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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 33-75072
STEINWAY MUSICAL INSTRUMENTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 35-1910745
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
800 South Street, Suite 425, Waltham, Massachusetts 02154
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (617) 894-9770
and
THE SELMER COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4432228
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Industrial Parkway, Elkhart, Indiana 46516
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (219) 522-1675
Securities registered pursuant Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Ordinary Common Shares, $.001 par value New York Stock Exchange
Securities registered pursuant Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant was $121,344,298 as of February 28, 1997.
Number of shares of Common Stock issued and outstanding as of February 28, 1997:
Class A 477,953
Ordinary 8,944,984
---------
Total 9,422,937
Documents incorporated by reference: Part III - Items 10-13 - Definitive
Proxy Statement of the Registrant to be filed pursuant to Regulation 14A, Parts
I-IV - Final Prospectus of the Registrant dated August 1, 1996 filed pursuant to
Rule 424(b).
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PART I
ITEM 1 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. More than 90% of all concert piano performances worldwide
were on Steinway grand pianos during the 1996 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. The Company's net sales of $258 million for the
year ended December 31, 1996 were split between Steinway piano sales (53%)
and sales of Selmer band and orchestral instruments (47%).
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 approximately 200 independent piano dealers
worldwide and five Steinway-operated retail showrooms located in New York,
New Jersey, London, Hamburg and Berlin. In 1996, approximately 54% of
Steinway's net sales were in the United States, 33% 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 approximately 1,600 independent
dealers. Beginner instruments accounted for 75% of Selmer's unit sales and
52% of instrument revenues in 1996 with advanced and professional instruments
representing the balance. In 1996, 82% of Selmer's net sales were in the
United States.
Through selected acquisitions and internal growth, the Company has
expanded into a full-line musical instrument manufacturer. Its most recent
acquisition occurred on January 15, 1997 when the Company acquired Emerson
Musical Instruments, Inc., a manufacturer of flutes and piccolos.
In August 1996, the Company completed an initial public offering of its
ordinary common stock which raised approximately $63.1 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 to
give effect to the stock split.
Certain statements contained throughout this annual report are
"forward-looking statements" within the meaning of Section 21E of the
Securities 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 Final Prospectus filed in August 1996, particularly the section
therein entitled "Risk Factors".
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PRODUCTS
The Company offers pianos, band and orchestral instruments and services
through the following subsidiaries and operating divisions:
STEINWAY AND SONS offers two premium-priced product lines: grand pianos
and vertical pianos. Steinway pianos differ from all others in design
specifications, materials used and the assembly process. All of Steinway's
patented designs and innovations provide the unique sound and quality of the
Steinway piano.
Grand pianos historically have accounted for the bulk of Steinway's
production. Steinway offers eight models of the grand piano ranging from the
5'1" baby grand to the largest 9' concert grand. The smaller grands are sold
to both individual and institutional customers, while the concert grands are
sold primarily to institutions. Steinway grand pianos are premium pianos in
terms of quality and price, with retail prices generally ranging from $29,100
to $114,200 in the United States. In 1996, Steinway sold 3,066 grand pianos,
with 2,156 units shipped from its New York facility and 910 units shipped
from its German facility.
Vertical pianos offer dealers a complete line of quality pianos to
satisfy the needs of institutions and other customers who are constrained by
space limitations but unwilling to compromise on quality. Steinway also
provides services, such as restoration, repair, replacement part sales,
tuning and regulation of pianos, at locations in New York, London, Hamburg
and Berlin. Restoration services range from minor damage repairs to complete
restorations of old pianos. Over the past few years, Steinway has expanded
its restoration capacity to accommodate an increased focus on the procurement
and resale of used Steinway pianos.
BOSTON PIANO COMPANY, which offers a complete line of grand and
vertical pianos designed by Steinway and produced by a Japanese manufacturer,
provides Steinway dealers with pianos priced in the upper end of the
mid-priced 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, management believes the Boston piano
provides 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.
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.
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
1996. While the extension of these distribution rights is
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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
LaGrange, 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'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. Approximately 90% of Steinway piano
sales in the United States are to individuals. In other countries, sales to
individuals are a smaller percentage. 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 7% of sales
in 1996, while the top 15 accounts represented 32% of sales.
Historically, a majority of Selmer's net sales has been to dealers
supplying instruments 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
products are also used by professional players. Selmer's customers include
approximately 1,600 musical instrument dealers. Selmer's largest customer
accounted for approximately 5% of sales in 1996, while the top 15 accounts
represented approximately 27% of sales.
SALES AND MARKETING
Steinway distributes its products primarily on a wholesale basis
through approximately 200 select dealers 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 in Europe, Africa
and Asia. The New York manufacturing facility manufactured approximately 69%
of Steinway pianos sold in 1996.
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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 1996, 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.
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.
NORTH AND LATIN AMERICA: Steinway pianos are sold by dealers in 43
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 27% of domestic wholesale revenue in 1996. 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 1996 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 established a new subsidiary to expand its
market presence. Steinway grand pianos are also sold in most other East
Asian countries.
STEINWAY ARTISTS. The most effective form of marketing for Steinway is
the endorsement of world class pianists who voluntarily select the Steinway
piano. In sharp contrast to typical modern marketing practices, 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 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 360 instruments worldwide. Of these instruments,
approximately 285 are located in the United States. In New York City, the
Steinway concert department has approximately 117 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 products in the music industry,
the Piano Bank provides Steinway with feedback on the quality and performance
of the instruments from its most
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critical customer, the professional pianist. Since the average age of the
instruments in the Piano Bank is less than 4 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
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.
BAND AND ORCHESTRAL INSTRUMENTS. Selmer employs 18 domestic sales
managers who are responsible for band and orchestral instrument sales within
assigned geographic territories. Each sales manager is also responsible for
developing relationships with high school and college band directors who will
ultimately influence and refer students to designated dealers for the
purchase of instruments. Management believes that its well established, long
standing relationships with these music influencers are an important
component of its distribution strategy.
Band instrument dealers are supported through incentive programs and
advertising and promotional activities. Trade shows, print media, direct
mail and personal sales calls are the primary methods of reaching customers.
The Company 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. The Company also
provides educational materials and up-to-date instrument catalogs to
educators in the band, orchestral and percussion fields.
MUSICAL INSTRUMENT INDUSTRY
PIANOS. The overall piano industry can be best analyzed when subdivided
into three categories: high end grand pianos, where Steinway realizes the
vast majority of its profit; mid/low end grand pianos; and vertical pianos.
Grand piano sales are affected by economic cycles, with the high end pianos
tending to lag in both the entry and recovery phases of the cycle.
Consistent with this, the unit volume of Steinway's domestic sales has
increased steadily during the U.S. economic recovery. The overall decline in
domestic piano sales has been driven primarily by a sharp decrease in
vertical pianos which have been impacted by the increase in competition
stemming from electronic alternatives and lower-cost, smaller, mass produced
grand pianos. Since only a small percentage of Steinway's profits are
derived from sales of vertical pianos, management believes this trend will
not have a material adverse effect on Steinway's operating results.
Market size and volume trends are difficult to quantify for
international markets as there is no single source for worldwide sales data.
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.
While negative economic conditions have affected certain foreign
markets, the Company believes that expansion opportunities, especially in
certain Asian markets where the Company has a disproportionately low market
share, may mitigate current adverse economic factors.
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BAND AND ORCHESTRAL INSTRUMENTS. The Company believes that the band
and orchestral instrument industry has historically been impacted more by
demographic trends and school budgeting than by macroeconomic cycles. The
band and orchestral instrument industry experienced moderate sales declines
starting in the mid to late 1970s, which management believes was primarily
due to a reduction in the number of students enrolled in grades 4 through 12.
Since 1984, both student enrollment (grades K through 12) and school
expenditures have increased steadily.
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.
COMPETITION
The Company is one of the largest domestic producers of band and
orchestral instruments. New entrants have difficulty competing with the
Company 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.
The Company enjoys leading market shares in many of its product lines
and holds a unique position at the top end of the market for grand pianos.
Few manufacturers compete directly with Steinway, both in terms of quality
and price.
Management believes that used instruments provide significant
competition within certain segments of the musical instrument industry.
Because of the potential savings associated with buying a used Steinway
piano, as well as the durability of the instrument, a relatively large market
exists for used Steinways. 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.
The effect of used instruments in the band and orchestral market is less
significant since instruments are less durable and more affordable to
consumers.
PATENTS AND TRADEMARKS
The Company has several trademarks and patents effective and pending 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 &
SONS, SELMER, BACH, BUNDY, SIGNET, WILLIAM LEWIS, LUDWIG, MUSSER and EMERSON.
Steinway has pioneered the development of the modern piano with over 125
patents granted since its founding. Management considers its various
trademarks and patents to be important and valuable assets.
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PRODUCTION PROCESS
The manufacturing process for musical instruments involves a large
number of tasks performed by skilled craftsmen. Employees perform various
forming, drilling and assembling applications throughout the process.
The manufacturing process for pianos takes up to nine months to achieve
the high quality standards expected for Steinway pianos. Raw materials are
purchased primarily in the United States and Europe.
The Company maintains a fairly constant production schedule for band
and orchestral instruments in order to minimize labor disruptions and keep
inventory relatively stable. Raw materials used in the production of
brasswind and woodwind instruments are purchased primarily in the United
States. Component parts are imported from Europe and Asia for stringed and
percussion instruments.
LABOR
As of December 31, 1996, the Company employed 1,959 people, consisting
of 1,463 hourly and 496 salaried employees. Of the 1,959 employees, 1,526
were employed in the United States and the remaining 433 were 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 represented by the United Furniture
Workers/IUE, AFL/CIO. The current labor agreement covering these workers
expires in September 1997. In Hamburg, Germany, 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 to negotiate
labor rates. Wage increases tend to track those of the major unions in
Germany. The contract covering hourly German employees is negotiated
annually. The United Auto Workers and the United Brotherhood of Carpenters
represent 676 members of Selmer's workforce. In March 1997, the Company
entered into new collective bargaining agreements with the United Auto
Workers membership which will expire in February 2000. The agreement
covering the rest of its union membership expires in November 1999. The
Company believes that its relationship with its employees is generally good.
