<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-75072
STEINWAY MUSICAL INSTRUMENTS, INC.
(FORMERLY SELMER INDUSTRIES, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 35-1910745
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
and
THE SELMER COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4432228
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Industrial Parkway, Elkhart, Indiana 46516
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (219) 522-1675
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements during the past 90 days. Yes [X] No [ ]
Number of shares of Common Stock issued and outstanding as of October 24, 1996:
6,780,286
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<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
FORM 10Q
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets
September 28, 1996 and December 31, 1995. . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations
Nine months ended September 28, 1996 and September 30, 1995 . . 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 28, 1996 and September 30, 1995 . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 28, DECEMBER 31,
1996 1995
-------- --------
<C> <C> <C>
ASSETS
Current assets:
Cash $ 315 $ 3,706
Accounts, notes and leases receivable, net of allowance for
bad debts of $7,267 and $6,281 in 1996 and 1995, respectively 67,757 41,860
Inventories 76,920 79,063
Prepaid expenses and other current assets 2,978 3,058
Deferred tax asset 4,570 4,693
-------- --------
Total current assets 152,540 132,380
Property, plant and equipment, net of accumulated depreciation of
$12,385 and $7,596 in 1996 and 1995, respectively 61,138 64,132
Other assets, net 27,850 32,114
Cost in excess of fair value of net assets acquired, net of accumulated
amortization of $1,678 and $1,024 in 1996 and 1995, respectively 33,765 35,170
-------- --------
TOTAL ASSETS $275,293 $263,796
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 2,988 $ 2,306
Accounts payable 5,149 8,172
Other current liabilities 27,388 31,289
-------- --------
Total current liabilities 35,525 41,767
Long-term debt 132,821 171,733
Deferred taxes 26,973 29,452
Non-current pension liability 14,773 15,016
-------- --------
Total liabilities 210,092 257,968
Commitments and Contingencies
Stockholders' equity:
Common and preferred equity 5 1
Additional paid in capital 68,982 5,629
Accumulated deficit (2,138) (2,261)
Other stockholders' equity (1,648) 2,459
-------- --------
Total stockholders' equity 65,201 5,828
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $275,293 $263,796
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 61,460 $ 59,223 $ 194,876 $ 130,937
Cost of sales 41,798 47,575 132,527 98,766
---------- ---------- ---------- ----------
Gross profit 19,662 11,648 62,349 32,171
Operating Expenses:
Sales and marketing 6,831 6,638 22,330 14,599
Provision for doubtful accounts 194 141 604 539
General and administrative 4,061 3,754 11,934 7,369
Amortization 1,069 1,097 3,374 1,961
Other expense 112 207 359 649
---------- ---------- ---------- ----------
Total Operating Expenses 12,267 11,837 38,601 25,117
---------- ---------- ---------- ----------
Earnings (loss) from operations 7,395 (189) 23,748 7,054
Interest expense, net 4,592 5,160 14,168 9,768
---------- ---------- ---------- ----------
Income (loss) before income taxes
and extraordinary item 2,803 (5,349) 9,580 (2,714)
Provision for (benefit of) income taxes 1,603 (2,379) 5,089 (1,453)
---------- ---------- ---------- ----------
Income (loss) before extraordinary item 1,200 (2,970) 4,491 (1,261)
Extraordinary item - Early extinguishment
of debt (net of tax benefit of $2,640) 4,368 4,368
---------- ---------- ---------- ----------
Net income (loss) $ (3,168) $ (2,970) $ 123 $ (1,261)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) per share:
Income (loss) before extraordinary item $ .14 $ (1.98) $ .67 $ (.84)
Extraordinary item (.52) (.65)
---------- ---------- ---------- ----------
Net income (loss) per share $ (.38) $ (1.98) $ .02 $ (.84)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common and
common equivalent shares outstanding 8,337,127 1,499,900 6,750,460 1,499,900
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 123 $ (1,261)
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Depreciation and amortization 8,317 4,739
Provision for doubtful accounts 604 473
Amortization of senior note discount 213 206
Deferred tax benefit (1,666) (4,895)
Early extinguishment of debt 4,368 -
Other 10 132
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (26,888) (24,336)
Inventories 425 12,426
Prepaid expense and other current assets 143 318
Accounts payable (3,031) (2,140)
Accrued expenses 211 836
-------- ---------
Net cash flows from operating activities (17,171) (13,502)
Cash flows from investing activities
Capital expenditures (2,765) (2,680)
Proceeds from disposals of fixed assets 16 145
Acquisition of Steinway Musical Properties, Inc.
