn and recovery phases of the industry cycle.
Vertical piano sales have been impacted not only by the general economic
recession, but also by the increase in competition stemming from electronic
alternatives to the vertical piano and lower-cost and smaller grand pianos mass
produced by Asian manufacturers. Since only a small percentage of Steinway's
profits are derived from sales of vertical pianos, the Company believes this
trend will not have a material adverse effect on Steinway's operating results.
UNITED STATES. In 1995, the musical instrument industry in the United
States generated retail sales of approximately $5.5 billion. Meanwhile, the
acoustic piano industry, which represents approximately 11% of the total musical
instrument industry, had retail sales of $598 million in 1995, up 7% from 1994
which included an 11% increase for grand pianos over five feet in length.
Sixty-one percent of this increase was attributable to grand piano sales.
During the period from 1991 to 1995, total dollar sales of grand pianos
increased at an average annual rate of 7.3% from $287.8 million to $371.8
million, whereas vertical piano dollar sales increased during such period at an
average annual rate of only 1.5%. For Steinway, this market differential between
verticals versus grands is significant, as the vast majority of Steinway's net
sales is attributable to grand pianos.
FOREIGN MARKETS. Korea, China and Japan are the three largest piano markets
in the world. Steinway's strongest international markets outside the Americas
are Germany, Japan, Switzerland, France, the United Kingdom and Italy.
BAND AND ORCHESTRAL INSTRUMENTS. Selmer believes that the band and
orchestral instrument industry has historically been impacted more by
demographic trends than by macroeconomic cycles. Since 1984, both student
enrollment (grades K through 12) and school expenditures have increased
steadily. The U.S. Department of Education projects that student enrollment is
expected to grow steadily over the next decade. The following table shows the
relationship between domestic industry unit sales for the years indicated and
the number of live births in the United States 11 years prior.
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RELATIONSHIP BETWEEN LIVE BIRTHS 11 YEARS PRIOR AND BAND INDUSTRY UNITS
(IN THOUSANDS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
UNITS LIVE BIRTHS
<S> <C> <C> <C>
1974 595 1974 4098
1975 503 1975 4027
1976 497 1976 3760
1977 472 1977 3606
1978 472 1978 3521
1979 478 1979 3502
1980 462 1980 3600
1981 494 1981 3731
1982 462 1982 3556
1983 443 1983 3258
1984 363 1984 3137
1985 365 1985 3160
1986 371 1986 3144
1987 449 1987 3168
1988 475 1988 3327
1989 456 1989 3329
1990 441 1990 3468
1991 437 1991 3623
1992 429 1992 3645
1993 465 1993 3690
1994 465 1994 3616
1995 475 1995 3697
1996 3749
1997 3731
1998 3829
1999 3914
2000 4022
2001 4179
</TABLE>
The band and orchestral instrument industry experienced moderate sales
declines starting in the mid to late 1970s, which Selmer believes were primarily
due to a reduction in the number of students enrolled in grades 4 through 12.
The Company estimates that there are approximately 25,000 high schools with one
or more bands. Historically, approximately 1 in 10 ten-year-olds in the United
States has played a band or orchestral instrument.
Sales improvements have also been caused by recent cultural and social
trends. The Company believes that parents are encouraging their children to
pursue musical instruments as a response to recent studies that show
participation in music programs increase a student's ability to excel in other
aspects of their education (e.g., college entrance test scores). Additionally,
many school band directors are promoting band programs as social organizations
rather than the first step of intensive music study.
PRODUCTION PROCESS
STEINWAY. The manufacturing process of a Steinway piano is an exercise in
diligence and precision. Much of the construction of a finished piano is
performed by hand. A Steinway grand piano consists of approximately 12,000
parts, each of them carefully made, shaped and inspected. The manufacturing
process takes up to nine months and primarily involves the fabrication and
assembly of piano components by skilled workers, each of whom has his or her own
area of specialization. At the end of this process, each piano is tuned, voiced
and regulated to achieve the high standard of sound that customers have come to
expect from a Steinway piano.
SELMER. Selmer's manufacturing process involves a large number of tasks
performed by skilled craftsmen. Employees perform welding, forming, drilling and
polishing applications throughout the process. Selmer maintains a fairly
constant production schedule, minimizing labor disruptions and keeping inventory
relatively stable. Selmer's Ludwig/Musser Division primarily assembles
percussion parts and components purchased from both domestic and foreign
suppliers. Stringed instruments, except cellos (which Selmer manufactures), are
assembled and finished at the Glaesel/William Lewis Division with unfinished
components imported from Europe and Asia.
Raw materials for use in the production of the Company's instruments are
purchased predominately in the United States.
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LABOR
As of March 30, 1996, the Company employed 1,945 people, consisting of 1,443
hourly and 502 salaried employees. Of the 1,945 employees, 1,507 are employed in
the United States and the remaining 438 are employed in Europe. At the New York
manufacturing and retail facilities, all employees except executives,
supervisory employees and clerical, administrative and retail sales department
employees are organized under Local 102 of the United Furniture Workers/IUE,
AFL/CIO. The current labor agreement covering domestic employees expires on
September 30, 1997. In Hamburg, manufacturing employees are represented by the
workers' council, Gewerkschaft Holz und Kunststoff, which negotiates on their
behalf. In Germany, Steinway participates in a consortium with other local
manufacturers in similar industries, primarily woodworking, to negotiate labor
rates. Wage increases tend to track those of the major unions in Germany.
Steinway's current contract covering salaries and wages for hourly German
employees is negotiated annually. Many of the Company's craftsmen are second or
third generation employees of Steinway. The United Auto Workers and the United
Brotherhood of Carpenters represent 670 members of the Company's workforce. The
Company has experienced only one labor strike which lasted for 10 days in March
1994 and involved 415 hourly employees. The Company's collective bargaining
agreements expire in November 1996, February 1997 and September 1997. The
Company believes that its relationship with its employees is generally good.
PROPERTIES
The Company owns most of its manufacturing and warehousing facilities.
Substantially all of the domestic real estate has been pledged to secure the
Company's debt. The Company believes its facilities to be in good operating
condition. The following table lists the Company's owned and leased facilities.
<TABLE>
<CAPTION>
APPROXIMATE
FLOOR SPACE
LOCATION OWNED/LEASED (SQUARE FEET) USE
- ----------------------- -------------- ------------- ---------------------------------------------------------
<S> <C> <C> <C>
New York, NY Owned 449,900 Piano manufacturing; restoration center; parts sales;
sales; research and development; executive offices;
training
Leased 38,750 Steinway Hall retail store/showroom; Piano Bank for the
New York City metropolitan area
Hamburg, Germany Owned 220,660 Piano manufacturing; executive offices; training
Leased 11,300 Steinway Haus retail store/showroom
Elkhart, IN Owned 144,000 Brasswind manufacturing
Owned 77,000 Woodwind manufacturing
Owned 75,000 Warehouse
Owned 25,000 Executive offices
LaGrange, IL Owned 46,000 Percussion instrument manufacturing
Leased 18,000 Timpani production
Monroe, NC Leased 44,000 Drum warehouse
Leased 42,000 Drum assembly
Leased 40,000 Case assembly
Leased 21,000 Drum woodshop
Cleveland, OH Leased 35,000 Stringed instrument manufacturing
London, England Leased 20,000 Vincent Bach International
Leased 9,580 Steinway Hall retail store/showroom
Leased 5,780 Piano repair/restoration
Berlin, Germany Leased 5,650 Steinway Haus retail store/showroom
Paramus, NJ Leased 4,200 Steinway Hall West retail store
</TABLE>
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PATENTS AND TRADEMARKS
The Company has several trademarks and patents effective in the United
States and in several foreign countries for varying lengths of time, including
the trademarks STEINWAY, STEINWAY & SONS, the Lyre symbol, STEINWAY THE
INSTRUMENT OF THE IMMORTALS, BOSTON, DESIGNED BY STEINWAY, SELMER, BACH, BUNDY,
SIGNET, WILLIAM LEWIS, LUDWIG and MUSSER. Steinway has pioneered the development
of the modern piano with over 125 patents granted since its founding. Several of
the Company's patents remain in force, with additional patents pending. The
Company considers its various trademarks and patents to be important and
valuable assets.
COMPETITION
STEINWAY. In general, the piano market in which Steinway operates is
competitive; however, the level of competition Steinway faces depends to a large
extent on the market definition. While there are many makers of pianos, both
domestically and abroad, only a few compete directly with Steinway. Steinway
holds a unique position at the top end of the market for grand and vertical
pianos, both in terms of quality and price. Other manufacturers of higher priced
pianos include Yamaha, Bechstein, Baldwin, Bosendorfer and Fazioli Pianoforti
SLR. However, these manufacturers' instruments are generally not considered
comparable in quality to the Steinway piano.
Because of the potential savings associated with buying a used instrument,
as well as the durability of the Steinway piano, a relatively large market for
used Steinways exists. It is difficult to estimate the significance of used
piano sales, since most are conducted in the private aftermarket. The Company,
however, believes that used Steinway pianos provide the most significant
competition in its market segment. To capitalize on this segment, Steinway has
recently increased its emphasis on both its restoration services and the
procurement, refurbishment and sale of used Steinway pianos.
SELMER. A number of domestic and foreign manufacturers compete in the
musical instrument industry. Other manufacturers of band and orchestral
instruments include Yamaha, United Musical Instruments and LeBlanc. However,
Selmer is the largest domestic producer of band and orchestral instruments and
enjoys leading market shares in many of its product lines. New entrants have
difficulty competing with Selmer due to the long learning curve inherent in the
production of musical instruments, cost of tooling, significant capital
requirements, lack of name-brand recognition and an effective distribution
system.
ENVIRONMENTAL MATTERS
The Company is subject to compliance with various federal, state, local and
foreign environmental regulations. On August 9, 1993, Philips Electronics North
America Corporation ("Philips") agreed to continue to indemnify Selmer for any
and all losses, damages, liabilities and claims relating to environmental
matters resulting from certain activities of Philips occurring prior to December
29, 1988 (the "Environmental Indemnity Agreement"). To date, Philips has fully
performed its obligations under the Environmental Indemnity Agreement. The
Environmental Indemnity Agreement terminates on December 29, 2008.
Three unsettled matters covered by the Environmental Indemnity Agreement are
currently pending. For two of these sites, Philips has entered into Consent
Orders with the Environmental Protection Agency ("EPA") or the North Carolina
Department of Environment, Health and Natural Resources, as appropriate, whereby
Philips has agreed to pay required response costs. For the third site, the EPA
has notified Selmer it intends to carry out the final remediation remedy itself.
The EPA estimates that this remedy has a present net cost of approximately $12
million. Over 40 persons or entities have been named by the EPA as potentially
responsible parties at this site. This matter has been tendered to Philips
pursuant to the Environmental Indemnity Agreement. The potential liability of
the Company at any of these sites is affected by several factors including, but
not limited to, the method of remediation, the Company's portion of the
materials on the site relative to other named parties, the number of parties
participating and the financial capabilities of the other potentially
responsible parties once the relative share has been determined.
The matters discussed above and the Company's compliance with environmental
laws and regulations are not expected to have a material impact on the Company's
capital expenditures, earnings or competitive position. The Company has taken
several remedial and preventative steps to comply with
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federal and state environmental regulations over the last 10 to 15 years. These
measures have included independent site assessments, installation of water
treatment equipment and installation of a hazardous material recycling system.
The Company believes that to the best of its knowledge, no further incident of
contamination has occurred since December 1988. No assurance can be given,
however, that additional environmental issues will not require additional,
currently unanticipated investigation, assessment or remediation expenditures or
that Philips will make payments that it is obligated to make under the
Environmental Indemnity Agreement.
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is a party to various
legal actions that the Company believes are routine in nature and incidental to
the operation of its business. While the outcome of such actions cannot be
predicted with certainty, the Company believes that, based on the experience of
the Company in dealing with these matters, the ultimate resolution of these
matters will not have a material adverse impact on the business, financial
condition and results of operations or prospects of the Company. See "--
Environmental Matters."
41
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
Set forth below are the names, ages, positions and offices held and a brief
account of the business experience for each executive officer and director of
the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- --------------------------------------------------------------------------
<S> <C> <C>
Kyle R. Kirkland 34 Chairman of the Board
Dana D. Messina 34 Chief Executive Officer and Director
Thomas Burzycki 52 President -- Selmer and Director
Bruce Stevens 53 President -- Steinway and Director
Dennis Hanson 42 Chief Financial Officer
Michael R. Vickrey 53 Executive Vice President
Thomas Kurrer 47 Managing Director, Steinway-Germany
Peter McMillan 38 Director
</TABLE>
KYLE R. KIRKLAND, CHAIRMAN OF THE BOARD AND DIRECTOR. Mr. Kirkland has been
a principal of Kirkland Messina, Inc. since 1994. Mr. Kirkland was a Senior Vice
President of a Los Angeles-based investment bank from 1991 to 1994, where he was
responsible for its private placement financing activities. From 1990 to 1991,
Mr. Kirkland was employed by Canyon Partners as a Vice President. From 1988 to
1990 he was employed by Drexel Burnham Lambert in its High Yield Bond
Department. Mr. Kirkland is also a director, at the request of certain
creditors, of International Airline Support Group, Inc.
DANA D. MESSINA, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Messina has been
a principal of Kirkland Messina, Inc. since 1994. Mr. Messina was a Senior Vice
President of a Los Angeles-based investment bank from 1990 to 1994, where he was
responsible for all of its corporate finance and merchant banking activities.
From 1987 to 1990, he was employed at Drexel Burnham Lambert in its High Yield
Bond Department.
THOMAS BURZYCKI, PRESIDENT-SELMER AND DIRECTOR. Mr. Burzycki joined Selmer
in 1990 as President. From 1978 to 1990, Mr. Burzycki held various financial and
operational positions with United Musical Instruments, including President from
1985 to 1990.
BRUCE STEVENS, PRESIDENT-STEINWAY AND DIRECTOR. Mr. Stevens was employed by
the Polaroid Corporation for 18 years. Mr. Stevens held various positions at
Polaroid and in 1980 moved to Tokyo, Japan, where he operated a $100 million
subsidiary of Polaroid, eventually returning to the United States as Director of
Marketing for all of Polaroid's international business. After leaving Polaroid
in 1984, he became the President of Robert Williams, Inc. He joined Steinway in
1985 when Steinway was acquired from CBS. He has served on numerous industry and
music education committees.
DENNIS HANSON, CHIEF FINANCIAL OFFICER. Mr. Hanson serves as the Company's
Chief Financial Officer as well as the Company's General Counsel. Mr. Hanson
started his career in public accounting at Haskins and Sells in 1976. In 1980,
he joined Computervision Corporation, where he held various financial positions
including Vice President of Audit. He joined Steinway in 1988 as Vice President
Finance and assumed duties as General Counsel in 1993.
MICHAEL R. VICKREY, EXECUTIVE VICE PRESIDENT. Mr. Vickrey has been employed
by Selmer since 1970. He has held the positions of Controller, Accounting
Manager, Cost Accounting Manager and Regional Credit Manager. Prior to joining
Selmer, Mr. Vickrey spent seven years in the banking industry, specializing in
commercial finance.
THOMAS KURRER, MANAGING DIRECTOR, STEINWAY-GERMANY. Mr. Kurrer was employed
by the German-American Chamber of Commerce in New York from 1976 to 1978.
Between 1978 and 1989, he held
42
<PAGE>
various positions of increasing responsibility with the Otto Wolff-Group, a
conglomerate of steel and machinery equipment companies. Mr. Kurrer's last
position with the Otto Wolff-Group was Managing Director of Wirth Gmbh. Mr.
Kurrer joined Steinway in 1989 as Managing Director of the Hamburg facility.
PETER MCMILLAN, DIRECTOR. Mr. McMillan is Executive Vice President and
Chief Investment Officer of SunAmerica Investments, Inc. As Chief Investment
Officer, Mr. McMillan has overall investment management responsibility for the
major asset classes in SunAmerica's portfolio, including government securities,
mortgage-backed securities, public and private bonds, and commercial and
residential mortgages. Mr. McMillan joined SunAmerica Investments, Inc. in 1989
after managing the fixed-income portfolio for Aetna Life Insurance and Annuity
Company.
Each director of the Company is elected for a period of one year and serves
until his successor is duly elected and appointed.
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid and accrued by
the Company for services rendered during the fiscal years ended December 31,
1995, 1994 and 1993 to (i) the Company's Chief Executive Officer and (ii) the
four other most highly compensated executive officers of the Company serving at
the end of the last completed fiscal year ("Named Executive Officer").
SUMMARY COMPENSATION TABLE (1)(2)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION
- -------------------------------------------------- ----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Kyle R. Kirkland.................................. 1995 $ 1 -- (3)
Chairman of the Board 1994 $ 1 -- (3)
1993 $ 1 -- (3)
Dana D. Messina................................... 1995 $ 1 -- (3)
Chief Executive Officer 1994 $ 1 -- (3)
1993 $ 1 -- (3)
Thomas Burzycki................................... 1995 $ 268,000 $ 263,000
President -- Selmer 1994 $ 268,000 $ 180,000
1993(4) $ 268,000 $ 82,000
Bruce Stevens .................................... 1995(5) $ 340,000 $ 70,000
President -- Steinway
Dennis Hanson .................................... 1995(5) $ 170,000 $ 100,000
Chief Financial Officer
Michael R. Vickrey................................ 1995 $ 100,000 $ 112,000
Executive Vice President 1994 $ 100,000 $ 70,000
1993(4) $ 100,000 $ 45,000
Thomas Kurrer .................................... 1995(5) $ 278,300 $ 135,043
Managing Director, Steinway-Germany
</TABLE>
- ------------------------
(1) The table does not include the cost for personal benefits made available by
the Company. However, no executive officer named in the Summary Compensation
Table received such compensation in excess of the lesser of $50,000 or 10%
of such officer's cash compensation, nor did all executive officers together
receive such other compensation in excess of the lesser of $50,000 times the
number of such executive officers or 10% of such officers' aggregate cash
compensation.
(2) The Company did not have any stock option or other long-term incentive plans
based on the performance of the Company during the periods reflected in the
Summary Compensation Table.
43
<PAGE>
(3) Kyle Kirkland and Dana Messina received compensation indirectly pursuant to
the Selmer and Steinway Management Agreements which allowed, subject to
certain performance criteria, the payment of $400,000 in the aggregate. The
Selmer and Steinway Management Agreements have been replaced with agreements
which allow for a payment of $200,000 for each of Kyle Kirkland and Dana
Messina. See "Employment Contracts." In connection with the Offering,
Kirkland Messina, Inc., a company owned by Kyle Kirkland and Dana Messina,
will receive a fee of $1.0 million for arranging, negotiating, obtaining
bank waivers and other required consents, financial and market analyses and
other similar consulting and investment banking services. See "Related Party
Agreements."
(4) Salary and bonus for 1993 reflect payments made by the Company after the
Company's acquisition of Selmer in August 1993 as well as payments made by
the Predecessor prior to that date.
(5) Salary and bonus for 1995 reflect payments made by the Company after the
Steinway Acquisition in May 1995 as well as payments made by Steinway prior
to that date.
EMPLOYMENT CONTRACTS
Contemporaneous with the Offering, the Company will enter into an agreement
with Kyle Kirkland and Kirkland Messina, Inc. which will provide that until
December 31, 2006, unless earlier terminated in accordance with its terms, Mr.
Kirkland will serve as Chairman of the Company. The consideration for such
services will be an annual payment of $200,000 subject to an annual cost of
living adjustment. In addition, Mr. Kirkland may be entitled to receive bonuses
and certain other employment benefits as determined by the Board of Directors in
its discretion. Mr. Kirkland will be required to devote his time to the Company
as may be reasonably required to discharge his obligations under the agreement
and otherwise will be permitted to render similar services to other companies.
Upon a Change of Control (as defined in the agreement), the contract will
terminate.
Contemporaneous with the Offering, the Company will enter into an agreement
with Dana Messina and Kirkland Messina, Inc. which will provide that until
December 31, 2006, unless earlier terminated in accordance with its terms, Mr.
Messina will serve as Chief Executive Officer of the Company. The consideration
for such services will be an annual payment of $200,000 subject to an annual
cost of living adjustment. In addition, Mr. Messina may be entitled to receive
bonuses and certain other employment benefits as determined by the Board of
Directors in its discretion. Mr. Messina will be required to devote his time to
the Company as may be reasonably required to discharge his obligations under the
agreement and otherwise will be permitted to render similar services to other
companies. Upon a Change of Control (as defined in the agreement), the contract
will terminate.
On June 22, 1993, the Company entered into an Employment Agreement with
Thomas Burzycki that became effective on August 11, 1993. Such agreement
provides that until December 31, 1996 unless affirmatively terminated, Mr.
Burzycki will serve as President of Selmer in consideration of an annual base
salary of $268,000 per year, which base salary may be increased following the
end of each year of service. In addition to a base salary, Mr. Burzycki is
eligible to receive bonuses and certain other employment benefits. Mr.
Burzycki's Employment Agreement provides that, in certain circumstances, the
Company is obligated to pay up to $550,000 to Mr. Burzycki upon termination of
his employment by Selmer.
On May 1, 1995, the Company entered into an Employment Agreement with Bruce
Stevens that provides that until December 31, 1996, Mr. Stevens will serve as
President of Steinway in consideration of an annual base salary of $340,000 per
year, which base salary may be increased following the end of each year of
service. In addition to a base salary, Mr. Stevens is eligible to receive
bonuses and certain other employment benefits. Mr. Stevens' Employment Agreement
provides that, in certain circumstances, the Company is obligated to pay up to
$340,000, plus the salary for the remainder of his term, to Mr. Stevens upon
termination of his employment by Steinway.
On May 1, 1995, the Company entered into an Employment Agreement with Dennis
Hanson that provides that until December 31, 1996, Mr. Hanson will serve as
Chief Financial Officer of the Company in
44
<PAGE>
consideration of an annual base salary of $170,000 per year, which base salary
may be increased following the end of each year of service. In addition to a
base salary, Mr. Hanson is eligible to receive bonuses and certain other
employment benefits. Mr. Hanson's Employment Agreement provides that, in certain
circumstances, the Company is obligated to pay up to $210,000, plus the salary
for the remainder of his term, to Mr. Hanson upon termination of his employment
by Steinway.
On December 19, 1995, the Company entered into an Employment Agreement with
Michael Vickrey that provides that until December 31, 1996, Mr. Vickrey will
serve as Executive Vice President of the Company in consideration of an annual
base salary of $100,000 per year, which base salary may be increased following
the end of each year of service. In addition to a base salary, Mr. Vickrey is
eligible to receive bonuses and certain other employment benefits. Mr. Vickrey's
Employment Agreement provides that, in certain circumstances, the Company is
obligated to pay $100,000, plus the salary for the remainder of his term, to Mr.
Vickrey upon termination of his employment by the Company.
As of May 8, 1989, Steinway entered into an Employment Agreement with Thomas
Kurrer that provides that Mr. Kurrer will serve as Managing Director of
Steinway's German operations in consideration of an annual base salary of
Deutsch Mark 300,000, which base salary may be increased following the end of
each year of service. In addition to a base salary, Mr. Kurrer is eligible to
receive bonuses and certain other employment benefits. The agreement
automatically renews every three years unless at least 12 months' notice is
given by either party.
RELATED PARTY AGREEMENTS
Selmer previously entered into a Management Agreement (the "Selmer
Management Agreement") with Kirkland Messina, Inc., a company owned by Kyle
Kirkland and Dana Messina, pursuant to which Selmer agreed to pay Kirkland
Messina, Inc. an aggregate of $250,000 per year to provide management and
consulting services, monitor the business of Selmer and conduct periodic reviews
of such business as reasonably requested by Selmer's board of directors, assist
in developing a long-term strategic plan and identify, review and analyze merger
and acquisition opportunities. In addition, the Company paid Kirkland Messina,
Inc. a one-time transaction and consulting fee of $750,000 in connection with
the Steinway Acquisition pursuant to an unwritten agreement for its services in
arranging and structuring the Steinway Merger Agreement, obtaining long-term
financing, negotiating the terms of the Bank Credit Facility and related
documents and providing financial and market analyses and other similar
consulting and investment banking services.
Steinway previously entered into a Management Agreement (the "Steinway
Management Agreement") with Kirkland Messina, Inc., pursuant to which Steinway
agreed to pay Kirkland Messina, Inc. up to an aggregate of $150,000 per year to
provide, among other things, management and consulting services similar to those
provided under the Selmer Management Agreement.
Upon consummation of the Offering, both of the Selmer and Steinway
Management Agreements will be terminated and replaced with the agreements
discussed above under "Employment Contracts."
In connection with the Offering, Kirkland Messina, Inc. will receive a fee
of $1.0 million for arranging, negotiating and obtaining waivers and other
required consents and for providing financial and market analyses and other
similar consulting and investment banking services.
Kirkland Messina, Inc. is a merchant banking firm founded by Kyle Kirkland
and Dana Messina in 1994. The firm is a licensed broker-dealer and has
participated in numerous financing, leveraged recapitalization and restructuring
transactions. See "Risk Factors -- Control by Principal Stockholders; Conflicts
of Interest."
1996 STOCK PLAN
Contemporaneous with the Offering, the Company will adopt the 1996 Stock
Plan. The total number of shares of Ordinary Common Stock subject to issuance
under the 1996 Stock Plan is 778,250, subject to adjustments as provided in the
1996 Stock Plan. The 1996 Stock Plan provides for the grant of stock options
(including incentive stock options as defined in Section 422 of the Internal
Revenue Code of
45
<PAGE>
1986, as amended, and non-qualified stock options), stock appreciation rights
("SARs") and other stock awards (including restricted stock awards and stock
bonuses) to employees of the Company, its subsidiaries, affiliates or any
consultant or advisor engaged by the Company who renders bona fide services to
the Company or the Company's subsidiaries or affiliates in connection with their
businesses; provided, that such services are not in connection with the offer or
sale of securities in a capital raising transaction. Prior to the date when
securities are first registered pursuant to Section 12 of the Exchange Act, the
1996 Stock Plan will be administered by the Company's Board of Directors. Upon
registration of the Ordinary Common Stock, the 1996 Stock Plan will be
administered by the Option Committee of the Board of Directors (the "Committee")
which will be comprised of "disinterested persons" within the meaning of Rule
16b-3 of the Exchange Act. Stock options may be granted by the Committee on such
terms, including vesting and payment forms, as it deems appropriate in its
discretion; provided, that no option may be exercised later than ten years after
its grant, and the purchase price for incentive stock options and non-qualified
stock options shall not be less than 100% and 85% of the fair market value of
the Ordinary Common Stock at the time of grant, respectively. SARs may be
granted by the Committee on such terms, including payment forms, as the
Committee deems appropriate, provided that a SAR granted in connection with a
stock option shall become exercisable and lapse according to the same vesting
schedule and lapse rules established for the stock option (which shall not
exceed ten years from the date of grant). A SAR shall not be exercisable during
the first six months of its term and only when the fair market value of the
underlying Ordinary Common Stock exceeds the SAR's exercise price and is
exercisable subject to any other conditions on exercise imposed by the
Committee. Unless terminated by the Board of Directors, the 1996 Stock Plan
continues for ten years from the date of adoption. Upon the occurrence of an
event constituting a change in control of the Company, in the sole discretion of
the Committee, all options, SARs and other awards will become immediately
exercisable in full for the remainder of their terms and restrictions on stock
granted pursuant to a restricted stock award will lapse. The Board of Directors
has authorized the grant of options to certain officers and key employees to
purchase an aggregate of shares of Ordinary Common Stock under the 1996
Stock Plan at the initial public offering price contingent upon the consummation
of the Offering.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1995, the Company's Board of Directors did not have a
compensation committee or other committee performing similar functions. All
compensation decisions concerning the Company's executive officers during fiscal
1995 were made by the entire Board of Directors.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 30, 1996, certain information
regarding the beneficial ownership of voting securities of the Company by (i)
each person known by the Company to be the beneficial owner of more than 5% of
any class of the Company's voting securities, (ii) each of the directors and
named officers of the Company, and (iii) all executive officers and directors of
the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP OF CLASS A COMMON STOCK (1)
OWNERSHIP OF ORDINARY COMMON STOCK
--------------------------------------- ---------------------------------------
BEFORE AFTER BEFORE AFTER
OFFERING PERCENT OFFERING PERCENT OFFERING PERCENT OFFERING PERCENT
--------- ------- --------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SunAmerica Life Insurance
Company................. 1,553,356 28.4% 1,553,356 17.1% -- -- -- --
1 SunAmerica Center
Los Angeles, California
90067
John Hancock Mutual Life
Insurance Company....... 1,543,638 28.2% 1,241,927 13.7% -- -- -- --
200 Clarendon Street
John Hancock Place,
57th Floor Boston,
Massachusetts 02117
Equitable Capital Private
Income and Equity
Partnership II, L.P..... 583,150 10.6% 446,451 4.9% -- -- -- --
c/o Alliance Corporate
Finance Group, Inc.
1285 Avenue of the
Americas, 19th Floor
New York, New York
10019
Directors
Thomas T. Burzycki..... 197,081 3.6% 197,081 2.2% -- -- -- --
Kyle Kirkland (3)...... 191,792 3.5% 191,792 2.1% 226,949 47.5% 226,949 47.5%
Dana D. Messina (3).... 198,267 3.6% 198,267 2.2% 251,004 52.5% 251,004 52.5%
Bruce Stevens.......... 86,174 1.6% 86,174 0.9% -- -- -- --
Peter McMillan (2)..... (2) (2)
Other Executive Officers
Dennis Hanson.......... 41,601 0.8% 41,601 0.5% -- -- -- --
Michael R. Vickrey..... 145,134 2.6% 145,134 1.6% -- -- -- --
Thomas Kurrer.......... 41,601 0.8% 41,601 0.5%
All directors and
executive officers as a
group (8 persons)
(2)(3).................. 901,650 16.5% 901,649 9.9% 477,953 100.0% 477,953 100.0%
</TABLE>
- ------------------------------
(1) Each share of Class A Common Stock has 98 votes. Each share of Ordinary
Common Stock has one vote.
(2) Mr. McMillan is Executive Vice President and Chief Investment Officer of
SunAmerica Investments, Inc. As Chief Investment Officer, Mr. McMillan has
overall investment management responsibility for the major asset classes in
SunAmerica's investment portfolio, including the 1,553,356 shares owned by
SunAmerica Life Insurance Company. Mr. McMillan disclaims beneficial
ownership of such shares.
(3) Includes 6,922 shares owned by Kirkland Messina, Inc., which may be deemed
to be beneficially owned by both Kyle Kirkland and Dana Messina.
47
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth information regarding the shares of Ordinary
Common Stock (i) beneficially owned by the Selling Stockholders and (ii) to be
sold by the Selling Stockholders in the Offering.
<TABLE>
<CAPTION>
SHARES TO
BE SOLD IN
SHARES OWNED PRIOR TO THE SHARES TO BE OWNED AFTER THE
THE OFFERING OFFERING OFFERING
------------------------ ----------- ----------------------------
NAME AND ADDRESS NUMBER PERCENTAGE NUMBER(1) NUMBER(1) PERCENTAGE(1)
- ------------------------------------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
John Hancock Mutual Life Insurance
Company................................... 1,543,638 28.2% 301,711 1,241,927 13.7%
200 Clarendon Street
John Hancock Place, 57th Floor
Boston, Massachusetts 02117
Equitable Capital Private Income and Equity
Partnership II, L.P. ..................... 583,150 10.6% 136,699 446,451 4.9%
c/o Alliance Corporate Finance Group,
Inc.
1285 Avenue of the Americas,
19th Floor
New York, New York 10019
BNY Financial Corporation.................. 198,100 3.6% 198,100 0 0%
1290 Avenue of the Americas
3rd Floor
New York, New York
Allstate Life Insurance Company............ 82,328 1.5% 82,328 0 0%
Allstate Plaza West M2A
3100 Sanders Road
Northbrook, Illinois 60062
BEA Associates............................. 82,328 1.5% 20,582 62,746 *
c/o Atwell & Co.
P O Box 456
Wall Street Station
New York, New York 10005
Lipper & Company........................... 20,580 * 20,580 0 0%
101 Park Avenue, 6th Floor
New York, New York 10178
</TABLE>
- ------------------------
* Represents less than one percent.
(1) If the Underwriters' over-allotment option is exercised in full, John
Hancock Mutual Life Insurance Company will sell an additional 84,198 shares
in the Offering and Equitable Capital Private Income and Equity Partnership
II, L.P. will sell an additional 38,246 shares in the Offering.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation (the "Certificate") and
Bylaws ("Bylaws") is a summary and is qualified in its entirety by the
provisions of the Certificate and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
Upon completion of the Offering, the authorized capital stock of the Company
will consist of (i) 90,000,000 shares of Ordinary Common Stock, $.001 par value
per share, of which 9,557,150 shares will be outstanding, (ii) 5,000,000 shares
of Class A Common Stock, $.001 par value per share, of which 477,953 will be
outstanding and (iii) 5,000,000 shares of Preferred Stock, $.001 par value per
share ("Preferred Stock"), of which no shares will be outstanding.
ORDINARY COMMON STOCK AND CLASS A COMMON STOCK
The Certificate authorizes two classes of Common Stock designated as
Ordinary Common Stock and Class A Common Stock. With the exception of disparate
voting power, both classes of Common Stock are substantially identical.
Each share of Ordinary Common Stock and Class A Common Stock entitles the
record holder to one vote and 98 votes, respectively, at any meeting of
stockholders or in any action by written consent of stockholders in lieu of
meeting. The holders of Ordinary Common Stock and Class A Common Stock vote
together as a single class on all matters submitted to a vote of the
stockholders, except as otherwise provided by law. Neither the holders of
Ordinary Common Stock nor the holders of Class A Common Stock have cumulative
voting or preemptive rights.