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ITEM 2 PROPERTIES
The Company owns most of its manufacturing and warehousing facilities.
All of the Steinway retail stores are in leased facilities. Substantially
all of the domestic real estate has been pledged to secure the Company's
debt. The following table lists the Company's owned and leased facilities.
<TABLE>
<CAPTION>
APPROXIMATE
FLOOR SPACE
LOCATION OWNED/LEASED (SQUARE FEET) ACTIVITY
- -------- ------------ ------------- --------
<S> <C> <C> <C>
New York, NY Owned 449,900 Piano manufacturing; restoration center;
parts sales; sales; research & 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 147,000 Drum and Case manufacturing
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
Waltham, MA Leased 2,440 Executive offices
</TABLE>
The Company spent approximately $5.2 million for capital expenditures
in 1996. The majority of the expenditures were used for 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.
ITEM 3 LEGAL PROCEEDINGS
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 the Company 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,
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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 in the site relative to
the 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
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 the installation of a hazardous material
recycling system. Management 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.
OTHER - 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.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1996.
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PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The ordinary common stock of the Company began trading in August 1996
(subsequent to an initial public offering) on the New York Stock Exchange
("NYSE") under the symbol "LVB". The following table sets forth for the period
indicated, the high and low closing sales price per share of the ordinary
common stock as reported on the NYSE. Prior to the offering in August 1996, no
established public trading market existed.
High Low
---- ---
Fiscal Year Ended December 31, 1996
Third Quarter $19.00 $16.38
Fourth Quarter 18.38 16.13
The Company's common stock is comprised of two classes: Class A and
Ordinary. With the exception of disparate voting power, both classes are
substantially identical. Each share of Class A common stock entitles the
holder to 98 votes, holders of ordinary common stock are entitled to one vote
per share. 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. As of February 21, 1997, there were ninety-one holders of
record of the Company's ordinary common stock and two holders of record of the
Class A common stock.
The Company has no plans to pay cash 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.
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ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company as of and for the five years ended December 31, 1996. The historical
balance sheet data as of December 31, 1992, 1993 1994, 1995 and 1996, and
August 10, 1993, and operating data for the fiscal years ending December 31,
1992, 1994, 1995 and 1996, the period January 1,1993 to August 10, 1993 and the
period August 11, 1993 to December 31, 1993, are derived from the audited
financial statements of the Company. 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 report.
<TABLE>
<CAPTION>
Predecessor(1) Company
-------------------- ---------------------------------------------------
(Dollars in thousands, except Period Year Ended December 31,
per share information) Year Ended ---------------------- ----------------------------------
December 31, 1/1/93- 8/11/93-
1992 8/10/93 12/31/93 1994 1995(2) 1996
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 85,895 $ 57,171 $ 34,339 $ 101,114 $ 189,805 $ 257,903
Gross profit 29,458 17,955 5,484 31,661 50,218 84,235
Earnings (loss) from operations 9,233 5,520 (1,640) 12,472 13,102 33,020
Net income (loss) before
extraordinary item 2,343 1,405 (3,109) 2,922 (2,074) 7,421
Net income (loss) before
extraordinary item per share - - (2.07) 0.52 (1.36) 1.00
Weighted average common and
common equivalent shares
outstanding - - 1,499,900 5,660,000 1,524,663 7,418,580
OTHER FINANCIAL DATA:
Adjusted gross profit (3) $ 29,458 $ 17,955 $ 10,238 $ 31,925 $ 59,856 $ 84,235
EBITDA(3)(4) 14,437 8,522 4,597 16,638 30,479 44,520
Capital expenditures 720 576 303 1,112 3,162 5,199
Cash flows from:(5)
Operating activities 6,847 (8,565) 15,102 10,973 6,663 5,927
Investing activities (553) (577) (94,413) (1,202) (107,702) (5,039)
Financing activities (5,967) 9,512 78,648 (9,549) 104,365 (865)
MARGINS:
Adjusted gross profit(3) 34.3% 31.4% 29.8% 31.6% 31.5% 32.7%
EBITDA(3)(4) 16.8 14.9 13.4 16.5 16.1 17.3
BALANCE SHEET DATA (AT PERIOD END):
Cash $ 402 $ 716 $ 53 $ 380 $ 3,706 $ 3,277
Current assets 55,712 69,563 56,736 56,265 132,380 140,353
Total assets 82,785 95,349 88,970 85,524 263,796 265,366
Current liabilities 9,519 9,907 10,174 13,388 41,767 37,720
Total debt 55,024 65,053 71,369 62,057 174,039 118,391
Partners'/Stockholders' equity 16,626 17,999 4,226 7,253 5,828 67,878
</TABLE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA:
(1) On August 10, 1993, the Company purchased substantially all of the assets
and certain liabilities of The Selmer Company, L.P. (the "Predecessor").
(2) The Company acquired Steinway in May 1995.
(3) Adjusted gross profit and EBITDA under the captions "Other Financial Data"
and "Margins" for the period August 11, 1993 to December 31, 1993 and for
the years ending 1994 and 1995 reflect positive adjustments of $4,754, $264
and $9,638, respectively, relating to purchase accounting adjustments to
inventory for the acquisitions of Selmer in 1993 and Steinway in 1995.
(4) 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.
(5) For more information regarding cash flow data, see "Management's
Discussions and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and the Company's
Consolidated Financial Statements included elsewhere in this report.
12
<PAGE>
ITEM 7 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 report.
OVERVIEW
The Company, through its subsidiaries Steinway and Selmer, is one of the
world's leading manufacturers of musical instruments. The Company's net sales
and earnings from operations improved 10.3% and 29.4%, respectively, for 1996
compared to pro forma 1995 as if the acquisition of Steinway had occurred
January 1, 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. The
Company's net sales of $258 million for the year ended December 31, 1996 were
split between Steinway piano sales (53%) and sales of Selmer band and
orchestral instruments (47%).
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 (3,066 sold in 1996), a decrease of a relatively few number of units being
sold by Steinway can have a material impact on the Company's business and
operating results. Domestic grand piano unit sales have increased 32.2% from
1993 to 1996, 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 remained relatively flat over the same
period primarily as a result of the weakness of the European economies. In
1996, approximately 54% of Steinway's net sales were in the United States, 33%
in Europe and the remaining 13% primarily in Asia.
Selmer student instrument sales 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. Beginner instruments
accounted for 75% of Selmer's unit sales and 52% of instrument revenues in 1996
with advanced and professional instruments representing the balance.
Band and orchestral instrument unit sales have grown an average of 4% a
year, and net sales have grown an average of 11% a year, since 1993. The 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 33% of
consolidated net sales, with Steinway's net international sales accounting for
over 74% 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
13
<PAGE>
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 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
On May 25, 1995, Selmer acquired Steinway for approximately $104.0
million. The acquisition of Steinway was effected pursuant to a Merger
Agreement dated as of April 11, 1995. The acquisition was 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 acquisition as well as the results of operations for
Steinway for the period May 25, 1995 to December 31, 1995.
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 $2.3 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 to give effect to the
stock split.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
NET SALES -- Net sales increased $68.1 million (35.9%) to $257.9 million
in 1996. Steinway net sales contributed $55.4 million of this increase,
reflecting the impact of a full year's results in 1996 versus the seven months
included in 1995. Selmer sales increased $12.7 million (11.6%) with instrument
unit growth of 4.1% representing $2.8 million of the increase. The balance of
the increase relates to price increases and a favorable mix of higher priced
instruments.
GROSS PROFIT -- Gross profit increased $34.0 million (67.7%) to $84.2
million. Steinway contributed $26.6 million of this increase, the majority of
which is attributable to the full year's sales impact noted above. In
addition, 1995 results were affected by $9.6 million in additional cost of
sales relating to the fair value adjustment of Steinway's inventory effected
upon its acquisition. Selmer gross profit increased $7.5 million (22.1%) in
1996, reflecting the increase in sales. Gross margins increased to 32.7% in
1996 compared to 26.5% in 1995 primarily as a result of having fully absorbed
the $9.6 million Steinway inventory acquisition adjustment during 1995.
OPERATING EXPENSES -- Operating expenses increased $14.1 million (38.0%)
to $51.2 million in 1996. Steinway operating expenses accounted for $12.7
million of the increase. Selmer operating expenses increased $1.2 million
(6.3%) to $20.7 million, but decreased as a percentage of sales from 17.8% in
1995 to 17.0% in 1996. Overall, operating expenses remained under 20.0% of
sales for both 1995 and 1996.
EARNINGS FROM OPERATIONS -- Earnings from operations increased by $19.9
million (152.0%) to $33.0 million in 1996. The impact of Steinway's full year
results in 1996 combined with the negative effect on 1995 earnings associated
with the $9.6 million inventory acquisition adjustment accounted for $13.7
million of this improvement. The remaining $6.2 million increase in earnings
represents the contribution from Selmer's increased sales level.
14
<PAGE>
NET INTEREST EXPENSE -- Net interest expense increased $2.8 million
(19.3%) to $17.1 million in 1996. This increase was a product of the
additional five months that the $110 million in Steinway acquisition debt was
outstanding offset by the savings realized from the early extinguishment of $55
million in senior secured notes accomplished with the proceeds of the Company's
initial public offering in August 1996.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
NET SALES -- Net sales increased by $88.7 million (87.7%) to $189.8 million
in 1995. Steinway net sales contributed $80.9 million during the period May
25, 1995 to December 31, 1995. Selmer 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 increases in most divisions.
GROSS PROFIT -- Gross profit increased by $18.5 million (58.6%) to $50.2
million in 1995. The majority of this increase, $16.4 million, was derived
from Steinway sales. Selmer gross profits increased by $2.1 million (6.7%) to
$33.8 million. Gross profit margins fell from 31.3% in 1994 to 26.5% in 1995
as a direct result of a $9.6 million fair value adjustment to Steinway's
inventory recorded upon its acquisition and absorbed through cost of sales
during 1995. Adjusting 1995 to eliminate this one time purchase accounting
charge, gross margins remained essentially unchanged.