(net of cash acquired) - (102,790)
Increase in other assets (113) (248)
-------- ---------
Net cash flows from investing activities (2,862) (105,573)
Cash flows from financing activities
Net borrowings under line of credit agreement 15,704 15,547
Proceeds from issuance of long-term debt 4,639 110,000
Repayments of long-term debt (64,582) (5,499)
Proceeds from issuance of stock 61,022 -
-------- ---------
Net cash flows from financing activities 16,783 120,048
Effects of foreign exchange rate changes on cash (141) 34
-------- ---------
Increase (Decrease) in Cash (3,391) 1,007
Cash, beginning of period 3,706 380
-------- ---------
Cash, end of period $ 315 $ 1,387
-------- ---------
-------- ---------
Supplemental Cash Flow Information
Interest paid $ 11,368 $ 4,312
-------- ---------
-------- ---------
Taxes paid $ 8,698 $ 4,559
-------- ---------
-------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Steinway
Musical Instruments, Inc. (formerly Selmer Industries, Inc.) and subsidiaries
(the "Company") for the nine months ended September 28, 1996 and September
30, 1995 are unaudited. In the opinion of management, these statements have
been prepared on the same basis as the audited consolidated financial
statements as of and for the year ended December 31, 1995, and include all
adjustments which are of a normal and recurring nature, necessary for the
fair presentation of financial position, results of operations and cash flows
for the interim period. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto, together with management's discussion and analysis of
financial condition and results of operations, contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995. The
results of operations for the nine months ended September 28, 1996 are not
necessarily indicative of the results which may be expected for the entire
year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of
the Company include the accounts of its wholly-owned subsidiary, The Selmer
Company, Inc. ("Selmer") and Selmer's wholly-owned subsidiaries, Steinway
Musical Properties, Inc. ("Steinway") and Vincent Bach International, Ltd.
("VBI"). Significant intercompany balances have been eliminated in
consolidation.
RECLASSIFICATIONS - Certain reclassifications of 1995 amounts have been
made to conform to the financial statement classification adopted in 1996.
(3) COMMITMENTS AND CONTINGENCIES
Certain environmental matters are pending against the Company, which
might result in monetary damages, the amount of which, if any, cannot be
determined at the present time. Philips Electronics, a previous owner of the
Company, has agreed to hold the Company harmless from any financial liability
arising from these environmental matters which were pending as of December
29, 1988. Management believes that these matters will not have a material
adverse impact on the Company's results of operations or financial condition.
6
<PAGE>
(4) SUMMARIZED FINANCIAL INFORMATION
Steinway Musical Instruments, Inc. is a holding company whose only
material 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:
Nine Months Ended
September 28, December 31, September 28, September 30,
1996 1995 1996 1995
------------- ------------ ------------- -------------
Current assets $152,132 $132,380
Total assets 274,885 263,796
Current liabilities 34,921 41,767
Stockholder's equity 3,107 5,198
Total revenues $194,876 $130,937
Gross profit 62,349 32,171
Net loss (319) (1,261)
(5) STOCKHOLDERS' EQUITY
In August 1996, the Company completed an initial public offering of its
ordinary common stock which raised approximately $63.1 million. After
deducting expenses of approximately $2.1 million, the Company used the net
proceeds from the offering to repay $54.6 million of Senior Secured Notes,
and related prepayment penalties of $4.5 million. Prior to the offering, the
Company effected a 2.83-to-1 stock split. All share and per share amounts
have been retroactively adjusted for all periods presented and give effect to
the stock split.
(6) 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, 1995 (in thousands, except
per share data):
Nine Months
Ended
September 30, 1995
------------------
Revenues $174,863
Net income $ 403
Net income per share $ .07
7
<PAGE>
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.