Holders of Common Stock will be entitled to receive such dividends and other
distributions as may be declared by the Board of Directors out of assets or
funds of the Company legally available therefor after payment of any
preferential dividends on shares of Preferred Stock as provided in the
Certificate.
The holders of more than 50% of the Ordinary Common Stock and Preferred
Stock, voting as a class, must approve any proposal to amend the Bylaws of the
Company in a way that would affect the respective designations, rights or
preferences of holders of Ordinary Common Stock and Preferred Stock. Any
amendment, modification or waiver to the Certificate requires the approval of at
least 66 2/3% of the holders of each class of Common Stock adversely affected by
such action.
Only Messrs. Kirkland and Messina, and their wholly-owned entities, may hold
Class A Common Stock. If at any time, any share of Class A Common Stock shall
become owned by a stockholder other than Dana Messina or Kyle Kirkland, or their
wholly-owned entities, such share of Class A Common Stock shall automatically
convert into Ordinary Common Stock on a share-per-share basis. Holders of
Ordinary Common Stock as a result of such conversion would be entitled to one
vote per share.
In the event of any liquidation, dissolution or winding up of the Company,
holders of Common Stock will be entitled to receive the assets and funds of the
Company available for distribution after payments to creditors and to holders of
any outstanding Preferred Stock, in proportion to the number of shares they
hold.
The Ordinary Common Stock has been approved for listing, subject to notice
of issuance, on the NYSE under the symbol "LVB."
PREFERRED STOCK
The Board of Directors, without further action by the stockholders, may
issue shares of the Preferred Stock in one or more series and may fix or alter
the relative, participating, optional or other rights, preferences, privileges
and restrictions, including the voting rights, redemption provisions (including
sinking fund provisions), dividend rights, dividend rates, liquidation
preferences and conversion rights, and the description of and number of shares
constituting any wholly unissued series of Preferred Stock. The Board of
Directors, without further stockholder approval, can issue Preferred Stock with
voting and conversion rights that could adversely affect the voting power of the
holders of Common Stock. The
49
<PAGE>
Company currently has no plans to issue shares of Preferred Stock and, upon
completion of the Offering, no shares of Preferred Stock will be outstanding.
The issuance of Preferred Stock in certain circumstances may have the effect of
delaying or preventing a change of control of the Company without further action
by the stockholders, may discourage bids for the Company's Common Stock at a
premium over the market price of the Common Stock and may adversely affect the
market price and the voting and other rights of the holders of Common Stock.
As of the date hereof, there are 1,000,000 shares of the Convertible
Participating Preferred Stock outstanding. Pursuant to the Certificate, upon
consummation of the Offering such Preferred Stock shall be automatically
converted into 2,830,000 shares of Ordinary Common Stock.
DELAWARE LAW AND CERTAIN CORPORATE PROVISIONS
Upon the consummation of the Offering, the Company will be subject to the
provisions of Section 203 of the General Corporation Law ("GCL") of Delaware. In
general, this statute prohibits a publicly held Delaware corporation from
engaging under certain circumstances in any "business combination" with an
"interested stockholder," for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
prior to the date at which the stockholder became an interested stockholder the
Board of Directors approved either the business combination or the transaction
which resulted in the person becoming an interested stockholder, (ii) the
stockholder owned at least 85% of the outstanding voting stock of the
corporation (excluding shares held by directors who are officers or held in
certain employee stock plans) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, or (iii) the
business combination is approved by the Board of Directors and by 66 2/3% of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder) at a meeting of stockholders (and not by written
consent) held on or subsequent to the date of the business combination. An
"interested stockholder" is a person who (x) owns 15% or more of the
corporation's voting stock or (y) is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the prior three years. Section 203 defines a
"business combination" to include, without limitation, mergers, consolidations,
stock sales and asset based transactions and other transactions resulting in a
financial benefit to the interested stockholder.
The Company's Certificate and Bylaws contain a number of provisions relating
to corporate governance and to the rights of stockholders. Certain of these
provisions may be deemed to have a potential "anti-takeover" effect in that such
provisions may delay or prevent a change of control of the Company. These
provisions include (a) a requirement that, in the event that Kyle Kirkland and
Dana Messina, collectively, cease to have directly or indirectly, voting control
of at least 50% of the voting securities of the Company entitled to vote
generally in the election of directors, any action required or permitted to be
taken by the stockholders of the Company may be effected only at an annual or
special meeting and not by written consent of the stockholders, (b) a
requirement that, in the event that Kyle Kirkland and Dana Messina,
collectively, cease to have directly or indirectly, voting control of at least
50% of the voting securities of the Company entitled to vote generally in the
election of directors, the stockholders will not be able to remove a member of
the Board of Directors without cause, and (c) a provision that holders of the
Class A Common Stock shall have 98 votes per share on all matters to be voted
upon by the stockholders. See also "Risk Factors -- Control by Principal
Stockholders; Conflicts of Interest."
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the GCL, the Certificate provides that directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) under Section 174 of the GCL or any amendment thereto or successor
provision thereto, (ii) for any breach of the director's duty of loyalty to the
Company or its stockholders, (iii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, or (iv) for
any transaction from which the director derives any improper personal benefit.
In addition, the Company's Bylaws provide for indemnification of the Company's
officers and directors to the fullest extent permitted under Delaware law.
Insofar as indemnification for liabilities arising under the
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Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be Continental
Stock Transfer & Trust Company.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
BANK CREDIT FACILITY
The Bank Credit Facility with BNY Financial Corporation (the "Bank")
provides Steinway and Selmer (collectively, the "Borrowers" and, together with
the Company, the "Credit Parties") with a line of credit consisting of a
revolver and a term loan subfacility with aggregate commitments of $60.0
million. The principal terms of the Bank Credit Facility are described herein.
The information contained herein relating to the Bank Credit Facility is
qualified in its entirety by reference to the complete text of the documents
entered into in connection therewith, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
The proceeds of the Bank Credit Facility may be used for the following
purposes by the Credit Parties: (i) general working capital needs; (ii) certain
capital expenditures; (iii) payment of administrative and legal expenses; (iv)
payment of capitalized and interest expenses; (v) repurchase of the Textron
Notes (as defined below); and (vi) limited repurchase of Senior Secured Notes
(as defined below). The final maturity of the Bank Credit Facility is March 31,
2000, with the amounts then outstanding to be paid in full on such date, unless
extended pursuant to mutual agreement by the parties thereto.
Borrowings under the Bank Credit Facility bear interest, at the option of
the Company, at (i) the higher of the prime rate or the federal funds rate plus
0.5% on any day, plus 1.5%, or (ii) the Eurodollar rate plus 3.0%. The Bank
Credit Facility is secured by a first lien on the inventory, receivables and
intangibles of Selmer and the domestic assets of Steinway and a second lien on
Selmer's fixed assets. Additionally, the Bank Credit Facility is guaranteed by
the Company and the Company's direct and indirect domestic subsidiaries.
Covenants contained in the Bank Credit Facility include (i) maintenance by
the Borrowers of a minimum consolidated net worth; (ii) maintenance by the
Borrowers of a minimum quick asset ratio, fixed charge coverage ratio and
interest coverage ratio; (iii) limitations on the creation of liens by the
Credit Parties; (iv) limitations on the Credit Parties' ability to make
investments; (v) limitations on the Credit Parties' capital expenditures; (vi)
limitations on the Credit Parties' ability to pay dividends; (vii) limitations
on the Credit Parties ability to incur additional indebtedness; (viii)
limitations on transactions with affiliates of the Credit Parties; and (ix)
restrictions on the transfer of assets by the Credit Parties.
Events of default include: (i) failure by the Borrowers to make any payment
of principal, interest or any other amount owing in respect of any obligation
under the Bank Credit Facility when due and payable; (ii) a representation or
warranty by a Credit Party proves to have been materially false or misleading
when made; (iii) failure by a Credit Party to furnish financial information when
due or to permit inspection of books or records; (iv) issuance of a notice of a
material lien or similar charge; (v) breach of certain of the covenants
contained in the Bank Credit Facility or any other agreement with the Bank; (vi)
any judgment rendered or judgment lien filed for an amount in excess of $500,000
against a Credit Party; (vii) application for the appointment of a receiver,
custodian, trustee or liquidator, an admission of inability to pay debts, a
general assignment for the benefit of creditors, or a commencement of a
voluntary case under the bankruptcy laws by a Credit Party; (viii) default under
any agreement, instrument or arrangement which has a material adverse effect on
the conditions or affairs of a Credit Party; (ix) termination or breach of
certain other documents or guarantees delivered in connection with the Bank
Credit Facility; (x) any change in control (as such event is defined in the Bank
Credit Facility); (xi) any offset by Philips of any amounts Philips owes
pursuant to the Environmental Indemnity Agreement or a default under such
agreement (see "Business -- Environmental Matters"); (xii) any failure by
Textron to purchase the Textron Notes pursuant to the Textron Note Purchase
Agreement (as defined below); (xiii) determination that any material provision
of the Bank Credit Facility or certain other related documents ceases to be
valid and binding on any Credit Party; and (xiv) any competition by Kyle
Kirkland or Dana Messina with a Credit Party.
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11% SENIOR SUBORDINATED NOTES DUE 2005
The Company's 11% Senior Subordinated Notes due 2005 (the "Notes") will
mature on May 15, 2005. As of March 30, 1996, there were $110.0 million of Notes
outstanding. Proceeds from the Notes were used to pay a portion of the cash
consideration payable in connection with the Steinway Acquisition and to repay
certain indebtedness of Steinway. The information contained herein relating to
the Notes is qualified in its entirety by reference to the complete text of the
documents entered into in connection therewith, copies of which have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
The Notes are general unsecured obligations of Selmer, subordinated in right
of payment to all senior debt (as such term is defined in the Indenture. The
Notes are guaranteed by the Company, Steinway and certain of Steinway's
subsidiaries (the "Guarantors"). The Notes have no mandatory redemption or
sinking fund payments until maturity. The Notes are redeemable at the option of
the Company beginning June 1, 2000 at 104.125%, with the redemption price
declining ratably each year thereafter to par on June 1, 2003.
The Indenture contains certain covenants including limitations on (i) the
incurrence by Selmer and its subsidiaries of additional indebtedness; (ii) the
ability of Selmer and its subsidiaries to pay dividends; (iii) transactions by
Selmer and its subsidiaries with affiliates; (iv) the retention of proceeds by
Selmer and its subsidiaries from the sales of assets; (v) the ability of Selmer
and its subsidiaries to incur certain liens; and (vi) Selmer's ability to
consolidate or merge with or into, or to transfer all or substantially all of
its assets, to another entity.
Events of default under the Indenture include (i) default in the payment of
interest on the Notes when due and payable, which default continues for 30 days;
(ii) default in the payment of the principal of or any applicable premium when
due and payable on the Notes; (iii) Selmer or any Guarantor fails to observe or
perform any covenant, condition, or agreement made pursuant to the Indenture of
the Notes, which failure remains uncurred after notice of such default is
provided to Selmer; (iv) default under any mortgage, indenture, or instrument
evidencing any indebtedness of Selmer or its subsidiaries; (v) failure by Selmer
or any of its subsidiaries to discharge within 60 days final judgments entered
by a court which in the aggregate exceed $5.0 million; (vi) any guarantee under
the Indenture or the Notes held by a judicial proceeding to be unenforceable or
invalid, or if any Guarantor defaults on, denies or disaffirms its obligations
under its guarantee; and (vii) certain events of bankruptcy or insolvency with
respect to Selmer or any of its subsidiaries.
SENIOR SECURED NOTES DUE 2000
The Company intends to use a portion of the net proceeds from the Offering
to redeem its 11.00% Senior Secured Notes due 2000 and 10.92% Senior Secured
Notes due 2000 (collectively, the "Senior Secured Notes"). See "Use of
Proceeds." As of March 30, 1996, there were $52.9 million of Senior Secured
Notes outstanding. The information contained herein relating to the Senior
Secured Notes is qualified in its entirety by reference to the complete text of
the documents entered into in connection therewith, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
Proceeds from the Senior Secured Notes were used to pay a portion of the
cash consideration payable in connection with the Company's acquisition of
Selmer in 1993. The indenture governing the Senior Secured Notes contains
certain covenants, similar to those contained in the Indenture relating to the
Notes. See "-- 11% Senior Subordinated Notes due 2005" above.
The Senior Secured Notes are redeemable at the option of the Company
beginning July 31, 1996. At any time on or after such date and upon 30 days'
notice, the Company may prepay the Senior Secured Notes at a redemption price
equal to the sum of 100% of the principal amount to be prepaid, together with
accrued and unpaid interest, plus a premium equal to the Make-Whole Amount (as
defined in the Senior Secured Notes). See "Capitalization." The Company intends
to send a notice of redemption to the holders of the Senior Secured Notes upon
consummation of the Offering.
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NOTES RECEIVABLE FINANCING
Certain of Selmer's dealers may convert their open accounts to Selmer into a
promissory note. The program divides the year into two periods commencing in
January and October, and dealers must elect to participate in the program in
advance at the beginning of each year. If dealers elect to participate in this
program with respect to purchases made from January through September, then the
initial payment on their notes receivable is due in October. Notes receivable
applicable to purchases made from October through December have their initial
payment due in February. The term of the notes receivable range from six to
twelve months, and bear interest at 3% to 5% over the prime rate. The notes
receivable are secured by the respective dealer's inventory. Substantially all
of the notes receivable are purchased by a third-party financial institution on
a recourse basis.
The notes receivable are currently being purchased by Textron pursuant to a
Master Note Purchase and Repurchase Agreement dated December 2, 1994 (the
"Textron Note Purchase Agreement") by and between the Company and Textron. The
Textron Note Purchase Agreement, which expires in December 1997, permits the
Company to sell and have outstanding up to $15.0 million of such notes
receivable to Textron (the "Textron Notes").
The Company may enter into other financing arrangements with its dealers
and/or other financial institutions in the future; however, there can be no
assurance that the Company will secure financing arrangements on the same terms
as currently exist under the Textron Note Purchase Agreement.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after consummation of the Offering, the Company will have
outstanding 9,557,150 shares of Common Stock, including 477,953 shares of Class
A Common Stock, assuming no exercise of the over-allotment option granted to the
Underwriters. Of these shares, the 4,360,000 shares of Ordinary Common Stock
sold in the Offering (or a maximum of 5,022,444 shares if the over-allotment
option is exercised in full) will be freely tradable without restrictions or
further registration under the Securities Act unless purchased by "affiliates"
of the Company (as that term is defined under Rule 144 of the Securities Act
("Rule 144")). The remaining 5,197,150 shares of Common Stock, including the
477,953 shares of Class A Common Stock, will be "restricted securities" as
defined under the Securities Act, and may not be sold in the absence of
registration under the Securities Act other than pursuant to Rule 144 or another
applicable exemption from registration under the Securities Act. As defined in
Rule 144, an "affiliate" of an issuer is a person that directly, or indirectly
through the usage of one or more intermediaries, controls, or is controlled by,
or is under common control with, such issuer.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
restricted securities for at least two years, is entitled to sell within any
three-month period that number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of the Ordinary Common Stock or (ii)
the average weekly trading volume of the then outstanding securities for the
four weeks preceding each such sale. Sales under Rule 144 also are subject to
certain manner of sale restrictions and notice requirements, and to the
availability of current public information about the Company.
A person (or persons whose shares are aggregated) who is not deemed to have
been an affiliate of the Company at any time during 90 days immediately
preceding the sale and who has beneficially owned the shares proposed to be sold
for at least three years is entitled to sell such shares pursuant to Rule 144(k)
under the Securities Act without regard to the limitations described above. The
Commission has published a notice of rulemaking that, if adopted as proposed,
would shorten the two-year holding period under Rule 144 to one year and would
shorten the three-year holding period under Rule 144(k) to two years. If such
amendments are adopted, certain shares of Ordinary Common Stock may be sold
under Rule 144 immediately following the Offering. The Company cannot predict
whether such amendments will be adopted.
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The Company and certain of the Company's stockholders have agreed, subject
to certain exceptions, not to sell, offer to sell, grant any option (other than
pursuant to the Company's existing stock option plans) for the sale of or
otherwise dispose of any shares of Common Stock or securities convertible into
or exercisable or exchangeable for Common Stock (except for the shares offered
hereby) for a period of 180 days after the date of this Prospectus.
No prediction can be made as to the effect, if any, that future sales of
shares, or availability of shares for future sale, will have on the market price
of the Ordinary Common Stock prevailing from time to time. Sales of substantial
amounts of Ordinary Common Stock (including shares issued upon the exercise of
stock options), or the perception that such sales could occur, could adversely
affect prevailing market prices for the Ordinary Common Stock, with the result
that the Company's ability to raise additional capital in the equity markets
could be adversely affected.
In accordance with a registration rights agreement dated as of August 9,
1993 (the "Registration Rights Agreement"), the Company granted to certain
holders of outstanding Ordinary Common Stock, warrants exercisable into Ordinary
Common Stock and preferred stock convertible into Ordinary Common Stock the
right to require the Company to register such shares of Ordinary Common Stock
for resale under the Securities Act. Such holders have the right beginning 180
days after the closing of the Offering, to twice demand that the Company cause
all, or any portion, of those holders' shares to be registered for resale under
the Securities Act. In addition, such holders have the "piggyback" right to
require the Company to include their shares with other shares that may be
registered by the Company under the Securities Act. Such holders waived their
"piggyback" rights in connection with the Offering.
In the event that additional shares of Ordinary Common Stock are registered
as a result of the exercise of either their demand or piggyback registration
rights pursuant to the Registration Rights Agreement, the prevailing market
price for the Ordinary Common Stock and the Company's ability to raise
additional capital could be adversely affected.
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CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Ordinary
Common Stock applicable to "Non-United States Holders." A "Non-United States
Holder" is any beneficial owner of Ordinary Common Stock that, for United States
federal income tax purposes, is a non-resident alien individual, a foreign
corporation, a foreign partnership or a non-resident fiduciary of a foreign
estate or trust as such terms are defined in the Internal Revenue Code of 1986,
as amended (the "Code"). This discussion is based on the Code and administrative
and judicial interpretations as of the date hereof, all of which are subject to
change either retroactively or prospectively. This discussion does not address
all aspects of United States federal income and estate taxation that may be
relevant to Non-United States Holders in light of their particular circumstances
and does not address any tax consequences arising under the laws of any state,
local or foreign taxing jurisdiction. Prospective investors are urged to consult
with their tax advisors regarding the United States federal, state and local
income and other tax consequences, and the non-United States tax consequences,
of owning and disposing of Ordinary Common Stock.
DIVIDENDS
Subject to the discussion below, any dividend paid to a Non-United States
Holder generally will be subject to United States withholding tax either at a
rate of 30% of the gross amount of the dividend or such lower rate as may be
specified by an applicable income tax treaty. For purposes of determining
whether tax is to be withheld at a 30% rate or at a reduced rate as specified by
an income tax treaty, the Company ordinarily will presume that dividends paid to
an address in a foreign country are paid to a resident of such country absent
knowledge that such presumption is not warranted. However, under proposed United
States Treasury regulations not currently in effect, a Non-United States Holder
would be required to file certain forms accompanied by a statement from a
competent authority of the treaty country in order to claim the benefits of a
tax treaty. Dividends paid to a holder with an address within the United States
generally will not be subject to withholding tax, unless the Company has actual
knowledge that the holder is a Non-United States Holder.
Dividends received by a Non-United States Holder that are effectively
connected with a United States trade or business conducted by such Non-United
States Holder are exempt from withholding tax. However, such effectively
connected dividends are subject to regular United States income tax in the same
manner as if the Non-United States Holder were a United States resident. A
Non-United States Holder may claim exemption from withholding under the
effectively connected income exception by filing Form 4224 (Statement Claiming
Exemption from Withholding of Tax on Income Effectively Connected With the
Conduct of Business in the United States) each year with the Company or its
paying agent prior to the payment of the dividends for such year. Effectively
connected dividends received by a corporate Non-United States Holder may be
subject to an additional "branch profits tax" at a rate of 30% (or such lower
rate as may be specified by an applicable tax treaty) of such corporate
Non-United States Holder's effectively connected earnings and profits, subject
to certain adjustments.
A Non-United States Holder eligible for a reduced rate of United States
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
United States Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF ORDINARY COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax with respect to a gain realized upon the sale or a
disposition of Ordinary Common Stock unless: (i) such gain is effectively
connected with a United States trade or business of the Non-United States
Holder, (ii) the Non-United States Holder is an individual who is present in the
United States for a period or periods aggregating 183 days or more during the
calendar year in which such sale or disposition occurs and certain other
conditions are met, or (iii) the Company is or has been a "United States real
property holding corporation" for federal income tax purposes at any time within
the shorter of the five-year period preceding such disposition or such holder's
holding period and certain other conditions are met. The
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Company has determined that it is not, has not been for the last five years, and
does not believe that it will become a "United States real property holding
corporation" for federal income tax purposes. If a Non-United States Holder
falls under clause (i) above, the Non-United States holder will be taxed on the
net gain derived from the sale under regular graduated United States federal
income tax rates (and, with respect to corporate Non-United States Holders, may
also be subject to the branch profits tax described above). If an individual
Non-United States Holder falls under clause (ii) above, the Non-United States
Holder generally will be subject to a 30% tax on the gain derived from the sale,
which gain may be offset by United States capital losses recognized within the
same taxable year of such sale.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.
Unless the Company has actual knowledge that a holder is a non-United States
person, dividends paid to a holder at an address within the United States may be
subject to backup withholding at a rate of 31% if the holder is not an exempt
recipient as defined in Treasury Regulation Section 1.6049-4(c)(1)(ii) (which
includes corporations) and fails to provide a correct taxpayer identification
number and other information to the Company. Backup withholding will generally
not apply to dividends paid to holders at an address outside the United States
(unless the Company has knowledge that the holder is a United States person.)
If the proceeds of the disposition of Ordinary Common Stock by a Non-United
States Holder are paid over, by or through a United States office of a broker,
the payment is subject to information reporting and to backup withholding at a
rate of 31% unless the disposing holder certifies as to its name, address and
status as a Non-United States Holder under penalties of perjury or otherwise
establishes an exemption. Generally, United States information reporting and
backup withholding will not apply to a payment of disposition proceeds if the
payment is made outside the United States through a non-United States office of
a non-United States broker. However, United States information reporting
requirements (but not backup withholding) will apply to a payment of disposition
proceeds outside the United States if (a) the payment is made through an office
outside the United States of a broker that is either (i) a United States person
for United States federal income tax purposes, (ii) a "controlled foreign
corporation" for United States federal income tax purposes or (iii) a foreign
person which derives 50% or more of its gross income for certain periods from
the conduct of a United States trade or business, and (b) the broker fails to
maintain documentary evidence in its files that the holder is a Non-United
States Holder and that certain conditions are met or that the holder otherwise
is entitled to an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to 31% backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
The United States Treasury has recently issued proposed regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed regulations do not alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. If finalized in their current form,
the proposed regulations would generally be effective for payments made after
December 31, 1997, subject to certain transition rules.
ESTATE TAX
An individual Non-United States Holder who is treated as the owner of
Ordinary Common Stock at the time of his or her death or has made certain
lifetime transfers of an interest in Ordinary Common Stock will be required to
include the value of such Ordinary Common Stock in his or her gross estate for
United States federal estate tax purposes and may be subject to United States
federal estate tax, unless an applicable estate tax treaty provides otherwise.
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LEGAL MATTERS
Certain legal matters with respect to the Ordinary Common Stock have been
passed upon for the Company by Milbank, Tweed, Hadley & McCloy, Los Angeles,
California. Certain legal matters relating to the Offering will be passed upon
for the Underwriters by Latham & Watkins, Los Angeles, California.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1994
and 1995 and for the period January 1, 1993 to August 10, 1993, the period
August 10, 1993 to December 31, 1993 and the years ended December 31, 1994 and
1995 and the consolidated financial statements of Steinway as of June 30, 1993
and 1994 and for each of the three years in the period ended June 30, 1994
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports dated March 8, 1996 and
September 9, 1994, respectively, appearing herein and elsewhere in the
Registration Statement, and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Ordinary Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement including the exhibits and schedules thereto. For further
information with respect to the Company or the Ordinary Common Stock, reference
is made to the Registration Statement and the schedules and exhibits filed as a
part thereof. Statements contained in this Prospectus regarding the contents of
any contract or any other document are necessarily summaries and each such
statement is qualified in its entirety by reference to the copy of such contract
or other document filed as an exhibit to the Registration Statement. In
addition, the Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith the Company files periodic reports and other information
with the Commission relating to its business, financial statements and other
matters. The Registration Statement and other information, including exhibits
thereto, may be inspected at the Commission's principal office in Washington,
D.C., and at the following regional offices of the Commission: Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of all or any
part thereof may be obtained from the Public Reference Section, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment
of the prescribed fees. Reports, proxy statements and other information
regarding the Company may also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
The Company intends to furnish to its stockholders annual reports containing
audited financial statements and quarterly reports containing unaudited interim
financial information for the first three fiscal quarters of each fiscal year of
the Company.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Operations.................................................................... F-4
Consolidated Statements of Partners' Equity.............................................................. F-5
Consolidated Statements of Stockholders' Equity.......................................................... F-6
Consolidated Statements of Cash Flows.................................................................... F-7
Notes to Consolidated Financial Statements............................................................... F-8
Condensed Consolidating Financial Statements............................................................. F-22
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
Independent Auditor's Report............................................................................. F-28
Consolidated Balance Sheets.............................................................................. F-29
Consolidated Statements of Stockholders' Equity.......................................................... F-30
Consolidated Statements of Operations.................................................................... F-31
Consolidated Statements of Cash Flows.................................................................... F-32
Notes to Consolidated Financial Statements............................................................... F-33
Supplemental Condensed Consolidating Financial Statements................................................ F-42
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Steinway Musical Instruments, Inc. (formerly Selmer Industries, Inc.)
Elkhart, Indiana
We have audited the accompanying consolidated financial statements of
Steinway Musical Instruments, Inc. (formerly Selmer Industries, Inc.) and
subsidiaries (the "Successor") as of December 31, 1995 and 1994 and for the
years ended December 31, 1995 and 1994 and the period from August 10, 1993 to
December 31, 1993, and of The Selmer Company, Inc. (formerly, The Selmer
Company, L.P.) and subsidiaries (the "Predecessor") for the period from January
1, 1993 to August 10, 1993 listed in the table of contents. These financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Steinway Musical Instruments,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for the years ended December 31, 1995 and 1994
and the period from August 10, 1993 to December 31, 1993, and the results of
operations and cash flows of The Selmer Company, Inc. and subsidiaries for the
period January 1, 1993 to August 10, 1993 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, on August 10, 1993, the
net assets of the Predecessor were acquired in a transaction accounted for as a
purchase. Accordingly, the financial statements of the Successor reflect the
revaluation of the net assets at the date of acquisition, and the amounts
reported for the Successor are not comparable to the amounts shown for the
Predecessor in prior periods.
Chicago, Illinois
March 8, 1996 ( , 1996 as to the fifth paragraph of Note 9)
The accompanying financial statements include the effects of a stock split
of the Company's common stock and its name change approved by the Company's
Board of Directors subject to stockholder approval prior to the date of
effectiveness of this offering. The above opinion is the form which will be
signed by Deloitte & Touche LLP upon consummation of the stock split, which is
described in Note 9 of the notes to the financial statements, and assuming that,
from March 8, 1996 to the date of such stock split, no other events have
occurred that would affect the accompanying financial statements and notes
thereto.
DELOITTE & TOUCHE LLP
Chicago, Illinois
July 1, 1996
F-2
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND MARCH 30, 1996
<TABLE>
<CAPTION>
MARCH 30,
DECEMBER 31, DECEMBER 31, 1996
1994 1995 (UNAUDITED)
-------------- -------------- ------------
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.............................................................. $ 380 $ 3,706 $ 2,146
Accounts, notes and leases receivable, net of allowance for bad
debts of $5,003, $6,281 and $6,599 in 1994, 1995 and 1996,
respectively..................................................... 26,940 41,860 46,693
Inventories....................................................... 26,807 79,063 76,189
Prepaid expenses and other current assets......................... 1,038 3,058 2,946
Deferred tax asset................................................ 1,100 4,693 4,629
-------------- -------------- ------------
Total current assets................................................ 56,265 132,380 132,603
Property, plant and equipment, net.................................. 15,341 64,132 62,557
Other assets, net................................................... 3,469 32,114 30,616
Cost in excess of fair value of net assets acquired, net of
accumulated amortization of $376, $1,024 and $1,243 in 1994, 1995
and 1996, respectively............................................. 10,449 35,170 34,594
-------------- -------------- ------------
TOTAL ASSETS........................................................ $ 85,524 $ 263,796 $ 260,370
-------------- -------------- ------------
-------------- -------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt............... $ 2,306 $ 2,245
Accounts payable.................................................. $ 2,825 8,172 5,763
Other current liabilities......................................... 10,563 31,289 33,348
-------------- -------------- ------------
Total current liabilities........................................... 13,388 41,767 41,356
Long-term debt...................................................... 62,057 171,733 169,402
Deferred taxes...................................................... 500 29,452 28,463
Non-current pension liability....................................... 2,326 15,016 14,709
-------------- -------------- ------------
Total liabilities................................................... 78,271 257,968 253,930
Commitments and Contingencies
Stockholders' equity:
Convertible, participating preferred stock, $.001 par value,
authorized 14,150,000 shares, 2,830,000 shares issued and
outstanding...................................................... 1 1 1
Class A Common Stock, $.001 par value, authorized 1,415,000
shares, 477,953 shares issued and outstanding.................... -- -- --
Common stock, $.001 par value, authorized 26,885,000 shares,
issued and outstanding -- 1,021,946 in 1994 and 1,319,097 shares
in 1995 and 1996................................................. -- -- --
Warrants, 1,330,100 common stock equivalents outstanding.......... 2,335 2,335 2,335
Additional paid-in capital........................................ 4,999 5,629 5,629
Accumulated deficit............................................... (187) (2,261) (679)
Accumulated translation adjustment................................ 105 124 (846)
-------------- -------------- ------------
Total stockholders' equity...................................... 7,253 5,828 6,440
-------------- -------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $ 85,524 $ 263,796 $ 260,370
-------------- -------------- ------------
-------------- -------------- ------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIODS ENDED AUGUST 10, 1993 AND DECEMBER 31, 1993
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
PERIODS ENDED APRIL 1, 1995 AND MARCH 30, 1996
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------- ------------------------------------------- PERIOD PERIOD
PERIOD PERIOD YEAR ENDED YEAR ENDED 1/1/95 - 1/1/96 -
1/1/93 - 8/10/93 - DECEMBER 31, DECEMBER 31, 4/1/95 3/30/96
8/10/93 12/31/93 1994 1995 (UNAUDITED) (UNAUDITED)
------------- ----------- -------------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net sales.......................... $ 57,171 $ 34,339 $ 101,114 $ 189,805 $ 31,880 $ 69,049
Cost of sales...................... 39,216 28,855 69,453 139,587 21,733 47,329
------------- ----------- -------------- -------------- ------------ ------------
Gross profit....................... 17,955 5,484 31,661 50,218 10,147 21,720
Operating Expenses:
Sales and marketing.............. 6,570 4,116 11,328 21,001 3,570 8,272
Provision for doubtful
accounts........................ 919 157 655 797 250 229
General and administrative....... 3,121 2,158 5,435 11,612 1,251 3,931
Amortization..................... 1,527 409 1,067 3,041 282 1,100
Other expense.................... 298 284 704 665 113 81
------------- ----------- -------------- -------------- ------------ ------------
Total Operating Expenses........... 12,435 7,124 19,189 37,116 5,466 13,613
------------- ----------- -------------- -------------- ------------ ------------
Earnings (loss) from operations.... 5,520 (1,640) 12,472 13,102 4,681 8,107
Other (income) expense:
Other income, principally
interest and late charges....... (360) (226) (503) (583) (104) (131)
Interest and amortization of debt
discount........................ 4,432 3,254 8,255 14,923 1,712 4,791
------------- ----------- -------------- -------------- ------------ ------------
Other expense, net................. 4,072 3,028 7,752 14,340 1,608 4,660
------------- ----------- -------------- -------------- ------------ ------------
Income (loss) before income
taxes............................. 1,448 (4,668) 4,720 (1,238) 3,073 3,447
Provision for (benefit of) income
taxes............................. 43 (1,559) 1,798 836 1,125 1,866
------------- ----------- -------------- -------------- ------------ ------------
Net income (loss).................. $ 1,405 $ (3,109) $ 2,922 $ (2,074) $ 1,948 $ 1,581
------------- ----------- -------------- -------------- ------------ ------------
------------- ----------- -------------- -------------- ------------ ------------
Net income (loss) per share........ $ (2.07) $ .52 $ (1.36) $ .34 $ .27
----------- -------------- -------------- ------------ ------------
----------- -------------- -------------- ------------ ------------
Weighted average common and common
equivalent shares outstanding..... 1,499,900 5,660,000 1,524,663 5,660,000 5,957,150
----------- -------------- -------------- ------------ ------------
----------- -------------- -------------- ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
PERIOD ENDED AUGUST 10, 1993
<TABLE>
<CAPTION>
THE SELMER COMPANY, L.P. (PREDECESSOR)
-------------------------------------------------------------
ACCUMULATED
TRANSLATION PENSION
CAPITAL DEFICIT ADJUSTMENT LIABILITY TOTAL
--------- --------- --------------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992........................... $ 22,366 $ (5,021) $ (260) $ (459) $ 16,626
Net income for the period............................ 1,405 1,405
State tax withholdings............................... (108) (108)
Foreign currency translation adjustment.............. (56) (56)
Recognition of additional minimum pension
liability........................................... 132 132
--------- --------- ------ ----------- ---------
BALANCE, August 10, 1993............................. $ 22,258 $ (3,616) $ (316) $ (327) $ 17,999
--------- --------- ------ ----------- ---------
--------- --------- ------ ----------- ---------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD ENDED DECEMBER 31, 1993,
THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THE PERIOD ENDED MARCH 30, 1996
<TABLE>
<CAPTION>
STEINWAY MUSICAL INSTRUMENTS, INC.