OPERATING EXPENSES -- Operating expenses increased by $17.9 million (93.4%)
to $37.1 million in 1995. Steinway operating expenses, which were $17.7
million for the period, accounted for virtually all of the increase. 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 increased by $0.6
million (5.1%) to $13.1 million. Adjusting for the $9.6 million inventory
charge noted above, earnings rose more than $10.0 million (82.3%) over 1994.
The bulk of this improvement, $8.4 million, is attributable to Steinway's
initial, partial year 1995 results. In addition, Selmer earnings from
operations increased $1.9 million (15.0%) over 1994.
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.
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.
The Company has financed its major acquisitions through the issuance of
long-term debt. Cash provided from the issuance of $105.0 million of Senior
Subordinated Notes funded the Steinway acquisition in 1995.
Cash provided by operations was $11.0 million in 1994, $6.7 million in
1995 and $5.9 million in 1996. 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 decrease in cash provided by
operations in 1996 is primarily attributable to
15
<PAGE>
$5.8 million invested in increased accounts receivable, inventories, prepaid
assets and lower current liability balances, offset by an additional $5.0
million of cash earnings from operations.
The Company's investing activities used cash of $102.8 million in 1995
to acquire Steinway. Capital expenditures in 1994, 1995 and 1996 were $1.1
million, $3.2 million and $5.2 million, respectively. These capital
expenditures were primarily used for purchasing 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.
Consistent with industry practice, Selmer sells band instruments almost
entirely on credit utilizing the two financing programs described below.
These programs create large working capital requirements during the year when
band instrument receivable balances reach highs of approximately $50-55
million in August and September, and lows of approximately $20-25 million in
January and February. The financing options, 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:
a) RECEIVABLE DATING: Purchases made from January through September have payment
due in October. Purchases made from October to December have payment due
in January. Dealers are offered discounts for early payment.
b) 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 notes receivable are purchased by a third-party financial institution,
on a full recourse basis. The Company'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 $11.8 million in
cash in 1995 and 1996, 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 Company's domestic, seasonal borrowing requirements are accommodated
through a committed, revolving credit facility with a domestic bank (the
"Facility"). The Facility was restated on May 25, 1995 providing 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, and fixed assets. As of
December 31, 1996, $2.6 million was outstanding, and availability was
approximately $46.5 million. The Facility currently bears interest, at the
option of the Company, at (i) the prime rate plus 1.0%, or (ii) the
Eurodollar rate plus 2.5%, 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.
At December 31, 1996, the Company's total outstanding indebtedness
amounted to $118.4 million, consisting of $2.6 million under the Facility,
$110.0 million of 11% Senior Subordinated Notes and $5.8 million of notes
payable to foreign banks. The $55.6 million reduction in outstanding
indebtedness from December 31, 1995 reflects the repayment of $54.6 million
of Senior Secured Notes accomplished with the proceeds of the Company's
initial public offering in August 1996. Cash interest paid was $13.4 million
and $17.7 million in 1995 and 1996, respectively. All of the Company's debt
agreements contain
16
<PAGE>
covenants that place certain restrictions on the Company, including its
ability to incur additional indebtedness, to make investments in other
entities, and to pay cash dividends.
Management believes that cash on hand, together with cash flow
anticipated from operations and available borrowings under the Facility, will
be adequate to meet debt service requirements, fund continuing capital
requirements and satisfy working capital and general corporate needs through
the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In 1996, the Company adopted 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". This standard requires that long-lived
assets and certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The adoption of
this standard had no effect on the Company's results of operations, financial
position or cash flows.
The Company also adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" in 1996. 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 accounts for employee stock-based compensation
arrangements under APB Opinion No. 25.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1995 and 1996
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996
Notes to Consolidated Financial Statements
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Steinway Musical Instruments, Inc.
Waltham, Massachusetts
We have audited the accompanying consolidated financial statements of
Steinway Musical Instruments, Inc. and subsidiaries as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31,
1996, listed in the index on page 17. These financial statements are the
responsibility of the Company's 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 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 7, 1997
18
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<S> <C> <C>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
ASSETS
Current assets:
Cash $ 3,706 $ 3,277
Accounts, notes and leases
receivable, net of allowance for
bad debts of $6,281 and $7,120 in
1995 and 1996, respectively 41,860 45,563
Inventories 79,063 82,950
Prepaid expenses and other current
assets 3,058 2,867
Deferred tax asset 4,693 5,696
------------ ------------
Total current assets 132,380 140,353
Property, plant and equipment, net 64,132 62,101
Other assets, net 32,114 26,291
Cost in excess of fair value of net
assets acquired, net of accumulated
amortization of $1,024 and $1,894 in
1995 and 1996, respectively 35,170 36,621
------------ ------------
TOTAL ASSETS $ 263,796 $ 265,366
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of
long-term debt $ 2,306 $ 2,354
Accounts payable 8,172 6,453
Other current liabilities 31,289 28,913
------------ ------------
Total current liabilities 41,767 37,720
Long-term debt 171,733 116,037
Deferred taxes 29,452 30,003
Non-current pension liability 15,016 13,728
------------ ------------
Total liabilities 257,968 197,488
Commitments and Contingencies
Stockholders' equity:
Convertible, participating preferred
stock, $.001 par value,
authorized 5,000,000 shares,
2,829,999 shares issued and
outstanding in 1995 1 -
Class A Common Stock, $.001 par value,
authorized 5,000,000 shares,
477,953 shares issued and outstanding - -
Common stock, $.001 par value, authorized
90,000,000 shares, 1,319,087 shares
and 8,944,984 shares issued and
outstanding in 1995 and 1996, respectively - 9
Warrants, 1,330,091 common stock
equivalents outstanding in 1995 2,335 -
Additional paid-in capital 5,629 68,729
Retained earnings (accumulated deficit) (2,261) 792
Accumulated translation adjustment 124 (1,652)
------------ ------------
Total stockholders' equity 5,828 67,878
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 263,796 $ 265,366
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1994 1995 1996
--------- ---------- ---------
Net sales $ 101,114 $ 189,805 $ 257,903
Cost of sales 69,453 139,587 173,668
--------- ---------- ---------
Gross profit 31,661 50,218 84,235
Operating Expenses:
Sales and marketing 11,328 21,001 29,206
Provision for doubtful accounts 655 797 760
General and administrative 5,435 11,612 16,363
Amortization 1,067 3,041 4,388
Other expense 704 665 498
--------- ---------- ---------
Total operating expenses 19,189 37,116 51,215
--------- ---------- ---------
Earnings from operations 12,472 13,102 33,020
Other (income) expense:
Other income, principally interest
and late charges (503) (583) (763)
Interest and amortization of debt discount 8,255 14,923 17,870
--------- ---------- ---------
Other expense, net 7,752 14,340 17,107
--------- ---------- ---------
Income (loss) before income taxes 4,720 (1,238) 15,913
Provision for income taxes 1,798 836 8,492
--------- ---------- ---------
Income (loss) before extraordinary item 2,922 (2,074) 7,421
Extraordinary item - Early extinguishment
of debt (net of tax benefit of $2,640) 4,368
--------- ---------- ---------
Net income (loss) $ 2,922 $ (2,074) $ 3,053
--------- ----------- --------
--------- ----------- --------
Income (loss) per share:
Income (loss) before extraordinary item $ .52 $ (1.36) $ 1.00
Extraordinary item (.59)
--------- ----------- --------
Net income (loss) per share $ .52 $ (1.36) $ .41
--------- ----------- --------
--------- ----------- --------
Weighted average common and
common equivalent shares outstanding 5,660,000 1,524,663 7,418,580
--------- ---------- ---------
--------- ---------- ---------
See notes to consolidated financial statements.
20
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Retained Accumulated
Preferred Common Paid in Earnings Translation
Stock Stock Warrants Capital (Deficit) Adjustment
---------- -------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 year 3,053
Foreign currency translation
adjustment (1,776)
Issuance of 3,570,000 shares of
common stock 4 60,769
Conversion of preferred stock
and warrants (1) 5 (2,335) 2,331
---------- -------- ---------- ---------- ---------- -----------
BALANCE, December 31, 1996 $ - $ 9 $ - $68,729 $ 792 $ (1,652)
---------- -------- ---------- ---------- ---------- -----------
---------- -------- ---------- ---------- ---------- -----------
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1994 1995 1996
--------- ---------- ----------
Cash flows from operating activities
Net income (loss) $ 2,922 $ (2,074) $ 3,053
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Depreciation and amortization 3,198 7,739 10,970
Provision for doubtful accounts 655 766 760
Amortization of senior note discount 248 277 213
Deferred tax provision (benefit) 1,000 (5,083) (3,123)
Early extinguishment of debt 4,368
Other 14 93 61
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (2,126) (4,172) (4,606)
Inventories 2,586 7,664 (5,786)
Prepaid expense and other current assets 137 (701) (127)
Accounts payable 1,170 1,354 (1,712)
Accrued expenses 1,169 800 1,856
--------- ---------- ----------
Net cash flows from operating activities 10,973 6,663 5,927
Cash flows from investing activities
Capital expenditures (1,112) (3,162) (5,199)
Proceeds from disposals of fixed assets 17 51 51
Changes in other assets (107) (1,801) 109
Acquisition of Steinway Musical
Properties, Inc. (net of cash acquired) - (102,790) -
--------- ---------- ----------
Net cash flows from investing activities (1,202) (107,702) (5,039)
Cash flows from financing activities
Borrowing under line of credit agreement 88,830 147,993 195,222
Repayments under line of credit agreement (97,958) (148,486) (196,754)
Proceeds from issuance of long-term debt - 110,000 4,717
Proceeds from issuance of stock - 630 60,773
Repayments of long-term debt (421) (5,772) (64,823)
--------- ---------- ----------
Net cash flows from financing activities (9,549) 104,365 (865)
Effects of foreign exchange rate changes
on cash 105 - (452)
--------- ---------- ----------
Increase (decrease) in cash 327 3,326 (429)
Cash, beginning of year 53 380 3,706
--------- ---------- ----------
Cash, end of year $ 380 $ 3,706 $ 3,277
--------- ---------- ----------
--------- ---------- ----------
See notes to consolidated financial statements.