8
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 28, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 408 $ (1,346) $ 780 $ 473 $ 315
Accounts, notes and leases receivable, net 52,530 6,009 9,218 67,757
Inventories 26,907 24,562 25,794 $ (343) 76,920
Prepaid expenses and other current assets 1,150 982 846 2,978
Deferred tax asset 700 1,888 1,982 4,570
------- -------- -------- ------- --------- --------
Total current assets 408 79,941 34,221 38,313 (343) 152,540
Property, plant and equipment, net 14,254 27,136 19,748 61,138
Investment in subsidiaries 7,335 105,630 30,521 178 (143,664) -
Intercompany 62,305 1,343 (63,648) -
Other assets, net 2,734 16,568 9,861 (1,313) 27,850
Cost in excess of fair value
of net assets acquired, net 9,976 11,849 11,940 33,765
------- -------- -------- ------- --------- --------
TOTAL ASSETS $70,048 $213,878 $120,295 $80,040 $(208,968) $275,293
------- -------- -------- ------- --------- --------
------- -------- -------- ------- --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current
portion of long-term debt $ 2,988 $ 2,988
Accounts payable $ 2,360 $ 1,578 1,211 5,149
Other current liabilities $ 604 8,800 8,233 10,205 $ (454) 27,388
------- -------- -------- ------- --------- --------
Total current liabilities 604 11,160 9,811 14,404 (454) 35,525
Long-term debt 126,445 2,626 3,750 132,821
Intercompany 15 61,967 74,893 6,319 (143,194) -
Deferred taxes 880 12,701 13,392 26,973
Non-current pension liability 2,206 13,880 (1,313) 14,773
------- -------- -------- ------- --------- --------
Total liabilities 619 202,658 100,031 51,745 (144,961) 210,092
Stockholders' equity 69,429 11,220 20,264 28,295 (64,007) 65,201
------- -------- -------- ------- --------- --------
Total $70,048 $213,878 $120,295 $80,040 $(208,968) $275,293
------- -------- -------- ------- --------- --------
------- -------- -------- ------- --------- --------
</TABLE>
9
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 28, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $98,141 $57,320 $43,400 $(3,985) $194,876
Cost of sales 66,217 41,119 29,210 (4,019) 132,527
------- ------- ------- ------- --------
Gross profit 31,924 16,201 14,190 34 62,349
Operating expenses:
Sales and marketing 9,679 7,396 5,343 (88) 22,330
Provision for doubtful accounts 500 76 28 604
General and administrative 4,256 4,136 3,542 11,934
Amortization 586 1,552 1,236 3,374
Other (income) expense 119 (515) 667 88 359
------- ------- ------- ------- --------
Total operating expenses 15,140 12,645 10,816 - 38,601
------- ------- ------- ------- --------
Earnings from operations 16,784 3,556 3,374 34 23,748
Interest (income) expense:
Interest income $(698) (6,791) - (36) 7,067 (458)
Interest expense 14,473 6,706 514 (7,067) 14,626
----- ------- ------- ------- ------- --------
Interest expense, net (698) 7,682 6,706 478 - 14,168
----- ------- ------- ------- ------- --------
Income (loss) before income taxes
and extraordinary item 698 9,102 (3,150) 2,896 34 9,580
Provision for (benefit of) income taxes 256 3,566 (1,131) 2,398 5,089
----- ------- ------- ------- ------- --------
Income (loss) before extraordinary item 442 5,536 (2,019) 498 34 4,491
Extraordinary item - Early
extinguishment of debt 4,368 4,368
----- ------- ------- ------- ------- --------
Net income (loss) $ 442 $ 1,168 $(2,019) $ 498 $ 34 $ 123
----- ------- ------- ------- ------- --------
----- ------- ------- ------- ------- --------
</TABLE>
10
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 28, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 442 $ 1,168 $(2,019) $ 498 $ 34 $ 123
Adjustments to reconcile net income (loss)
to cash flows from operating activities:
Depreciation and amortization 2,445 3,419 2,453 8,317
Provision for doubtful accounts 500 76 28 604
Amortization of senior note discount 213 - - 213
Deferred tax benefit - (864) (802) (1,666)
Early extinguishment of debt 4,368 - - 4,368
Other - 14 (4) 10
Changes in operating assets and
liabilities:
Accounts, notes and leases receivable (27,330) 1,418 (976) (26,888)
Inventories 1,604 (474) (671) (34) 425
Prepaid expense and other current assets (42) 34 151 143
Accounts payable (725) (651) (1,655) (3,031)
Accrued expenses 604 1,421 890 (2,250) (454) 211
-------- -------- ------- ------- ----- --------
Net cash flows from operating activities 1,046 (16,378) 1,843 (3,228) (454) (17,171)
Cash flows from investing activities
Capital expenditures (1,471) (1,084) (210) (2,765)
Proceeds from disposals of fixed assets - 12 4 16
(Increase) decrease in other assets 14 (10) (117) (113)
-------- -------- ------- ------- ----- --------
Net cash flows from investing activities (1,457) (1,082) (323) - (2,862)
Cash flows from financing activities
Net borrowings under
line of credit agreement 13,654 978 1,072 15,704
Issuance of long-term debt - - 4,639 4,639
Repayments of long-term debt (59,096) - (5,486) (64,582)