AND SUBSIDIARIES (SUCCESSOR)
--------------------------------------------------------------------------------------
ADDITIONAL ACCUMULATED
PREFERRED COMMON PAID IN ACCUMULATED TRANSLATION
STOCK STOCK WARRANTS CAPITAL DEFICIT ADJUSTMENT
--------------- ----------- ----------- ----------- ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INITIAL STOCK ISSUANCE
August 10, 1993................... $ 1 -- $ 2,335 $ 4,999
Net loss for the period............. $ (3,109)
--
----- ----------- ----------- ------------- ------
BALANCE, December 31, 1993.......... 1 -- 2,335 4,999 (3,109)
Net income for the year............. 2,922
Foreign currency translation
adjustment......................... $ 105
--
----- ----------- ----------- ------------- ------
BALANCE, December 31, 1994.......... 1 -- 2,335 4,999 (187) 105
Net loss for the year............... (2,074)
Foreign currency translation
adjustment......................... 19
Issuance of 297,150 shares of common
stock.............................. 630
--
----- ----------- ----------- ------------- ------
BALANCE, December 31, 1995.......... 1 -- 2,335 5,629 (2,261) 124
Net income for the period
(unaudited)........................ 1,581
Foreign currency translation
adjustment (unaudited)............. (1) (970)
--
----- ----------- ----------- ------------- ------
BALANCE, March 30, 1996
(unaudited)........................ $ 1 -- $ 2,335 $ 5,629 $ (679) $ (846)
--
--
----- ----------- ----------- ------------- ------
----- ----------- ----------- ------------- ------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED AUGUST 10, 1993 AND DECEMBER 31, 1993
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
PERIODS ENDED APRIL 1, 1995 AND MARCH 30, 1996
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------- ------------------------------------------- PERIOD PERIOD
PERIOD PERIOD YEAR ENDED YEAR ENDED 1/1/95 - 1/1/96 -
1/1/93 - 8/10/93 - DECEMBER 31, DECEMBER 31, 4/1/95 3/30/96
8/10/93 12/31/93 1994 1995 (UNAUDITED) (UNAUDITED)
------------- ----------- -------------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)........................ $ 1,405 $ (3,109) $ 2,922 $ (2,074) $ 1,948 $ 1,581
Adjustments to reconcile net income
(loss) to net cash flows from operating
activities:
Depreciation and amortization.......... 2,704 1,199 3,198 7,739 819 2,773
Provision for doubtful accounts........ 919 157 655 766 250 176
Amortization of senior note discount... -- 91 248 277 68 76
Deferred tax provision (benefit)....... -- (1,600) 1,000 (5,083) -- (582)
Other.................................. 424 3 14 93 -- --
Changes in operating assets and
liabilities:
Accounts, notes and leases
receivable.......................... (15,313) 12,947 (2,126) (4,172) (722) (5,274)
Inventories.......................... 989 4,235 2,586 7,664 2,203 1,959
Prepaid expense and other current
assets.............................. (81) 183 137 (701) 77 (200)
Accounts payable..................... 766 (908) 1,170 1,354 1,316 (3,408)
Accrued expenses..................... (378) 1,904 1,169 800 205 3,815
------------- ----------- -------------- -------------- ------------ ------------
Net cash flows from operating
activities............................ (8,565) 15,102 10,973 6,663 6,164 916
Cash flows from investing activities
Capital expenditures..................... (576) (303) (1,112) (3,162) (679) (706)
Proceeds from disposals of fixed assets.. 4 6 17 51 -- 12
Increase in other assets................. (5) (5) (107) (1,801) (195) 595
Acquisition of Steinway Musical
Properties, Inc. (net of cash
acquired)............................... -- -- -- (102,790) -- --
Acquisition of The Selmer Company, L.P... -- (94,111) -- -- -- --
------------- ----------- -------------- -------------- ------------ ------------
Net cash flows from investing
activities............................ (577) (94,413) (1,202) (107,702) (874) (99)
Cash flows from financing activities
Borrowing under line of credit
agreement............................... 12,992 60,916 88,830 147,993 24,119 44,210
Repayments under line of credit
agreement............................... (3,372) (47,268) (97,958) (148,486) (28,639) (46,183)
Proceeds from issuance of long-term
debt.................................... -- 57,630 -- 110,000 -- --
Proceeds from issuance of stock and
warrants................................ -- 7,370 -- 630 -- --
Repayments of long-term debt............. -- -- (421) (5,772) -- (269)
Other financing activities................. (108) -- -- -- -- --
------------- ----------- -------------- -------------- ------------ ------------
Net cash flows from financing
activities............................ 9,512 78,648 (9,549) 104,365 (4,520) (2,242)
Effects of foreign exchange rate changes on
cash...................................... (56) -- 105 -- 60 (135)
------------- ----------- -------------- -------------- ------------ ------------
Increase (Decrease) in Cash................ 314 (663) 327 3,326 830 (1,560)
Cash, beginning of period.................. 402 716 53 380 380 3,706
------------- ----------- -------------- -------------- ------------ ------------
Cash, end of period........................ $ 716 $ 53 $ 380 $ 3,706 $ 1,210 $ 2,146
------------- ----------- -------------- -------------- ------------ ------------
------------- ----------- -------------- -------------- ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED AUGUST 10, 1993 AND DECEMBER 31, 1993
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
(UNAUDITED) PERIODS ENDED APRIL 1, 1995 AND MARCH 30, 1996
(DOLLARS IN THOUSANDS)
(1) NATURE OF BUSINESS
Steinway Musical Instruments, Inc. (formerly Selmer Industries, Inc.) and
subsidiaries (the "Company" or the "Successor") is a major manufacturer and
distributor of woodwind, brasswind, percussion and string musical instruments,
pianos and related accessories and services.
On August 10, 1993, the Company purchased substantially all of the assets
and certain liabilities of The Selmer Company, L.P. (the "Predecessor"), a
wholly owned subsidiary of Integrated Resources, Inc. ("Integrated"), for $94.1
million, including fees and expenses. The Selmer Company, L.P. was reorganized
as The Selmer Company, Inc. ("Selmer").
On May 25, 1995, Selmer purchased the assets of Steinway Musical Properties,
Inc. and its wholly-owned subsidiaries ("Steinway") for approximately $104
million. The acquisition has been accounted for as a purchase for financial
reporting purposes.
The unaudited financial statements for the periods ended April 1, 1995 and
March 30, 1996 reflect all adjustments, all of which are of a normal recurring
nature, necessary in the opinion of management for a fair presentation of the
results for such interim periods and are not necessarily indicative of full-year
results.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements of the
Company include the accounts of Selmer and its wholly-owned subsidiaries,
Steinway and Vincent Bach International, Ltd. ("VBI"). Significant intercompany
balances have been eliminated in consolidation.
REVENUE RECOGNITION -- Revenue is recognized at the date of shipment. The
Company provides for the estimated costs of warranties at the time of sale.
INCOME TAXES -- Income taxes are provided using an asset and liability
approach to financial accounting and reporting for income taxes. Deferred income
tax assets and liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
INVENTORIES -- Inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or market. On August 10, 1993, Selmer inventories
were adjusted up by approximately $5,000 to reflect their fair market value. On
May 25, 1995, Steinway inventories were adjusted up by approximately $9,638 to
reflect their fair market value. Cost of sales for the period from August 10,
1993 to December 31, 1993 and the years ended December 31, 1994 and 1995
included $4,800, $200, and $9,638, respectively, of such adjustments.
F-8
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION -- Property, plant and equipment are recorded
at cost. Assets existing at the acquisition date were revalued to fair value at
that date. Depreciation has been computed using the straight-line method over
the estimated useful lives of the respective assets. Leasehold improvements are
amortized using the straight-line method over the estimated useful lives of the
improvements or the remaining term of the respective lease, whichever is
shorter. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Building and improvements...................................... 15-30 years
Leasehold improvements......................................... 5-15 years
Machinery, equipment and tooling............................... 3-10 years
Office furniture and fixtures.................................. 3-10 years
Concert and artist and rental pianos........................... 15 years
</TABLE>
Cost in excess of fair value acquired is amortized over 40 years. Trademarks
acquired are recorded at appraised value and are amortized over 10 years.
Deferred financing costs are amortized on a straight-line basis over the
repayment periods of the under-lying debt.
FOREIGN CURRENCY TRANSLATION -- Assets and liabilities of non-U.S.
operations are translated into U.S. dollars at year-end rates, and revenues and
expenses at average rates of exchange prevailing during the year. The resulting
translation adjustments are reported as a separate component of stockholders'
equity. Foreign currency transaction gains and losses are recognized in income
currently.
FOREIGN EXCHANGE CONTRACTS -- The Company enters into foreign exchange
contracts as a hedge against foreign currency transactions. Gains and losses
arising from fluctuations in exchange rates are recognized at the end of each
reporting period. Such gains and losses directly offset the foreign exchange
gains or losses associated with the hedged receivable or payable. Gains and
losses on foreign exchange contracts which exceed the related balance sheet or
firm purchase commitment exposure are included in foreign currency gain or loss
in the statement of operations.
INCOME (LOSS) PER COMMON SHARE -- Income (loss) per common share has been
computed using the weighted average number of common and common equivalent
shares outstanding.
RECLASSIFICATIONS -- Certain reclassifications of 1993 and 1994 amounts have
been made to conform to the financial statement classification adopted in 1995.
ENVIRONMENTAL MATTERS -- Potential environmental liabilities are accounted
for in accordance with Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies", which requires a liability to be recorded when
it is probable that a loss has been incurred and its amount can reasonably be
estimated.
NEW ACCOUNTING PRONOUNCEMENTS -- In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", which the Company must adopt by fiscal
year 1996. SFAS 121 is not expected to have a material effect on the Company's
net income or financial position. In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company has no stock-based
compensation which meets the criteria for SFAS 123.
F-9
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- MARCH 30
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Raw materials.............................................. $ 3,383 $ 11,332 $ 11,104
Work in process............................................ 13,273 37,793 34,357
Finished goods............................................. 10,151 29,938 30,728
--------- --------- ---------
Total...................................................... $ 26,807 $ 79,063 $ 76,189
--------- --------- ---------
--------- --------- ---------
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Land................................................................... $ 770 $ 18,296
Building and improvements.............................................. 5,636 19,949
Leasehold improvements................................................. 196 690
Machinery, equipment and tooling....................................... 9,235 16,612
Office furniture and fixtures.......................................... 2,085 4,191
Concert and artist and rental pianos................................... 11,087
Construction in progress............................................... 464 903
--------- ---------
18,386 71,728
Less accumulated depreciation and amortization......................... 3,045 7,596
--------- ---------
Total.................................................................. $ 15,341 $ 64,132
--------- ---------
--------- ---------
</TABLE>
(5) OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Trademarks.............................................................. $ 22,548
Deferred financing cost................................................. $ 2,842 10,340
Other assets............................................................ 1,727 2,708
--------- ---------
4,569 35,596
Less accumulated amortization........................................... 1,100 3,482
--------- ---------
Total................................................................... $ 3,469 $ 32,114
--------- ---------
--------- ---------
</TABLE>
F-10
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Accrued payroll and related benefits................................... $ 3,930 $ 10,983
Current pension liability.............................................. 1,800 2,433
Accrued promotional expenses........................................... 2,340 2,357
Accrued warranty expense............................................... 2,175
Accrued taxes.......................................................... 892 3,980
Accrued interest....................................................... 208 1,541
Other accrued expenses................................................. 1,393 7,820
--------- ---------
Total.................................................................. $ 10,563 $ 31,289
--------- ---------
--------- ---------
</TABLE>
(7) INCOME TAXES
The components of the income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
PERIOD YEAR ENDED
8/10/93 - --------------------
12/31/93 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current.................................................... $ 600 $ 2,439
Deferred................................................... $ (1,284) 882 (1,684)
State and local:
Current.................................................... 11 41 574
Deferred................................................... (316) 108 (321)
Foreign:
Current.................................................... 30 167 2,906
Deferred................................................... (3,078)
--------- --------- ---------
Total........................................................ $ (1,559) $ 1,798 $ 836
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's income tax (benefit) differed from the statutory federal rate
as follows:
<TABLE>
<CAPTION>
PERIOD YEAR ENDED
8/10/93 - --------------------
12/31/93 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate applied to earnings before income taxes........ $ (1,587) $ 1,605 $ (433)
Increase (decrease) in income taxes resulting from:
Foreign income taxes........................................ 30 167 (172)
State income taxes.......................................... (305) 149 (49)
Valuation allowance on foreign tax credits.................. 1,277
Other....................................................... 303 (123) 213
--------- --------- ---------
Income tax (benefit).......................................... $ (1,559) $ 1,798 $ 836
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-11
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
The components of net deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
--------- ----------
<S> <C> <C>
Deferred tax assets:
AMT credit carry-forward............................................ $ 350
Uniform capitalization adjustment to inventory...................... 336 $ 2,303
Allowance for doubtful accounts..................................... 300 1,406
Accrued expenses and other current assets and liabilities........... 579 2,709
Foreign tax credits................................................. 22,086
Other............................................................... 135 223
Valuation allowances................................................ (13,534)
--------- ----------
Total deferred tax assets......................................... 1,700 15,193
Deferred tax liabilities
Pension contributions............................................... (500) (1,759)
Fixed assets........................................................ (358) (23,488)
Intangibles......................................................... (232) (14,705)
Other............................................................... (10)
--------- ----------
Total deferred tax liabilities.................................... (1,100) (39,952)
--------- ----------
Net deferred taxes.................................................... $ 600 $ (24,759)
--------- ----------
--------- ----------
</TABLE>
Valuation allowances provided relate to excess foreign tax credits generated
over expected credit absorption. Of these valuation allowances, $12,257 were
recorded at the date of acquisition of Steinway. Should the related tax benefits
be recognized in the future, the effect of removing the valuation allowances
would generally be a decrease in goodwill. During 1995, these valuation
allowances increased by $1,277 due to the generation of deferred foreign tax
credits for which realization does not appear likely. Foreign tax credit
carryforwards expire in varying amounts through 2000.
F-12
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) NOTES PAYABLE AND LONG TERM DEBT
Notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
--------- -----------
<S> <C> <C>
Senior Debt, bearing interest at prime plus 1 1/2% due March 31, 2000
(9.25% and 8.5%).................................................... $ 4,520 $ 4,439
Senior Secured Notes:
11% Notes, due June 30, 2000, net of unamortized discount of $1,644
and $1,418........................................................ 42,906 43,132
10.92% Notes, due June 30, 2000, net of unamortized discount of
$369 and $318..................................................... 9,631 9,682
11% Senior Subordinated Notes, due May 15, 2005...................... 110,000
10% Subordinated Notes, due July 31, 2001............................ 5,000
Note payable to a foreign bank, due in annual installments of of
principal and interest of DM 645 ($449 at the December 31, 1995
exchange rate) at an interest rate of 8.75% with the balance due in
September 2005...................................................... 2,874
Note payable to a foreign bank, due in quarterly installments of DM
250 ($174 at the December 31, 1995 exchange rate) through September
30, 1999, plus interest at 6.5%..................................... 2,611
Note payable to a foreign bank, due in monthly installments of DM 25
($17 at the December 31, 1995 exchange rate) through August 31,
1997, plus interest at 9.6%......................................... 348
Open account loan, payable on demand to a foreign bank............... 953
--------- -----------
Total................................................................ 62,057 174,039
Less current portion................................................. 2,306
--------- -----------
Long-term debt....................................................... $ 62,057 $ 171,733
--------- -----------
--------- -----------
</TABLE>
Scheduled maturities of long-term debt as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
1996................................................................... $ 2,306
1997................................................................... 2,300
1998................................................................... 4,680
1999................................................................... 6,776
2000................................................................... 46,279
Thereafter............................................................. 111,698
-----------
Total.................................................................. $ 174,039
-----------
-----------
</TABLE>
The open account loan provides for borrowings by foreign subsidiaries of up
to DM 10,000 ($6,961 at the December 31, 1995 exchange rate) payable on demand,
of which up to DM 4,000 ($2,784 at the December 31, 1995 exchange rate) may be
drawn as a term loan for 30, 60, 90 or 180 days. Demand borrowings bear interest
at the rate of 8.25% and term borrowings bear interest at the Euromarket rate
plus 2%.
In connection with the merger discussed in Note 17, the Company entered into
a restated and amended Senior Bank Credit Agreement. The restated agreement
provides for borrowings by Selmer
F-13
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) NOTES PAYABLE AND LONG TERM DEBT (CONTINUED)
and Steinway's domestic subsidiaries up to $60 million and extends the due date
to March 31, 2000. Interest on the outstanding balances accrues at the prime
rate plus 1 1/2% or the Eurodollar rate plus 3%. Borrowings are collateralized
by domestic accounts receivable and inventory balances, a first lien on
Steinway's domestic fixed assets, and a second lien on Selmer's fixed assets.
The available balance is determined by eligible domestic accounts receivable and
inventory balances and was approximately $40.7 million on December 31, 1995.
The Senior Secured Notes are secured by the fixed assets and common stock of
The Selmer Company, Inc. and mature on various dates from December 31, 1996
through June 30, 2000. The notes are guaranteed by the Company. In connection
with the merger discussed in Note 17, the Senior Secured Note Indenture was
amended to provide for the additional guarantee of the Senior Notes by the
Steinway Guarantors.
All of the Company's debt agreements contain certain financial covenants
which, among other things, require the maintenance of certain financial ratios
and net worth, place certain limitations on additional borrowings and capital
expenditures, and prohibit the payment of cash dividends. The Company is in
compliance with all such covenants.
(9) STOCKHOLDERS' EQUITY AND WARRANTS
Funding for the Company's acquisition discussed in Note 1 was provided in
part by the issuance of capital stock on August 10, 1993. Holders of the
Convertible Participating Preferred Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available for such purpose. The Company is restricted from paying dividends on
common stock unless dividends are made on the preferred stock in an amount equal
to the dividend payable upon conversion of each share of preferred stock. The
preferred stock has a liquidation value of $4.50 per share.
Each share of Class A Common Stock is entitled to 98 votes, and each share
of ordinary common stock is entitled to one vote. Holders of preferred stock are
entitled to a number of votes equal to the number of ordinary common shares into
which the preferred shares may be converted. Class A Common Stock shall
automatically convert to ordinary common stock if, at any time, the Class A
Common Stock is not owned by an original Class A holder.
The Company issued warrants in conjunction with the issuance of the Senior
Secured Notes on August 10, 1993. The warrants, which may be exercised after the
earlier of August 1, 1995, or change of control, entitle holders to purchase
1,330,100 shares of ordinary common stock at a purchase price of $0.01 per
share. The warrants expire on August 1, 2000.
The Company has the option to convert the preferred stock and to set a date
for exercising the warrants if a registered public offering of common stock
raising $15 million in the aggregate is made.
On May 14, 1996, the Company filed a registration statement with the
Securities and Exchange Commission for the proposed sale of shares of the
Company's ordinary common stock. On July xx, 1996, the Company effected a
2.83-to-1 stock split. All share and per share amounts have been retroactively
adjusted for all periods presented to give effect to the stock split.
Additionally, on July , 1996, the Company changed its name to Steinway Musical
Instruments, Inc.
F-14
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS -- The Company has entered into various operating leases
for certain facilities and equipment, some of which have noncancelable terms,
expiring at various times through 2016 with various renewal options. Minimum
lease payments under noncancelable leases for the years ending December 31, are
as follows:
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
1996..................................................................... $ 3,182
1997..................................................................... 2,970
1998..................................................................... 1,722
1999..................................................................... 860
2000..................................................................... 564
Thereafter............................................................... 2,742
---------
Total.................................................................... $ 12,040
---------
---------
</TABLE>
Rent expense was $662 for the period January 1, 1993 to August 10, 1993,
$344 for the period from August 10, 1993 to December 31, 1993, and $970 and
$2,202 for the years ended December 31, 1994 and 1995, respectively,
NOTES RECEIVABLE SOLD WITH RECOURSE -- The Company sells notes receivable on
a recourse basis to a commercial finance company under a three-year facility.
Pursuant to the terms of the facility, the commercial finance company may, at
its option, purchase at any one time up to an aggregate principal amount of $15
million of the Company's notes receivable. The Company received proceeds of
approximately $12.0 and $13.0 million from the sales of such notes for the years
ended December 31, 1994 and 1995, respectively. Approximately $6.8 and $7.5
million of these notes remain outstanding as of December 31, 1994 and 1995,
respectively.
ENVIRONMENTAL MATTERS -- 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.
LITIGATION -- In the ordinary course of its business, the Company is party
to various legal actions that management believes are routine in nature and
incidental to the operation of its business. While the outcome of such actions
cannot be predicted with certainty, management believes that, based on the
experience of the Company in dealing with these matters, the ultimate resolution
of these matters will not have a material adverse impact on the business,
financial condition and results of operations or prospects of the Company.
(11) RETIREMENT PLANS
DOMESTIC PLANS -- The Company has a noncontributory defined benefit pension
plan (the "Selmer Plan") in which all eligible employees may participate. On
December 31, 1995, Steinway's defined benefit pension plan was merged with the
Selmer Plan. The Company's funding policy is to contribute the minimum required
contribution for each plan year by the fifteenth day of the month following each
quarter plus the balance of the minimum required contribution for the plan year
by the following September 15.
F-15
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) RETIREMENT PLANS (CONTINUED)
The components of net pension expense are as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------- ---------------------------------
PERIOD PERIOD YEAR ENDED
1/1/93 - 8/10/93 - --------------------
8/10/93 12/31/93 1994 1995
------------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Service cost -- benefits earned during the
year.......................................... $ 237 $ 238 $ 803 $ 651
Interest cost on projected benefit
obligation.................................... 310 182 605 739
Return on plan assets.......................... (124) (53) (38) (993)
Net amortization............................... 152 (172) 621
------ ----- --------- ---------
Net pension expense............................ $ 575 $ 367 $ 1,198 $ 1,018
------ ----- --------- ---------
------ ----- --------- ---------
</TABLE>
The funded status of the pension plan at December 31, 1994 and 1995 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Accumulated benefit obligation (including vested benefit obligation of
approximately $6,486 and $12,983 at December 31, 1994 and 1995,
respectively).......................................................... $ 6,996 $ 13,841
--------- ---------
--------- ---------
Projected benefit obligation............................................ $ 7,499 $ 14,592
Plan assets at fair value............................................... 3,953 12,020
--------- ---------
Projected benefit obligation in excess of plan assets................... 3,546 2,572
Unrecognized net gain (loss)............................................ 1,423 (137)
Unrecognized prior service cost......................................... (843) (765)
Recognition of minimum liability........................................ 762
--------- ---------
Net accrued pension cost................................................ 4,126 2,432
Less amount currently payable........................................... 1,800 1,539
--------- ---------
Net accrued pension cost................................................ $ 2,326 $ 893
--------- ---------
--------- ---------
</TABLE>
The projected benefit obligation was determined using an assumed discount
rate of 8.5% and 7.5% in 1994 and 1995, respectively. The assumed long-term rate
of compensation increase was 4%. The assumed long-term rate of return on plan
assets was 8.5%.
The Company also sponsors 401(k) retirement savings plans for eligible
employees. Discretionary employer contributions, as determined annually by the
Board of Directors, are made to one these plans. The 1995 contribution
approximated $159.
The Company provides postretirement health care and life insurance benefits
to eligible hourly retirees and their dependents. The health care plan is
contributory, with retiree contributions adjusted every three years as part of a
union contract agreement. The plans are unfunded and the Company pays part of
the health care premium and the full amount of the life insurance cost.
Effective January 1, 1994 the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". SFAS 106 requires
recognition, during employees' service with the Company, of the cost of their
retiree health and life insurance benefits.
F-16
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) RETIREMENT PLANS (CONTINUED)
In accordance with the Statement, the Company has elected to recognize this
change in accounting over a twenty-year period. The accumulated postretirement
benefit obligation was $1,004 at January 1, 1994.
Net postretirement benefit cost for 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Service cost.................................................................. $ 35 $ 32
Interest cost................................................................. 71 79
Amortization of transition obligation......................................... 50 50
Net amortization and deferral................................................. (6)
--------- ---------
Net postretirement benefit cost............................................... $ 156 $ 155
--------- ---------
--------- ---------
</TABLE>
The adoption of SFAS No. 106 did not have a material effect on the Company's
1994 postretirement benefit cost. In prior years, the cost of providing these
benefits to retired employees was recognized as an expense primarily as premiums
were paid.
The following table sets forth the funded status of the Company's
postretirement benefit plans and accrued postretirement benefit cost reflected
in the Company's balance sheet at year end:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees................................................................. $ 314 $ 337
Active Employees......................................................... 596 750
--------- ---------
910 1,087
Unrecognized net obligation at date of adoption of SFAS No. 106............ (954) (904)
Unrecognized net gain...................................................... 164 52
--------- ---------
Accrued postretirement benefit cost........................................ $ 120 $ 235
--------- ---------
--------- ---------
</TABLE>
The annual assumed rate of increase in the per capita cost of covered health
care benefits is 10.5% for retirees under age 65 in 1996 and is assumed to
decrease gradually to 4.5% in 2008, and remain at that level thereafter.
The effect of increasing the assumed health care cost trend by 1 percentage
point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1995 by $52 and the aggregate of the service and
interest cost components of the net periodic postretirement benefit cost for the
year then ended by $7.
The discount rate used in determining the transition obligation as of
January 1 and the net periodic postretirement benefit cost was 7% and 8.5% in
1994 and 1995, respectively. The accumulated postretirement benefit obligation
was determined using an assumed discount rate of 8.5% and 7.5% in 1994 and 1995,
respectively.
FOREIGN PLANS -- The foreign divisions of the Company's Steinway subsidiary
have separate pension plans which provide retirement benefits for all hourly and
certain salaried employees. Unfunded accrued pension costs are included in
liabilities. The plans are funded in accordance with the requirements of
regulatory bodies governing each plan.
F-17
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) RETIREMENT PLANS (CONTINUED)
The components of net pension cost for the Company's foreign divisions are
as follows:
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Service cost -- benefits earned during the period.................................... $ 240
Interest cost on projected benefit obligation........................................ 602
Return on plan assets................................................................ (199)
Net amortization and deferral........................................................ 102
---------
Net pension cost..................................................................... $ 745
---------
---------
</TABLE>
The following table sets forth the funded status and obligations of the
plans for the foreign divisions as of December 31, 1995:
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Accumulated benefit obligation (including vested benefit obligation of
approximately $15,199 at December 31, 1995)....................................... $ 15,824
---------
---------
Projected benefit obligation....................................................... $ 17,222
Plan assets at fair value.......................................................... 2,323
---------
Projected benefit obligation in excess of plan assets.............................. 14,899
Unrecognized net gain.............................................................. 118
---------
Net accrued pension cost........................................................... 15,017
Less amount currently payable...................................................... 894
---------
Net accrued pension cost........................................................... $ 14,123
---------
---------
</TABLE>
The weighted average discount rates and rates of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7% and 3%, respectively. The expected
long-term rate of return on assets was 9%.
(12) FOREIGN EXCHANGE CONTRACTS
At December 31, 1995, the Company's German divisions, whose functional
currency is the deutsche mark, had forward contracts maturing at various dates
through August 1996 to purchase $1,486 as a hedge against intercompany
transactions with U.S. affiliates. In addition, the German divisions had forward
contracts maturing at various dates through March 1996 to sell 350 British
pounds sterling as a hedge against transactions with their London affiliate.
(13) SEGMENT INFORMATION
The Company operates in one industry segment, the manufacture and sale of
musical instruments. Sales and marketing operations outside the United States
are conducted through subsidiaries in Germany and the United Kingdom. Foreign
manufacturing operations are located in Germany.
F-18
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) SEGMENT INFORMATION (CONTINUED)
Financial information concerning the Company's operations by major
geographical area is as follows:
<TABLE>
<CAPTION>
PERIOD PERIOD YEAR ENDED
1/1/93 - 8/10/93 - ------------------------
8/10/93 12/31/93 1994 1995
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales
United States
Sales to unaffiliated customers............................. $ 55,565 $ 32,494 $ 97,027 $ 148,269
Intersegment sales.......................................... 649 738 1,585 4,190
--------- ----------- ----------- -----------
Total..................................................... 56,214 33,232 98,612 152,459
Western Europe
Sales to unaffiliated customers............................. 1,606 1,845 4,087 41,536
Intersegment sales.......................................... -- -- -- --
--------- ----------- ----------- -----------
Total..................................................... 1,606 1,845 4,087 41,536
--------- ----------- ----------- -----------
Total........................................................... 57,820 35,077 102,699 193,995
Less eliminations............................................. 649 738 1,585 4,190
--------- ----------- ----------- -----------
Total........................................................... $ 57,171 $ 34,339 $ 101,114 $ 189,805
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Operating Income (loss)
United States................................................. $ 5,385 $ (1,736) $ 12,082 $ 13,460
Western Europe................................................ 131 89 400 (294)
Eliminations................................................ 4 7 (10) (64)
--------- ----------- ----------- -----------
Total..................................................... $ 5,520 $ (1,640) $ 12,472 $ 13,102
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Identifiable Assets (at period end)
United States................................................. $ 94,765 $ 88,473 $ 84,535 $ 210,811
Western Europe................................................ 2,316 2,884 3,416 86,370
Eliminations.................................................. (1,732) (2,387) (2,427) (33,385)
--------- ----------- ----------- -----------
Total..................................................... $ 95,349 $ 88,970 $ 85,524 $ 263,796
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
Export sales from the United States to unaffiliated customers were
approximately $7,964 for the period from January 1, 1993 to August 10, 1993,
$6,588 for the period from August 10, 1993 to December 31, 1993, and $15,717 and
$22,104 for the years ended December 31, 1994 and 1995, respectively.
(14) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------- ---------------------------------
PERIOD PERIOD YEAR ENDED
1/1/93 - 8/10/93 - --------------------
8/10/93 12/31/93 1994 1995
------------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Interest paid................................. $ 3,445 $ 3,057 $ 8,025 $ 13,399
Income taxes paid............................. 0 73 470 5,532
</TABLE>
F-19
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
Cash flow information with respect to Selmer's acquisition of Steinway, as
discussed in Note 17, is as follows:
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
Fair value of assets acquired.................................................... $ 183,003
Liabilities assumed.............................................................. (78,542)
Cash paid........................................................................ 104,461
</TABLE>
(15) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair values of financial
instruments are made in accordance with the requirements of SFAS No. 107
"Disclosures about Fair Values of Financial Instruments". The estimated fair
values have been developed using appropriate methodologies; however,
considerable judgment is required to develop these estimates. Accordingly, the
estimates presented herein are not necessarily indicative of amounts that could
be realized in a current market exchange. Use of different assumptions or
methodologies could have a significant effect on these estimates.
<TABLE>
<CAPTION>
1994 1995
---------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets
Cash...................................... $ 380 $ 380 $ 3,706 $ 3,706
Accounts, notes and leases receivable..... 26,940 26,940 41,860 41,860
Financial liabilities
Accounts payable.......................... 2,825 2,825 8,172 8,172
Notes payable and long term debt.......... 62,057 62,057 174,039 172,773
Foreign currency contracts................ 36 36
</TABLE>
The carrying amount of cash, accounts, notes and leases receivable, and
accounts payable approximate fair value because of the short maturity of these
instruments.
The estimated fair value of existing notes payable and long-term debt is
based on rates currently available to the Company for debt with similar terms
and remaining maturities.
The estimated fair value of foreign currency contracts (used for hedging
purposes) has been determined as the difference between the current spot rate
and the contract rate multiplied by the notional amount of the contract.
F-20
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) SUMMARIZED FINANCIAL INFORMATION
The Company is a holding company whose only asset consists of its investment
in its wholly-owned subsidiary, The Selmer Company, Inc. Summarized financial
information for The Selmer Company, Inc. and subsidiaries is as follows:
<TABLE>
<CAPTION>
PERIOD
-----------------------------------------------------------
APRIL 1, MARCH 30,
1993 1994 1995 1995 1996
--------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Current assets........................... $ 56,736 $ 56,265 $ 132,380 $ 55,287 $ 132,603
Total assets............................. 88,970 85,524 263,796 84,601 260,370
Current liabilities...................... 10,174 13,388 41,767 14,909 41,356
Stockholder's equity..................... 4,226 7,253 5,198 9,261 5,810
Total revenues........................... 34,339 101,114 189,805 31,880 69,049
Gross profit............................. 5,484 31,661 50,218 10,147 21,720
Net income (loss)........................ (3,109) 2,922 (2,074) 1,948 1,581
</TABLE>
(17) SUMMARY OF MERGER AND GUARANTEES
On May 25, 1995, Selmer acquired Steinway pursuant to an Agreement and Plan
of Merger dated as of April 11, 1995. The total purchase price of approximately
$104 million, including fees and expenses, was funded by Selmer's issuance of
$105 million of 11% Senior Subordinated Notes due 2005 and available cash
balances of the Company.
The following pro forma financial information gives effect to the
acquisition as if it had occurred as of January 1, 1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Revenues............................................................ $ 215,097 $ 233,731
Net (loss).......................................................... (8,141) (89)
Net (loss) per share................................................ $ (5.43) $ (.06)
</TABLE>
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 wholly-owned
subsidiaries of Steinway, each a direct or indirect wholly-owned subsidiary of
the Company and 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.