22
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
(1) NATURE OF BUSINESS
Steinway Musical Instruments, Inc. and subsidiaries (the "Company") is
one of the world's leading manufacturers of musical instruments. On
August 10, 1993, the Company acquired The Selmer Company, Inc. ("Selmer"), a
major manufacturer of band and orchestral instruments and related accessories,
including a complete line of brasswind, woodwind, percussion and stringed
instruments. On May 25, 1995, Selmer purchased the assets of Steinway
Musical Properties, Inc. and its wholly-owned subsidiaries ("Steinway"), a
manufacturer and distributor of pianos and related accessories and services,
for approximately $104 million. The acquisition has been accounted for as a
purchase for financial reporting purposes.
(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 May 25, 1995, Steinway
inventories were adjusted up by approximately $9,638 to reflect their fair
market value. Cost of sales for the year ended December 31, 1995 included
this adjustment.
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:
23
<PAGE>
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
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.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees".
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 1994 and 1995 amounts
have been made to conform to the financial statement classification adopted
in 1996.
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 1996, the Company adopted 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".
This standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The adoption of this standard had no effect on
the Company's results of operation, financial position or cash flows.
In June 1996, the Financial Accounting Standards Baord issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which the Company will adopt in 1997. The
new standard is not expected to have a material effect on the Company's
financial position or results of operations.
24
<PAGE>
(3) INVENTORIES
Inventories consist of the following:
December 31,
---------------------
1995 1996
-------- --------
Raw materials $ 11,332 $ 12,114
Work in process 37,793 33,428
Finished goods 29,938 37,408
-------- --------
Total $ 79,063 $ 82,950
-------- --------
-------- --------
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31,
---------------------
1995 1996
-------- --------
Land $ 18,296 $ 17,835
Building and improvements 19,949 20,080
Leasehold improvements 690 779
Machinery, equipment and tooling 16,612 19,526
Office furniture and fixtures 4,191 5,033
Concert and artist and rental pianos 11,087 11,470
Construction in progress 903 1,282
-------- --------
71,728 76,005
Less accumulated depreciation and amortization 7,596 13,904
-------- --------
Total $ 64,132 $ 62,101
-------- --------
-------- --------
(5) Other Assets
Other assets consist of the following:
December 31,
---------------------
1995 1996
-------- --------
Trademarks $ 22,548 $ 21,746
Deferred financing cost 10,340 8,504
Other assets 2,708 2,044
-------- --------
35,596 32,294
Less accumulated amortization 3,482 6,003
-------- --------
Total $ 32,114 $ 26,291
-------- --------
-------- --------
25
<PAGE>
(6) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
December 31,
---------------------
1995 1996
-------- --------
Accrued payroll and related benefits $ 10,983 $ 12,547
Current pension liability 2,433 1,823
Accrued promotional expenses 2,357 2,834
Accrued warranty expense 2,175 1,855
Accrued taxes 3,980 1,547
Accrued interest 1,541 1,512
Other accrued expenses 7,820 6,795
-------- --------
Total $ 31,289 $ 28,913
-------- --------
-------- --------
(7) INCOME TAXES
The components of income tax expense are as follows:
Year Ended December 31,
----------------------------------
1994 1995 1996
-------- -------- --------
Federal:
Current $ 600 $ 2,439 $ 5,726
Deferred 882 (1,684) (935)
State and local:
Current 41 574 712
Deferred 108 (321) (197)
Foreign:
Current 167 2,906 5,177
Deferred (3,078) (1,991)
-------- -------- --------
Total $ 1,798 $ 836 $ 8,492
-------- -------- --------
-------- -------- --------
The Company's income tax differed from the statutory federal rate as
follows:
Year Ended December 31,
----------------------------
1994 1995 1996
-------- -------- --------
Statutory rate applied to earnings before
income taxes $ 1,605 $ (433) $ 5,570
Increase (decrease) in income taxes resulting from:
Foreign income taxes (net of benefit) 167 (172) 2,092
State income taxes 149 (49) 477
Valuation allowance on foreign tax credits 1,277
Other (123) 213 353
-------- -------- --------
Income tax $ 1,798 $ 836 $ 8,492
-------- -------- --------
-------- -------- --------
26
<PAGE>
The components of net deferred taxes are as follows:
December 31,
---------------------
1995 1996
-------- --------
Deferred tax assets:
Uniform capitalization adjustment to inventory $ 2,303 $ 2,084
Allowance for doubtful accounts 1,406 1,198
Accrued expenses and other current assets and liabilities 2,709 4,357
Foreign tax credits 22,086 18,777
Other 223 130
Valuation allowances (13,534) (15,113)
-------- --------
Total deferred tax assets 15,193 11,433
Deferred tax liabilities
Pension contributions (1,759) (1,586)
Fixed assets (23,488) (21,570)
Intangibles (14,705) (12,584)
-------- --------
Total deferred tax liabilities (39,952) (35,740)
-------- --------
Net deferred taxes $(24,759) $(24,307)
-------- --------
-------- --------
Valuation allowances provided relate to excess foreign tax credits
generated over expected credit absorption. Of these valuation allowances,
$10,305 relate to the acquisition of Steinway, including a final
purchase accounting adjustment of $3,200 which was added during 1996 due to
changes in assumed rates of foreign tax credit absorption. 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.
During 1996, changes in valuation allowances were caused in part by the
write-off of $3,842 of expired foreign tax credits and a reduction of $345
caused by foreign currency translation, offset by additional valuation
allowances of $2,566 for current year credits generated for which realization
does not appear likely. Foreign tax credit carryforwards expire in varying
amounts through 2001.
27
<PAGE>
(8) NOTES PAYABLE AND LONG TERM DEBT
Notes payable and long-term debt consists of the following:
December 31,
------------------
1995 1996
-------- --------
Senior Debt, bearing interest at the
Eurodollar rate plus 3% due March 31, 2000
(8.65% and 8.89%) $ 4,439 $ 2,573
Senior Secured Notes:
11% Notes, net of unamortized discount of $1,418 43,132
10.92% Notes, net of unamortized discount of $318 9,682
11% Senior Subordinated Notes, due May 15, 2005 110,000 110,000
Note payable to a foreign bank, due in monthly
installments of principal and interest of DM
127 ($83 at the December 31, 1996 exchange rate)
through June 1, 2001 at an interest rate of 6.25% 4,454
Note payable to a foreign bank at an interest rate of 8.75% 2,874
Note payable to a foreign bank at an interest rate of 6.5% 2,611
Note payable to a foreign bank at an interest rate of 9.6% 348
Open account loans, payable on demand to a foreign bank 953 1,364
-------- --------
Total 174,039 118,391
Less current portion 2,306 2,354
-------- --------
Long-term debt $171,733 $116,037
-------- --------
-------- --------
Scheduled maturities of long-term debt as of December 31, 1996 are as follows:
Amount
--------
1997 $ 2,354
1998 990
1999 990
2000 3,563
2001 494
Thereafter 110,000
--------
Total $118,391
--------
--------
The open account loans provide for borrowings by foreign subsidiaries of
up to DM 20,000 ($13,000 at the December 31, 1996 exchange rate) payable on
demand, DM 17,000 ($11,040 at the December 31, 1996 exchange rate) of which
can be drawn as a term loan for up to 360 days. A portion of the open
account loan can be converted into a maximum of 1,050 GBP ($1,800 at the
December 31, 1996 exchange rate) for use by the Company's UK subsidiary.
Demand borrowings bear interest at rates of 6.5 to 6.75% for the deutsche
mark loans and 8.5% for British pounds sterling. Term borrowings bear
interest at Libor plus .75%.
In connection with the merger discussed in Note 18, the Company entered
into a restated and amended Senior Bank Credit Agreement. The restated
agreement provides for borrowings by Selmer and Steinway's domestic
subsidiaries of up to $60.0 million and extends the due date to March 31,
2000. Outstanding balances under the agreement, as amended on January 1,
1997, bear interest at the prime rate plus 1% or the Eurodollar rate plus
2.5%. Borrowings are collateralized by the Company's domestic accounts
28
<PAGE>
receivable, inventory and fixed assets. The available balance is determined
by eligible domestic accounts receivable and inventory balances and was
approximately $46.5 million on December 31, 1996.
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 $2.3 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.
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
In August 1996, the Company completed an initial public offering of
3,570,000 shares of its ordinary common stock. Prior to the offering, the
Company effected a 2.83-to-1 stock split of all of its outstanding shares and
amended the Company's Certificate of Incorporation increasing the total
number of authorized shares of common stock to 100,000,000. In conjunction
with the offering, all of the Company's outstanding preferred stock was
converted to ordinary common stock and the expiration date for exercising
outstanding warrants was accelerated, so that no preferred stock or warrants
were outstanding on December 31, 1996. All references in the accompanying
financial statements as to the number of common shares and per share amounts
have been restated to reflect the stock split, the amendment and the
conversion of the preferred stock and warrants.
The Company's common stock is comprised of two classes: Class A and
Ordinary. With the exception of disparate voting power, both classes are
substantially identical. Each share of Class A common stock entitles the
holder to 98 votes, holders of ordinary common stock are entitled to one vote
per share. 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.
EMPLOYEE STOCK PURCHASE PLAN - Under the 1996 employee stock purchase
plan (the "Purchase Plan"), the Company is authorized to issue over a period
of ten years up to 500,000 shares of ordinary common stock to its employees,
nearly all of whom are eligible to participate. Under the terms of the
Purchase Plan, the Board may make an annual offering to employees allowing
them to have up to 5% of their annual base earnings withheld through periodic
payroll deductions to purchase the stock. The purchase price of the stock is
equal to 85% of the lower of the market value at the date of offering or at
the end of each twelve month offering period. During 1996 the Company
allocated 125,000 shares to the initial offering under the Purchase Plan.
STOCK PLAN - The 1996 stock plan (the "Stock Plan") provides for the
granting of stock options (including incentive stock options and non-qualified
stock options), stock appreciation rights, and other stock awards to certain key
employees, consultants and advisors of the Company and its subsidiaries. Common
stock reserved for issuance under the Stock Plan is 778,250 shares.