Proceeds from issuance of stock 61,022 - - - 61,022
Intercompany (61,660) 61,570 (2,585) 2,221 454 -
-------- -------- ------- ------- ----- --------
Net cash flows from financing activities (638) 16,128 (1,607) 2,446 454 16,783
Effect of exchange rate changes on cash - - (141) (141)
Increase (decrease) in cash 408 (1,707) (846) (1,246) - (3,391)
Cash, beginning of period 361 1,626 1,719 3,706
-------- -------- ------- ------- ----- --------
Cash, end of period $ 408 $ (1,346) $ 780 $ 473 $ - $ 315
-------- -------- ------- ------- ----- --------
-------- -------- ------- ------- ----- --------
</TABLE>
11
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS) (UNAUDITED)
INTRODUCTION
On May 25, 1995, Selmer acquired Steinway Musical Properties, Inc. for
approximately $104 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
interim financial statements of the Company as of and for the nine months
ending September 30, 1995 include the effects of the acquisition as well as
the results of operations for Steinway for the period May 25, 1995 to
September 30, 1995. On July 3, 1996, the Company changed its name from
Selmer Industries, Inc. to Steinway Musical Instruments, Inc.
Certain statements contained in the following Discussion and Analysis of
Financial Condition and Results of Operations are "forward-looking
statements" within the meaning of Section 21E of the Securities and Exchange
Act of 1934, as amended. These forward-looking statements represent the
Company's present expectations or beliefs concerning future events. The
Company cautions that such statements are necessarily based on certain
assumptions which are qualified by and subject to important factors. Such
factors could cause actual results to differ materially from those indicated
herein. Further information on these factors is included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 and its
Registration Statement on Form S-1 filed on May 14, 1996, particularly the
section therein entitled "Risk Factors."
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 28, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
NET SALES - Net sales increased by $2.2 million (3.8%) to $61.4 million
in the third quarter of 1996. While Selmer instrument unit sales remained
unchanged from the prior year, realization of price increases, as well as a
favorable mix of higher priced instruments, resulted in an 8.2% increase in
revenues for Selmer. Overall sales for Steinway pianos for the quarter were
essentially unchanged from the prior year. While unit volume in the United
States increased by 10%, continued sluggishness in Europe, a strong U.S.
dollar and a slight change in product mix combined to offset this increase.
GROSS PROFIT - Consistent with the increase in sales, gross profit
increased by $0.8 million (4.2%) to $19.7 million in the third quarter of
1996, after positive adjustments of $7.2 million in the third quarter of 1995
relating to purchase accounting adjustments to inventory. Gross margins
increased slightly to 32.0% for the third quarter of 1996 compared to 31.9%
in 1995.
OPERATING EXPENSES - Operating expenses increased by $0.4 million (3.6%)
to $12.3 million in the third quarter of 1996, reflecting both inflation and
increased sales volume. The expenses represented 20.0% of third quarter
sales in both 1996 and 1995.
EARNINGS FROM OPERATIONS - Earnings from operations increased by $0.4
million (5.1%) to $7.4 million in the third quarter of 1996, after positive
adjustments of $7.2 million in the third quarter of 1995 relating to purchase
accounting adjustments to inventory. These improved earnings resulted from
increased sales combined with consistent profit margins.
12
<PAGE>
NET INTEREST EXPENSE - Net interest expense decreased by $0.6 million
(11.0%) to $4.6 million in the third quarter of 1996 primarily due to lower
outstanding long-term debt balances resulting from the retirement of the
Company's Senior Secured Notes.
NINE MONTHS ENDED SEPTEMBER 28, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
NET SALES - Net sales increased by $63.9 million (48.8%) to $194.9
million in the first nine months of 1996. The Steinway Acquisition
contributed $52.6 million of this increase. Selmer sales increased $11.3
million (12.9%) with instrument unit growth of 5% representing $3.5 million
of the increase. The balance of the increase relates to price realization
and a favorable mix of higher priced instruments.
GROSS PROFIT - Gross profit increased by $20.5 million (49.0%) to $62.3
million in the first nine months of 1996, after positive adjustments of $9.6
million in the first nine months of 1995 relating to purchase accounting
adjustments to inventory. The Steinway Acquisition contributed $15.8 million
of the increase. Selmer gross profit increased $4.7 million (16.9%) in 1996,
reflecting the increase in sales. Gross margins increased slightly to 32.0%
in 1996 compared to 31.9% in 1995.