F-21
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NON
GUARANTOR GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash....................... $ 361 $ 1,626 $ 1,719 $ 3,706
Accounts, notes and leases
receivable, net........... 25,700 7,504 8,656 41,860
Inventories................ 28,511 23,954 26,975 $ (377) 79,063
Prepaid expenses and other
current assets............ 1,108 1,006 944 3,058
Deferred tax asset......... 700 1,888 2,105 4,693
----------- ------------ ------------ ------------ -------------
Total current assets......... 56,380 35,978 40,399 (377) 132,380
Property, plant and
equipment, net.............. 14,642 28,077 21,413 64,132
Investment in subsidiaries... $ 7,335 105,630 30,521 177 (143,663) --
Intercompany................. 630 1,576 2,523 (4,729) --
Other assets, net............ 4,070 17,888 11,469 (1,313) 32,114
Cost in excess of fair value
of net assets acquired,
net......................... 10,179 12,079 12,912 35,170
----------- ----------- ------------ ------------ ------------ -------------
TOTAL ASSETS................. $ 7,965 $ 192,477 $ 127,066 $ 86,370 $ (150,082) $ 263,796
----------- ----------- ------------ ------------ ------------ -------------
----------- ----------- ------------ ------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current
portion of long-term
debt...................... $ 250 $ 2,056 $ 2,306
Accounts payable........... 3,085 $ 2,994 2,093 8,172
Other current liabilities.. 10,019 6,576 14,694 31,289
----------- ------------ ------------ ------------ -------------
Total current liabilities.... 13,354 9,570 18,843 41,767
Long-term debt............... 165,355 1,648 4,730 171,733
Intercompany................. 630 80,000 4,099 $ (84,729) --
Deferred taxes............... 880 13,565 15,007 29,452
Non-current pension
liability................... 2,206 14,123 (1,313) 15,016
----------- ------------ ------------ ------------ -------------
Total liabilities............ 182,425 104,783 56,802 (86,042) 257,968
Stockholders' equity......... $ 7,965 10,052 22,283 29,568 (64,040) 5,828
----------- ----------- ------------ ------------ ------------ -------------
Total........................ $ 7,965 $ 192,477 $ 127,066 $ 86,370 $ (150,082) $ 263,796
----------- ----------- ------------ ------------ ------------ -------------
----------- ----------- ------------ ------------ ------------ -------------
</TABLE>
F-22
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NON
GUARANTOR GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................... $ 106,498 $ 45,961 $ 41,536 $ (4,190) $ 189,805
Cost of sales................ 73,787 37,003 32,923 (4,126) 139,587
----------- ------------ ------------ ------------ -------------
Gross profit................. 32,711 8,958 8,613 (64) 50,218
Operating expenses:
Sales and marketing........ 11,172 5,911 4,078 (160) 21,001
Provision for doubtful
accounts.................. 566 47 184 797
General and
administrative............ 5,332 2,805 3,475 11,612
Amortization............... 864 1,234 943 3,041
Other expense.............. 466 (188) 227 160 665
----------- ------------ ------------ ------------ -------------
Total operating expenses..... 18,400 9,809 8,907 -- 37,116
----------- ------------ ------------ ------------ -------------
Earnings (loss) from
operations.................. 14,311 (851) (294) (64) 13,102
Other (income) expense:
Other income............... (5,817) -- (89) 5,323 (583)
Interest expense........... 14,406 5,210 630 (5,323) 14,923
----------- ------------ ------------ ------------ -------------
Other expense, net........... 8,589 5,210 541 -- 14,340
----------- ------------ ------------ ------------ -------------
Income (loss) before income
taxes....................... 5,722 (6,061) (835) (64) (1,238)
Provision for (benefit of)
income taxes................ 2,530 (2,014) 320 836
----------- ------------ ------------ ------------ -------------
Net income (loss)............ $ 3,192 $ (4,047) $ (1,155) $ (64) $ (2,074)
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
</TABLE>
F-23
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
GUARANTOR GUARANTOR NON GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net income (loss)...... $ 3,192 $ (4,047) $ (1,155) $ (64) $ (2,074)
Adjustments to
reconcile net income
(loss) to cash flows
from operating
activities:
Depreciation and
amortization........ 3,146 2,650 1,943 7,739
Provision for
doubtful accounts... 566 -- 200 766
Amortization of
senior note
discount............ 277 -- -- 277
Deferred tax
provision
(benefit)........... 780 (2,785) (3,078) (5,083)
Other................ 52 71 (30) 93
Changes in operating
assets and
liabilities:
Accounts, notes and
leases
receivable........ (1,443) (1,100) (1,629) (4,172)
Inventories........ (2,475) 6,438 3,637 64 7,664
Prepaid expense and
other current
assets............ (120) (587) 6 (701)
Accounts payable... 596 323 435 1,354
Accrued expenses... (404) (738) 1,942 800
---------- ------------- ------------- --- -------------
Net cash flows from
operating activities.... 4,167 225 2,271 -- 6,663
Cash flows from investing
activities
Capital expenditures... (1,639) (810) (713) (3,162)
Proceeds from disposals
of fixed assets....... 3 11 37 51
Increase in other
assets................ (1,196) (255) (350) (1,801)
Acquisition of Steinway
Musical Properties,
Inc. (net of cash
acquired)............. (104,461) 1,548 123 (102,790)
---------- ------------- ------------- --- -------------
Net cash flows from
investing activities.... (107,293) 494 (903) -- (107,702)
Cash flows from financing
activities
Borrowing under line of
credit agreement...... 105,187 42,441 365 147,993
Repayments under line
of credit agreement... (106,915) (41,571) (148,486)
Proceeds from issuance
of long-term debt..... 110,000 110,000
Proceeds from issuance
of stock.............. $ 630 630
Repayments of long-term
debt.................. (5,000) (772) (5,772)
Intercompany
dividends............. 1,500 (1,500) --
Intercompany........... (630) 222 (1,463) 1,871 --
---------- ---------- ------------- ------------- --- -------------
Net cash flows from
financing activities.... -- 103,494 907 (36) -- 104,365
Effect of exchange rate
changes on cash......... --
Increase (decrease) in
cash.................... -- 368 1,626 1,332 -- 3,326
Cash, beginning of
period.................. (7) -- 387 380
---------- ---------- ------------- ------------- --- -------------
Cash, end of period...... $ -- $ 361 $ 1,626 $ 1,719 $ -- $ 3,706
---------- ---------- ------------- ------------- --- -------------
---------- ---------- ------------- ------------- --- -------------
</TABLE>
F-24
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 30, 1996
<TABLE>
<CAPTION>
NON
GUARANTOR GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................. $ (1,387) $ 1,818 $ 1,715 $ 2,146
Accounts, notes and leases
receivable, net................. 32,089 6,204 8,400 46,693
Inventories...................... 25,275 24,422 26,968 $ (476) 76,189
Prepaid expenses and other
current assets.................. 1,441 936 569 2,946
Deferred tax asset............... 700 1,888 2,041 4,629
----------- ------------ ------------ ------------ -------------
Total current assets............... 58,118 35,268 39,693 (476) 132,603
Property, plant and equipment,
net............................... 14,315 27,679 20,563 62,557
Investment in subsidiaries......... $ 7,335 105,630 30,521 178 (143,664) --
Intercompany....................... 630 1,508 3,245 (5,383)
Other assets, net.................. 3,610 17,448 10,871 (1,313) 30,616
Cost in excess of fair value of net
assets acquired, net.............. 10,111 12,003 12,480 34,594
----------- ----------- ------------ ------------ ------------ -------------
TOTAL ASSETS....................... $ 7,965 $ 193,292 $ 126,164 $ 83,785 $ (150,836) $ 260,370
----------- ----------- ------------ ------------ ------------ -------------
----------- ----------- ------------ ------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion
of long-term debt............... $ 500 $ 1,745 $ 2,245
Accounts payable................. 2,386 $ 1,286 2,091 5,763
Other current liabilities........ 11,586 7,693 14,069 33,348
----------- ------------ ------------ ------------ -------------
Total current liabilities.......... 14,472 8,979 17,905 41,356
Long-term debt..................... 162,498 2,614 4,290 169,402
Intercompany....................... 630 80,000 4,753 $ (85,383) --
Deferred taxes..................... 880 13,264 14,319 28,463
Non-current pension liability...... 2,206 13,816 (1,313) 14,709
----------- ------------ ------------ ------------ -------------
Total liabilities.................. 180,686 104,857 55,083 (86,696) 253,930
Stockholders' equity............... $ 7,965 12,606 21,307 28,702 (64,140) 6,440
----------- ----------- ------------ ------------ ------------ -------------
Total.............................. $ 7,965 $ 193,292 $ 126,164 $ 83,785 $ (150,836) $ 260,370
----------- ----------- ------------ ------------ ------------ -------------
----------- ----------- ------------ ------------ ------------ -------------
</TABLE>
F-25
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 30, 1996
<TABLE>
<CAPTION>
NON
GUARANTOR GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------- ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales........................... $ 36,966 $ 18,001 $ 15,266 $ (1,184) $ 69,049
Cost of sales....................... 24,984 13,278 10,152 (1,085) 47,329
--------- ------------ ------------ ------------ -------------
Gross profit........................ 11,982 4,723 5,114 (99) 21,720
Operating expenses:
Sales and marketing............... 3,901 2,337 2,074 (40) 8,272
Provision for doubtful accounts... 176 27 26 229
General and administrative........ 1,332 1,254 1,345 3,931
Amortization...................... 200 518 382 1,100
Other expense..................... 10 (92) 123 40 81
--------- ------------ ------------ ------------ -------------
Total operating expenses............ 5,619 4,044 3,950 -- 13,613
--------- ------------ ------------ ------------ -------------
Earnings (loss) from operations..... 6,363 679 1,164 (99) 8,107
Other (income) expense:
Other income...................... (2,320) -- (19) 2,208 (131)
Interest expense.................. 4,611 2,154 234 (2,208) 4,791
--------- ------------ ------------ ------------ -------------
Other expense, net.................. 2,291 2,154 215 -- 4,660
--------- ------------ ------------ ------------ -------------
Income (loss) before income taxes... 4,072 (1,475) 949 (99) 3,447
Provision for (benefit of) income
taxes.............................. 1,518 (498) 846 1,866
--------- ------------ ------------ ------------ -------------
Net income (loss)................... $ 2,554 $ (977) $ 103 $ (99) $ 1,581
--------- ------------ ------------ ------------ -------------
--------- ------------ ------------ ------------ -------------
</TABLE>
F-26
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 30, 1996
<TABLE>
<CAPTION>
GUARANTOR GUARANTOR NON GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- --------- ------------- ------------- --------------- -------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)................... $ 2,554 $ (977) $ 103 $ (50) $ 1,581
Adjustments to reconcile net income
(loss) to cash flows from operating
activities:
Depreciation and amortization..... 822 1,158 793 2,773
Provision for doubtful accounts... 176 -- -- 176
Amortization of senior note
discount......................... 76 -- -- 76
Deferred tax benefit.............. -- (303) (279) (582)
Changes in operating assets and
liabilities:
Accounts, notes and leases
receivable..................... (6,565) 1,299 (8) (5,274)
Inventories..................... 3,236 (387) (989) 50 1,959
Prepaid expense and other
current assets................. (333) 71 62 (200)
Accounts payable................ (699) (1,866) (843) (3,408)
Accrued expenses................ 1,567 1,276 972 3,815
--------- ------------- ------------- --- -------------
Net cash flows from operating
activities........................... 834 271 (189) -- 916
Cash flows from investing activities
Capital expenditures................ (295) (333) (78) (706)
Proceeds from disposals of fixed
assets............................. -- 12 -- 12
(Increase) decrease in other
assets............................. 328 (1) 268 595
--------- ------------- ------------- --- -------------
Net cash flows from investing
activities........................... 33 (322) 190 -- (99)
Cash flows from financing activities
Net borrowings (repayments) under
line of credit agreement........... (2,683) 966 (256) (1,973)
Repayments of long-term debt........ -- -- (269) (269)
Intercompany........................ 68 (723) 655 --
----- --------- ------------- ------------- --- -------------
Net cash flows from financing
activities........................... -- (2,615) 243 130 -- (2,242)
Effect of exchange rate changes on
cash................................. -- -- (135) (135)
Increase (decrease) in cash........... -- (1,748) 192 (4) -- (1,560)
Cash, beginning of period............. 361 1,626 1,719 3,706
----- --------- ------------- ------------- --- -------------
Cash, end of period................... $ -- $ (1,387) $ 1,818 $ 1,715 $ -- $ 2,146
----- --------- ------------- ------------- --- -------------
----- --------- ------------- ------------- --- -------------
</TABLE>
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
Steinway Musical Properties, Inc.:
We have audited the accompanying consolidated balance sheets of Steinway
Musical Properties, Inc. and subsidiaries (the "Companies") as of June 30, 1993
and 1994 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
1994. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Companies at June 30, 1993
and 1994, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 1994 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1994 the
Companies changed their method of accounting for income taxes to conform with
Statement of Financial Accounting Standards No. 109.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplemental condensed
consolidating balance sheets as of June 30, 1993 and 1994, and the supplemental
condensed consolidating statements of operations and of cash flows for each of
the three years in the period ended June 30, 1994 are presented for purposes of
additional analysis and are not a required part of the basic consolidated
financial statements. This supplemental condensed consolidated information is
the responsibility of the Companies' management. Such condensed consolidating
information has been subjected to the auditing procedures applied in our audits
of the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects when considered in relation to the basic
consolidated financial statements taken as a whole.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
September 9, 1994
F-28
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, ------------
-------------------- 1995
NOTES 1993 1994 ------------
--------- --------- --------- (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................................................................ $ 1,606 $ 1,396 $ 1,080
Short-term investments.............................................. 1 1,054 3,089 1,018
Accounts receivable (less allowance for doubtful accounts and sales
returns of approximately $1,673, $1,610 and $1,615 in 1993, 1994
and 1995, respectively............................................. 3 9,650 9,191 11,618
Inventory........................................................... 1,2,3 42,373 43,622 46,303
Prepaid expenses and other assets................................... 1,576 1,462 1,440
--------- --------- ------------
Total current assets.............................................. 56,259 58,760 61,459
--------- --------- ------------
Property, plant and equipment:
Land................................................................ 1,3 204 208 217
Building and improvements........................................... 8,400 10,322 11,184
Leasehold improvements.............................................. 1,240 1,502 1,513
Equipment........................................................... 9,327 11,372 12,403
Furniture and fixtures.............................................. 1,267 1,388 1,601
Concert and artist and rental pianos................................ 4,834 5,266 5,644
Construction in progress............................................ 384 145 820
--------- --------- ------------
Total............................................................. 25,656 30,203 33,382
Less accumulated depreciation and amortization...................... (12,751) (17,440) (19,694)
--------- --------- ------------
Property, plant and equipment -- net.............................. 12,905 12,763 13,688
Other assets:
Deferred financing costs -- net..................................... 1 935 1,974 1,600
Deferred pension costs -- net....................................... 7 1,276 1,108 1,278
Other noncurrent assets............................................. 7 1,302 1,414 1,420
--------- --------- ------------
Total other assets................................................ 3,513 4,496 4,298
--------- --------- ------------
Total................................................................. $ 72,677 $ 76,019 $ 79,445
--------- --------- ------------
--------- --------- ------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Notes payable....................................................... 3 $ 15,695 $ 11,470 $ 6,188
Current portion of long-term debt................................... 3 1,767 1,619 1,764
Accounts payable and accrued expenses............................... 7 6,963 8,635 7,597
Income and other taxes payable...................................... 4 252 1,413 1,681
Accrued warranty.................................................... 1 1,125 1,625 1,901
Accrued compensation................................................ 6,083 7,168 8,864
Deferred income taxes............................................... 4 11 1,039 1,039
--------- --------- ------------
Total current liabilities......................................... 31,896 32,969 29,034
--------- --------- ------------
Long-term debt........................................................ 3 26,934 25,379 24,982
--------- --------- ------------
Pension liability..................................................... 1,7 10,682 11,867 14,433
--------- --------- ------------
Deferred income taxes................................................. 4 1,398 599 790
--------- --------- ------------
Redeemable common stock............................................... 6,11 1,000
--------- --------- ------------
Redeemable warrant capital............................................ 6 270 510
--------- --------- ------------
Stockholders' equity: 6
Common stock; $0.01 par value; 300,000 shares authorized; 429,600
and 600 shares issued in 1993, 1994 and 1995, respectively.........
Additional paid-in capital.......................................... 1,002 2,002 2,002
Retained earnings (deficit)......................................... (209) 2,906 7,096
Cumulative translation adjustments.................................. 1 (26) 313 884
Treasury stock (171 shares at cost)................................. 6 (286) (286)
--------- --------- ------------
Total stockholders' equity........................................ 767 4,935 9,696
--------- --------- ------------
Total................................................................. $ 72,677 $ 76,019 $ 79,445
--------- --------- ------------
--------- --------- ------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-29
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED CUMULATIVE
------------------------ PAID-IN EARNINGS TRANSLATION TREASURY
NOTES SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENTS STOCK
--------- ----------- ----------- ----------- ---------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1991............. 429 $ 1,002 $ 9,908 $ (304)
Net Loss........................ (10,335)
Reduction of redemption value of
redeemable common stock........ 11 2,756
Translation adjustments......... 663
--- ----- ----------- ---------- ------ -----------
BALANCE, JUNE 30, 1992............ 429 1,002 2,329 359
Net Loss........................ (3,009)
Reduction of redemption value of
redeemable common stock........ 11 471
Translation adjustments......... (385)
--- ----- ----------- ---------- ------ -----------
BALANCE, JUNE 30, 1993............ 429 1,002 (209) (26)
Net income...................... 3,115
Purchase of treasury stock...... 6,11 171 1,000 (286)
Translation adjustments......... 339
--- ----- ----------- ---------- ------ -----------
BALANCE, JUNE 30, 1994............ 600 2,002 2,906 313 $ (286)
Unaudited:
Net income...................... 4,430
Accretion to redeemable warrant
redemption value............... 6 (240)
Translation adjustments......... 571
--- ----- ----------- ---------- ------ -----------
BALANCE, MARCH 31, 1995
(Unaudited)..................... 600 $ $ 2,002 $ 7,096 $ 884 $ (286)
--- ----- ----------- ---------- ------ -----------
--- ----- ----------- ---------- ------ -----------
<CAPTION>
TOTAL
----------
<S> <C>
BALANCE, JULY 1, 1991............. $ 10,606
Net Loss........................ (10,335)
Reduction of redemption value of
redeemable common stock........ 2,756
Translation adjustments......... 663
----------
BALANCE, JUNE 30, 1992............ 3,690
Net Loss........................ (3,009)
Reduction of redemption value of
redeemable common stock........ 471
Translation adjustments......... (385)
----------
BALANCE, JUNE 30, 1993............ 767
Net income...................... 3,115
Purchase of treasury stock...... 714
Translation adjustments......... 339
----------
BALANCE, JUNE 30, 1994............ 4,935
Unaudited:
Net income...................... 4,430
Accretion to redeemable warrant
redemption value............... (240)
Translation adjustments......... 571
----------
BALANCE, MARCH 31, 1995
(Unaudited)..................... $ 9,696
----------
----------
</TABLE>
F-30
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH
YEAR ENDED JUNE 30, 31,
----------------------------------------- ------------------------
NOTES 1992 1993 1994 1994 1995
--------- -------------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales................................. 1 $ 89,240 $ 89,714 $ 101,896 $ 77,724 $ 93,539
Cost of sales............................. 58,481 63,575 70,260 53,546 62,539
-------------- ------------ ----------- ----------- -----------
Gross profit.............................. 30,759 26,139 31,636 24,178 31,000
Selling, general and administrative
expenses................................. (26,203) (24,469) (22,841) (16,844) (18,696)
Pension curtailment gain.................. 7 1,083
Restructuring charges..................... 9 (834)
-------------- ------------ ----------- ----------- -----------
Operating income.......................... 4,556 1,919 8,795 7,334 12,304
-------------- ------------ ----------- ----------- -----------
Other income (expense):
Interest income......................... 338 365 293 173 209
Interest expense........................ 3 (3,646) (4,755) (4,134) (3,221) (2,873)
Foreign currency transaction gain
(loss)................................. 1,8 54 (294) (80) 68 20
Other................................... (225) (300) 30 (347) (251)
-------------- ------------ ----------- ----------- -----------
Total................................. (3,479) (4,984) (3,891) (3,327) (2,895)
-------------- ------------ ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item....................... 1,077 (3,065) 4,904 4,007 9,409
Provision for (benefit of) income taxes... 4 4,007 (56) 2,417 2,067 4,979
-------------- ------------ ----------- ----------- -----------
Income (loss) before extraordinary item... (2,930) (3,009) 2,487 1,940 4,430
Extraordinary item (net of taxes of
$123).................................... 6 628
-------------- ------------ ----------- ----------- -----------
Discontinued operations:.................. 10
Income from operations.................. 11
Loss on sale of discontinued
operations............................. (7,416)
-------------- ------------ ----------- ----------- -----------
Net income (loss)......................... $ (10,335) $ (3,009) $ 3,115 $ 1,940 $ 4,430
-------------- ------------ ----------- ----------- -----------
-------------- ------------ ----------- ----------- -----------
Income (loss) per common share:........... 1
Income (loss before extraordinary item
and discontinued operations............ $ (4,883.33) $ (5,015.00) $ 4,215.25 $ 3,233.33 $ 7,981.98
Extraordinary item...................... 1,064.41
Discontinued operations................. (12,341.67)
-------------- ------------ ----------- ----------- -----------
Net income (loss)....................... $ (17,225.00) $ (5,015.00) $ 5,279.66 $ 3,233.33 $ 7,981.98
-------------- ------------ ----------- ----------- -----------
-------------- ------------ ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding.......... 600 600 590 600 555
-------------- ------------ ----------- ----------- -----------
-------------- ------------ ----------- ----------- -----------
</TABLE>
F-31
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------- --------------------
1992 1993 1994 1994 1995
---------- ---------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ (10,335) $ (3,009) $ 3,115 $ 1,940 $ 4,430
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization...................... 3,102 2,695 3,227 1,944 2,017
Loss (gain) on sales of property................... 102 (61) (54)
Deferred income taxes.............................. (1,403) (11) 366 114 (610)
Unrealized foreign exchange loss (gain)............ (669) 904 (168) (147) 328
Pension curtailment gain........................... (1,083)
Loss on sale of subsidiary......................... 6,283
Extraordinary gain................................. (751)
Increase (decrease) in cash from:
Accounts receivable.............................. 245 2,116 530 (1,140) (1,324)
Inventory........................................ (7,466) 2,281 272 3,769 421
Prepaid expenses and other assets................ (66) 501 (42) (265) (170)
Deferred financing costs......................... (82) (130) (2,337) (1,422)
Accounts payable and accrued expenses............ 1,150 416 2,552 1,297 (524)
Income and other taxes payable................... 2,325 (1,526) 1,094 1,345 56
Increase in pension liability.................... 1,397 736 633 50 495
---------- ---------- ---------- --------- ---------
Cash provided by (used in) operating
activities.................................... (5,417) 3,829 8,437 7,485 5,119
---------- ---------- ---------- --------- ---------
Cash flows from investing activities:
Sale (purchase) of short-term investments............ 3,659 (1,144) (1,839) (1,144) 2,294
Proceeds from sales of property, plant and
equipment........................................... 917 1,078 905 686 431
Proceeds from sale of subsidiary..................... 10,593
Purchase of property, plant and equipment............ (3,677) (2,469) (2,502) (1,660) (2,217)
---------- ---------- ---------- --------- ---------
Cash provided by (used in) investing
activities.................................... 899 8,058 (3,436) (2,118) 508
---------- ---------- ---------- --------- ---------
Cash flows from financing activities:
Net (repayment of) proceeds from notes payable....... 5,749 (8,827) (4,279) (5,697) (5,347)
Repayment of long-term debt.......................... (1,652) (2,029) (12,789) (1200) (1,248)
Issuance of long-term debt........................... 11,730 1,552
Issuance of redeemable warrants...................... 270
Purchase of treasury stock........................... (286)
---------- ---------- ---------- --------- ---------
Cash provided by (used in) financing
activities.................................... 4,097 (10,856) (5,354) (5,345) (6,595)
---------- ---------- ---------- --------- ---------
Effect of exchange rate changes on cash.............. 321 11 143 (431) 652
---------- ---------- ---------- --------- ---------
Increase (decrease) in cash.......................... (100) 1,042 (210) (409) (316)
Cash, beginning of period............................ 664 564 1,606 1,606 1,396
---------- ---------- ---------- --------- ---------
Cash, end of period.................................. $ 564 $ 1,606 $ 1,396 $ 1,197 $ 1,080
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
F-32
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN
THOUSANDS)
BUSINESS -- Steinway Musical Properties, Inc. (the "Company") designs,
develops, manufactures and markets musical instruments.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION -- The consolidated financial statements include the
accounts of Steinway Musical Properties, Inc. and its wholly-owned subsidiaries:
Steinway, Inc.
Steinway & Sons
Boston Piano Company, Inc.
Boston Piano GmbH
All significant intercompany accounts and transactions have been eliminated
in consolidation.
INCOME TAXES -- Effective July 1, 1993, the Company changed its method of
accounting for income taxes prospectively to conform with Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"). SFAS No. 109 requires the
recognition of deferred tax liabilities and assets for the future tax
consequences of temporary differences between the financial reporting and tax
bases of existing assets and liabilities. In addition, future tax benefits, such
as net operating loss and foreign tax credit carryforwards are recognized to the
extent realization of such benefits is more likely than not (see Note 4). The
cumulative effect of this change on retained earnings at the beginning of the
year and the impact on net income for the year ended June 30, 1994 were
immaterial.
REVENUE RECOGNITION -- Revenue is generally recognized when products are
shipped. The Company generally warrants its products against defects for five
years and provides for the estimated costs of such warranties at the time of
sale.
UNAUDITED INTERIM FINANCIAL INFORMATION -- The interim financial statements
as of March 31, 1995 and for the nine-month periods ended March 31, 1994 and
1995 are unaudited. In the opinion of management, the unaudited financial
statements include all adjustments necessary, consisting solely of normal
recurring accruals, for a fair presentation of such information. The
consolidated results of operations for the nine-month periods ended March 31,
1994 and 1995 are not necessarily indicative of the results that would be
expected for a full year.
CASH FLOW INFORMATION -- Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Cash paid for interest................................................... $ 4,876 $ 4,488
Cash paid for income taxes............................................... 1,762.... 1,130
</TABLE>
INVENTORY -- Inventory is stated at the lower of cost, using the FIFO
method, or market.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are recorded
at cost. Depreciation is provided based on the estimated useful lives of the
assets using the straight-line method. For income tax purposes, depreciation is
computed using accelerated and straight-line methods. Leasehold improvements are
amortized using the straight-line method over the estimated useful lives of the
improvements or the remaining term of the respective lease, whichever is
shorter. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings and improvements...................................... 15 years
Equipment....................................................... 3-10 years
Furniture and fixtures.......................................... 5-10 years
Concert and artist and rental pianos............................ 15 years
</TABLE>
F-33
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN
THOUSANDS) (CONTINUED)
DEFERRED FINANCING COSTS -- Costs related to obtaining debt financing have
been deferred and are being amortized over the approximate repayment period of
the related debt. Accumulated amortization amounted to approximately $2,688 and
$3,324 at June 30, 1993 and 1994, respectively.
FOREIGN CURRENCY TRANSLATION -- Assets and liabilities of non-U.S.
operations are translated into U.S. dollars at year-end rates, and revenues and
expenses at average rates of exchange prevailing during the year. The resulting
translation adjustments are reported as a separate component of stockholders'
equity. Foreign currency transaction gains and losses are recognized in income
currently.
FOREIGN EXCHANGE CONTRACTS -- The Company enters into foreign exchange
contracts as a hedge against foreign currency transactions. Gains and losses
arising from fluctuations in exchange rates are recognized at the end of each
reporting period. Such gains and losses directly offset the foreign exchange
gains or losses associated with the hedged receivable or payable. Gains and
losses on foreign exchange contracts which exceed the related balance sheet or
firm purchase commitment exposure are included in foreign currency gain or loss
on the income statement. (See Note 8).
SHORT-TERM INVESTMENTS -- Short-term investments are comprised of interest
bearing bank time deposits. These deposits are stated at cost, which
approximates market.
INCOME (LOSS) PER COMMON SHARE -- Income (loss) per common share has been
computed using the weighted average number of common and common equivalent
shares outstanding.
(2) INVENTORY
At June 30, 1993 and 1994 and March 31, 1995 (unaudited), inventory
consisted of the following:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Raw materials.............................................. $ 4,879 $ 5,592 $ 5,764
Work-in-process............................................ 20,727 22,027 22,626
Finished goods............................................. 16,767 16,003 17,913
--------- --------- ---------
Total.................................................. $ 42,373 $ 43,622 $ 46,303
--------- --------- ---------
--------- --------- ---------
</TABLE>
(3) NOTES PAYABLE AND LONG TERM DEBT
NOTES PAYABLE -- Notes payable at June 30, 1993 and 1994 consisted of the
following:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Revolving loan facility................................................ $ 15,340 $ 10,132
Open account loan...................................................... 355 1,338
--------- ---------
Total.............................................................. $ 15,695 $ 11,470
--------- ---------
--------- ---------
</TABLE>
The revolving loan facility (the "Facility") provides for borrowings by
domestic subsidiaries of up to $18,000 ($19,000 at June 30, 1993) payable on
demand. Interest on the first $5,000 of the Facility is fixed at 10.25% through
May 6, 1996; interest on the balance is at 1% over the bank's base interest rate
(8.25% at June 30, 1994). There is a commitment fee associated with the Facility
of 0.5% per year on the average daily unused portion.
The open account loan provides for borrowings by foreign subsidiaries of up
to deutsche mark (DM) 11,500 ($7,249 at the June 30, 1994 exchange rate) payable
on demand, of which up to DM 4,000 ($2,521 at the June 30, 1994 exchange rate)
may be drawn as a term loan for 30, 60, 90 or 180 days. Demand borrowings bear
interest at the rate of 9.25% and term borrowings bear interest at the
Euromarket rate plus 2%.
F-34
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NOTES PAYABLE AND LONG TERM DEBT (CONTINUED)
The Company and its foreign subsidiaries have guaranteed payment of
borrowings under the Facility. In addition, borrowings under the Facility in
excess of $14,000 are guaranteed by certain stockholders of the Company. The
Facility and the open account loan are periodically reviewed by the banks and
are generally subject to withdrawal at their discretion.
LONG-TERM DEBT
Long-term debt at June 30, 1993 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Notes payable to a domestic bank. Interest payments are due monthly at the bank's
prime rate plus 2% (9.25% at June 30, 1994). Principal is due in monthly
installments of $52 through October 1, 1996 and a final payment of $7,031 on
November 1, 1996................................................................ $ 9,115 $ 8,489
Note payable to a foreign bank, due in annual installments of principal and
interest of DM 645 ($407 at the June 30, 1994 exchange rate) at an interest rate
of 8.9% with the balance due in September 2005.................................. 2,776 2,843
Note payable to a foreign bank, due in quarterly installments of DM 250 ($158 at
the June 30, 1994 exchange rate) through September 30, 1999, plus interest at
6.5%............................................................................ 3,806 3,309
Notes payable to a foreign bank, due in monthly installments of DM 25 ($16 at the
June 30, 1994 exchange rate) through August 31, 1997, plus interest at 9.6%..... 732 599
Subordinated note payable to a warrant-holder, (net of discount of $206, see Note
6), due in installments of $2,400 on April 13, 2000 and April 13, 2001 and a
final payment of $3,200 due April 13, 2002, plus interest payable quarterly on
the last day of March, June, September and December currently at 6%............. 7,794
Subordinated notes payable, (net of discount of $523, see Note 6). Interest
payments are due monthly at the bank's base rate plus 2.5% (9.75% at June 30,
1994). Principal is due on October 25, 1996..................................... 3,947
Senior subordinated note payable to CBS, Inc. at an interest rate of 11%......... 5,000
Deferred interest on senior subordinated note.................................... 210
Subordinated note payable to a stockholder, at an interest rate of 15%........... 7,000
Other debt, due in various monthly installments through 1994, plus interest at
12%............................................................................. 62 17
--------- ---------
Tota1............................................................................ 28,701 26,998
Less current portion............................................................. 1,767 1,619
--------- ---------
Long-term debt................................................................... $ 26,934 $ 25,379
--------- ---------
--------- ---------
</TABLE>
The subordinated note payable to a warrant-holder currently bears interest
at 6%. The interest rate increases to 8% in the second year and 14% thereafter.
An effective rate of interest of 11.2% has been used to calculate interest
expense in the consolidated statement of operations.
Borrowings under the revolving loan facility, the open account loan and the
various long-term loan agreements are secured by accounts receivable, inventory,
property, plant and equipment, patents and trademarks and common stock of the
subsidiaries. The loan agreements contain certain covenants
F-35
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NOTES PAYABLE AND LONG TERM DEBT (CONTINUED)
which, among other things, require the maintenance of ratios of current assets
to current liabilities of 1.5 to 1; a minimum capital base (which includes
subordinated debt) of $8,500; a ratio of liabilities to capital base of not
greater than 5.75 to 1; and a debt service ratio of not less than 1 to 1.