In August of 1996, the Company granted 557,500 options which had an
exercise price of $19.00, all of which were outstanding on December 31, 1996.
29
<PAGE>
STOCK-BASED COMPENSATION EXPENSE - As described in Note 2, the Company
uses the intrinsic value method to measure compensation expense associated
with grants of stock options to employees. Had the Company used the fair
value method to measure compensation, reported net income and net income per
share would have been $2,758 and $.37, respectively ($7,126 or $.96 per share
before extraordinary item) for the year ended December 31, 1996.
The fair value of options on their grant date, including the valuation of
the option feature implicit in the Purchase Plan, was measured using the
Black/Scholes option pricing model. Key assumptions used to apply this
pricing model in 1996 are as follows:
Range of risk-free interest rates 5.64 - 6.36%
Range of expected life of option grants ( in years) 1 to 6
Expected volatility of underlying stock 16.4%
The fair value of option grants made in 1996 pursuant to the Stock Plan
was $6.15 per option. The fair value of awards made pursuant to the Purchase
Plan, including the option feature, in 1996 was $4.04 per share expected to
be issued.
It should be noted that the option pricing model was designed to value
readily tradable options with relatively short lives. The options granted to
employees are not tradable and have contractual lives of up to ten years.
However, management believes that the assumptions used to value the options
and the model applied yield a reasonable estimate of the grants' fair value
as that term is defined by SFAS No. 123 "Accounting for Stock-Based
Compensation".
(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:
Amount
-------
1997 $ 3,196
1998 1,975
1999 1,084
2000 789
2001 633
Thereafter 3,512
-------
Total $11,189
-------
-------
Rent expense was $970, $2,202 and $3,176 for the years ended December 31,
1994, 1995 and 1996, 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 $13.0 and $11.8 million from the
sales of such notes for the years ended December 31, 1995
30
<PAGE>
and 1996, respectively. Approximately $7.5 and $7.1 million of these notes
remain outstanding as of December 31, 1995 and 1996, 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.
The components of net pension expense are as follows:
Year Ended December 31,
-------------------------
1994 1995 1996
------ ------ -------
Service cost - benefits earned during the year $ 803 $ 651 $ 837
Interest cost on projected benefit obligation 605 739 1,102
Return on plan assets (38) (993) (1,776)
Net amortization (172) 621 814
------ ------ -------
Net pension expense $1,198 $1,018 $ 977
------ ------ -------
------ ------ -------
31
<PAGE>
The funded status of the pension plan at December 31, 1995 and 1996 is as
follows:
December 31,
----------------------
1995 1996
-------- --------
Accumulated benefit obligation (including vested benefit
obligation of approximately $12,983 and $14,175 at
December 31, 1995 and 1996, respectively) $13,841 $14,711
-------- --------
-------- --------
Projected benefit obligation $14,592 $15,620
Plan assets at fair value 12,020 14,883
-------- --------
Projected benefit obligation in excess of plan assets 2,572 737
Unrecognized net gain (loss) (137) 1,097
Unrecognized prior service cost (765) (776)
Recognition of minimum liability 762
-------- --------
Net accrued pension cost 2,432 1,058
Less amount currently payable 1,539 1,058
-------- --------
Net accrued pension cost $ 893 -
-------- --------
-------- --------
The projected benefit obligation was determined using an assumed
discount rate of 7.5% in 1995 and 1996. 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 1996 contribution
approximated $327.
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 No. 106
requires recognition, during employees' service with the Company, of the cost
of their retiree health and life insurance benefits.
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 costs are as follows:
December 31,
------------------------------------
1994 1995 1996
-------- -------- --------
Service cost $ 35 $ 32 $ 31
Interest cost 71 79 72
Amortization of transition obligation 50 50 50
Net amortization and deferral (6) (8)
-------- -------- --------
Net postretirement benefit cost $ 156 $ 155 $ 145
-------- -------- --------
-------- -------- --------
32
<PAGE>
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,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees $ 337 $ 274
Active Employees 750 738
-------- --------
1,087 1,012
Unrecognized net obligation at date of adoption of SFAS No. 106 (904) (853)
Unrecognized net gain 52 181
-------- --------
Accrued postretirement benefit cost $ 235 $ 340
-------- --------
-------- --------
</TABLE>
The annual assumed rate of increase in the per capita cost of covered
health care benefits is 10.0% for retirees under age 65 in 1997 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, 1996 by $40 and the aggregate of the
service and interest cost components of the net periodic postretirement
benefit cost for the year then ended by $5.
The discount rate used in determining the transition obligation as of
January 1 and the net periodic postretirement benefit cost was 8.5% and 7.5%
in 1995 and 1996, respectively. The accumulated postretirement benefit
obligation was determined using an assumed discount rate of 7.5% in 1995 and
1996.
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.
The components of net pension cost for the Company's foreign divisions
are as follows:
1995 1996
-------- --------
Service cost - benefits earned during the period $ 240 $ 497
Interest cost on projected benefit obligation 602 1,157
Return on plan assets (199) (175)
Net amortization and deferral 102 (47)
-------- --------
Net pension cost $ 745 $ 1,432
-------- --------
-------- --------
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<PAGE>
The following table sets forth the funded status and obligations of the
plans for the foreign divisions as of December 31, 1995 and 1996:
1995 1996
-------- --------
Accumulated benefit obligation (including vested benefit
obligation of approximately $15,199 and $15,049 at
December 31, 1995 and 1996, respectively) $ 15,824 $ 15,813
-------- --------
-------- --------
Projected benefit obligation $ 17,222 $ 17,270
Plan assets at fair value 2,323 2,730
-------- --------
Projected benefit obligation in excess of plan assets 14,899 14,540
Unrecognized net gain (loss) 118 (47)
-------- --------
Net accrued pension cost 15,017 14,493
Less amount currently payable 894 765
-------- --------
Net accrued pension cost $ 14,123 $ 13,728
-------- --------
-------- --------
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 ranged from 6.5% to 8% and from 3% to 5.5%,
respectively. The expected long-term rate of return on assets was 9.5%.
(12) FOREIGN EXCHANGE CONTRACTS
At December 31, 1996, the Company's German divisions, whose functional
currency is the deutsche mark, had forward contracts maturing at various
dates through October 1997 to purchase 1,000 British pounds sterling as a
hedge against intercompany transactions.
(13) RELATED PARTY TRANSACTIONS
The principals of Kirkland Messina LLC, a merchant banking firm,
control 84% of the voting power of the Company's common stock. Kirkland
Messina LLC received payments of $750 in 1995 for arranging the financing and
acting as financial advisor to the Company in connection with the Steinway
acquisition and $1.0 million in 1996 for arranging, negotiating and obtaining
waivers and other required consents in connection with the Company's initial
public offering. In addition, the Company has entered into agreements which
require annual payments of $400 in the aggregate to Kirkland Messina LLC and
its principals for ongoing management and other services to the Company.
34
<PAGE>
(14) SEGMENT INFORMATION
Financial information concerning the Company's operations by major
geographical area is as follows:
Year Ended December 31,
--------------------------------
1994 1995 1996
-------- -------- --------
Net Sales
United States
Sales to unaffiliated customers $ 97,027 $148,269 $195,275
Intersegment sales 1,585 4,190 5,615
-------- -------- --------
Total 98,612 152,459 200,890
Western Europe
Sales to unaffiliated customers 4,087 41,536 62,628
Intersegment sales - - -
-------- -------- --------
Total 4,087 41,536 62,628
-------- -------- --------
Total 102,699 193,995 263,518
Less eliminations 1,585 4,190 5,615
-------- -------- --------
Total $101,114 $189,805 $257,903
-------- -------- --------
-------- -------- --------
Operating Income (Loss)
United States $ 12,082 $ 13,460 $ 27,092
Western Europe 400 (294) 6,020
Eliminations (10) (64) (92)
-------- -------- --------
Total $ 12,472 $ 13,102 $ 33,020
-------- -------- --------
-------- -------- --------
Identifiable Assets (at period end)
United States $ 84,535 $210,811 $220,107
Western Europe 3,416 86,370 82,220
Eliminations (2,427) (33,385) (36,961)
-------- -------- --------
Total $ 85,524 $263,796 $265,366
-------- -------- --------
-------- -------- --------
Export sales from the United States to unaffiliated customers were
approximately $15,717, $22,104 and $25,301 for the years ended December 31,
1994, 1995 and 1996, respectively.
(15) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year Ended December 31,
--------------------------------
1994 1995 1996
-------- -------- --------
Interest paid $ 8,025 $13,399 $17,665
Income taxes paid 470 5,532 11,145
35
<PAGE>
Cash flow information with respect to Selmer's acquisition of Steinway, as
discussed in Note 18, is as follows:
1995
--------
Fair value of assets acquired $183,003
Liabilities assumed (78,542)
Cash paid 104,461
Cash acquired 1,671
(16) 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.
1995 1996
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ----------- ---------- -----------
Financial liabilities
Notes payable and long term debt $174,039 $172,773 $118,391 $128,401
Foreign currency contracts 36 36 0 (143)
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.
(17) 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:
1994 1995 1996
-------- -------- --------
Current assets $ 56,265 $132,380 $140,335
Total assets 85,524 263,796 265,348
Current liabilities 13,388 41,767 37,673
Stockholder's equity 7,253 5,198 68,718
Net sales 101,114 189,805 257,903
Gross profit 31,661 50,218 84,235
Net income (loss) 2,922 (2,074) 2,988
36
<PAGE>
(18) 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:
Year Ended December 31,
-----------------------
1994 1995
---------- ----------
Net sales $215,097 $233,731
Net loss (8,141) (89)
Net loss per share ($5.43) ($.06)
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.