OPERATING EXPENSES - Operating expenses increased by $13.5 million
(53.7%) to $38.6 million in the first nine months of 1996. Steinway
operating expenses accounted for $12.4 million of the increase. Selmer
operating expenses increased $1.1 million (7.5%) for the first nine months
of 1996. This increase occurred primarily in sales and marketing expenses
associated with the increased sales level. As a percentage of sales, Selmer
operating expenses decreased from 16.6% of sales in 1995 to 15.8% in 1996.
EARNINGS FROM OPERATIONS - Earnings from operations increased by $7.0
million (42.1%) to $23.7 million in the first nine months of 1996, after
positive adjustments of $9.6 million in the first nine months of 1995
relating to purchase accounting adjustments to inventory. The Steinway
Acquisition contributed $3.4 million of the increase in earnings during the
period. The remaining $3.6 million increase in earnings represents the
contribution from Selmer's increased sales level.
NET INTEREST EXPENSE - Net interest expense increased by $4.4 million
(45.0%) to $14.2 million in the first nine months of 1996 primarily due to
higher outstanding long-term debt balances relating to the Steinway
Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily upon cash provided by operations,
supplemented as necessary by seasonal borrowings under its working capital
line, to finance its operations, repay long-term indebtedness and fund
capital expenditures.
Cash required for operations for the first nine months of 1996 increased
$3.7 million over the comparable period in 1995 primarily due to increased
receivables arising from higher Selmer sales and the Steinway Acquisition.
The higher Selmer sales combined with its special receivable financing
arrangements were the major determinants of the seasonal growth in working
capital which increased $29.1 million during the first nine months of 1996.
The seasonal increase in receivables generally peaks in September. The
Company anticipates that these balances will decrease in October as customer
payments accelerate and will continue to decrease through the end of the year.
13
<PAGE>
Capital expenditures were $2.8 million and $2.7 million for the nine
month periods ended in 1996 and 1995, respectively. These capital
expenditures were mainly used for the purchase of new machinery and building
improvements. The Company expects to increase its level of capital
expenditures in the future in order to modernize, expand and renovate its
equipment and facilities. The Company's debt agreements limit domestic
capital expenditures to $5.0 million per year.
The Bank Credit Facility provides the Company with a potential borrowing
capacity of up to $60 million, based on eligible accounts receivable and
inventory balances. As of September 28, 1996, $19.1 million was outstanding,
and availability was approximately $40.5 million. Open account loans with
foreign banks also provide for borrowings by Steinway's foreign subsidiaries
of up to 20 million Deutsche Marks.
The Company's long-term financing consists primarily of $110 million of
Senior Subordinated Notes. The Company's debt agreements contain restrictive
covenants that place certain restrictions on the Company, including
restrictions to the Company's ability to incur additional indebtedness, to
make investments in other entities, or to pay cash dividends.
In August 1996, the Company completed an initial public offering of its
ordinary common stock which raised approximately $63.1 million. After
deducting expenses of approximately $2.1 million, the Company used the net
proceeds from the offering to repay $54.6 million of Senior Secured Notes,
and related prepayment penalties of $4.5 million. Prior to the offering, the
Company effected a 2.83-to-1 stock split. All share and per share amounts
have been retroactively adjusted for all periods presented and give effect to
the stock split.
Management believes that cash on hand, together with cash flow
anticipated from operations and available borrowings under the Bank Credit
Facility, will be adequate to fund the Company's operations through 1996.
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Steinway Musical Instruments, Inc. -- Financial
Data Schedule.
Exhibit 27.2 The Selmer Company, Inc. -- Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended September 28, 1996.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized.
STEINWAY MUSICAL INSTRUMENTS INC.
/s/ Dana D. Messina
-------------------------------------------
Dana D. Messina
Director, President and Chief Executive Officer
/s/ Dennis M. Hanson
-------------------------------------------
Dennis M. Hanson
Vice President and Chief Financial Officer
THE SELMER COMPANY, INC.
/s/ Thomas T. Burzycki
-------------------------------------------
Thomas T. Burzycki
Director, President and Chief Executive Officer
/s/ Michael R. Vickrey
-------------------------------------------
Michael R. Vickrey
Executive Vice President and Chief Financial
Officer
Date: November 8, 1996
15
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