Principal payments on long-term debt are due as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30:
- ---------------------------------------------------------------------------------------------
<S> <C>
1995......................................................................................... $ 1,619
1996......................................................................................... 1,616
1997......................................................................................... 12,193
1998......................................................................................... 865
1999......................................................................................... 851
Thereafter................................................................................... 9,854
---------
Total...................................................................................... $ 26,998
---------
---------
</TABLE>
(4) INCOME TAXES
The provision for (benefit of) income taxes is approximately as follows:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Domestic:
Current................................................................ $ 80 $ 1,106
Deferred............................................................... (305)
Foreign:
Current................................................................ 5,382 $ (368) 1,452
Deferred............................................................... (1,455) 312 164
--------- --------- ---------
Total.................................................................... $ 4,007 $ (56) $ 2,417
--------- --------- ---------
--------- --------- ---------
</TABLE>
The differences between the provision for (benefit of) income taxes and
income taxes computed using the U.S. federal income tax rate, computed using the
provisions of APB 11 in 1992 and 1993 and SFAS No. 109 in 1994, were as follows:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Amount computed using the statutory rate................................ $ 366 $ (1,042) $ 1,667
Increase (reduction) of taxes resulting from:
Foreign income taxes (net of benefit)................................. 3,537 (56) 880
State income taxes (net of benefit)................................... 146
Expenses not deductible for income tax purposes....................... 24 13 29
Other................................................................... 80
U.S. tax benefit for which realization (has been) is not assured........ 1,029 (305)
--------- --------- ---------
Provision for (benefit of) income taxes................................. $ 4,007 $ (56) $ 2,417
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-36
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at June 30, 1994 are presented
below:
<TABLE>
<S> <C>
DOMESTIC
Current Assets:
Accounts receivable, principally due to allowances for doubtful accounts
and returns............................................................. $ 494
Inventories, principally due to costs capitalized for tax but not for
book.................................................................... 534
Accrued expenses, principally due to costs not currently deductible...... 2,400
---------
Total current assets................................................... 3,428
---------
Current Liabilities:
Prepaid expenses deducted for tax........................................ (185)
---------
Total current tax assets -- net........................................ 3,243
Less valuation reserves.................................................. (3,243)
---------
Current deferred taxes -- domestic....................................... $
---------
---------
Long-term Assets:
Property and equipment, principally due to different lives............... $ 696
Net operating loss carryforwards, state level (expiring through 2008).... 917
Foreign tax credit carryforwards (expiring through 1998)................. 7,458
---------
Total long-term assets................................................. 9,071
---------
Long-term Liabilities:
Pension asset, principally due to excess tax deductions.................. (525)
---------
Total long-term assets -- net.......................................... 8,546
Less valuation reserves.................................................. (8,546)
---------
Long-term deferred taxes -- domestic..................................... $
---------
---------
FOREIGN
Current Liabilities:
Inventories, principally due to costs capitalized for book but not for
tax..................................................................... $ (565)
Accrued expenses, principally due to costs deducted for tax, not book.... (474)
---------
Total current liabilities -- foreign................................... $ (1,039)
---------
---------
Long-term Assets:
Accrued expenses, principally pension accruals........................... $ 70
---------
Long-term Liabilities:
Property and equipment, principally due to different lives............... (669)
---------
Net long-term liabilities -- foreign..................................... $ (599)
---------
---------
</TABLE>
Valuation allowances are provided against temporary deductible differences
and tax credits which are not more likely than not to be realized. During 1994,
the net reduction of the valuation allowance approximated $2,127 of which $305
was recorded as a reduction of the income tax provision.
(5) LEASE COMMITMENTS
The Company leases real estate and equipment under operating leases expiring
through 2016 with various renewal options.
F-37
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LEASE COMMITMENTS (CONTINUED)
Minimum lease payments under noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30:
- -----------------------------------------------------------------------------------
<S> <C>
1995............................................................................... $ 2,469
1996............................................................................... 2,345
1997............................................................................... 2,227
1998............................................................................... 1,895
1999............................................................................... 567
Thereafter......................................................................... 2,730
---------
Total............................................................................ $ 12,233
---------
---------
</TABLE>
Rent expense under all operating leases was approximately $2,403, $2,372 and
$2,338 for 1992, 1993 and 1994, respectively.
(6) FINANCING ACTIVITIES
During 1994, the Company completed a refinancing of its subordinated debt. A
certain portion of this debt was extinguished at a discount from the face value
of the note. The gain arising from the discount has been included as an
extraordinary item on the income statement after deducting related expenses and
the associated tax provision. Also included in this transaction was the
acquisition by the Company of 171 shares of redeemable common. The new
subordinated notes (see Note 4) were issued with detachable warrants to purchase
common stock initially equal to 22.731% of the Company on a fully diluted and as
converted basis. The warrants have a term of ten years and an exercise price of
$.01 per share. The percentage ownership is subject to increase to 23.954% on
April 13, 1997 and 27.036% on April 13, 1999 should certain defined "Triggering
Events" (a qualified public offering, a qualified business combination or a
qualified asset sale) not have occurred by those dates. The proceeds received
from the issuance of the subordinated notes and associated warrants were
allocated between the debt and equity securities based on the value established
for the treasury stock acquired in the same series of refinancing transactions.
This value has been recognized on the balance sheet by recording a discount on
the related notes payable and increasing the additional paid-in capital by a
corresponding amount. The warrants are also subject to redemption at fair market
value commencing the earlier of April 13, 1999 or a change in control of the
Company. The warrants will be accreted to redemption value each reporting period
using the current estimate of the redemption price in such a way as to
approximate the interest method.
(7) PENSION PLANS
DOMESTIC PLANS -- The Company has a defined-benefit, trusteed pension plan
which provides retirement benefits for substantially all of its non-union
domestic employees. The plan benefits were originally based on the employee's
compensation, the number of years of service and age at retirement. The Company
funds the minimum amount required by the Internal Revenue Service.
Effective June 30, 1993, the Company amended the primary benefit formula of
the Plan to freeze both the final average salary and years of service components
of a participant's benefit calculation at their June 30, 1993 levels. This
amendment resulted in a curtailment gain of $1,083 for 1993 creating a prepaid
pension asset included in other non-current assets on the balance sheet.
F-38
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) PENSION PLANS (CONTINUED)
The components of domestic net pension cost are as follows:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost benefits earned during the period..................... $ 314 $ 265 $ 17
Interest cost on projected benefit obligation...................... 302 334 243
Return on plan assets.............................................. (255) (314) (353)
Amortization of unrecognized prior service cost.................... (3)
--------- --------- ---------
Net pension (income) expense....................................... $ 361 $ 282 $ (93)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the domestic plan's funded status and
obligations as of June 30, 1993 and 1994:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation -- vested................................ $ 2,988 $ 3,046
--------- ---------
--------- ---------
Projected benefit obligation............................................ $ (2,988) $ (3,046)
Plan assets at fair value, primarily stocks, bonds and U.S. Government
securities............................................................. 4,065 4,447
Unrecognized net gain................................................... (231)
--------- ---------
Pension asset at June 30................................................ $ 1,077 $ 1,170
--------- ---------
--------- ---------
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation and the expected long-term rate of
return on assets was 8.5% for both years.
The Company also maintains a 401(k) retirement savings plan for its
non-union domestic employees. Effective for the year ended June 30, 1994 the
401(k) plan was amended to allow discretionary employer contributions. The
Company contribution to this plan is determined annually by the Board of
Directors. The 1994 contribution approximated $301.
FOREIGN PLANS -- The German branch of the Company's Steinway & Sons'
subsidiary has an unfunded pension plan which provides retirement benefits for
all hourly and certain salaried employees. Unfunded accrued pension costs are
included in liabilities at June 30, 1993 and 1994. In compliance with German
Labor rulings and with the provisions of SFAS No. 87, the branch has included in
its calculation of benefit obligations and pension expense those salaried
employees not formally admitted to the plan. The benefit determination method in
force bases benefits for employees on a career average earnings approach.
The Company's United Kingdom branch has a separate defined benefit pension
plan covering substantially all of its employees. Both employees and the branch
contribute to the plan. The benefit determination method in force bases benefits
for employees on the three highest yearly salaries during an employee's last ten
working years. The branch funds the plan in accordance with the requirements of
regulatory bodies in the United Kingdom.
F-39
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) PENSION PLANS (CONTINUED)
The components of net pension cost for the Company's foreign branches is as
follows:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost benefits earned during the period................. $ 365 $ 348 $ 344
Interest cost on projected benefit obligation.................. 1,065 1,119 1,013
Actual return on plan assets................................... (153) (168) (157)
Net amortization and deferral.................................. 217 218 204
--------- --------- ---------
Net pension cost............................................... $ 1,494 $ 1,517 $ 1,404
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the funded status and obligations of the
plans for the foreign branches as of June 30, 1993 and 1994:
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $12,035
and $13,123, respectively........................................... $ 13,099 $ 14,440
---------- ----------
---------- ----------
Projected benefit obligation......................................... $ (13,848) $ (15,263)
Plan assets at fair value, principally consisting of units in a life
assurance fund and cash............................................. 1,727 1,787
Unrecognized prior service cost arising from plan amendment at June
30, 1989 being recognized over 15 years............................. (1,110) (1,069)
Unrecognized net gain from past experience different from that
assumed............................................................. 355 346
Unrecognized net obligation at July 1, 1987 being recognized over 15
years............................................................... 2,753 2,634
Adjustment required to recognize minimum liability................... (1,276) (1,108)
---------- ----------
Unfunded accrued pension cost included in pension liability.......... (11,399) (12,673)
Less amount currently payable and included in accrued expenses....... 716 806
---------- ----------
Pension liability at June 30......................................... $ (10,683) $ (11,867)
---------- ----------
---------- ----------
</TABLE>
The range of weighted average discount rates and rates of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were from 7.0% to 7.5% and from 3.0% to 4.0%,
respectively. The expected long-term rate of return on assets was 9.0% for both
years.
(8) FOREIGN EXCHANGE CONTRACTS
At June 30, 1994, the Company's German branch, whose functional currency is
the deutsche mark, had forward contracts maturing at various dates through
December, 1995 to purchase $3,800.
(9) RESTRUCTURING
During the year ended June 30, 1993, the Company implemented a comprehensive
cost reduction program in order to position itself for maximum profitability
during the anticipated economic recovery. This program included the streamlining
of corporate and divisional administrative functions, revisions to the Company's
domestic pension plan (see Note 7) and a conversion from a self-insured to a set
premium domestic health insurance plan. Costs associated with resulting employee
severance, office relocation and consolidation as well as expenditures for
previous debt restructuring efforts were accrued at year end in 1993 and
included in restructuring charges on the income statement.
F-40
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) DISCONTINUED OPERATIONS
In September 1992, the Company sold its investment in the common stock of
Gemeinhardt Company, Inc., a wholly owned subsidiary engaged in the manufacture
of band instruments such as flutes and piccolos. In accordance with the purchase
and sale agreement, certain intangible assets were not transferred pursuant to
the sale. Such assets have been written off and included in the loss on the
sale. Net sales for Gemeinhardt Company, Inc. were $14,138 for 1992.
The loss on the sale of Gemeinhardt Company, Inc. includes a loss from
operations of $615 for the period subsequent to the decision to sell Gemeinhardt
Company, Inc.
(11) REDEEMABLE COMMON STOCK
The 171 shares of redeemable common stock were initially recorded at fair
value at the date of issuance. The shares were redeemable, after September 1991,
at a price equal to the greater of the Company's fully diluted book value per
share or the appraised value per share. Redemption was at the option of either
the stockholder or the Company. Each year, the Company transferred the
difference between fully diluted book value per share (which represented the
Company's best estimate of redemption value at the time) between stockholders'
equity and redeemable common stock.
In connection with the refinancing of the Company's subordinated debt (see
Note 6), the Company repurchased the entire amount outstanding of the redeemable
common stock.
(12) SEGMENT INFORMATION
The Company operates in one industry segment, the manufacture and sale of
musical instruments, chiefly high-quality grand pianos. The following tables set
forth the geographic segments in which the Company operates:
<TABLE>
<CAPTION>
1992 U.S. EUROPE ELIM. CONSOL
- -------------------------------------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Revenues................................................ $ 36,239 $ 53,001 $ $ 89,240
Income (loss) before extraordinary item and discontinued
operations............................................. (5,077) 2,147 (2,930)
Assets.................................................. 49,008 42,776 91,784
<CAPTION>
1993 U.S. EUROPE ELIM. CONSOL
- -------------------------------------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Revenues................................................ $ 47,041 $ 47,967 $ (5,294) $ 89,714
Income (loss) before extraordinary item................. (2,714) (268) (27) (3,009)
Assets.................................................. 37,505 35,254 (82) 72,677
<CAPTION>
1994 U.S. EUROPE ELIM. CONSOL
- -------------------------------------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Revenues................................................ $ 57,180 $ 47,522 $ (2,806) $ 101,896
Income before extraordinary item........................ 613 1,946 (72) 2,487
Assets.................................................. 39,139 37,035 (155) 76,019
</TABLE>
Intersegment sales activity is accounted for at sales price, less a
discount. Intersegment geographic sales and related costs are eliminated from
the statement of operations in consolidation, and the profit remaining in unsold
inventory acquired through intersegment sales is eliminated from the balance
sheet and the statement of operations in consolidation. Intersegment sales above
principally reflect sales by the Company's U.S. Boston Piano subsidiary to its
German Boston Piano subsidiary.
(13) SALE OF COMPANY (UNAUDITED)
On April 11, 1995, the Company entered into an agreement to merge with The
Selmer Company, Inc. The merger is expected to be consummated in May 1995.
F-41
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 1993
<TABLE>
<CAPTION>
NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash........................................... $ 797 $ 809 $ 1,606
Short-term investments......................... 1,054 1,054
Accounts receivable -- net..................... 5,580 4,070 9,650
Inventory...................................... 21,383 21,220 $ (230) 42,373
Prepaid expenses and other assets.............. $ 255 186 1,010 125 1,576
---------- ------------ ------------ ------------ -------------
Total current assets......................... 255 27,946 28,163 (105) 56,259
---------- ------------ ------------ ------------ -------------
Property, plant and equipment -- net............. 78 7,692 5,135 12,905
---------- ------------ ------------ ------------ -------------
Other assets -- net.............................. 182 1,230 1,809 292 3,513
---------- ------------ ------------ ------------ -------------
Total............................................ $ 515 $ 36,868 $ 35,107 $ 187 $ 72,677
---------- ------------ ------------ ------------ -------------
---------- ------------ ------------ ------------ -------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.................................. $ 24 $ 15,316 $ 355 $ 15,695
Current portion of long-term debt.............. 37 672 1,058 1,767
Accounts payable and accrued expenses.......... 1,327 4,186 8,658 14,171
Income and other taxes payable................. (306) 249 $ 309 252
Deferred income taxes.......................... 11 11
---------- ------------ ------------ ------------ -------------
Total current liabilities.................... 1,093 20,174 10,320 309 31,896
Long-term debt................................... 7,110 12,004 10,020 (2,200) 26,934
Pension liability................................ 10,682 10,682
Deferred income taxes............................ 1,398 1,398
Intercompany payables (receivables).............. (11,614) 8,730 684 2,200
Redeemable common stock.......................... 1,000 1,000
Stockholders' equity............................. 2,926 (4,040) 2,003 (122) 767
---------- ------------ ------------ ------------ -------------
Total............................................ $ 515 $ 36,868 $ 35,107 $ 187 $ 72,677
---------- ------------ ------------ ------------ -------------
---------- ------------ ------------ ------------ -------------
</TABLE>
F-42
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 1994
<TABLE>
<CAPTION>
NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash...................................... $ 968 $ 428 $ 1,396
Short-term investments.................... 3,089 3,089
Accounts receivable -- net................ 5,790 3,401 9,191
Inventory................................. 21,741 22,264 $ (383) 43,622
Prepaid expenses and other assets......... $ 594 308 560 1,462
---------- ------------ ------------ ------------ -------------
Total current assets.................... 594 28,807 29,742 (383) 58,760
---------- ------------ ------------ ------------ -------------
Property, plant and equipment -- net........ 86 7,344 5,333 12,763
---------- ------------ ------------ ------------ -------------
Other assets -- net......................... 274 2,073 1,857 292 4,496
---------- ------------ ------------ ------------ -------------
Total....................................... $ 954 $ 38,224 $ 36,932 $ (91) $ 76,019
---------- ------------ ------------ ------------ -------------
---------- ------------ ------------ ------------ -------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable........................... $ 270 $ 9,862 $ 1,338 $ 11,470
Current portion of long-term debt....... 642 977 1,619
Accounts payable and accrued expenses..... 965 6,622 9,841 17,428
Income and other taxes payable............ 216 1,197 1,413
Deferred income taxes..................... 1,039 1,039
---------- ------------ ------------ -------------
Total current liabilities............... 1,451 17,126 14,392 32,969
Long-term debt.............................. 7,794 11,812 9,758 $ (3,985) 25,379
Pension liability........................... 11,867 11,867
Deferred income taxes....................... 599 599
Intercompany payables (receivables)......... (13,351) 12,197 (3,014) 4,168
Redeemable warrant capital.................. 270 270
Stockholders' equity........................ 4,790 (2,911) 3,330 (274) 4,935
---------- ------------ ------------ ------------ -------------
Total....................................... $ 954 $ 38,224 $ 36,932 $ (91) $ 76,019
---------- ------------ ------------ ------------ -------------
---------- ------------ ------------ ------------ -------------
</TABLE>
F-43
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash...................................... $ 315 $ 765 $ 1,080
Short-term investments.................... 1,018 1,018
Accounts receivable -- net................ 5,604 6,014 11,618
Inventory................................. 22,531 24,003 $ (231) 46,303
Prepaid expenses and other assets......... $ 541 118 781 1,440
---------- ------------ ------------ ------------ -------------
Total current assets.................... 541 28,568 32,581 (231) 61,459
---------- ------------ ------------ ------------ -------------
Property, plant and equipment -- net........ 107 7,509 6,072 13,688
---------- ------------ ------------ ------------ -------------
Other assets -- net......................... 275 1,797 1,934 292 4,298
---------- ------------ ------------ ------------ -------------
Total....................................... $ 923 $ 37,874 $ 40,587 $ 61 $ 79,445
---------- ------------ ------------ ------------ -------------
---------- ------------ ------------ ------------ -------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................. $ 194 $ 5,670 $ 324 $ 6,188
Current portion of long-term debt......... 625 1,139 1,764
Accounts payable and accrued expenses..... 752 5,712 11,898 18,362
Income and other taxes payable............ (2,777) 2,560 1,898 1,681
Deferred income taxes..................... 1,039 1,039
---------- ------------ ------------ ------------ -------------
Total current liabilities............... (1,831) 14,567 16,298 29,034
Long-term debt.............................. 7,826 11,351 9,790 $ (3,985) 24,982
Pension liability........................... 74 14,359 14,433
Deferred income taxes....................... 790 790
Intercompany payables (receivables)......... (14,632) 12,933 (2,470) 4,169
Redeemable warrant capital.................. 510 510
Stockholders' equity........................ 9,050 (1,051) 1,820 (123) 9,696
---------- ------------ ------------ ------------ -------------
Total....................................... $ 923 $ 37,874 $ 40,587 $ 61 $ 79,445
---------- ------------ ------------ ------------ -------------
---------- ------------ ------------ ------------ -------------
</TABLE>
F-44
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1992
<TABLE>
<CAPTION>
NON
GUARANTOR GUARANTOR GUARANTOR DISCONTINUED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS OPERATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.......................... $ 36,495 $ 55,678 $ (2,933) $ 89,240
Cost of sales...................... 25,142 36,128 (2,789) 58,481
------------ ------------ ------------ -------------
Gross profit....................... 11,353 19,550 (144) 30,759
Selling, general and administrative
expenses.......................... $ (4,025) (11,385) (11,166) 373 (26,203)
---------- ------------ ------------ ------------ -------------
Operating income (loss)............ (4,025) (32) 8,384 229 4,556
---------- ------------ ------------ ------------ -------------
Other income (expense)
Interest income.................. 38 545 (245) 338
Interest expense................. (2,455) (1,436) 245 (3,646)
Intercompany fees................ 4,211 (1,436) (1,516) (1,259)
Foreign currency transaction gain
(loss).......................... 18 36 54
Other............................ (186) (193) 154 (225)
---------- ------------ ------------ ------------ -------------
Total.......................... 4,043 (4,046) (2,217) (1,259) (3,479)
---------- ------------ ------------ ------------ -------------
Income (loss) from continuing
operations before provision for
income taxes.................... 18 (4,078) 6,167 (1,030) 1,077
Provision for (benefit of) income
taxes........................... 80 3,927 4,007
---------- ------------ ------------ ------------ -------------
Income (loss) from continuing
operations........................ (62) (4,078) 2,240 (1,030) (2,930)
Discontinued operations:
(Loss) income of operations...... 356 $ (345) 11
Loss on sale of discontinued
operations...................... 530 (7,946) (7,416)
---------- ------------ ------------ ------------ ------------- -------------
Net income (loss) before
intercompany dividends............ (62) (4,078) 2,240 (144) (7,946) (7,416)
Intercompany dividends............. 6,831 (6,831)
---------- ------------ ------------ ------------ ------------- -------------
Net income (loss)................ $ 6,769 $ (4,078) $ (4,591) $ (144) $ (8,291) $ (10,335)
---------- ------------ ------------ ------------ ------------- -------------
---------- ------------ ------------ ------------ ------------- -------------
</TABLE>
F-45
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1993
<TABLE>
<CAPTION>
NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales................................... $ 47,545 $ 50,838 $ (8,669) $ 89,714
Cost of sales............................... 34,336 37,821 (8,582) 63,575
------------ ------------ ------------ -------------
Gross profit................................ 13,209 13,017 (87) 26,139
Selling, general and administrative
expenses................................... $ (3,151) (10,989) (10,796) 467 (24,469)
Pension curtailment gain.................... 383 700 1,083
Restructuring charges....................... (639) (195) (834)
----------- ------------ ------------ ------------ -------------
Operating income (loss)..................... (3,407) 2,725 2,221 380 1,919
----------- ------------ ------------ ------------ -------------
Other income (expense)
Interest income........................... 128 8 246 (17) 365
Interest expense.......................... (3,012) (1,760) 17 (4,755)
Intercompany fees......................... 2,938 (1,546) (925) (467)
Foreign currency transaction gain
(loss)................................... (8) (286) (294)
Other..................................... 190 (664) 174 (300)
----------- ------------ ------------ ------------ -------------
Total................................... 3,248 (5,214) (2,551) (467) (4,984)
----------- ------------ ------------ ------------ -------------
Income (loss) before provision for income
taxes...................................... (159) (2,489) (330) (87) (3,065)
Provision for (benefit of) income taxes..... (56) (56)
----------- ------------ ------------ ------------ -------------
Net income (loss) before intercompany
dividends.................................. (159) (2,489) (274) (87) (3,009)
Intercompany dividends......................
----------- ------------ ------------ ------------ -------------
Net income (loss)........................... $ (159) $ (2,489) $ (274) $ (87) $ (3,009)
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
</TABLE>
F-46
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales................................... $ 57,528 $ 49,673 $ (5,305) $ 101,896
Cost of sales............................... 40,704 34,708 (5,152) 70,260
------------ ------------ ------------ -------------
Gross profit................................ 16,824 14,965 (153) 31,636
Selling, general and administrative
expenses................................... $ (2,832) (10,785) (9,612) 388 (22,841)
----------- ------------ ------------ ------------ -------------
Operating income (loss)..................... (2,832) 6,039 5,353 235 8,795
----------- ------------ ------------ ------------ -------------
Other income (expense)
Interest income........................... 337 (44) 293
Interest expense.......................... (2,762) (1,416) 44 (4,134)
Intercompany fees......................... 2,821 (1,433) (999) (389)
Foreign currency transaction gain
(loss)................................... 46 (126) (80)
Other..................................... 11 (438) 457 30
----------- ------------ ------------ ------------ -------------
Total................................... 2,832 (4,587) (1,747) (389) (3,891)
----------- ------------ ------------ ------------ -------------
Income (loss) before income taxes and
extraordinary item and intercompany
dividends................................ 1,452 3,606 (154) 4,904
Provision for (benefit of) income taxes... 801 1,616 2,417
----------- ------------ ------------ ------------ -------------
Income (loss) before extraordinary item and
intercompany dividends..................... 651 1,990 (154) 2,487
Extraordinary item (net of taxes of
$123,000).................................. 480 148 628
----------- ------------ ------------ ------------ -------------
Net income (loss) before intercompany
dividends.................................. 1,131 2,138 (154) 3,115
Intercompany dividends...................... 1,150 (1,150)
----------- ------------ ------------ ------------ -------------
Net income.................................. $ 1,150 $ 1,131 $ 988 $ (154) $ 3,115
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
</TABLE>
F-47
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales................................... $ 42,853 $ 38,901 $ (4,030) $ 77,724
Cost of sales............................... 30,499 27,034 (3,987) 53,546
------------ ------------ ------------ -------------
Gross profit................................ 12,354 11,867 (43) 24,178
Selling, general and administrative
expenses................................... $ (1,783) (7,879) (7,472) 290 (16,844)
----------- ------------ ------------ ------------ -------------
Operating income (loss)..................... (1,783) 4,475 4,395 247 7,334
----------- ------------ ------------ ------------ -------------
Other income (expense)
Interest income........................... 191 (18) 173
Interest expense.......................... (2,147) (1,092) 18 (3,221)
Intercompany fees......................... 1,781 (833) (658) (290)
Foreign currency transaction gain
(loss)................................... 73 (5) 68
Other..................................... 2 (420) 71 (347)
----------- ------------ ------------ ------------ -------------
Total................................... 1,783 (3,327) (1,493) (290) (3,327)
----------- ------------ ------------ ------------ -------------
Income (loss) before provision for income
taxes and intercompany dividends........... 1,148 2,902 (43) 4,007
Provision for (benefit of) income taxes..... 349 1,718 2,067
----------- ------------ ------------ ------------ -------------
Net income (loss) before intercompany
dividends.................................. 799 1,184 (43) 1,940
Intercompany dividends...................... 1,150 (1,150)
----------- ------------ ------------ ------------ -------------
Net income (loss)........................... $ 1,150 $ 799 $ 34 $ (43) $ 1,940
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
</TABLE>
F-48
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales................................... $ 49,996 $ 48,422 $ (4,879) $ 93,539
Cost of sales............................... 35,128 32,440 (5,029) 62,539
------------ ------------ ------------ -------------
Gross profit................................ 14,868 15,982 150 31,000
Selling, general and administrative
expenses................................... $ (2,095) (8,509) (8,632) 540 (18,696)
----------- ------------ ------------ ------------ -------------
Operating income (loss)..................... (2,095) 6,359 7,350 690 12,304
----------- ------------ ------------ ------------ -------------
Other income (expense)
Interest income........................... 282 (73) 209
Interest expense.......................... (1,863) (1,083) 73 (2,873)
Intercompany fees......................... 2,095 (1,025) (530) (540)
Foreign currency transaction gain
(loss)................................... 150 (130) 20
Other..................................... (310) 59 (251)
----------- ------------ ------------ ------------ -------------
Total................................... 2,095 (3,048) (1,402) (540) (2,895)
----------- ------------ ------------ ------------ -------------
Income (loss) before provision for income
taxes and intercompany dividends......... 3,311 5,948 150 9,409
Provision for (benefit of) income taxes... 1,452 3,527 4,979
----------- ------------ ------------ ------------ -------------
Net income (loss) before intercompany
dividends................................ 1,859 2,421 150 4,430
Intercompany dividends.................... 4,500 (4,500)
----------- ------------ ------------ ------------ -------------
Net income (loss)......................... $ 4,500 $ 1,859 $ (2,079) $ 150 $ 4,430
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
</TABLE>
F-49
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1992
<TABLE>
<CAPTION>
GUARANTOR GUARANTOR NONGUARANTOR DISCONTINUED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS OPERATIONS CONSOLIDATED
----------- ------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................. $ 6,769 $ (4,078) $ (4,591) $ (144) $ (8,291) $ (10,335)
Adjustments to reconcile net
income (loss) to cash provided by
(used in) operating activities:
Depreciation and amortization... 161 1,475 1,039 427 3,102
Loss (gain) on sales of
property....................... 102 102
Deferred income taxes........... (1,403) (1,403)
Unrealized foreign exchange loss
(gain)......................... (669) (669)
Loss on sale of subsidiary...... 6,283 6,283
Increase (decrease) in cash
from:
Accounts receivable........... 409 (710) (356) 902 245
Inventory..................... (3,577) (4,317) 144 284 (7,466)
Prepaid expenses and other
assets....................... (133) (33) 37 63 (66)
Deferred financing costs...... (81) (1) (82)
Accounts payable and accrued
expenses..................... (132) 1,171 127 (16) 1,150
Income and other taxes
payable...................... (721) 452 2,584 10 2,325
Increase in pension
liability.................... 1,397 1,397
Intercompany.................. (6,200) 3,293 (209) 187 2,929
----------- ------------- ------- ------ ------------- -------------
Cash provided by (used in)
operating activities....... 153 (2,088) (6,259) 187 2,590 (5,417)
----------- ------------- ------- ------ ------------- -------------
Cash flows from investing
activities:
Sale (purchase of short-term
investments...................... 3,659 3,659
Proceeds from sales of property,
plant and equipment.............. 807 110 917
Purchase of property, plant and
equipment........................ (206) (2,327) (1,233) 186 (97) (3,677)
----------- ------------- ------- ------ ------------- -------------
Cash provided by (used in)
investing activities....... (206) (1,520) 2,536 186 (97) 899
----------- ------------- ------- ------ ------------- -------------
Cash flows from financing
activities:
Net proceeds from (repayment of)
notes payable.................... 90 4,654 3,684 (186) (2,493) 5,749
Repayment of long term debt....... (37) (876) (739) (1,652)
----------- ------------- ------- ------ ------------- -------------
Cash provided by (used in)
financing activities....... 53 3, 778 2,945 (186) (2,493) 4,097
----------- ------------- ------- ------ ------------- -------------
Effect of exchange rate changes on
cash............................... 508 (187) 321
----------- ------------- ------- ------ ------------- -------------
Increase (decrease) in cash......... 170 (270) (100)
Cash, beginning of period........... 79 585 664
----------- ------------- ------- ------ ------------- -------------
----------- ------------- ------- ------ ------------- -------------
Cash, end of period................. $ $ 249 $ 315 $ $ $ 564
----------- ------------- ------- ------ ------------- -------------
----------- ------------- ------- ------ ------------- -------------
</TABLE>
F-50
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1993
<TABLE>
<CAPTION>
GUARANTOR GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ (159) $ (2,489) $ (274) $ (87) $ (3,009)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating
activities:
Depreciation and amortization............ 79 1,599 1,017 2,695
Loss (gain) on sales of property......... (132) 71 (61)
Deferred income taxes.................... (11) (11)
Unrealized foreign exchange loss
(gain).................................. 904 904
Pension curtailment gain................. (383) (700) (1,083)
Loss on sale of subsidiary...............
Extraordinary gain.......................