37
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<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 $ - $ 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>
38
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- -------- ------------ ------------ ------------ ------------
<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>
39
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<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) $ - $ 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
Changes 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 year (7) - 387 380
--------- ----------- --------------- -------------- -------------- -------------
Cash, end of year $ - $ 361 $ 1,626 $ 1,719 $ - $ 3,706
--------- ----------- --------------- -------------- -------------- -------------
--------- ----------- --------------- -------------- -------------- -------------
</TABLE>
40
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<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 $ 18 $ (350) $ 2,220 $ 1,389 $ - $ 3,277
Accounts, notes and leases receivable, net 29,711 5,797 10,055 45,563
Inventories 34,707 25,321 23,391 (469) 82,950
Prepaid expenses and other current assets 1,460 1,090 317 2,867
Deferred tax asset 700 2,024 2,972 5,696
--------- ----------- --------------- -------------- -------------- -------------
Total current assets 18 66,228 36,452 38,124 (469) 140,353
Property, plant and equipment, net 15,103 27,509 19,489 62,101
Investment in subsidiaries 69,643 167,938 34,242 178 (272,001) -
Intercompany 1,272 (1,272) -
Other assets, net 1,976 16,139 9,489 (1,313) 26,291
Cost in excess of fair value
of net assets acquired, net 9,908 11,773 14,940 36,621
--------- ----------- --------------- -------------- -------------- -------------
TOTAL ASSETS $ 69,661 $262,425 $ 126,115 $ 82,220 $ (275,055) $ 265,366
--------- ----------- --------------- -------------- -------------- -------------
--------- ----------- --------------- -------------- -------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current
portion of long-term debt $ - $ - $ - $ 2,354 $ - $ 2,354
Accounts payable 2,749 2,579 1,125 6,453
Other current liabilities 47 10,301 8,963 10,194 (592) 28,913
--------- ----------- --------------- -------------- -------------- -------------
Total current liabilities 47 13,050 11,542 13,673 (592) 37,720
Long-term debt 110,000 2,573 3,464 116,037
Intercompany 811 63,853 (66,434) 3,042 (1,272) -
Deferred taxes 1,165 11,706 17,132 30,003
Non-current pension liability 721 13,728 (721) 13,728
--------- ----------- --------------- -------------- -------------- -------------
Total liabilities 858 188,789 (40,613) 51,039 (2,585) 197,488
Stockholders' equity 68,803 73,636 166,728 31,181 (272,470) 67,878
--------- ----------- --------------- -------------- -------------- -------------
Total $ 69,661 $ 262,425 $ 126,115 $ 82,220 $ (275,055) $ 265,366
--------- ----------- --------------- -------------- -------------- -------------
--------- ----------- --------------- -------------- -------------- -------------
</TABLE>
41
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ - $ 119,472 $ 81,418 $ 62,628 $ (5,615) $ 257,903
Cost of sales 78,885 57,301 43,005 (5,523) 173,668
------------- ------------- ------------- ------------- ------------- -------------
Gross profit - 40,587 24,117 19,623 (92) 84,235
Operating expenses:
Sales and marketing 12,312 10,246 6,820 (172) 29,206
Provision for doubtful accounts 600 103 57 760
General and administrative 135 6,113 5,733 4,382 16,363
Amortization 727 2,070 1,591 4,388
Other expense 211 (638) 753 172 498
------------- ------------- ------------- ------------- ------------- -------------
Total operating expenses 135 19,963 17,514 13,603 - 51,215
------------- ------------- ------------- ------------- ------------- -------------
Earnings (loss) from operations (135) 20,624 6,603 6,020 (92) 33,020
Other (income) expense:
Other income (244) (8,888) (2,481) (78) 10,928 (763)
Interest expense 19,257 8,904 637 (10,928) 17,870
------------- ------------- ------------- ------------- ------------- -------------
Other expense, net (244) 10,369 6,423 559 - 17,107
------------- ------------- ------------- ------------- ------------- -------------
Income before income taxes 109 10,255 180 5,461 (92) 15,913
Provision for income taxes 44 4,611 43 3,794 8,492
------------- ------------- ------------- ------------- ------------- -------------
Net income before extraordinary item 65 5,644 137 1,667 (92) 7,421
Extraordinary item 4,368 4,368
------------- ------------- ------------- ------------- ------------- -------------
Net income $ 65 $ 1,276 $ 137 $ 1,667 $ (92) $ 3,053
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
42
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<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) $ 65 $ 1,276 $ 137 $ 1,667 $ (92) $ 3,053
Adjustments to reconcile net
income (loss) to cash flows from
operating activities:
Depreciation and amortization 3,205 4,554 3,211 10,970
Provision for doubtful accounts 600 103 57 760
Amortization of senior note
discount 213 - - 213
Deferred tax provision (benefit) 285 (1,417) (1,991) (3,123)
Early extinguishment of debt 4,368 - - 4,368
Other 78 - (17) 61
Changes in operating assets
and liabilities:
Accounts, notes and leases
receivable (4,611) 1,604 (1,599) (4,606)
Inventories (6,196) (1,451) 1,769 92 (5,786)
Prepaid expense and other
current assets (352) (71) 296 (127)
Accounts payable (336) (416) (960) (1,712)
Accrued expenses 47 2,198 1,810 (2,199) 1,856
------------- ------------- ------------- ------------- ------------- -------------
Net cash flows from operating
activities 112 728 4,853 234 - 5,927
Cash flows from investing activities
Capital expenditures (3,044) (1,832) (323) (5,199)
Proceeds from disposals of
fixed assets 28 - 23 51
Changes in other assets (63) (28) 200 109
------------- ------------- ------------- ------------- ------------- -------------
Net cash flows from investing
activities - (3,079) (1,860) (100) - (5,039)
Cash flows from financing activities
Borrowing under line of
credit agreement 113,728 81,160 334 195,222
Repayments under line of
credit agreement (116,519) (80,235) (196,754)
Proceeds from issuance of
long-term debt 4,717 4,717
Proceeds from issuance of stock 60,773 60,773
Repayments of long-term debt (59,096) (5,727) (64,823)
Intercompany dividends 2,000 (2,000) -
Intercompany (60,867) 63,527 (5,324) 2,664 -
------------- ------------- ------------- ------------- ------------- -------------
Net cash flows from financing
activities (94) 1,640 (2,399) (12) - (865)
Effect of exchange rate changes
on cash - - - (452) (452)
Increase (decrease) in cash 18 (711) 594 (330) - (429)
Cash, beginning of year - 361 1,626 1,719 3,706
------------- ------------- ------------- ------------- ------------- -------------
Cash, end of year $ 18 $ (350) $ 2,220 $ 1,389 $ - $ 3,277
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
43
<PAGE>
(19) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited results of operations (in thousands
except per share data) for the years ended December 31, 1995 and 1996.
Year Ended December 31, 1995
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Net sales $ 31,880 $ 39,834 $ 59,223 $ 58,868
Net income (loss) $ 1,948 $ (239) $ (2,970) $ (813)
Net income (loss) per
common share $ .34 $ (.16) $ (1.98) $ (.51)
Weighted average
common and common
share equivalents 5,660,000 1,499,900 1,499,900 1,598,950
Year Ended December 31, 1996
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Net sales $ 69,049 $ 64,367 $ 61,460 $ 63,027
Net income before
extraordinary item $ 1,581 $ 1,710 $ 1,200 $ 2,930
Extraordinary item (4,368)
--------- --------- --------- ---------
Net income (loss) $ 1,581 $ 1,710 $ (3,168) $ 2,930
Net income (loss) per
common share
Net income before
extraordinary item $ .27 $ .29 $ .14 $ .31
Extraordinary item (.52)
--------- --------- --------- ---------
Net income (loss) $ .27 $ .29 $ (.38) $ .31
Weighted average
common and common
share equivalents 5,957,127 5,957,127 8,337,127 9,422,937
44
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for the fiscal year
ended December 31, 1996, which Proxy Statement will be filed with the
Securities and Exchange Commission no later than 120 days after the end of
the fiscal year covered by this report.
ITEM 11 EXECUTIVE COMPENSATION
The information called for by this item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for the fiscal year
ended December 31, 1996, which Proxy Statement will be filed with the
Securities and Exchange Commission no later than 120 days after the end of
the fiscal year covered by this report.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for the fiscal year
ended December 31, 1996, which Proxy Statement will be filed with the
Securities and Exchange Commission no later than 120 days after the end of
the fiscal year covered by this report.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for the fiscal year
ended December 31, 1996, which Proxy Statement will be filed with the
Securities and Exchange Commission no later than 120 days after the end of
the fiscal year covered by this report.
45
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) The following documents are filed as a part of this report:
SEQUENTIAL
(1) FINANCIAL STATEMENTS PAGE NUMBER
-------------------- -----------
Independent Auditors' Report 18
Consolidated Balance Sheets as of December 31,
1995 and 1996 19
Consolidated Statements of Operations for the
Years Ended December 31, 1994, 1995 and 1996 20
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1994, 1995
and 1996 21
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1994, 1995 and 1996 22
Notes to Consolidated Financial Statements 23
(3) EXHIBITS: The Exhibits listed below are filed as part of, or
incorporated by reference into this Report.