Increase (decrease) in cash from:
Accounts receivable.................... (829) 2,945 2,116
Inventory.............................. 1,378 817 86 2,281
Prepaid expenses and other assets...... 108 267 126 501
Deferred financing costs............... (130) (130)
Accounts payable and accrued expenses.. 162 576 (322) 416
Income and other taxes payable......... (3) (260) (1,263) (1,526)
Increase in pension liability.......... 736 736
Intercompany........................... (9,906) 8,111 2,309 (514)
----------- ------------- ------- ------ -------------
Cash provided by (used in) operating
activities.......................... (10,234) 7,523 7,055 (515) 3,829
----------- ------------- ------- ------ -------------
Cash flows from investing activities:
Sale (purchase) of short-term
investments............................... (1,144) (1,144)
Proceeds from sales of property, plant and
equipment................................. 318 668 92 1,078
Proceeds from sale of subsidiary........... 10,214 78 301 10,593
Purchase of property, plant and
equipment................................. (20) (1,667) (782) (2,469)
----------- ------------- ------- ------ -------------
Cash provided by (used in) investing
activities.......................... 10,512 (921) (1,834) 301 8,058
----------- ------------- ------- ------ -------------
Cash flows from financing activities:
Net proceeds from (repayment of) notes
payable................................... (241) (4,832) (3,754) (8,827)
Repayment of long term debt................ (37) (1,222) (770) (2,029)
----------- ------------- ------- ------ -------------
Cash provided by (used in) financing
activities.......................... (278) (6,054) (4,524) (10,856)
----------- ------------- ------- ------ -------------
Effect of exchange rate changes on cash...... (203) 214 11
----------- ------------- ------- ------ -------------
Increase (decrease) in cash.................. 548 494 1,042
Cash, beginning of period.................... 249 315 564
----------- ------------- ------- ------ -------------
----------- ------------- ------- ------ -------------
Cash, end of period.......................... $ $ 797 $ 809 $ $ 1,606
----------- ------------- ------- ------ -------------
----------- ------------- ------- ------ -------------
</TABLE>
F-51
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
GUARANTOR GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ 1,150 $ 1,131 $ 988 $ (154) $ 3,115
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating
activities:
Depreciation and amortization............ 44 2,256 991 (64) 3,227
Loss (gain) on sales of property......... (133) 79 (54)
Deferred income taxes.................... 10 105 126 125 366
Unrealized foreign exchange loss
(gain).................................. (168) (168)
Extraordinary gain....................... (566) (249) 64 (751)
Increase (decrease) in cash from:
Accounts receivable.................... (21) (230) 781 530
Inventory.............................. (360) 479 153 272
Prepaid expenses and other assets...... (430) (207) 595 (42)
Deferred financing costs............... (1,932) (405) (2,337)
Accounts payable and accrued expenses.. (363) 2,437 478 2,552
Income and other taxes payable......... (117) 640 880 (309) 1,094
Increase in pension liability.......... 633 633
Intercompany........................... (1,042) 2,771 (1,739) 10
----------- ------------- ------- ------ -------------
Cash provided by (used in) operating
activities (902) 6,045 3,469 (175) 8,437
----------- ------------- ------- ------ -------------
Cash flows from investing activities:
Sale (purchase) of short-term
investments............................... (1,839) (1,839)
Proceeds from sales of property, plant and
equipment................................. 150 726 29 905
Purchase of property, plant and
equipment................................. (60) (1,677) (765) (2,502)
----------- ------------- ------- ------ -------------
Cash provided by (used in) investing
activities.......................... 90 (951) (2,575) (3,436)
----------- ------------- ------- ------ -------------
Cash flows from financing activities:
Net proceeds from (repayment of) notes
payable................................... 245 (5,453) 929 (4,279)
Repayment of long-term debt................ (7,147) (3,470) (2,172) (12,789)
Issuance of long-term debt................. 7,785 3,945 11,730
Issuance of redeemable warrants............ 215 55 270
Purchase of treasury stock................. (286) (286)
----------- ------------- ------- ------ -------------
Cash provided by (used in) financing
activities.......................... 812 (4,923) (1,243) (5,354)
----------- ------------- ------- ------ -------------
Effect of exchange rate changes on cash...... (32) 175 143
----------- ------------- ------- ------ -------------
Increase (decrease) in cash.................. 171 (381) (210)
Cash, beginning of period.................... 797 809 1,606
----------- ------------- ------- ------ -------------
Cash, end of period.......................... $ $ 968 $ 428 $ $ 1,396
----------- ------------- ------- ------ -------------
----------- ------------- ------- ------ -------------
</TABLE>
F-52
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ 1,150 $ 799 $ 34 $ (43) $ 1,940
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating
activities:
Depreciation and amortization............ 24 1,222 698 1,944
Deferred income taxes.................... 10 105 (1) 114
Unrealized foreign exchange loss
(gain).................................. (147) (147)
Increase (decrease) in cash from:
Accounts receivable.................... (997) (143) (1,140)
Inventory.............................. 1,807 1,962 3,769
Prepaid expenses and other assets...... (569) (217) 521 (265)
Deferred financing costs............... (1,295) (127) (1,422)
Accounts payable and accrued expenses.. (638) 1,335 600 1,297
Income and other taxes payable......... (399) 349 1,395 1,345
Increase in pension liability.......... 50 50
Intercompany........................... (1,728) 4,964 (3,548) 312
----------- ------------- ------- ------ -------------
Cash provided by (used in) operating
activities.......................... (2,150) 8,072 1,294 269 7,485
----------- ------------- ------- ------ -------------
Cash flows from investing activities:
Sale (purchase) of short-term
investments............................... (1,144) (1,144)
Proceeds from sales of property, plant and
equipment................................. 8 581 97 686
Purchase of property, plant and
equipment................................. (45) (1,201) (414) (1,660)
----------- ------------- ------- ------ -------------
Cash provided by (used in) investing
activities.......................... (37) (620) (1,461) (2,118)
----------- ------------- ------- ------ -------------
Cash flows from financing activities:
Net proceeds from (repayment of) notes
payable................................... 635 (6,691) 359 (5,697)
Repayment of long-term debt................ (504) (696) (1,200)
Issuance of long-term debt................. 1,552 1,552
----------- ------------- ------- ------ -------------
Cash provided by (used in) financing
activities.......................... 2,187 (7,195) (337) (5,345)
----------- ------------- ------- ------ -------------
Effect of exchange rate changes on cash...... (162) (269) (431)
----------- ------------- ------- ------ -------------
Increase (decrease) in cash.................. 257 (666) (409)
Cash, beginning of period.................... 797 809 1,606
----------- ------------- ------- ------ -------------
Cash, end of period.......................... $ $ 1,054 $ 143 $ $ 1,197
----------- ------------- ------- ------ -------------
----------- ------------- ------- ------ -------------
</TABLE>
F-53
<PAGE>
STEINWAY MUSICAL PROPERTIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ 4,500 $ 1,859 $ (2,079) $ 150 $ 4,430
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating
activities:
Depreciation and amortization............ 60 1,217 740 2,017
Deferred income taxes.................... (610) (610)
Unrealized foreign exchange loss
(gain).................................. 328 328
Increase (decrease) in cash from:
Accounts receivable.................... 21 239 (1,584) (1,324)
Inventory.............................. (790) 1,361 (150) 421
Prepaid expenses and other assets...... 30 137 (337) (170)
Accounts payable and accrued expenses.. (213) (837) 526 (524)
Income and other taxes payable......... (1,895) 1,462 489 56
Increase in pension liability.......... 495 495
Intercompany........................... (2,379) 1,836 940 (397)
----------- ------------- ------- ------ -------------
Cash provided by (used in) operating
activities.......................... 124 5,123 269 (397) 5,119
----------- ------------- ------- ------ -------------
Cash flows from investing activities:
Sale (purchase) of short-term
investments............................... 2,294 2,294
Proceeds from sales of property, plant and
equipment................................. (6) 262 175 431
Purchase of property, plant and
equipment................................. (42) (1,360) (815) (2,217)
----------- ------------- ------- ------ -------------
Cash provided by (used in) investing
activities.......................... (48) (1,098) 1,654 508
----------- ------------- ------- ------ -------------
Cash flows from financing activities:
Net proceeds from (repayment of) notes
payable................................... (76) (4,192) (1,079) (5,347)
Repayment of long-term debt................ (486) (762) (1,248)
----------- ------------- ------- ------ -------------
Cash provided by (used in) financing
activities.......................... (76) (4,678) (1,841) (6,595)
----------- ------------- ------- ------ -------------
Effect of exchange rate changes on cash...... 255 397 652
----------- ------------- ------- ------ -------------
Increase (decrease) in cash.................. (653) 337 (316)
Cash, beginning of period.................... 968 428 1,396
----------- ------------- ------- ------ -------------
----------- ------------- ------- ------ -------------
Cash, end of period.......................... $ $ 315 $ 765 $ $ 1,080
----------- ------------- ------- ------ -------------
----------- ------------- ------- ------ -------------
</TABLE>
F-54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the U.S.
Underwriters named below, and each of such U.S. Underwriters, for whom Goldman,
Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation and CS First
Boston Corporation are acting as representatives, has severally agreed to
purchase from the Company and the Selling Stockholders, the respective number of
shares of Ordinary Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
ORDINARY
COMMON
UNDERWRITER STOCK
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Goldman, Sachs & Co..................................................................................
Donaldson, Lufkin & Jenrette Securities Corporation..................................................
CS First Boston Corporation..........................................................................
-----------
Total............................................................................................ 3,488,000
-----------
-----------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The U.S. Underwriters propose to offer the shares of Ordinary Common Stock
in part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The U.S. Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Ordinary Common Stock are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the representatives.
The Company and the Selling Stockholders have entered into an underwriting
agreement (the "International Underwriting Agreement") with the underwriters of
the international offering (the "International Underwriters") providing for the
concurrent offer and sale of 872,000 shares of Ordinary Common Stock in an
international offering outside the United States. The offering price and
aggregate underwriting discounts and commissions per share for the two offerings
are identical. The closing of the offering made hereby is a condition to the
closing of the international offering, and vice versa. The representatives of
the International Underwriters are Goldman Sachs International, Donaldson,
Lufkin & Jenrette Securities Corporation and CS First Boston Limited.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Ordinary Common Stock, directly or indirectly, only in
the United States of America (including the States and the District of
Columbia), its territories, its possessions and other areas subject to its
jurisdiction (the "United States") and to U.S. persons, which term shall mean,
for purposes of this paragraph: (a) any individual who is a resident of the
United States or (b) any corporation, partnership or other entity organized in
or under the laws of the United States or any political subdivision thereof and
whose office most directly involved with the purchase is located in the United
States. Each of the International Underwriters has agreed pursuant to the
Agreement Between that, as a part of the distribution of the shares offered as a
part of the international offering, and subject to certain exceptions, it will
(i) not, directly or indirectly, offer, sell or deliver shares of Ordinary
Common
U-1
<PAGE>
Stock (a) in the United States or to any U.S. persons or (b) to any person who
it believes intends to reoffer, resell or deliver the shares in the United
States or to any U.S. persons, and (ii) cause any dealer to whom it may sell
such shares at any concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Ordinary Common Stock as may be mutually agreed. The price of any shares so sold
shall be the initial public offering price, less an amount not greater than the
selling concession.
The Company and the Selling Stockholders have granted the U.S. Underwriters
an option exercisable for 30 days after the date of this Prospectus to purchase
up to an aggregate of 523,200 additional shares of Ordinary Common Stock solely
to cover over-allotments, if any. If the U.S. Underwriters exercise their
over-allotment option, the U.S. Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares to be purchased by each of them, as shown in the foregoing
table, bears to the 4,360,000 shares of Ordinary Common Stock offered. The
Company and the Selling Stockholders have granted the International Underwriters
a similar option to purchase up to an aggregate of 132,489 additional shares of
Ordinary Common Stock.
The Company and the Selling Stockholders have agreed that, during the period
beginning from the date of the Prospectus and continuing to and including the
date 180 days after the date of the Prospectus, they will not offer, sell,
contract to sell or otherwise dispose of any securities of the Company (other
than pursuant to stock option plans existing, or on the conversion or exchange
of convertible or exchangeable securities outstanding, on the date of this
Prospectus) which are substantially similar to the shares of the Ordinary Common
Stock or which are convertible or exchangeable into securities which are
substantially similar to the Ordinary Common Stock without the prior written
consent of the representatives, except for the shares of Ordinary Common Stock
offered in connection with the concurrent U.S. and international offerings.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Ordinary Common Stock, including shares initially sold
in the international offering to persons located in the United States.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Ordinary Common Stock offered by them.
Prior to the Offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company, the Selling
Stockholders and the representatives of the U.S. Underwriters and the
International Underwriters. Among the factors to be considered in determining
the initial public offering price of the Ordinary Common Stock, in addition to
prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
The Ordinary Common Stock has been approved for listing, subject to notice
of issuance, on the NYSE under the symbol "LVB." In order to meet one of the
requirements for listing the Ordinary Common Stock on the NYSE, the Underwriters
have undertaken to sell lots of 100 or more shares to a minimum of 2,000
beneficial holders.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR
ACCOUNTS OF OTHERS IN THE ORDINARY COMMON STOCK PURSUANT TO EXEMPTIONS FROM
RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
U-2
<PAGE>
DESCRIPTION OF PHOTOS
Picture of Steinway grand piano.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
The Company............................................................... 13
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Dilution.................................................................. 14
Capitalization............................................................ 15
Pro Forma Condensed Consolidated Financial Information.................... 16
Selected Consolidated Financial Information............................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Business.................................................................. 30
Management................................................................ 42
Principal Stockholders.................................................... 47
Selling Stockholders...................................................... 48
Description of Capital Stock.............................................. 49
Description of Certain Indebtedness....................................... 52
Shares Eligible for Future Sale........................................... 54
Certain United States Tax Consequences to Non-United States Holders....... 56
Legal Matters............................................................. 58
Experts................................................................... 58
Additional Information.................................................... 58
Index to Consolidated Financial Statements................................ F-1
Underwriting.............................................................. U-1
</TABLE>
4,360,000 SHARES
[LOGO] INSTRUMENTS, INC.
ORDINARY COMMON STOCK
-----------
PROSPECTUS
-----------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CS FIRST BOSTON CORPORATION
REPRESENTATIVES OF THE UNDERWRITERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all estimated expenses incurred or
expected to be incurred by the Registrant in connection with the issuance and
distribution of the securities being registered hereby, other than underwriting
discounts and commissions.
<TABLE>
<CAPTION>
ITEM AMOUNT*
- ----------------------------------------------------------------- -----------
<S> <C>
SEC Registration Fee............................................. $ 38,046
NASD Filing Fee.................................................. 9,125
NYSE Listing Fee................................................. 62,450
Blue Sky Filing Fees and Expenses................................ 15,000
Printing and Engraving Costs..................................... 125,000
Transfer Agent Fees.............................................. 1,000
Legal Fees and Expenses.......................................... 150,000
Accounting Fees and Expenses..................................... 150,000
Miscellaneous.................................................... 49,379
-----------
Total........................................................ $ 600,000
-----------
-----------
</TABLE>
- ------------------------
*All amounts are estimated except for the SEC Registration Fee, the NASD Filing
Fee and the NYSE Listing Fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Sections 102 and 145 of the Delaware General Corporation
Law, the Registrant's certificate of incorporation eliminates a director's
personal liability for monetary damages to the Registrant and its stockholders
arising from a breach or alleged breach of a director's fiduciary duty except
for liability under Section 174 of the Delaware General Corporation Law or
liability for any breach of the director's duty of loyalty to the Registrant or
its stockholders, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law or for any transaction in
which the director derived an improper personal benefit. Article Sixth of the
Registrant's certificate of incorporation eliminates the rights of the
Registrant and its stockholders (through stockholders' derivative suits on
behalf of the Registrant) to recover monetary damages against a director for
breach of fiduciary duty as a director (including breaches resulting form
negligent or grossly negligent behavior) except in the situations described
above.
The Registrant's bylaws provide for indemnification of officers, directors,
employees and agents of the Registrant (the "Indemnitees"). Under the bylaws,
the Registrant must indemnify an Indemnitee to the fullest extent permitted by
applicable law for losses and expenses incurred in connection with actions in
which the Indemnitee is involved by reason of having been an officer, director,
employee or agent of the Registrant. The Registrant is also obligated to advance
expenses an Indemnitee may incur in connection with such actions before any
resolution of the action.
The Registrant also maintains directors' and officers' liability insurance.
In addition, the Underwriting Agreement provides for indemnification by the
Underwriters of the Registrant, its directors and officers against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act").
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On August 9, 1993, the Registrant issued the following securities to certain
institutional investors as consideration to purchase substantially all of the
assets and assume substantially all of the liabilities of The Selmer Company,
L.P.: (a) senior secured notes in the aggregate principal amount of $55 million;
(b) convertible participating preferred stock, $.001 par value per share, in the
amount of 1,000,000
II-1
<PAGE>
shares; and (c) ordinary common stock, $.001 par value per share, ("Ordinary
Common Stock") in the amount of 42,222 shares. These issuances were exempt from
registration under the Act pursuant to Section 4(2) as transactions not
involving any public offering.
On August 9, 1993, the Registrant issued an aggregate of 168,890 shares of
Ordinary Common Stock to a limited number of the Registrant's directors and to
certain employees of Dabney/Resnick, Inc. at a purchase price per share of
$1.18142. Executive officers of the Registrant were also issued an aggregate of
150,000 shares of Ordinary Common Stock at a purchase price per share of
$0.3333. These issuances were exempt from registration under the Act pursuant to
Section 4(2) as transactions not involving any public offering.
On August 9, 1993, the Registrant issued 84,444 shares of Class A Common
Stock to each of Kyle Kirkland and Dana Messina at a purchase price per share of
$1.18142. This issuance was exempt from registration under the Act pursuant to
Section 4(2) as a transaction not involving any public offering.
On December 6, 1995, the Registrant issued an aggregate of 105,000 shares of
Ordinary Common Stock to certain management employees of Steinway Musical
Properties, Inc. at a purchase price per share of $6.00. This issuance was
exempt from registration under the Act pursuant to Section 4(2) as a transaction
not involving any public offering.
Prior to the closing of the Offering, the Registrant intends to consummate a
stock split on its Class A Common Stock and Ordinary Common Stock. The issuance
of additional shares pursuant to such action will be deemed to be exempt from
registration under Section 3(a)(9) of the Act.
ITEM 16. EXHIBITS
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement**
3.1 Restated Certificate of Incorporation of Registrant*
3.2 Corrected Amendment to Restated Certificate of Incorporation of
Registrant*
3.3 Form of Amendment to Restated Certificate of Incorporation of
Registrant
3.4 Bylaws of Registrant*
3.5 Amendment No. 1 to Bylaws of Registrant
4.1 Specimen Certificate**
4.2 Indenture, dated as of August 9, 1993 among The Selmer Company, Inc.,
Selmer Industries, Inc. and IBJ Schroder Bank & Trust Company, as
trustee including the Forms of Notes and the Guarantee thereon (1)
4.3 Supplemental Indenture, dated as of May 25, 1995 among The Selmer
Company, Inc., Selmer Industries, Inc. and IBJ Schroder Bank & Trust
Company, as trustee (4)
4.4 Guarantee and Pledge Agreement, dated as of August 9, 1993, between
Selmer Industries, Inc. and IBJ Schroder Bank & Trust Company, as
trustee (1)
4.5 Security Agreement, dated as of August 9, 1993, among The Selmer
Company, Inc. and IBJ Schroder Bank & Trust Company, as trustee (1)
4.6 Security Agreement, dated as of August 9, 1993, among Selmer
Industries, Inc. and IBJ Schroder Bank & Trust Company, as trustee
(1)
4.7 Intercreditor Agreement, dated as of August 9, 1993, between BNY
Financial Corporation and IBJ Schroder Bank & Trust Company, as
trustee (1)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
4.8 Open-end Mortgage, Deed of Trust, Leasehold Mortgage, Leasehold Deed
of Trust, Assignment of Rents, Security Agreement, Financing
Statement and Fixture Filing, dated August 9, 1993, by and from The
Selmer Company, Inc. to IBJ Schroder Bank & Trust Company, as
trustee, relating to each of the Indiana, Illinois, Ohio, and North
Carolina properties (1)
4.9 Amended and Restated Revolving Credit, Term Loan and Security
Agreement, dated as of May 25, 1995, by and between The Selmer
Company, Inc., Selmer Industries, Inc., Steinway Musical Properties,
Inc., Steinway, Inc., Boston Piano Company, Inc. and BNY Financial
Corporation, including a list of Exhibits and Schedules thereto (5)
4.10 Subordination Agreement, dated as of August 9, 1993, among The Selmer
Company, Inc., IBJ Schroder Bank & Trust Company, as trustee, BNY
Financial Corporation and Philips Electronics North America
Corporation (1)
4.11 Registration Rights Agreement, dated as of August 9, 1993, among
Selmer Industries, Inc. and the purchasers of certain equity
securities (1)
4.12 Indenture, dated as of May 25, 1995, among The Selmer Company, Inc.,
Selmer Industries, Inc., Steinway Musical Properties, Inc., Steinway,
Inc., Boston Piano Company, Inc. and American Bank National
Association, as trustee, including the forms of Notes and the
Guarantee thereon (4)
4.13 Exchange Registration Rights Agreement, dated as of May 25, 1995, by
and among The Selmer Company, Inc., Selmer Corporation, Inc.,
Steinway Musical Properties, Inc., Steinway, Inc., Boston Piano
Company, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation
(4)
5.1 Opinion of Milbank, Tweed, Hadley & McCloy**
10.1 Employment Agreement, dated as of June 22, 1993, between The Selmer
Company, Inc. and Thomas Burzycki (1)
10.2 Employment Agreement, dated as of December 19, 1995, between The
Selmer Company, Inc. and Michael R. Vickrey (6)
10.3 Employment Agreement, dated May 8, 1989, between Steinway Musical
Properties, Inc. and Thomas Kurrer (5)
10.4 Employment Agreement, dated May 1, 1995, between Steinway Musical
Properties, Inc. and Bruce Stevens (5)
10.5 Employment Agreement, dated May 1, 1995, between Steinway Musical
Properties, Inc. and Dennis Hanson (5)
10.6 Agreement dated , 1996 between the Registrant, Kirkland
Messina, Inc. and Dana Messina
10.7 Agreement dated , 1996 between the Registrant, Kirkland
Messina, Inc. and Kyle Kirkland
10.8 Management Agreement, dated as of August 9, 1993, by and between The
Selmer Company, Inc., Dana Messina and Kyle Kirkland (1)
10.9 Management Agreement, dated as of May 25, 1995, by and between
Steinway Musical Properties, Inc., Dana Messina and Kyle Kirkland*
10.10 Environmental Indemnification and Non-Competition Agreement, dated as
of August 9, 1993, between The Selmer Company, Inc. and Philips
Electronics North American Corporation (1)
10.11 Unsecured Environmental Indemnification Agreement, dated as of August
9, 1993, between The Selmer Company, Inc., Selmer Industries, Inc.
and IBJ Schroder Bank & Trust Company, as trustee (1)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.12 Securityholders Agreement, dated as of August 9, 1993, among Selmer
Industries, Inc. and certain equity holders of Selmer Industries,
Inc. (1)
10.13 Master Note Purchase and Repurchase Agreement, dated December 4, 1994,
by and between Textron Financial Corporation and The Selmer Company,
Inc. (3)
10.14 Distribution Agreement, dated November 1, 1952, by and between H. & A.
Selmer, Inc. and Henri Selmer & Cie (1)
10.15 Asset Purchase Agreement, dated as of June 25, 1993, by and between
The Selmer Company, Inc., The Selmer Company, L.P. and Vincent Bach
International, Ltd. (2)
10.16 1996 Stock Plan of the Registrant
21.1 List of Subsidiaries of Registrant*
23.1 Consent of Deloitte & Touche LLP**
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Milbank, Tweed, Hadley & McCloy (included in Exhibit 5.1)**
24.1 Power of Attorney (incorporated by reference to page II-6 of the
Registration Statement on Form S-1).
</TABLE>
- ------------------------
* Previously filed with the Commission on May 14, 1996 as an exhibit to this
Registration Statement on Form S-1.
** To be filed by amendment.
(1) Previously filed with the Commission on February 8, 1994 as an exhibit to
the Registrant's Registration Statement on Form S-1.
(2) Previously filed with the Commission on April 28, 1994 as an exhibit to the
Registrant's Amendment No. 1 to Registration Statement on Form S-1.
(3) Previously filed with the Commission on March 30, 1995 as an exhibit to the
Registrant's Annual Report on Form 10-K.
(4) Previously filed with the Commission on June 7, 1995 as an exhibit to the
Registrant's Current Report on Form 8-K.
(5) Previously filed with the Commission on June 7, 1995 as an exhibit to the
Registrant's Registration Statement on Form S-4.
(6) Previously filed with the Commission on March 27, 1996 as an exhibit to the
Registrant's Annual Report on Form 10-K.
(b) Financial Statements and Schedules
None.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director,
II-4
<PAGE>
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on this 3rd day of July, 1996.
SELMER INDUSTRIES, INC.
By: /s/ DANA D. MESSINA
-----------------------------------------
Dana D. Messina
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kyle R. Kirkland, Dana D. Messina, Thomas
Burzycki, Bruce Stevens, Dennis Hanson and Michael R. Vickrey and each of them,
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof and the
registrant hereby confers like authority on its behalf.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on this 3rd day of July, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------- ----------------------------
<C> <S>
Director and Chief Executive
/s/ DANA D. MESSINA Officer
---------------------------------------- (Principal Executive
Dana D. Messina Officer)
/s/ DENNIS HANSON Chief Financial Officer
---------------------------------------- (Principal Financial
Dennis Hanson Officer)
* Executive Vice President
---------------------------------------- (Principal Accounting
Michael R. Vickrey Officer)
*
---------------------------------------- Director
Kyle R. Kirkland
*
---------------------------------------- Director
Thomas Burzycki
*
---------------------------------------- Director
Bruce Stevens
*
---------------------------------------- Director
Peter McMillan
*By: /s/ DANA D. MESSINA
----------------------------------------
Dana D. Messina
ATTORNEY IN FACT
</TABLE>
II-6
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION
OF
SELMER INDUSTRIES, INC.
SELMER INDUSTRIES, INC., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify that:
FIRST: The original Certificate of Incorporation of the Corporation
was filed with the Secretary of State of Delaware on July 8, 1993 under the name
Selmer Industries, Inc. On August 3, 1993, the Corporation filed a Restated
Certificate of Incorporation with the Secretary of State of Delaware. On May
24, 1995, the Corporation filed a Certificate of Amendment of Restated
Certificate of Incorporation with the Secretary of State of Delaware. On
May 25, 1995, the Corporation filed a Corrected Certificate of Amendment of
Restated Certificate of Incorporation with the Secretary of State of Delaware.
SECOND: The Board of Directors of the Corporation has duly adopted
resolutions setting forth a proposed amendment to the Restated Certificate of
Incorporation of the Corporation, as amended (the "Restated Certificate"),
declaring said amendment to be advisable and resolving that written consents of
stockholders entitled to vote thereon be solicited in accordance with Section
242 of the General Corporation Law of the State of Delaware for consideration
thereof. The resolution setting forth the proposed amendment to the Restated
Certificate of the Corporation is as follows:
RESOLVED, that the Restated Certificate of the Corporation shall be
amended as follows:
(A) Amend and restate in its entirety paragraph FIRST to read as follows:
The name of the corporation is Steinway Musical Instruments, Inc. (the
"COMPANY").
(B) Amend and restate in its entirety paragraph FOURTH to read as follows:
The presently authorized Common Stock (as defined below) of the
Company is hereby split on the basis of 2.83 shares for each share of
Common Stock outstanding. The Company shall pay in cash the fair value (as
determined in good faith by the Board of Directors) of fractions of each
share of Common Stock issuable as a result of such
<PAGE>
stock split. The total number of shares of capital stock that the
Company shall have authority to issue is 100,000,000, divided into
5,000,000 shares of Convertible Participating Preferred Stock,
par value $0.001 per share ("PREFERRED STOCK"), and 95,000,000
shares of Common Stock, par value $0.001 per share ("COMMON STOCK").
The Company is authorized to issue two classes of Common Stock,
designated respectively as Class A Common Stock ("CLASS A COMMON
STOCK") and Ordinary Common Stock ("ORDINARY COMMON STOCK"). The total
number of shares of Class A Common Stock that the Company shall have
authority to issue is 5,000,000 and the total number of shares of Ordinary
Common Stock that the Company shall have authority to issue is 90,000,000.
(C) Upon the later to occur of (i) the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
covering the public offering of shares of Common Stock for the account of the
Company with an aggregate offering price of $15,000,000 or more or (ii) the
conversion of all of the outstanding Convertible Participating Preferred Stock
of the Company pursuant to paragraph FIFTH, Section C.(4)(b) hereof, the
following amendments shall take effect and modify the Restated Certificate:
1. Amend and restate in its entirety paragraph FOURTH to read as
follows:
The total number of shares of capital stock that the Company shall
have authority to issue is 100,000,000 divided into 5,000,000 shares of
Preferred Stock, par value $0.001 per share ("PREFERRED STOCK"), and
95,000,000 shares of Common Stock, par value $0.001 per share ("COMMON
STOCK"). The Company is authorized to issue two classes of Common Stock,
designated respectively as Class A Common Stock ("CLASS A COMMON STOCK")
and Ordinary Common Stock ("ORDINARY COMMON STOCK"). The total number of
shares of Class A Common Stock that the Company shall have authority to
issue is 5,000,000 and the total number of shares of Ordinary Common Stock
that the Company shall have authority to issue is 90,000,000.
2. Delete Section A of Paragraph FIFTH in its entirety.
3. Amend and restate in its entirety Section B of paragraph FIFTH to
read as follows:
B. COMMON STOCK.
1. DIVIDENDS AND DISTRIBUTIONS. Subject to SECTION C of
this paragraph, the holders of Common Stock shall be entitled to
the payment of dividends when and as declared by the Board of
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<PAGE>
Directors out of funds legally available therefor, after payment
of such dividends on the shares of Preferred Stock as set forth
in SECTION C below.
2. VOTING RIGHTS.
(a) NUMBER OF VOTES. Each holder of shares of Class A
Common Stock shall be entitled to a number of votes equal to
the number of shares of Class A Common Stock held by such
holder multiplied by 98, and each holder of shares of
Ordinary Common Stock shall be entitled to a number of votes
equal to the number of shares of Ordinary Common Stock held
by such holder.
(b) VOTING AS A CLASS. The Class A Common Stock and
the Ordinary Common Stock shall vote together, without
distinction between classes, except as set forth herein.
3. AUTOMATIC CONVERSION OF CLASS A COMMON STOCK. If, at
any time, any share of Class A Common Stock shall not be owned by
either Kyle Kirkland or Dana Messina, either directly or
indirectly through wholly-owned entities, such share of Class A
Common Stock shall automatically convert to Ordinary Common Stock
based on the conversion ratio of one share of Class A Common
Stock for one share of Ordinary Common Stock. Any holder of
Class A Common Stock required to convert the same into Ordinary
Common Stock under this subsection shall, upon written request
from the Company, surrender any certificates for shares of Class
A Common Stock held by such holder. The Company shall, as soon
as practicable thereafter, issue and deliver to such holder a
certificate or certificates for the number of shares of Ordinary
Common Stock to which such holder shall be entitled as set forth
herein.
4. Amend and restate in its entirety Section C of paragraph FIFTH to
read as follows:
Shares of Preferred Stock may be issued from time to time in one
or more series. The Board of Directors of the Company is hereby
expressly authorized to establish and designate one or more series of
the Preferred Stock from time to time, to fix the number of shares
constituting such series, and to fix the designations, the terms of
any sinking fund, rights upon liquidation, winding up or dissolution
and the powers, preferences, qualifications, limitations,
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<PAGE>
conversion, redemption, special voting, dividend and other rights of
the shares of each such series and the variations of the relative
powers, rights and preferences, qualifications, limitations and
restrictions as between such series, and to increase and to
decrease (but not below the number of shares of such series then
outstanding) the number of shares constituting each such series.
Such determinations may be fixed by a resolution or resolutions
adopted by the Board of Directors. The Common Stock shall be
subject to the express terms of any series of the Preferred Stock
issued and outstanding pursuant to this Restated Certificate of
Incorporation. Upon any liquidation, dissolution or winding up
of the Company, after payment in full of all creditors of the
Company, and after the holders of any series of Preferred Stock
issued and outstanding at the time shall have been paid in full the
amounts, if any, to which they shall be entitled, the remaining assets
of the Company may be distributed pro rata to the holders of the
shares of Common Stock.
5. Delete Section D of paragraph FIFTH in its entirety.
6. Delete Section E of paragraph FIFTH in its entirety.
(D) Add a new paragraph EIGHTH to read as follows:
The Board of Directors may amend or repeal the bylaws of the Company.
THIRD: Thereafter, pursuant to resolution of the Board of Directors
of the Corporation, written consent of stockholders representing the necessary
number of shares as required by statute has been given in accordance with
Section 228 of the General Corporation Law of the State of Delaware to authorize
said amendment, and written notice has been given as provided in Section 228 of
the General Corporation Law of the State of Delaware.
FOURTH: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
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<PAGE>
IN WITNESS WHEREOF, Selmer Industries, Inc. has caused this
Certificate of Amendment to be signed and attested by its duly authorized
officers, this ___ day of ______, 1996.
SELMER INDUSTRIES, INC.
By: ______________________________
Name:
Title:
ATTEST:
______________________________
By:
Title:
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<PAGE>
EXHIBIT 3.5
AMENDMENT NO. 1 TO THE BY-LAWS
OF
SELMER INDUSTRIES, INC.
The By-laws of Selmer Industries, Inc., a Delaware Corporation (the
"Corporation"), shall be amended as follows:
(A) Amend and restate the last sentence of Section 1.1 of the By-Laws to
read as follows:
The annual meeting in each year shall be held at such hour on said day and
at such place within or without the State of Delaware as may be fixed by
the Board of Directors, or if not so fixed, at the principal business
office of the Corporation at 600 Industrial Parkway, Elkhart, Indiana
46516.
(B) Amend Section 1.9 of the By-Laws by adding the following sentence to
the end thereof:
NOTWITHSTANDING THE FOREGOING, in the event that Kyle R. Kirkland and Dana
D. Messina, collectively, cease to have, directly or indirectly, voting
control of at least 50% of the voting securities of the Corporation
entitled to vote generally in the election of directors, any action to be
taken by the stockholders of the Company will be required to be conducted
at an annual or special meeting of the stockholders and may not be taken by
written consent without a meeting.
(C) Amend Section 2.5 of the By-Laws by adding the following sentence to
the end thereof:
NOTWITHSTANDING THE FOREGOING, in the event that Kyle R. Kirkland and Dana
D. Messina, collectively, cease to have, directly or indirectly, voting
control of at least 50% of the voting securities of the Corporation
entitled to vote generally in the election of directors, a director may not
be removed without cause.
<PAGE>
EXHIBIT 10.6
AGREEMENT
This Agreement, dated as of ___________, 1996, is by and between
Steinway Musical Instruments, Inc., a Delaware corporation (the "COMPANY"),
Kirkland Messina, Inc., a California corporation ("KM") and Dana D. Messina (the
"EXECUTIVE").
In consideration of the premises and mutual covenants herein
contained, the parties hereto agree as follows:
Section 1. SERVICES
1.1 ENGAGEMENT OF SERVICES OF THE EXECUTIVE. The Company hereby
retains KM to provide the services of the Executive as described in this
SECTION 1 during the term of this Agreement, and KM hereby agrees to provide
such services to the Company during the term hereof.
1.2 SERVICES. KM shall cause the Executive to render management
services to the Company, subject to the direction of the Board of Directors
of the Company (the "BOARD"). Subject to such direction, the Executive shall:
(a) serve as Chief Executive Officer of the Company;
(b) provide ongoing management services to the Company,
including strategic planning, marketing, consulting, financial planning and
capital budgeting, executive compensation program analysis and such other
management services as may, from time to time, be reasonably requested by the
Company;
(c) monitor the business of the Company and conduct periodic
reviews and analyses of such business as may be reasonably requested by the
Company;
(d) assist the Company in developing a long-term strategic plan
with respect to the business of the Company and identify, review and analyze
merger and acquisition opportunities for the Company;
(e) use his reasonable efforts to assist the Company in
arranging for the sale of the business of the Company, at such time as may be
directed by the Board; and
(f) provide such written reports concerning the services he
provides hereunder as may be reasonably requested by the Company.
1.3 EXTENT OF SERVICES. In carrying out KM's obligations under
this SECTION 1, the Executive shall devote such of his time as reasonably may
be required to discharge KM's
<PAGE>
obligations to provide the services of the Executive hereunder and shall have
regard to the objectives of the Board with respect to the business of the
Company and any specific instructions from time to time communicated in
writing by the Board to the Executive with respect to the business of the
Company and the services of the Executive provided hereunder. KM and the
Executive shall be free to provide and render similar services to others.
Section 2. EXPENSE REIMBURSEMENT AND COMPENSATION
2.1 REIMBURSEMENT OF EXPENSES. KM or the Executive, as the case
may be, shall be reimbursed within 20 business days of the submission to the
Company of a reasonably detailed invoice for any reasonable out-of-pocket
expenses incurred by KM or the Executive in connection with the provision of
the services described in SECTION 1 hereof, including without limitation for
travel, meals, lodging, messengers or couriers.
2.2 ANNUAL FEE. As compensation for the services provided by KM
pursuant to this Agreement, KM shall be entitled to receive from the Company
an annual fee in an initial aggregate amount equal to $200,000 (the "ANNUAL
FEE"), payable in equal quarterly installments in arrears on the last day of
each of March, June, September and December, commencing September 30, 1996.
The Company shall pay the quarterly portion of the Annual Fee on each such
date by Company checks payable to Kirkland Messina, Inc. Beginning January
1, 1997 and on each January 1 thereafter during the term of this Agreement
(each such date being termed the "ANNIVERSARY DATE"), the Annual Fee shall be
adjusted to reflect the increase during the prior year in the Consumer Price
Index All Urban Consumers (base years 1982-1984 = 100) for Los
Angeles-Anaheim-Riverside published by the United States Department of Labor,
Bureau of Labor Statistics (the "INDEX"). If the Index published for any
Anniversary Date (the "COMPARISON INDEX") has increased over the Index
published for January 1, 1996 (the "BASE INDEX"), then the Annual Fee for the
following year shall be established by multiplying $200,000 by a fraction,
the numerator of which shall be the Comparison Index and the denominator of
which shall be the Base Index. Any such adjustments to the Annual Fee shall
be retroactive to the Anniversary Date to account for delays in reporting the
Index. If the Index ceases to be published, or if material changes are made
to the process by which the Index is computed, the increase in Annual Fee, if
any, shall be computed on the basis of any change in the most nearly
comparable index then being computed and published by the United States
government or an agency of the United States government.
2.3 BENEFITS. As additional compensation for the services
provided by KM pursuant to this Agreement, the Executive shall be eligible to
receive any benefits generally available to
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<PAGE>
employees of the Company.
Section 3. TERMINATION
3.1 TERM OF AGREEMENT. Subject to SECTION 3.2 hereof, this
Agreement shall become effective upon the later to occur of (x) the
consummation of the initial public offering of the Company's Ordinary Common
Stock and (y) the termination of the Management Agreements dated as of August
9, 1993 and May 25, 1995 between the Company and KM (the "Effective Date"),
and shall continue in full force and effect until the earlier of (i) the
consummation of a Change in Control and (ii) the date that is ten years after
the Effective Date. For purposes of this SECTION 3.1, a "CHANGE IN CONTROL"
shall be deemed to have occurred if Kyle R. Kirkland and Dana D. Messina
collectively do not have, directly or indirectly, voting control of at least
50% of the voting securities of the Company entitled to vote generally in the
election of directors.
3.2 TERMINATION
(a) RIGHT OF TERMINATION. The Company may terminate this
Agreement upon 60 days' prior written notice to KM if KM is in breach of its
material obligations under this Agreement, and KM may terminate this
Agreement upon 60 days' prior written notice to the Company if the Company is
in breach of its material obligations to KM under this Agreement.
(b) TERMINATION FOR CAUSE. The Company may immediately
terminate this Agreement upon delivery of written notice to KM if: (i) the
Executive is convicted of a serious crime involving moral turpitude; or (ii)
the Executive in rendering the management services set forth in SECTION 1.2
has been guilty of gross neglect or willful misconduct, resulting in either
case in material harm to the Company.
(c) EFFECT OF TERMINATION. From and after the effective date
of termination, whether pursuant to SECTION 3.2(A) or SECTION 3.2(B) hereof
or at the end of the term specified in SECTION 3.1 hereof, the Company shall
have no liability to KM or the Executive for any compensation hereunder
(other than compensation accrued prior to the effective date of termination
and remaining unpaid), and KM and the Executive shall have no obligation to
provide the services of the Executive hereunder.
Section 4. INDEMNIFICATION
The Company hereby unconditionally and irrevocably covenants and
agrees to indemnify and hold harmless the Executive and KM, their respective
successors and assigns, and all of KM's officers, directors, shareholders,
beneficial owners, partners, affiliates, agents and employees (collectively, the
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<PAGE>
"INDEMNITEES"), against any and all claims, liabilities, attorneys' fees and
related litigation costs, fees and expenses in connection with any claim(s)
against any Indemnitee for any acts or omissions by KM or the Executive under or
in connection with this Agreement, except by reason of acts constituting bad
faith, willful misconduct or gross negligence in the performance or reckless
disregard of the duties of the Executive to be rendered hereunder.
Section 5. MISCELLANEOUS
5.1 ASSIGNMENT. Neither KM nor the Company may assign this
Agreement or their respective rights or obligations hereunder to any third
party; PROVIDED, HOWEVER, that KM may assign any or all of its rights or
obligations hereunder to any entity that controls, is controlled by or is
under common control with KM.
5.2 NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be sent by
registered or certified mail, postage prepaid, or shall be delivered
personally or by overnight courier, or shall be sent by telecopy or similar
means of simultaneous transmission and receipt to the party to whom it is to
be given at the address or telecopy number of such party set forth below (or
to such other address as the party shall have furnished in writing in
accordance with the provisions of this SECTION 5.2):
(a) If to the Company, to:
Steinway Musical Instruments, Inc.
600 Industrial Parkway
Elkhart, Indiana 46516
Attention: Michael Vickrey
Telecopy: (219) 295-5405
(b) If to KM, to:
Kirkland Messina, Inc.
11100 Santa Monica Boulevard, Suite 825
Los Angeles, California 90025
Attention: Kyle R. Kirkland
Telecopy: (310) 445-6522
(c) If to the Executive, to:
Dana D. Messina
c/o Kirkland Messina, Inc.
11100 Santa Monica Boulevard, Suite 825
Los Angeles, California 90025
Telecopy: (310) 445-6522
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<PAGE>
Notices shall be deemed to have been given on the fifth day after being so
mailed, the next business day after delivery to an overnight courier, when sent
by telecopier (with receipt acknowledged) or upon receipt when delivered
personally.
5.3 WAIVER; REMEDIES. Any waiver by any party of a breach of
any provision of this Agreement shall not operate as or be construed to be a
waiver of any other breach of this Agreement. The failure of a party to
insist upon strict adherence to any term of this Agreement on one or more
occasions will not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Agreement. Any waiver hereunder must be in writing. All rights and
remedies which the Company, KM or the Executive may have under this Agreement
are cumulative and in addition to any rights or remedies under applicable law
or in equity.
5.4 BINDING EFFECT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, KM and the Executive
and their respective successors and assigns.
5.5 NO THIRD PARTY BENEFICIARIES. This Agreement does not create,
and shall not be construed as creating, any rights enforceable by any person
not a party to this Agreement.
5.6 HEADINGS. The headings in this Agreement are solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
5.7 COUNTERPARTS; GOVERNING LAW. This Agreement may be executed
in any number of counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument. This
Agreement shall be governed by and construed in accordance with the laws of
California, without giving effect to conflict of laws principles.
5.8 RELATIONSHIP OF PARTIES. The parties agree that KM and the
Executive in the performance of their duties hereunder are independent
contractors acting as agents of the Company, and that nothing contained
herein shall constitute any party as employee or legal representative of any
other for any purpose whatsoever, nor shall this Agreement be deemed to
create any form of business organization, joint venture or partnership
between the parties hereto or as giving KM or the Executive any type of
property interest in the Company, nor is any party granted any right or
authority to assume or create any obligation or responsibility on behalf of
any other party, except as otherwise provided herein or by the Company to the
Executive through the authority granted in its Certificate of Incorporation
and Bylaws, resolutions of the Board or stockholders of the Company or
similar corporate authorization, nor shall any party be in any
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<PAGE>
way liable to any other party for any debt of the other.
5.9 MODIFICATION. This Agreement sets forth the entire
understanding of the parties with respect to the subject matter hereof and
may be modified only by a written instrument duly executed by each party
hereto.
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.
STEINWAY MUSICAL INSTRUMENTS, INC.
By:______________________________________
Name:
Title:
KIRKLAND MESSINA, INC.
By:______________________________________
Kyle R. Kirkland
Title:
EXECUTIVE
_________________________________________
Dana D. Messina
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<PAGE>
EXHIBIT 10.7
AGREEMENT
This Agreement, dated as of ___________, 1996, is by and between
Steinway Musical Instruments, Inc., a Delaware corporation (the "COMPANY"),
Kirkland Messina, Inc., a California corporation ("KM") and Kyle R. Kirkland
(the "EXECUTIVE").
In consideration of the premises and mutual covenants herein
contained, the parties hereto agree as follows:
Section 1. SERVICES
1.1 ENGAGEMENT OF SERVICES OF THE EXECUTIVE. The Company hereby
retains KM to provide the services of the Executive as described in this
SECTION 1 during the term of this Agreement, and KM hereby agrees to provide
such services to the Company during the term hereof.
1.2 SERVICES. KM shall cause the Executive to render management
services to the Company, subject to the direction of the Board of Directors
of the Company (the "BOARD"). Subject to such direction, the Executive shall:
(a) serve as Chairman of the Company;
(b) provide ongoing management services to the Company,
including strategic planning, marketing, consulting, financial planning and
capital budgeting, executive compensation program analysis and such other
management services as may, from time to time, be reasonably requested by the
Company;
(c) monitor the business of the Company and conduct periodic
reviews and analyses of such business as may be reasonably requested by the
Company;
(d) assist the Company in developing a long-term strategic plan
with respect to the business of the Company and identify, review and analyze
merger and acquisition opportunities for the Company;
(e) use his reasonable efforts to assist the Company in
arranging for the sale of the business of the Company, at such time as may be
directed by the Board; and
(f) provide such written reports concerning the services he
provides hereunder as may be reasonably requested by the Company.
1.3 EXTENT OF SERVICES. In carrying out KM's obligations under
this SECTION 1, the Executive shall devote such of his time as reasonably may
be required to discharge KM's obligations to provide the services of the
Executive hereunder
<PAGE>
and shall have regard to the objectives of the Board with respect to the
business of the Company and any specific instructions from time to time
communicated in writing by the Board to the Executive with respect to the
business of the Company and the services of the Executive provided hereunder.
KM and the Executive shall be free to provide and render similar services to
others.
Section 2. EXPENSE REIMBURSEMENT AND COMPENSATION
2.1 REIMBURSEMENT OF EXPENSES. KM or the Executive, as the case
may be, shall be reimbursed within 20 business days of the submission to the
Company of a reasonably detailed invoice for any reasonable out-of-pocket
expenses incurred by KM or the Executive in connection with the provision of
the services described in SECTION 1 hereof, including without limitation for
travel, meals, lodging, messengers or couriers.
2.1 ANNUAL FEE. As compensation for the services provided by KM
pursuant to this Agreement, KM shall be entitled to receive from the Company
an annual fee in an initial aggregate amount equal to $200,000 (the "ANNUAL
FEE"), payable in equal quarterly installments in arrears on the last day of
each of March, June, September and December, commencing September 30, 1996.
The Company shall pay the quarterly portion of the Annual Fee on each such
date by Company checks payable to Kirkland Messina, Inc. Beginning January
1, 1997 and on each January 1 thereafter during the term of this Agreement
(each such date being termed the "ANNIVERSARY DATE"), the Annual Fee shall be
adjusted to reflect the increase during the prior year in the Consumer Price
Index All Urban Consumers (base years 1982-1984 = 100) for Los
Angeles-Anaheim-Riverside published by the United States Department of Labor,
Bureau of Labor Statistics (the "INDEX"). If the Index published for any
Anniversary Date (the "COMPARISON INDEX") has increased over the Index
published for January 1, 1996 (the "BASE INDEX"), then the Annual Fee for the
following year shall be established by multiplying $200,000 by a fraction,
the numerator of which shall be the Comparison Index and the denominator of
which shall be the Base Index. Any such adjustments to the Annual Fee shall
be retroactive to the Anniversary Date to account for delays in reporting the
Index. If the Index ceases to be published, or if material changes are made
to the process by which the Index is computed, the increase in Annual Fee, if
any, shall be computed on the basis of any change in the most nearly
comparable index then being computed and published by the United States
government or an agency of the United States government.
2.3 BENEFITS. As additional compensation for the services
provided by KM pursuant to this Agreement, the Executive shall be eligible to
receive any benefits generally available to employees of the Company.
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<PAGE>
Section 3. TERMINATION
3.1 TERM OF AGREEMENT. Subject to SECTION 3.2 hereof, this
Agreement shall become effective upon the later to occur of (x) the
consummation of the initial public offering of the Company's Ordinary Common
Stock and (y) the termination of the Management Agreements dated as of August
9, 1993 and May 25, 1995 between the Company and KM (the "Effective Date"),
and shall continue in full force and effect until the earlier of (i) the
consummation of a Change in Control and (ii) the date that is ten years after
the Effective Date. For purposes of this SECTION 3.1, a "CHANGE IN CONTROL"
shall be deemed to have occurred if Kyle R. Kirkland and Dana D. Messina
collectively do not have, directly or indirectly, voting control of at least
50% of the voting securities of the Company entitled to vote generally in the
election of directors.
3.2 TERMINATION
(a) RIGHT OF TERMINATION. The Company may terminate this
Agreement upon 60 days' prior written notice to KM if KM is in breach of its
material obligations under this Agreement, and KM may terminate this
Agreement upon 60 days' prior written notice to the Company if the Company is
in breach of its material obligations to KM under this Agreement.
(b) TERMINATION FOR CAUSE. The Company may immediately
terminate this Agreement upon delivery of written notice to KM if: (i) the
Executive is convicted of a serious crime involving moral turpitude; or (ii)
the Executive in rendering the management services set forth in SECTION 1.2
has been guilty of gross neglect or willful misconduct, resulting in either
case in material harm to the Company.
(c) EFFECT OF TERMINATION. From and after the effective date
of termination, whether pursuant to SECTION 3.2(A) or SECTION 3.2(B) hereof
or at the end of the term specified in SECTION 3.1 hereof, the Company shall
have no liability to KM or the Executive for any compensation hereunder
(other than compensation accrued prior to the effective date of termination
and remaining unpaid), and KM and the Executive shall have no obligation to
provide the services of the Executive hereunder.
Section 4. INDEMNIFICATION
The Company hereby unconditionally and irrevocably covenants and
agrees to indemnify and hold harmless the Executive and KM, their respective
successors and assigns, and all of KM's officers, directors, shareholders,
beneficial owners, partners, affiliates, agents and employees (collectively, the
"INDEMNITEES"), against any and all claims, liabilities, attorneys' fees and
related litigation costs, fees and expenses
- 3 -
<PAGE>
in connection with any claim(s) against any Indemnitee for any acts or
omissions by KM or the Executive under or in connection with this Agreement,
except by reason of acts constituting bad faith, willful misconduct or gross
negligence in the performance or reckless disregard of the duties of the
Executive to be rendered hereunder.
Section 5. MISCELLANEOUS
5.1 ASSIGNMENT. Neither KM nor the Company may assign this
Agreement or their respective rights or obligations hereunder to any third
party; PROVIDED, HOWEVER, that KM may assign any or all of its rights or
obligations hereunder to any entity that controls, is controlled by or is
under common control with KM.
5.2 NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be sent by
registered or certified mail, postage prepaid, or shall be delivered
personally or by overnight courier, or shall be sent by telecopy or similar
means of simultaneous transmission and receipt to the party to whom it is to
be given at the address or telecopy number of such party set forth below (or
to such other address as the party shall have furnished in writing in
accordance with the provisions of this SECTION 5.2):
(a) If to the Company, to:
Steinway Musical Instruments, Inc.
600 Industrial Parkway
Elkhart, Indiana 46516
Attention: Michael Vickrey
Telecopy: (219) 295-5405
(b) If to KM, to:
Kirkland Messina, Inc.
11100 Santa Monica Boulevard, Suite 825
Los Angeles, California 90025
Attention: Dana D. Messina
Telecopy: (310) 445-6522
(c) If to the Executive, to:
Kyle R. Kirkland
c/o Kirkland Messina, Inc.
11100 Santa Monica Boulevard, Suite 825
Los Angeles, California 90025
Telecopy: (310) 445-6522
Notices shall be deemed to have been given on the fifth day after
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<PAGE>
being so mailed, the next business day after delivery to an overnight
courier, when sent by telecopier (with receipt acknowledged) or upon receipt
when delivered personally.
5.3 WAIVER; REMEDIES. Any waiver by any party of a breach of any
provision of this Agreement shall not operate as or be construed to be a
waiver of any other breach of this Agreement. The failure of a party to
insist upon strict adherence to any term of this Agreement on one or more
occasions will not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Agreement. Any waiver hereunder must be in writing. All rights and
remedies which the Company, KM or the Executive may have under this Agreement
are cumulative and in addition to any rights or remedies under applicable law
or in equity.
5.4 BINDING EFFECT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, KM and the Executive
and their respective successors and assigns.
5.5 NO THIRD PARTY BENEFICIARIES. This Agreement does not create,
and shall not be construed as creating, any rights enforceable by any person
not a party to this Agreement.
5.6 HEADINGS. The headings in this Agreement are solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
5.7 COUNTERPARTS; GOVERNING LAW. This Agreement may be executed
in any number of counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument. This
Agreement shall be governed by and construed in accordance with the laws of
California, without giving effect to conflict of laws principles.
5.8 RELATIONSHIP OF PARTIES. The parties agree that KM and the
Executive in the performance of their duties hereunder are independent
contractors acting as agents of the Company, and that nothing contained
herein shall constitute any party as employee or legal representative of any
other for any purpose whatsoever, nor shall this Agreement be deemed to
create any form of business organization, joint venture or partnership
between the parties hereto or as giving KM or the Executive any type of
property interest in the Company, nor is any party granted any right or
authority to assume or create any obligation or responsibility on behalf of
any other party, except as otherwise provided herein or by the Company to the
Executive through the authority granted in its Certificate of Incorporation
and Bylaws, resolutions of the Board or stockholders of the Company or
similar corporate authorization, nor shall any party be in any way liable to
any other party for any debt of the other.
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<PAGE>
5.9 MODIFICATION. This Agreement sets forth the entire
understanding of the parties with respect to the subject matter hereof and
may be modified only by a written instrument duly executed by each party
hereto.
- 6 -
<PAGE>
IN WITNESS WHEREOF, THE PARTIES HAVE DULY EXECUTED THIS AGREEMENT
AS OF THE DATE FIRST ABOVE WRITTEN.
STEINWAY MUSICAL INSTRUMENTS, INC.
By:____________________________________
Name:
Title:
KIRKLAND MESSINA, INC.
By:____________________________________
Dana D. Messina
Chief Executive Officer
EXECUTIVE
_______________________________________
Kyle R. Kirkland
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EXHIBIT 10.16
STEINWAY MUSICAL INSTRUMENTS, INC.
1996 STOCK PLAN
1. PURPOSE. The purpose of the Steinway Musical Instruments, Inc. 1996
Stock Plan (the "Plan") is to further and promote the interests of Steinway
Musical Instruments, Inc. (the "Company"), its Subsidiaries and its stockholders
by enabling the Company and its Subsidiaries to attract, retain and motivate
employees or those who will become employees, to engage consultants or advisors
to the Company, and to align the interests of those individuals and the
Company's stockholders. To do this, the Plan offers equity-based and
performance-based incentive awards and opportunities to provide such employees,
consultants and advisors with a proprietary interest in maximizing the growth,
profitability and overall success of the Company and its Subsidiaries.
2. DEFINITIONS. For purposes of the Plan, the following terms shall have
the meanings set forth below:
2.1 "AWARD" means an award or grant made to a Participant under
Sections 6, 7, 8 or 9 of the Plan. "AWARD AGREEMENT" means the agreement
executed by a Participant pursuant to Sections 3.2 and 17.7 of the Plan in
connection with the granting of an Award.
2.2 "BOARD" means the Board of Directors of the Company, as
constituted from time to time.
2.3 "CLOSING" means the occurrence of the closing of the initial
public offering by the Company of the Common Stock.
2.4 "CODE" means the Internal Revenue Code of 1986, as in effect and
as amended from time to time, or any successor statute thereto, together with
any rules, regulations and interpretations promulgated thereunder or with
respect thereto.
2.5 "COMMITTEE" means the committee of the Board described in Section
3 of the Plan.
2.6 "COMMON STOCK" means the Ordinary Common Stock, par value $.001
per share, of the Company or any security of the Company issued by the Company
in substitution or exchange therefor.
2.7 "COMPANY" means Steinway Musical Instruments, Inc., a Delaware
corporation, or any successor corporation to Steinway Musical Instruments, Inc.
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2.8 "DISABILITY" means disability as defined in the Participant's
then effective employment agreement, or if the Participant is not then a party
to an effective employment agreement with the Company that defines such term,
"Disability" means disability as determined by the Committee in accordance with
standards and procedures similar to those under the Company's long-term
disability plan, if any. Subject to the first sentence of this Section 2.8, at
any time that the Company does not maintain a long-term disability plan,
"Disability" shall mean any physical or mental disability which is determined to
be total and permanent by a physician selected in good faith by the Committee.
2.9 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as in
effect and as amended from time to time, or any successor statute thereto,
together with any rules, regulations and interpretations promulgated thereunder
or with respect thereto.
2.10 "FAIR MARKET VALUE" means on, or with respect to, any given date,
the average of the highest and lowest market prices of the relevant security, as
reported on the consolidated transaction reporting system for the New York Stock
Exchange (or, if the relevant security is not so listed or if the principal
market on which it is traded is not the New York Stock Exchange, such other
reporting system as shall be selected by the Committee) for such date or, if the
relevant security was not traded on such date, on the next preceding day on
which the security was traded. The Committee shall determine the Fair Market
Value of any security that is not publicly traded, using criteria as it shall
determine, in its sole discretion, to be appropriate for the valuation.
2.11 "INCENTIVE STOCK OPTION" means any stock option granted pursuant
to the provisions of Section 6 of the Plan (and the relevant Award Agreement)
that is intended to be (and is specifically designated as) an "incentive stock
option" within the meaning of Section 422 of the Code.
2.12 "MAXIMUM SHARES" means the maximum number of shares of Common
Stock subject to the Plan in accordance with Section 4.2.
2.13 "NON-QUALIFIED STOCK OPTION" means any stock option granted
pursuant to the provisions of Section 6 of the Plan (and the relevant Award
Agreement) that is not (and is specifically designated as not being) an
Incentive Stock Option.
2.14 "PARTICIPANT" means any individual who is selected under
Section 5 to receive an Award under the Plan.
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2.15 "PERFORMANCE UNITS" means the monetary units granted under
Section 9 of the Plan and the relevant Award Agreement.
2.16 "PLAN" means the Steinway Musical Instruments, Inc. 1996 Stock
Plan, as set forth herein and as in effect and as amended from time to time
(together with any rules and regulations promulgated by the Committee with
respect thereto).
2.17 "RELOAD STOCK OPTION" means any Non-Qualified Stock Option
automatically granted pursuant to the provisions of Section 6.7 of the Plan and
the relevant Award Agreement.
2.18 "RESTRICTED SHARES" means the restricted shares of Common Stock
granted pursuant to the provisions of Section 8 of the Plan and the relevant
Award Agreement.
2.19 "RETIREMENT" means the voluntary retirement by the Participant
from active employment with the Company and its Subsidiaries on or after the
attainment of age 65.
2.20 "STOCK APPRECIATION RIGHT" means an Award described in Section
7.2 of the Plan and granted pursuant to the provisions of Section 7 of the Plan.
2.21 "SUBSIDIARY(IES)" means any corporation (other than the Company)
in an unbroken chain of corporations, including and beginning with the Company,
if each of such corporations, other than the last corporation in the unbroken
chain, owns, directly or indirectly, more than fifty percent (50%) of the voting
stock in one of the other corporations in such chain.
3. ADMINISTRATION.
3.1 THE COMMITTEE. The Plan shall be administered by the Committee.
The Committee shall be appointed from time to time by the Board and shall be
comprised of not less than two (2) of the then members of the Board all of whom
qualify to administer the Plan as disinterested persons within the meaning of
Rule 16b-3, as promulgated by the Securities and Exchange Commission under
Section 16(b) of the Exchange Act, or any successor rule or regulation thereto,
as such Rule is amended or applied from time to time ("SEC Rule 16b-3"). No
member of the Committee shall be eligible to receive grants of awards under the
Plan after the date of the registration of the Common Stock under Section 12 of
the Exchange Act. Consistent with the Bylaws of the Company, members of the
Committee shall serve at the pleasure of the Board and the Board, subject to the
immediately preceding sentence, may at any time and from time to time remove
members from, or add members to, the Committee.
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3.2 PLAN ADMINISTRATION AND PLAN RULES. The Committee is authorized
to construe and interpret the Plan and to promulgate, amend and rescind rules
and regulations relating to the implementation, administration and maintenance
of the Plan. Subject to the terms and conditions of the Plan, the Committee
shall make all determinations necessary or advisable for the implementation,
administration and maintenance of the Plan including, without limitation, (a)
selecting the Plan's Participants, (b) making Awards in such amounts and form as
the Committee shall determine, (c) imposing such restrictions, terms and
conditions upon such Awards as the Committee shall deem appropriate, and (d)
correcting any technical defect or technical omission, or reconciling any
technical inconsistency, in the Plan and/or any Award Agreement. The Committee
may designate persons other than members of the Committee to carry out the day-
to-day administration of the Plan under such conditions and limitations as it
may prescribe, except that the Committee shall not delegate its authority with
regard to selection for participation in the Plan and/or the granting of any
Awards to Participants. The Committee's determinations under the Plan need not
be uniform and may be made selectively among Participants, whether or not such
Participants are similarly situated. Any determination, decision or action of
the Committee in connection with the construction, interpretation,
administration, implementation or maintenance of the Plan shall be final,
conclusive and binding upon all Participants and any person(s) claiming under or
through any Participants. The Company shall effect the granting of Awards under
the Plan, in accordance with the determinations made by the Committee, by
execution of written agreements and/or other instruments in such form as is
approved by the Committee.
3.3 LIABILITY LIMITATION. Neither the Board nor the Committee, nor
any member of either, shall be liable for any act, omission, interpretation,
construction or determination made in good faith in connection with the Plan (or
any Award Agreement), and the members of the Board and the Committee shall be
entitled to indemnification and reimbursement by the Company in respect of any
claim, loss, damage or expense (including, without limitation, attorneys' fees)
arising or resulting therefrom to the fullest extent permitted by law and/or
under any directors and officers liability insurance coverage which may be in
effect from time to time.
3.4 PRE-IPO ADMINISTRATION. Notwithstanding anything in the Plan to
the contrary, during the period prior to the date of the registration of the
Common Stock under Section 12 of the Exchange Act (but not beyond), the Board
shall administer the Plan and shall have all the authority, rights and powers
set forth in Sections 3.1, 3.2 and 3.3 of the Plan and shall make any and all
determinations, and take any and all other actions, which may or could be made,
or taken, by the Committee under the Plan.
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4. TERM OF PLAN/COMMON STOCK SUBJECT TO PLAN.
4.1 TERM. The Plan shall terminate ten (10) years after the date
immediately preceding the Effective Date, as defined in Section 17.12 of the
Plan, except with respect to Awards then outstanding. After such date no
further Awards shall be granted under the Plan.
4.2 COMMON STOCK. The maximum number of shares of Common Stock in
respect of which Awards may be granted or paid out under the Plan, subject to
adjustment as provided in Section 14.2 of the Plan, shall not exceed 275,000
shares (prior to the stock split approved by the Board in May 1996) (the
"Maximum Shares"). In the event of a change in the Common Stock of the Company
that is limited to a change in the designation thereof to "Capital Stock" or
other similar designation, or to a change in the par value thereof, or from par
value to no par value, without increase or decrease in the number of issued
shares, the shares resulting from any such change shall be deemed to be the
Common Stock for purposes of the Plan. Common Stock which may be issued under
the Plan may be either authorized and unissued shares or issued shares which
have been reacquired by the Company and which are being held as treasury shares.
No fractional shares of Common Stock shall be issued under the Plan, unless the
Committee determines otherwise.
4.3 COMPUTATION OF AVAILABLE SHARES. For the purpose of computing
the total number of shares of Common Stock available for Awards under the Plan,
there shall be counted against the limitations set forth in Section 4.2 of the
Plan the maximum number of shares of Common Stock potentially subject to
issuance upon exercise or settlement of Awards granted under Sections 6 and 7 of
the Plan, the number of shares of Common Stock issued or subject to potential
issuance under grants of Restricted Shares pursuant to Section 8 of the Plan and
the maximum number of shares of Common Stock potentially issuable under grants
or payments of Performance Units pursuant to Section 9 of the Plan, in each case
determined as of the date on which such Awards are granted. If any Awards
expire unexercised or are forfeited, surrendered, cancelled, terminated or
settled in cash in lieu of Common Stock, the shares of Common Stock which were
theretofore subject (or potentially subject) to such Awards shall again be
available for Awards under the Plan to the extent of such expiration,
forfeiture, surrender, cancellation, termination or settlement of such Awards;
PROVIDED, HOWEVER, that such forfeited Awards shall again be available for
Awards under the Plan only to the extent that the related award would be exempt
under SEC Rule 16b-3.
5. ELIGIBILITY. Individuals eligible for Awards under the Plan shall
consist of all key employees, or those who will become key employees,
consultants and advisors of the Company and/or its
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Subsidiaries who are responsible for the management, growth and protection of
the business of the Company and/or its Subsidiaries or whose performance or
contribution, in the sole discretion of the Committee, benefits or will
benefit the Company.
6. STOCK OPTIONS.
6.1 TERMS AND CONDITIONS. Stock options granted under the Plan shall
be in respect of Common Stock and may be in the form of Incentive Stock Options,
Non-Qualified Stock Options or Reload Stock Options (sometimes referred to
collectively herein as the "Stock Option(s)"). Such Stock Options shall be
subject to the terms and conditions set forth in this Section 6 and any
additional terms and conditions, not inconsistent with the express terms and
provisions of the Plan, as the Committee shall set forth in the relevant Award
Agreement.
6.2 GRANT. Stock Options may be granted under the Plan in such form
as the Committee may from time to time approve. Stock Options may be granted
alone or in addition to other Awards under the Plan or in tandem with Stock
Appreciation Rights. Notwithstanding the above, no Incentive Stock Options
shall be granted to any employee, consultant or advisor who owns (within the
meaning of Section 422(b)(6) of the Code) more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or its parent
corporation or any subsidiary of the Company.
6.3 EXERCISE PRICE. The exercise price per share of Common Stock
subject to a Stock Option shall be determined by the Committee, including,
without limitation, a determination based on a formula determined by the
Committee; PROVIDED, HOWEVER, that (a) the exercise price of an Incentive Stock
Option shall not be less than one hundred percent (100%) of the Fair Market
Value of the Common Stock on the date of the grant of such Incentive Stock
Option, and (b) the exercise price of a Non-Qualified Stock Option shall not be
less than eighty-five percent (85%) of the Fair Market Value of the Common Stock
on the date of the grant of such Non-Qualified Stock Option; and, PROVIDED,
FURTHER that no exercise price shall be less than the par value of the Common
Stock.
6.4 TERM. The term of each Stock Option shall be such period of time
as is fixed by the Committee; PROVIDED, HOWEVER, that the term of any Stock
Option shall not exceed ten (10) years after the date on which the Stock Option
is granted.
6.5 METHOD OF EXERCISE. A Stock Option may be exercised, in whole or
in part, by giving written notice of exercise to the Secretary of the Company,
or the Secretary's designee, specifying the number of shares to be purchased.
Such notice shall be accompanied by payment in full of the exercise
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price in cash, by certified check, bank draft or money order payable to the
order of the Company or, if permitted by the Committee (in its sole
discretion) and applicable law, by delivery of, alone or in conjunction with
a partial cash or instrument payment, (a) a fully-secured promissory note or
notes, (b) shares of Common Stock already owned by the Participant for at
least six (6) months, or (c) some other form of payment acceptable to the
Committee. The Committee may also permit Participants (either on a selective
or group basis) to simultaneously exercise Stock Options and sell the shares
of Common Stock thereby acquired, pursuant to a "cashless exercise"
arrangement or program, selected by and approved of in all respects in
advance by the Committee. Payment instruments shall be received by the
Company subject to collection. The proceeds received by the Company upon
exercise of any Stock Option may be used by the Company for general corporate
purposes. Any portion of a Stock Option that is exercised may not be
exercised again.
6.6 DATE OF EXERCISABILITY.
6.6.1 In respect of any Stock Option granted under the Plan,
unless otherwise (a) determined by the Committee (in its sole discretion)
at any time and from time to time in respect of any such Stock Option, or
(b) provided in the Award Agreement or in the Participant's employment or
engagement agreement in respect of any such Stock Option, such Stock Option
shall become exercisable as to the aggregate number of shares of Common
Stock underlying such Stock Option on the date of grant as follows:
- 20%, on the first anniversary of the date of grant of the Stock
Option, provided the Participant is then employed or engaged by
the Company and/or one of its Subsidiaries;
- 40%, on the second anniversary of the date of grant of the Stock
Option, provided the Participant is then employed or engaged by
the Company and/or one of its Subsidiaries;
- 60%, on the third anniversary of the date of grant of the Stock
Option, provided the Participant is then employed or engaged by
the Company and/or one of its Subsidiaries;
- 80%, on the fourth anniversary of the date of grant of the Stock
Option, provided the Participant is then employed or engaged by
the Company and/or one of its Subsidiaries; and
- 100%, on the fifth anniversary of the date of grant of the Stock
Option, provided the
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Participant is then employed or engaged by the Company and/or
one of its Subsidiaries.
6.6.2 Notwithstanding anything to the contrary contained in
Section 6.6.1 above, such Stock Option shall become one hundred percent
(100%) exercisable as to the aggregate number of shares of Common Stock
then underlying such Stock Option upon the death, Disability or Retirement
of the Participant, or upon the occurrence of a Change of Control, as
defined in and in accordance with Section 15 of the Plan.
6.7 RELOAD STOCK OPTIONS. The Committee may, in its sole discretion,
provide in any Award Agreement in respect of any Non-Qualified Stock Option that
if the Participant delivers shares of the Company's Common Stock already owned
by such Participant for at least six (6) months in full or partial payment of
the exercise price of such Non-Qualified Stock Option, the Participant shall
automatically (subject to the limitations contained in Section 4.2) and
immediately thereupon be granted a Reload Stock Option to purchase that number
of shares of Common Stock delivered by the Participant to the Company (on such
terms as the Committee may prescribe under and in accordance with the Plan).