Exhibit Sequential
No. Description Page Number
------- ----------- -----------
3.1 Restated Certificate of Incorporation of Registrant
3.2 Bylaws of Registrant (6)
3.3 Amendment No. 1 to Bylaws of Registrant (6)
4.1 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)
4.2 First Amendment, Consent, Waiver and Agreement, dated as
of December 31, 1996, to the Existing Credit Agreement,
by and among The Selmer Company, Inc., Steinway, Inc.,
Steinway Musical Instruments, Inc., Steinway Musical
Properties, Inc., Boston Piano Company, Inc., The SMI
Trust, S&B Retail, Inc. and BNY Financial Corporation
4.3 Second Amendment, dated as of January 1, 1997, to the
Credit Agreement, by and among The Selmer Company, Inc.,
Steinway, Inc., Steinway Musical Instruments, Inc.,
Boston Piano Company, Inc., The SMI Trust, S&B Retail,
Inc. and BNY Financial Corporation
4.4 Third Amendment, Consent, Waiver and Agreement, dated as
of January 31, 1997, to the Existing Credit Agreement,
by and among The Selmer Company, Inc., Steinway, Inc.,
Steinway Musical Instruments, Inc., Boston Piano
Company, Inc., The SMI Trust,
46
<PAGE>
S&B Retail, Inc., Emerson Musical Instruments, Inc., The Steinway
Piano Company, Inc., and BNY Financial Corporation
4.5 Registration Rights Agreement, dated as of August 9, 1993, among
Selmer Industries, Inc. and the purchasers of certain equity
securities (1)
4.6 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)
4.7 Exchange Registration Rights agreement, dated as of May 25, 1995,
by and among The Selmer Company, Inc., Selmer Industries, Inc.,
Steinway Musical Properties, Inc., Steinway, Inc., Boston Piano
Company, Inc. and Donaldson, Lufkin & Jenrette Corporation (4)
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 17, 1996, between The
Selmer Company, Inc. and Michael R. Vickrey
10.3 Employment Agreement, dated May 8, 1989, between Steinway Musical
Properties, Inc. and Thomas Kurrer (5)
10.4 Employment Agreement, dated as of May 1, 1995, between Steinway
Musical Properties, Inc. and Bruce Stevens (5)
10.5 Employment Agreement Renewal and Amendment dated January 1, 1997
by and between Steinway Musical Instruments, Inc. and Bruce
Stevens
10.6 Employment Agreement, dated as of May 1, 1995, between Steinway
Musical Properties, Inc. and Dennis Hanson (5)
10.7 Employment Agreement Renewal and Amendment dated January 1, 1997
by and between Steinway Musical Instruments, Inc. and Dennis
Hanson
10.8 Agreement, dated as of August 1996, between the Registrant,
Kirkland Messina Inc., and Dana Messina (6)
10.9 Agreement, dated as of August 1996, between the Registrant,
Kirkland Messina Inc., and Kyle Kirkland (6)
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 Master Note Purchase and Repurchase Agreement, dated December 4,
1994, by and between Textron Financial Corporation and The Selmer
Company, Inc. (3)
10.12 Distribution Agreement, dated November 1, 1952, by and between H.
& A. Selmer, Inc. and Henri Selmer & Cie (1)
10.13 1996 Stock Plan of the Registrant (6)
10.14 Form of Noncompete Agreement dated July 1996 between Steinway
Musical Instruments, Inc. and each of Thomas Burzycki, Bruce
Stevens, Dennis Hanson and Michael Vickrey (7)
12.1 Statement re: computation of earnings to fixed charge coverage
ratio
21.1 List of Subsidiaries of the Registrants
23.1 Consent of Deloitte & Touche LLP
27.1 Steinway Musical Instruments, Inc. - Financial Data Schedule
47
<PAGE>
27.2 The Selmer Company, Inc. - Financial Data Schedule
___________________
(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 May 14, 1996 as an
exhibit to the Registrant's Registration Statement on Form S-1.
(7) Previously filed with the Commission on July 25, 1996 as an
exhibit to the Registrant's Amendment No. 2 to Registration
Statement on Form S-1.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ending
December 31, 1996.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
STEINWAY MUSICAL INSTRUMENTS, INC.
March 27, 1997 By /s/ Dana D. Messina
- -------------- --------------------------------
(Date) Dana D. Messina
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title
--------- ------
<S> <C> <C>
/s/ Dana D. Messina Director and Chief Executive Officer March 27, 1997
- ----------------------------- (Principal Executive Officer)
Dana D. Messina
/s/ Dennis M. Hanson Chief Financial Officer March 27, 1997
- ----------------------------- (Principal Financial Officer)
Dennis M. Hanson
/s/ Michael R. Vickrey Executive Vice President March 27, 1997
- ----------------------------- (Principal Accounting Officer)
Michael R. Vickrey
/s/ Kyle R. Kirkland Chairman of the Board March 27, 1997
- -----------------------------
Kyle R. Kirkland
/s/ Thomas T. Burzycki Director March 27, 1997
- -----------------------------
Thomas T. Burzycki
/s/ Bruce Stevens Director March 27, 1997
- -----------------------------
Bruce Stevens
/s/ Peter McMillan Director March 27, 1997
- -----------------------------
Peter McMillan
</TABLE>
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE SELMER COMPANY, INC.
March 27, 1997 By /s/ Dana D. Messina
- -------------- --------------------------------
(Date) Dana D. Messina
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title
--------- ------
<S> <C> <C>
/s/ Thomas Burzycki Director, President and March 27, 1997
- ----------------------------- Chief Executive Officer
Thomas Burzycki (Principal Executive Officer)
/s/ Michael R. Vickrey Executive Vice President March 27, 1997
- ----------------------------- and Chief Financial Officer
Michael R. Vickrey (Principal Financial and
Accounting Officer)
/s/ Kyle R. Kirkland Director March 27, 1997
- -----------------------------
Kyle R. Kirkland
/s/ Dana D. Messina Director March 27, 1997
- -----------------------------
Dana D. Messina
</TABLE>
50
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
STEINWAY MUSICAL INSTRUMENTS, INC.
The name of the corporation is Steinway Musical Instruments, Inc. The
date of filing of its original Certificate of Incorporation with the Secretary
of State of Delaware was July 8, 1993, and it was originally incorporated under
the name Selmer Industries, Inc. This Restated Certificate of Incorporation
restates and integrates and does not further amend the provisions of the
corporation's Certificate of Incorporation as heretofore amended and
supplemented. This Restated Certificate of Incorporation was duly adopted by
the Board of Directors in accordance with Section 245 of the General Corporation
Law of the State of Delaware.
FIRST: The name of the corporation is Steinway Musical Instruments,
Inc. (the "COMPANY").
SECOND: The address of the registered office of the Company in the
State of Delaware is The Corporation Trust Company, 1209 Orange Street,
Wilmington, Delaware 19801, County of New Castle. The name of its registered
agent at such address is the Corporation Trust Company.
THIRD: The purpose of the Company is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: 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.
FIFTH: The express terms and provisions of the various classes of
capital stock are as follows:
A. COMMON STOCK.
1. DIVIDENDS AND DISTRIBUTIONS. Subject to SECTION B of this
paragraph, the holders of Common Stock shall be
<PAGE>
entitled to the payment of dividends when and as declared by the Board of
Directors out of funds legally available therefor, after payment of such
dividends on the shares of Preferred Stock as set forth in SECTION B 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 through wholly-owned
subsidiaries, 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.
B. PREFERRED STOCK. 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, 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
-2-
<PAGE>
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.
SIXTH: A director 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) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived any improper personal
benefit. If the Delaware General Corporation Law is amended after the date of
the filing of this Restated Certificate of Incorporation to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the Company shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so
amended. No repeal or modification of this paragraph SIXTH shall apply to or
have any effect on the liability or alleged liability of any director of the
Company for or with respect to any acts or omissions of such director occurring
prior to such repeal or modification.
SEVENTH: To the fullest extent authorized by law, the Board of
Directors, acting on behalf of the Company, shall indemnify or advance costs of
defense, or commit the Company to indemnify or advance costs of defense in the
future, to any person who is made, or threatened to be made, a party to an
action, suit or proceeding, whether civil, criminal, administrative,
investigative or otherwise (including an action, suit or proceeding by or in the
right of the Company) by reason of the fact that the person is or was a
director, officer, employee or agent of the Company or a fiduciary within the
meaning of the Employee Retirement Income Security Act of 1974 with respect to
any employee benefit plan of the Company, or serves or served at the request of
the Company as a director, officer, partner, trustee, agent or employee, or
fiduciary of an employee benefit plan, of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise. This paragraph
shall not be deemed exclusive of any other provision for indemnification of
directors, officers, fiduciaries, employees or agents that may be included in
any statute, bylaw, resolution of stockholders or directors, agreement or
otherwise, either as to action in any official capacity or action in another
capacity while holding office.
-3-
<PAGE>
EIGHTH: The Board of Directors may amend or repeal the bylaws of the
Company.
STEINWAY MUSICAL INSTRUMENTS, INC.
By: _____________________________
Dana D. Messina
Chief Executive Officer
By: _____________________________
Dennis Hanson
Secretary
-4-
<PAGE>
FIRST AMENDMENT, CONSENT, WAIVER AND AGREEMENT
FIRST AMENDMENT, CONSENT, WAIVER AND AGREEMENT, dated as of
December 31, 1996 (this "AMENDMENT"), to the Existing Credit Agreement (as
hereinafter defined), by and among (i) THE SELMER COMPANY, INC., a Delaware
corporation f/k/a Symphony Industries, Inc. ("SELMER"), (ii) STEINWAY, INC., a
Delaware corporation ("STEINWAY" and, together with Selmer, the "BORROWERS"),
(iii) STEINWAY MUSICAL INSTRUMENTS, INC., a Delaware corporation f/k/a Selmer
Industries, Inc. ("SMI"), (iv) STEINWAY MUSICAL PROPERTIES, INC., a
Massachusetts corporation ("SMP"), (v) BOSTON PIANO COMPANY, INC., a
Massachusetts corporation ("BOSTON PIANO CO."), (vi) THE SMI TRUST, a
Massachusetts business trust ("SMIT"), (vii) S&B RETAIL, INC., a Delaware
corporation ("S&B RETAIL"), and (ix) BNY FINANCIAL CORPORATION, a New York
corporation (the "LENDER").