6.8 TANDEM GRANTS. If Non-Qualified Stock Options and Stock
Appreciation Rights are granted in tandem, as designated in the relevant Award
Agreements, the right of a Participant to exercise any such tandem Non-Qualified
Stock Option shall terminate to the extent that the shares of Common Stock
subject to such Non-Qualified Stock Option are used to calculate amounts or
shares receivable upon the exercise of the related tandem Stock Appreciation
Right.
7. STOCK APPRECIATION RIGHTS.
7.1 TERMS AND CONDITIONS. The grant of Stock Appreciation Rights
under the Plan shall be subject to the terms and conditions set forth in this
Section 7 and any additional terms and conditions, not inconsistent with the
express terms and provisions of the Plan, as the Committee shall set forth in
the relevant Award Agreement.
7.2 STOCK APPRECIATION RIGHTS. A Stock Appreciation Right is an
Award granted with respect to a specified number of shares of Common Stock
entitling a Participant to receive an amount equal to the excess of the Fair
Market Value of a share of Common Stock on the date of exercise over the Fair
Market Value of a share of Common Stock on the date of grant of the Stock
Appreciation Right, multiplied by the number of shares of Common Stock with
respect to which the Stock Appreciation Right shall have been exercised.
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7.3 GRANT. A Stock Appreciation Right may be granted in addition to
any other Award under the Plan or in tandem with or independent of a Non-
Qualified Stock Option.
7.4 DATE OF EXERCISABILITY. Unless otherwise provided in the
Participant's employment agreement or the Award Agreement in respect of any
Stock Appreciation Right, a Stock Appreciation Right may be exercised by a
Participant, in accordance with and subject to all of the procedures established
by the Committee, in whole or in part at any time and from time to time during
its specified term. Notwithstanding the preceding sentence, in no event shall a
Stock Appreciation Right be exercisable (a) prior to the date which is six (6)
months after the date on which the Stock Appreciation Right was granted, (b)
prior to the exercisability of any Non-Qualified Stock Option with which it is
granted in tandem or (c) if the Fair Market Value of the Common Stock on the
date of such exercise does not exceed the Fair Market Value of the Common Stock
on the date of grant of such Stock Appreciation Rights. The Committee may also
provide, as set forth in the relevant Award Agreement and without limitation,
that some Stock Appreciation Rights shall be automatically exercised on one or
more dates specified therein by the Committee.
7.5 FORM OF PAYMENT. Upon exercise of a Stock Appreciation Right,
payment may be made in cash, in Restricted Shares or in shares of unrestricted
Common Stock, or in any combination thereof, as the Committee, in its sole
discretion, shall determine and provide in the relevant Award Agreement.
7.6 TANDEM GRANT. The right of a Participant to exercise a tandem
Stock Appreciation Right shall terminate to the extent such Participant
exercises the Non-Qualified Stock Option to which such Stock Appreciation Right
is related. Subject to the limitations set forth in Section 7.4 of the Plan,
any Stock Appreciation Right granted in tandem with a Stock Option shall be
exercisable and lapse according to the same vesting schedule and lapse rules
established for such tandem Stock Option.
8. RESTRICTED SHARES.
8.1 TERMS AND CONDITIONS. Grants of Restricted Shares shall be
subject to the terms and conditions set forth in this Section 8 and any
additional terms and conditions, not inconsistent with the express terms and
provisions of the Plan, as the Committee shall set forth in the relevant Award
Agreement. Restricted Shares may be granted alone or in addition to any other
Awards under the Plan. Subject to the terms of the Plan, the Committee shall
determine the number of Restricted Shares to be granted to a Participant and the
Committee may provide or impose different terms and conditions on any particular
Restricted Shares grant made to any Participant. With respect to
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each Participant receiving an Award of Restricted Shares, there shall be
issued a stock certificate (or certificates) in respect of such Restricted
Stock. Such stock certificate(s) shall be registered in the name of such
Participant, shall be accompanied by a stock power duly executed by such
Participant, and shall bear, among other required legends, a legend
substantially in the following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including,
without limitation, forfeiture events) contained in the Steinway
Musical Instruments, Inc. 1996 Stock Plan and an Award Agreement
entered into between the registered owner hereof and Steinway Musical
Instruments, Inc. Copies of such Plan and Award Agreement are on file
in the office of the Secretary of Steinway Musical Instruments, Inc.,
600 Industrial Parkway, Elkhart, Indiana 46516. Steinway Musical
Instruments, Inc. will furnish to the recordholder of the certificate,
without charge and upon written request at its principal place of
business, a copy of such Plan and Award Agreement. Steinway Musical
Instruments, Inc. reserves the right to refuse to record the transfer
of this certificate until all such restrictions are satisfied, all
such terms are complied with and all such conditions are satisfied."
Such stock certificate evidencing such shares shall, in the sole discretion of
the Committee, be deposited with and held in custody by the Company until the
restrictions thereon shall have lapsed and all of the terms and conditions
applicable to such grant shall have been satisfied.
8.2 RESTRICTED SHARE GRANTS. A grant of Restricted Shares is an
Award of shares of Common Stock granted to a Participant, subject to such
restrictions, terms and conditions as the Committee deems appropriate,
including, without limitation, (a) restrictions on the sale, assignment,
transfer, hypothecation or other disposition of such shares, (b) the requirement
that the Participant deposit such shares with the Company while such shares are
subject to such restrictions, and (c) the requirement that such shares be
forfeited upon termination of employment for specified reasons within a
specified period of time or for other reasons.
8.3 RESTRICTION PERIOD. In accordance with Sections 8.1 and 8.2 of
the Plan and unless otherwise determined by the Committee (in its sole
discretion) at any time and from time to time, Restricted Shares shall only
become unrestricted and vested in the Participant in accordance with such
vesting schedule relating to the service performance restriction applicable
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to such Restricted Shares, if any, as the Committee may establish in the
relevant Award Agreement (the "Restriction Period"). Notwithstanding the
preceding sentence, in no event shall the Restriction Period be less than one
(1) year after the date of grant. During the Restriction Period, such stock
shall be and remain unvested and a Participant may not sell, assign,
transfer, pledge, encumber or otherwise dispose of or hypothecate such Award.
Upon satisfaction of the vesting schedule and any other applicable
restrictions, terms and conditions, the Participant shall be entitled to
receive payment of the Restricted Shares or a portion thereof, as the case
may be, as provided in Section 8.4 of the Plan.
8.4 PAYMENT OF RESTRICTED SHARE GRANTS. After the satisfaction
and/or lapse of the restrictions, terms and conditions established by the
Committee in respect of a grant of Restricted Shares, a new certificate, without
the legend set forth in Section 8.1 of the Plan, for the number of shares of
Common Stock which are no longer subject to such restrictions, terms and
conditions shall, as soon as practicable thereafter, be delivered to the
Participant.
8.5 STOCKHOLDER RIGHTS. A Participant shall have, with respect to
the shares of Common Stock underlying a grant of Restricted Shares, all of the
rights of a stockholder of such stock (except as such rights are limited or
restricted under the Plan or in the relevant Award Agreement). Any stock
dividends paid in respect of unvested Restricted Shares shall be treated as
additional Restricted Shares and shall be subject to the same restrictions and
other terms and conditions that apply to the unvested Restricted Shares with
respect to which such stock dividends are issued.
9. PERFORMANCE UNITS.
9.1 TERMS AND CONDITIONS. Performance Units shall be subject to the
terms and conditions set forth in this Section 9 and any additional terms and
conditions, not inconsistent with the express provisions of the Plan, as the
Committee shall set forth in the relevant Award Agreement.
9.2 PERFORMANCE UNIT GRANTS. A Performance Unit is an Award of units
(with each unit representing such monetary amount as is designated by the
Committee in the Award Agreement) granted to a Participant, subject to such
terms and conditions as the Committee deems appropriate, including, without
limitation, the requirement that the Participant forfeit such units (or a
portion thereof) in the event certain performance criteria or other conditions
are not met within a designated period of time.
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9.3 GRANTS. Performance Units may be granted alone or in addition to
any other Awards under the Plan. Subject to the terms of the Plan, the
Committee shall determine the number of Performance Units to be granted to a
Participant and the Committee may impose different terms and conditions on any
particular Performance Units granted to any Participant.
9.4 PERFORMANCE GOALS AND PERFORMANCE PERIODS. Participants
receiving a grant of Performance Units shall only earn into and be entitled to
payment in respect of such Awards if the Company and/or the Participant achieves
certain pre-determined and objective performance goals (the "Performance Goals")
during and in respect of a designated performance period (the "Performance
Period"). The Performance Goals and the Performance Period shall be established
by the Committee, in its sole discretion. The Committee shall establish
Performance Goals for each Performance Period prior to, or as soon as
practicable after, the commencement of such Performance Period. The Committee
shall also establish a schedule or schedules for Performance Units setting forth
the portion of the Award which will be earned or forfeited based on the degree
of achievement, or lack thereof, of the Performance Goals at the end of the
relevant Performance Period. In setting Performance Goals and until otherwise
determined by the Committee, the performance goal or goals shall be the
attainment of one or more of any of total stockholder return, return on equity,
net earnings growth, sales or revenue growth, objective comparisons to peer
companies, or cash flow. Such performance measures shall be defined as to their
respective components and meaning by the Committee (in its sole discretion).
Performance Units, performance-based Restricted Shares, and certain other stock-
based awards subject to performance criteria are intended to be "qualified
performance-based compensation" within the meaning of Section 162(m) of the Code
and shall be paid solely on account of the attainment of one or more
preestablished, objective performance goals within the meaning of such section
and the regulations thereunder.
9.5 PAYMENT OF UNITS. With respect to each Performance Unit, the
Participant shall, if the applicable Performance Goals have been achieved, or
partially achieved, as determined by the Committee in its sole discretion, by
the Company during the relevant Performance Period, be entitled to receive
payment in an amount equal to the designated value of each Performance Unit
times the number of such units so earned. Payment in settlement of earned
Performance Units shall be made as soon as practicable following the conclusion
of the respective Performance Period in cash, in unrestricted Common Stock, or
in Restricted Shares, or in any combination thereof, as the Committee in its
sole discretion, shall determine and provide in the relevant Award Agreement.
Notwithstanding the above, the payout of any such Award to a "covered employee"
(as defined in
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Section 162(m) of the Code) may be reduced, but not increased, based on the
degree of attainment of other performance criteria or otherwise in the sole
discretion of the Committee.
10. DEFERRAL ELECTIONS/TAX REIMBURSEMENTS/DIVIDEND EQUIVALENTS. The
Committee may permit a Participant to elect to defer receipt of any payment of
cash or any delivery of shares of Common Stock that would otherwise be due to
such Participant by virtue of the exercise, earn out or settlement of any Award
made under the Plan. If any such election is permitted, the Committee shall
establish rules and procedures for such deferrals, including, without
limitation, the payment or crediting of reasonable interest on such deferred
amounts credited in cash, and the payment or crediting of dividend equivalents
in respect of deferrals credited in units of Common Stock. The Committee may
also provide in the relevant Award Agreement for a tax reimbursement cash
payment to be made by the Company in favor of any Participant in connection with
the tax consequences resulting from the grant, exercise, settlement or earn out
of any Award made under the Plan. In addition to the provisions of Section 8.5
of the Plan, Awards of Stock Options, and/or Stock Appreciation Rights, may, in
the sole discretion of the Committee and if provided for in the relevant Award
Agreement, earn dividend equivalents. In respect of any such Award which is
outstanding on a dividend record date for Common Stock, the Participant shall be
credited with an amount equal to the amount of cash or stock dividends that
would have been paid on the shares of Common Stock covered by such Award had
such covered shares been issued and outstanding on such dividend record date.
The Committee shall establish such rules and procedures governing the crediting
of such dividend equivalents, including, without limitation, the amount, the
timing, form of payment and payment contingencies and/or restrictions of such
dividend equivalents, as it deems appropriate or necessary.
11. MAXIMUM YEARLY AWARDS. The maximum annual Award amounts in this
Section 11 are subject to adjustment under Section 14.2 and are subject to the
Plan maximum under Section 4.2.
11.1 PERFORMANCE-BASED AWARDS. All Participants in the aggregate may
not receive in any calendar year Performance Units, performance-based Restricted
Shares and other stock-based Awards subject to performance criteria exceeding,
in the aggregate, seventy-five percent (75%) of the Maximum Shares. The maximum
amount payable in respect of such Awards in any calendar year may not exceed
seventy-five percent (75%) of the Maximum Shares (or the then equivalent Fair
Market Value thereof) in the aggregate to all Participants and thirty-three
percent (33%) of the Maximum Shares (or the then equivalent Fair Market Value
thereof) in the case of any individual Participant.
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11.2 STOCK OPTIONS AND SARS. All Participants in the aggregate may
not receive in any calendar year Awards of Stock Options and Stock Appreciation
Rights, in the aggregate, exceeding seventy-five percent (75%) of the Maximum
Shares. Each individual Participant may not receive in any calendar year Awards
of Stock Options and Stock Appreciation Rights exceeding thirty-three percent
(33%) of the Maximum Shares.
12. TERMINATION OF EMPLOYMENT.
12.1 GENERAL. Subject to the terms and conditions of Section 15 of
the Plan, if, and to the extent that, the terms and conditions under which an
Award may be exercised, vested, earned out or settled after a Participant's
termination of employment for any particular reason shall not have been set
forth (a) in the relevant Award Agreement, by and as determined by the Committee
in its sole discretion, or (b) in the Participant's employment agreement, if
any, the following terms and conditions shall apply as appropriate and as not
inconsistent with the terms and conditions, if any, contained in such Award
Agreement and/or employment agreement:
12.1.1 OPTIONS/SARS. Except as otherwise provided in this
Section 12.1.1, if a Participant's employment with the Company and its
Subsidiaries is terminated for any reason, such Participant's rights, if
any, to exercise any then exercisable Stock Options and/or Stock
Appreciation Rights, if any, shall terminate ninety (90) days after the
date of such termination (but not beyond the term of any such option and/or
stock appreciation right as determined under Sections 6.4 and 7.4) and upon
such date the Participant (and such Participant's estate, designated
beneficiary or other legal representative) shall forfeit any rights or
interests in or with respect to any such Stock Options or Stock
Appreciation Rights. The Committee, in its sole discretion, may determine
that any such Participant's Stock Options and/or Stock Appreciation Rights,
if any, to the extent exercisable immediately prior to any termination of
employment (other than a termination due to death, Retirement or
Disability), may remain exercisable for an additional specified time period
after such ninety (90) day or shorter period expires (subject to any other
applicable terms and provisions of the Plan (and any rules or procedures
thereunder) and the relevant Award Agreement). If any termination of
employment is due to death, Retirement or Disability, a Participant (and
such Participant's estate, designated beneficiary or other legal
representative, as the case may be) shall have the right, subject to the
applicable terms and provisions of the Plan (and any rules or procedures
thereunder) and the relevant Award Agreement, to exercise such Stock
Options and/or Stock Appreciation Rights, if any, at any time within the
two (2) year period
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following such termination due to death, Retirement or Disability (but
not beyond the term of any such option and/or stock appreciation right
as determined under Sections 6.4 and 7.4).
12.1.2 RESTRICTED SHARES. If a Participant's employment with
the Company and its Subsidiaries is terminated for any reason (including,
without limitation, Disability, Retirement or death) prior to the actual or
deemed (under Section 15 of the Plan) satisfaction and/or lapse of the
restrictions, terms and conditions applicable to a grant of Restricted
Shares, such Restricted Shares shall immediately be cancelled and the
Participant (and such Participant's estate, designated beneficiary or other
legal representative) shall forfeit any rights or interests in and with
respect to any such Restricted Shares. Notwithstanding the immediately
preceding sentence, the Committee, in its sole discretion, may determine,
prior to or within ninety (90) days after the date of such termination,
that all or a portion of any such Participant's Restricted Shares shall not
be so cancelled and forfeited.
12.1.3 PERFORMANCE UNITS. If a Participant's employment with
the Company and its Subsidiaries is terminated for any reason (including,
without limitation, Disability, Retirement or death) prior to the actual or
deemed (under Section 15 of the Plan) completion of any Performance Period,
any Performance Units granted in respect of such Performance Period shall,
if and to the extent the relevant Performance Goals for such Performance
Period have not been actually or so deemed achieved as of the date of such
termination, immediately be cancelled and the Participant (and such
Participant's estate, designated beneficiary or other legal representative)
shall forfeit any rights or interests in and with respect to any such
Performance Units. Notwithstanding the immediately preceding sentence, the
Committee, in its sole discretion may determine, prior to or within ninety
(90) days after the date of such termination, that all or a portion of any
such Participant's Performance Units shall not be so cancelled and
forfeited.
13. NON-TRANSFERABILITY OF AWARDS. No Award under the Plan or any Award
Agreement, and no rights or interests herein or therein, shall or may be
assigned, transferred, sold, exchanged, encumbered, pledged or otherwise
hypothecated or disposed of by a Participant or any beneficiary(ies) of any
Participant, except by testamentary disposition by the Participant or the laws
of descent and distribution. No such interest shall be subject to execution,
attachment or similar legal process, including, without limitation, seizure for
the payment of the Participant's debts, judgements, alimony or separate
maintenance. During the
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lifetime of a Participant, Stock Options and Stock Appreciation Rights
are exercisable only by the Participant.
14. CHANGES IN CAPITALIZATION AND OTHER MATTERS.
14.1 NO CORPORATE ACTION RESTRICTION. The existence of the Plan, any
Award Agreement and/or the Awards granted hereunder shall not limit, affect or
restrict in any way the right or power of the Board or the stockholders of the
Company to make or authorize (a) any adjustment, recapitalization,
reorganization or other change in the Company's or any Subsidiary's capital
structure or its business, (b) any merger, consolidation or change in the
ownership of the Company or any Subsidiary, (c) any issue of bonds, debentures,
capital, preferred or prior preference stocks ahead of or affecting the
Company's or any Subsidiary's capital stock or the rights thereof, (d) any
dissolution or liquidation of the Company or any Subsidiary, (e) any sale or
transfer of all or any part of the Company's or any Subsidiary's assets or
business, or (f) any other corporate act or proceeding by the Company or any
Subsidiary. No Participant, beneficiary or any other person shall have any
claim against any member of the Board or the Committee, the Company or any
Subsidiary, or any employees, officers or agents of the Company or any
subsidiary, as a result of any such action.
14.2 RECAPITALIZATION ADJUSTMENTS. In the event of any change in
capitalization affecting the Common Stock of the Company, including, without
limitation, a stock dividend or other distribution, stock split, reverse stock
split, recapitalization, consolidation, subdivision, split-up, spin-off, split-
off, combination or exchange of shares or other form of reorganization or
recapitalization, or any other change affecting the Common Stock, the Committee
shall authorize and make such proportionate adjustments, if any, as the
Committee deems appropriate to reflect such change, including, without
limitation, with respect to the aggregate number of shares of the Common Stock
for which Awards in respect thereof may be granted under the Plan, the maximum
number of shares of the Common Stock which may be granted or awarded to any
Participant, the number of shares of the Common Stock covered by each
outstanding Award, and the exercise price or other price per share of Common
Stock in respect of outstanding Awards.
14.3 CERTAIN MERGERS.
14.3.1 If the Company enters into or is involved in any merger,
reorganization or other business combination with any person or entity
(such merger, reorganization or other business combination to be referred
to herein as a "Merger Event") and as a result of any such Merger Event the
Company will be or is the surviving corporation, a
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Participant shall be entitled to receive, as of the date of the
execution of the agreement evidencing the Merger Event (the "Execution
Date") and with respect to both exercisable and unexercisable Stock
Options and/or Stock Appreciation Rights (but only to the extent not
previously exercised), substitute stock options and/or stock
appreciation rights in respect of the shares of the surviving
corporation on such terms and conditions, as to the number of shares,
pricing and otherwise, which shall substantially preserve the value,
rights and benefits of any affected Stock Options or Stock Appreciation
Rights granted hereunder as of the date of the consummation of the
Merger Event. Notwithstanding anything to the contrary in this Section
14.3, if any Merger Event occurs, the Company shall have the right to
pay to each affected Participant an amount in cash or certified check
equal to the excess of the Fair Market Value of the Common Stock
underlying any affected unexercised Stock Options or Stock Appreciation
Rights as of the Execution Date (whether then exercisable or not) over
the aggregate exercise price of such unexercised Stock Options and/or
Stock Appreciation Rights, as the case may be.
14.3.2 If, in the case of a Merger Event in which the Company
will not be, or is not, the surviving corporation, and the Company
determines not to make the cash or certified check payment described in
Section 14.3.1 of the Plan, the Company shall compel and obligate, as a
condition of the consummation of the Merger Event, the surviving or
resulting corporation and/or the other party to the Merger Event, as
necessary, or any parent, subsidiary or acquiring corporation thereof, to
grant substitute stock options or stock appreciation rights in respect of
the shares of common or other capital stock of such surviving or resulting
corporation on such terms and conditions, as to the number of shares,
pricing and otherwise, which shall substantially preserve the value, rights
and benefits of any affected Stock Options and/or Stock Appreciation Rights
previously granted hereunder as of the date of the consummation of the
Merger Event.
14.3.3 Upon receipt by any affected Participant of any such
cash, certified check or substitute stock options or stock appreciation
rights as a result of any such Merger Event, such Participant's affected
Stock Options and/or Stock Appreciation Rights for which such cash,
certified check or substitute awards was received shall be thereupon
cancelled without the need for obtaining the consent of any such affected
Participant.
14.3.4 The foregoing adjustments and the manner of application
of the foregoing provisions, including, without limitation, the issuance of
any substitute stock
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options and/or stock appreciation rights, shall be determined in good
faith by the Committee in its sole discretion. Any such adjustment may
provide for the elimination of fractional shares without compensation.
15. CHANGE OF CONTROL.
15.1 ACCELERATION OF AWARDS VESTING. Anything in the Plan to the
contrary notwithstanding, if a Change of Control of the Company occurs (a) all
Stock Options and/or Stock Appreciation Rights then unexercised and outstanding
shall become fully vested and exercisable as of the date of the Change of
Control, (b) all restrictions, terms and conditions applicable to all Restricted
Shares then outstanding shall be deemed lapsed and satisfied as of the date of
the Change of Control, and (c) the Performance Period shall be deemed completed
and all Performance Units shall be deemed to have been fully earned as of the
date of the Change of Control. The immediately preceding sentence shall apply
to only those Participants (i) who are employed by the Company and/or one of its
Subsidiaries as of the date of the Change of Control, or (ii) to whom Section
15.3 below is applicable.
15.2 PAYMENT AFTER CHANGE OF CONTROL. Within thirty (30) days after
a Change of Control occurs, (a) the holder of an Award of Restricted Shares
shall receive a new certificate for such shares without the legend set forth in
Section 8 of the Plan, and (b) the holder of Performance Units shall receive
payment of the value of such grants in cash.
15.3 TERMINATION AS A RESULT OF A CHANGE OF CONTROL. Anything in the
Plan to the contrary notwithstanding, if a Change of Control occurs and if the
Participant's employment is terminated before such Change of Control and it is
reasonably demonstrated by the Participant that such employment termination (a)
was at the request, directly or indirectly, of a third party who has taken steps
reasonably calculated to effect the Change of Control, or (b) otherwise arose in
connection with or in anticipation of the Change of Control, then for purposes
of this Section 15, the Change of Control shall be deemed to have occurred
immediately prior to such Participant's employment termination.
15.4 CHANGE OF CONTROL. For the purpose of the Plan, a "Change of
Control" shall be deemed to have occurred if Kyle R. Kirkland and Dana D.
Messina collectively do not have, directly or indirectly, voting control of at
least 50% of the voting securities of the Company, or any successor thereto,
entitled to vote generally in the election of directors.
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16. AMENDMENT, SUSPENSION AND TERMINATION.
16.1 IN GENERAL. The Board may suspend or terminate the Plan (or any
portion thereof) at any time and may amend the Plan at any time and from time to
time in such respects as the Board may deem advisable to insure that any and all
Awards conform to or otherwise reflect any change in applicable laws or
regulations, or to permit the Company or the Participants to benefit from any
change in applicable laws or regulations, or in any other respect the Board may
deem to be in the best interests of the Company or any Subsidiary; PROVIDED,
HOWEVER, that no such amendment to the Plan shall, without stockholder approval
(a) except as provided in Section 14 of the Plan, materially increase the number
of shares of Common Stock which may be issued under the Plan, (b) materially
modify the requirements as to eligibility for participation in the Plan, (c)
materially increase the benefits accruing to Participants under the Plan (this
Section 16.1(c) shall not apply to any amendment or modification of any Award
Agreement permitted under Section 16.2 if such amendment or modification would
not require stockholder approval under SEC Rule 16b-3), or (d) extend the
termination date of the Plan. No such amendment, suspension or termination
shall (x) materially adversely affect the rights of any Participant under any
outstanding Stock Options, Stock Appreciation Rights, Performance Units or
Restricted Share grants, without the consent of such Participant, or (y) make
any change that would disqualify the Plan, or any other plan of the Company or
any Subsidiary intended to be so qualified, from (i) the exemption provided by
SEC Rule 16b-3, or (ii) the benefits provided under Section 422 of the Code, or
any successor provision thereto.
16.2 AWARD AGREEMENTS. The Committee may (in its sole discretion)
amend or modify at any time and from time to time the terms and provisions of
any outstanding Stock Options, Stock Appreciation Rights, Performance Units or
Restricted Share grants, in any manner to the extent that the Committee under
the Plan or any Award Agreement could have initially determined the
restrictions, terms and provisions of such Stock Options, Stock Appreciation
Rights, Performance Units and/or Restricted Share grants, including, without
limitation, changing or accelerating (a) the date or dates as of which such
Stock Options or Stock Appreciation Rights shall become exercisable, (b) the
date or dates as of which such Restricted Share grants shall become vested, or
(c) the performance period or goals in respect of any Performance Units. No
such amendment or modification shall, however, materially adversely affect the
rights of any Participant under any such Award without the consent of such
Participant.
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17. MISCELLANEOUS.
17.1 TAX WITHHOLDING. The Company shall have the right to deduct
from any payment or settlement under the Plan, including, without limitation,
the exercise of any Stock Option or Stock Appreciation Right, or the delivery,
transfer or vesting of any Common Stock or Restricted Shares, any federal,
state, local or other taxes of any kind which the Committee, in its sole
discretion, deems necessary to be withheld to comply with the Code and/or any
other applicable law, rule or regulation. If the Committee, in its sole
discretion, permits shares of Common Stock to be used to satisfy any such tax
withholding, such Common Stock shall be valued based on the Fair Market Value of
such stock as of the date the tax withholding is required to be made, such date
to be determined by the Committee. The Committee may establish rules limiting
the use of Common Stock to meet withholding requirements by Participants who are
subject to Section 16 of the Exchange Act.
17.2 NO RIGHT TO EMPLOYMENT. Neither the adoption of the Plan, the
granting of any Award, nor the execution of any Award Agreement, shall confer
upon any employee, consultant or advisor of the Company or any Subsidiary any
right to continued employment with or engagement by the Company or any
Subsidiary, as the case may be, nor shall it interfere in any way with the
right, if any, of the Company or any Subsidiary to terminate the employment or
engagement of any employee, consultant or advisor at any time for any reason.
17.3 UNFUNDED PLAN. The Plan shall be unfunded and the Company shall
not be required to segregate any assets in connection with any Awards under the
Plan. Any liability of the Company to any person with respect to any Award
under the Plan or any Award Agreement shall be based solely upon the contractual
obligations that may be created as a result of the Plan or any such award or
agreement. No such obligation of the Company shall be deemed to be secured by
any pledge of, encumbrance on, or other interest in, any property or asset of
the Company or any Subsidiary. Nothing contained in the Plan or any Award
Agreement shall be construed as creating in respect of any Participant (or
beneficiary thereof or any other person) any equity or other interest of any
kind in any assets of the Company or any Subsidiary or creating a trust of any
kind or a fiduciary relationship of any kind between the Company, any Subsidiary
and/or any such Participant, any beneficiary thereof or any other person.
17.4 PAYMENTS TO A TRUST. The Committee is authorized to cause to be
established a trust agreement or several trust agreements or similar
arrangements from which the Committee may make payments of amounts due or to
become due to any Participants under the Plan.
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17.5 OTHER COMPANY BENEFIT AND COMPENSATION PROGRAMS. Payments and
other benefits received by a Participant under an Award made pursuant to the
Plan shall not be deemed a part of a Participant's compensation for purposes of
the determination of benefits under any other employee welfare or benefit plans
or arrangements, if any, provided by the Company or any Subsidiary unless
expressly provided in such other plans or arrangements, or except where the
Board expressly determines in writing that inclusion of an Award or portion of
an Award should be included to accurately reflect competitive compensation
practices or to recognize that an Award has been made in lieu of a portion of
competitive annual base salary or other cash compensation. Awards under the
Plan may be made in addition to, in combination with, or as alternatives to,
grants, awards or payments under any other plans or arrangements of the Company
or its Subsidiaries. The existence of the Plan notwithstanding, the Company or
any Subsidiary may adopt such other compensation plans or programs and
additional compensation arrangements as it deems necessary to attract, retain
and motivate employees or consultants and advisors.
17.6 LISTING, REGISTRATION AND OTHER LEGAL COMPLIANCE. No Awards or
shares of the Common Stock shall be required to be issued or granted under the
Plan unless legal counsel for the Company shall be satisfied that such issuance
or grant will be in compliance with all applicable federal and state securities
laws and regulations and any other applicable laws or regulations. The
Committee may require, as a condition of any payment or share issuance, that
certain agreements, undertakings, representations, certificates and/or
information, as the Committee may deem necessary or advisable, be executed or
provided to the Company to assure compliance with all such applicable laws or
regulations. Certificates for shares of the Restricted Shares and/or Common
Stock delivered under the Plan may be subject to such stock-transfer orders and
such other restrictions as the Committee may deem advisable under the rules,
regulations, or other requirements of the Securities and Exchange Commission,
any stock exchange upon which the Common Stock is then listed, and any
applicable federal or state securities law. In addition, if, at any time
specified herein (or in any Award Agreement or otherwise) for (a) the making of
any Award, or the making of any determination, (b) the issuance or other
distribution of Restricted Shares and/or Common Stock, or (c) the payment of
amounts to or through a Participant with respect to any Award, any law, rule,
regulation or other requirement of any governmental authority or agency shall
require either the Company, any Subsidiary or any Participant (or any estate,
designated beneficiary or other legal representative thereof) to take any action
in connection with any such determination, any such shares to be issued or
distributed, any such payment, or the making of any such determination, as the
case may be, shall be deferred until such required action is taken. With
respect to
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persons subject to Section 16 of the Exchange Act, transactions under the
Plan are intended to comply with all applicable conditions of SEC Rule 16b-3.
To the extent any provision of the Plan or any action by the administrators
of the Plan fails to so comply with such rule, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Committee.
17.7 AWARD AGREEMENTS. Each Participant receiving an Award under the
Plan shall enter into an Award Agreement with the Company in a form specified by
the Committee. Each such Participant shall agree to the restrictions, terms and
conditions of the Award set forth therein and in the Plan.
17.8 DESIGNATION OF BENEFICIARY. Each Participant to whom an Award
has been made under the Plan may designate a beneficiary or beneficiaries to
exercise any option or to receive any payment which under the terms of the Plan
and the relevant Award Agreement may become exercisable or payable on or after
the Participant's death. At any time, and from time to time, any such
designation may be changed or cancelled by the Participant without the consent
of any such beneficiary. Any such designation, change or cancellation must be
on a form provided for that purpose by the Committee and shall not be effective
until received by the Committee. If no beneficiary has been designated by a
deceased Participant, or if the designated beneficiaries have predeceased the
Participant, the beneficiary shall be the Participant's estate. If the
Participant designates more than one beneficiary, any payments under the Plan to
such beneficiaries shall be made in equal shares unless the Participant has
expressly designated otherwise, in which case the payments shall be made in the
shares designated by the Participant.
17.9 LEAVES OF ABSENCE/TRANSFERS. The Committee shall have the power
to promulgate rules and regulations and to make determinations, as it deems
appropriate, under the Plan in respect of any leave of absence from the Company
or any Subsidiary granted to a Participant. Without limiting the generality of
the foregoing, the Committee may determine whether any such leave of absence
shall be treated as if the Participant has terminated employment with the
Company or any such Subsidiary. If a Participant transfers within the Company,
or to or from any Subsidiary, such Participant shall not be deemed to have
terminated employment as a result of such transfers.
17.10 LOANS. Subject to applicable law, the Committee may provide,
pursuant to Plan rules, for the Company or any Subsidiary to make loans to
Participants to finance the exercise price of any Stock Options, as well as the
withholding obligation under Section 17.1 of the Plan and/or the estimated or
actual taxes payable by the Participant as a result of the exercise of
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such Stock Option and the Committee may prescribe the terms and conditions of
any such loan.
17.11 GOVERNING LAW. The Plan and all actions taken thereunder shall
be governed by and construed in accordance with the laws of the State of
Delaware, without reference to the principles of conflict of laws thereof. Any
titles and headings herein are for reference purposes only, and shall in no way
limit, define or otherwise affect the meaning, construction or interpretation of
any provisions of the Plan.
17.12 EFFECTIVE DATE. Subject to the occurrence of the Closing, the
Plan shall be effective (the "Effective Date") upon the later to occur of (a)
its adoption by the Board and (b) the approval of the Plan by the Company's
stockholders in accordance with SEC Rule 16b-3 and Section 422 of the Code.
* * *
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EXHIBIT 23.2
INDEPENDENT AUDITORS CONSENT
We consent to the use in this Registration Statement No. 333-3667 of Selmer
Industries, Inc. on Form S-1 of our report dated September 9, 1994 appearing in
the Prospectus, which is part of this Registration Statement and to the
reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 1, 1996