RECITALS
The Borrowers, SMI, SMP, Boston Piano Co. and Lender have
entered into the Existing Credit Agreement, pursuant to which the Lender is
providing to the Borrowers a $60,000,000.00 credit facility, which is secured by
certain accounts receivable and other collateral of the Borrowers and guaranteed
by SMI, SMP and Boston Piano Co. The Credit Parties (as defined in the Existing
Credit Agreement) have requested the Lender's consent to certain transactions
which are proposed to be effected on or before December 31, 1996 (such
transactions, collectively, the "CORPORATE RESTRUCTURING"), namely, (i) the
contribution by SMI of all of SMI's interest in SMIT to Selmer, (ii) the
contribution to SMIT by Selmer of that certain Promissory Note (the "STEINWAY
NOTE") of SMP, dated May 25, 1995 in an aggregate principal amount of
$80,000,000.00, (iii) the merger of SMP with and into Steinway (the "MERGER"),
(iv) the transfer by Steinway of all of its Inventory located in New Jersey,
including, but not limited to, certain Concert and Artist Bank Pianos, and its
New Jersey operations to S&B Retail (the "S&B RETAIL TRANSFER") and (v) the
transfer by Steinway of certain of its Inventory, including but not limited to
its Concert and Artist Bank Pianos located outside New York and New Jersey, to
Boston Piano Co. (the "BOSTON PIANO TRANSFER", and together with the S&B Retail
Transfer, the "INVENTORY TRANSFERS"). Pursuant to Section 6.13 of the Existing
Credit Agreement, Steinway is required to cause S&B Retail to become a Credit
Party and Selmer will upon the acquisition of SMIT be required to cause SMIT to
become a Credit Party and each of S&B Retail, and SMIT desire to do so. In
addition, to enable the Steinway Parties (as hereinafter defined) to effectuate
the Corporate Restructuring, the Credit Parties have requested that the Lender
waive certain provisions of the Existing Credit Agreement and the other Credit
Documents. Subject to the terms and conditions hereof, the Lender is willing to
consent to the Corporate Restructuring and to waive such provisions of the
Existing Credit Agreement and the other Credit Documents.
In consideration of the foregoing and of the mutual covenants
and undertakings herein contained, the parties hereto hereby agree that the
Existing Credit Agreement is amended as hereinafter provided.
<PAGE>
ARTICLE I
Definitions
1. DEFINITIONS. (a) In addition to the definitions set forth
in the heading and the recitals to this Amendment, the following definitions
shall apply hereto:
"CREDIT AGREEMENT": means the Amended and Restated Revolving
Credit, Term Loan and Security Agreement, dated as of May 25, 1995, by and among
Selmer, Steinway, SMI, SMP, Boston Piano Co. and the Lender, as amended,
supplemented or otherwise modified from time to time up to and including this
Amendment.
"EXISTING CREDIT AGREEMENT": means the Amended and Restated
Revolving Credit, Term Loan and Security Agreement, dated as of May 25, 1995,
by and among Selmer, Steinway, SMI, SMP, Boston Piano Co. and the Lender, as
amended, supplemented or otherwise modified from time to time prior to the
First Amendment Effective Date.
"STEINWAY PARTIES": the collective reference to Selmer, Steinway,
SMI, SMP, Boston Piano Co., SMIT and S&B Retail.
(b) Unless otherwise indicated, capitalized terms that are used
but not defined herein shall have the meanings ascribed to them in the Existing
Credit Agreement.
ARTICLE II
Representations
1. REPRESENTATIONS. (a) Each of the Steinway Parties hereby
represents and warrants as follows:
(i) It has full power, authority and legal right, to enter into
this Amendment and perform all of its respective obligations hereunder. The
execution, delivery and performance hereof are within its powers and have been
duly authorized, are not in contravention of any law(s) which might have a
material adverse effect upon it, the Collateral, its operations, financial
condition or prospects, or in contravention of the terms of its by-laws,
certificate of incorporation, declaration of trust or other documents relating
to its formation, as applicable, or to the conduct of its business or of any
material agreement or undertaking to which it is a party or by it is bound, and
will not conflict with or result in any breach of any of the provisions of or
constitute a default under or result in the creation of any Lien, upon any of
its assets, under the provisions of any agreement, charter, instrument, by-law,
declaration of trust or other instrument to which it is a party or by which it
or its assets may be bound.
(ii) It is duly organized and in good standing under the laws of
its respective state of organization and it is qualified to do business and is
in good standing in the states listed on SCHEDULE 5.2 hereof, which constitute
all states in which qualification and good standing are necessary for it to
conduct its businesses and own its properties and where the failure to so
qualify would have a material adverse effect on it or its businesses.
-2-
<PAGE>
(iii) This Agreement has been duly executed and delivered on
its behalf and this Agreement constitutes its legal, valid and binding
obligation, enforceable against it in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
(iv) The conditions contained in Article VII hereof have been
satisfied.
(b) Each of the Credit Parties represents that each of the
Credit Documents is on the date hereof in full force and effect.
(c) Each of SMIT, S&B Retail and S&B Distributors hereby make
each of the representations and warranties in the Credit Agreement as of the
First Amendment Effective Date.
ARTICLE III
Addition of Credit Parties
ACKNOWLEDGMENT AND EXPRESS ASSUMPTION OF OBLIGATIONS. Each of
SMIT and S&B Retail acknowledges and agrees that from and after the First
Amendment Effective Date it will be a "Credit Party" within the meaning of, and
for all purposes under, the Credit Agreement and expressly agrees to assume all
of the obligations thereof and to be bound by the Credit Agreement to the extent
set forth in Section 14.22(b) of the Credit Agreement.
ARTICLE IV
Amendments to Existing Credit Agreement
1. AMENDMENTS TO SECTION 1. (a) Section 1.1 of the Existing
Credit Agreement is hereby amended by inserting the following new definitions
therein in the appropriate alphabetical order:
"AMENDMENT DOCUMENTS": the First Amendment, Amendment
No. 1 to Selmer Pledge Agreement, the Steinway Pledge Agreement, the
SMIT Guarantee, the SMIT Security Agreement, the SMIT Pledge
Agreement, the S&B Retail Guarantee, the S&B Retail Security
Agreement, any other agreements, instruments and all other documents
executed or delivered pursuant to or in connection with the First
Amendment and the transactions contemplated thereby.
"AMENDMENT NO. 1 TO SELMER PLEDGE AGREEMENT": that
certain Amendment No. 1 to Selmer Pledge Agreement, dated as of the
date hereof, from Selmer to the Lender, pursuant to which Selmer
pledges to the Lender all of the SMIT Interests.
"FIRST AMENDMENT": the First Amendment, Consent, Waiver
and Agreement, dated as of December 31, 1996, by and among Selmer,
Steinway, SMI,
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<PAGE>
SMP, Boston Piano Co., SMIT, S&B Retail and the Lender in respect of
this Agreement.
"FIRST AMENDMENT EFFECTIVE DATE": the date on which
all of the conditions precedent to the effectiveness of the First
Amendment set forth in Article VII of the First Amendment are first
satisfied or waived.
"S&B RETAIL": S&B Retail, Inc., a Delaware corporation.
"S&B RETAIL GUARANTEE": shall mean that certain
Guarantee, dated as of the date hereof, of S&B Retail to the Lender,
pursuant to which S&B Retail guarantees all of the Obligations of
the Borrowers under the Credit Agreement, as the same may be amended
supplemented or otherwise modified from time to time.
"S&B RETAIL SECURITY AGREEMENT": shall mean that
certain General Security Agreement, dated as of the date hereof, from
S&B Retail to the Lender securing S&B Retail's obligations to the
Lender under the S&B Retail Guarantee, as the same may be amended,
supplemented or otherwise modified from time to time.
"S&B RETAIL STOCK": shall mean all of the Capital Stock
of S&B Retail, together with all stock certificates, options or rights
of any nature whatsoever which may be issued or granted in respect
thereof while this Agreement is in effect.
"SELMER NOTE": shall mean that certain Promissory Note
of Selmer, dated September 4, 1996 in an aggregate principal amount of
$62,305,000.00.
"SMI": Steinway Musical Instruments, Inc., a Delaware
corporation, formerly known as Selmer Industries, Inc.
"SMIT": The SMI Trust, a Massachusetts business trust.
"SMIT INTERESTS": shall mean all of the ownership
interests in SMIT, together with all certificates or rights of any
nature whatsoever which may evidence such interests or may be issued
or granted in respect thereof while this Agreement is in effect.
"SMIT GUARANTEE": shall mean that certain Guarantee,
dated as of the date hereof, of SMIT to the Lender, pursuant to which
SMIT guarantees all of the Obligations of the Borrowers under the
Existing Credit Agreement, as the same may be amended supplemented or
otherwise modified from time to time.
"SMIT PLEDGE AGREEMENT": shall mean that certain
General Pledge and Security Agreement, dated as of the date hereof,
from SMIT to the Lender pursuant to which SMIT pledges the Selmer Note
and the Steinway Note to the Lender to secure SMIT's obligations under
the SMIT Guarantee, as the same may be amended, supplemented or
otherwise modified from time to time.
-4-
<PAGE>
"SMIT SECURITY AGREEMENT": shall mean that certain
General Security Agreement, dated as of the date hereof, from SMIT to
the Lender securing SMIT's obligations to the Lender under the SMIT
Guarantee, as the same may be amended, supplemented or otherwise
modified from time to time.
"STEINWAY PLEDGE AGREEMENT": that certain Steinway
Pledge and Security Agreement, dated as of the date hereof, from
Steinway to the Lender, pursuant to which Steinway pledges to the
Lender all of the S&B Retail Stock.
"STEINWAY NOTE": shall mean that certain Promissory
Note of SMP, dated May 25, 1995 in an aggregate principal amount of
$80,000,000.00.
(b) Section 1.1 of the Existing Credit Agreement is hereby
amended by deleting clause (i) of the definition of "Change in Control" in its
entirety and replacing it with the following language:
"(i) Selmer fails to be a wholly-owned subsidiary
of SMI and Steinway fails to be a wholly owned
subsidiary of Selmer,".
(c) Section 1.1 of the Existing Credit Agreement is hereby
amended by adding "all SMIT Interests, all S&B Retail Stock, the Selmer Note,
the Steinway Note" to subparagraph (e) of the definition of "Collateral" after
the words "all Steinway Stock."
(d) Section 1.1 of the Existing Credit Agreement is hereby
amended by deleting the definition of "Credit Documents" in its entirety and
replacing it with the following:
"shall be the collective reference to this
Agreement, the First Amendment, the Guarantees,
the Letter of Credit Documents and the Security
Documents."
(e) Section 1.1 of the Existing Credit Agreement is hereby
amended by adding "the SMIT Pledge Agreement, the SMIT Security Agreement, the
S&B Retail Security Agreement, to the definition of "Security Documents" after
the words "the Selmer Pledge Agreement."
(f) The caption to the Existing Credit Agreement is hereby
amended by adding ", now known as Steinway Musical Instruments, Inc." after the
words "Selmer Industries, Inc., a Delaware corporation".
2. AMENDMENTS TO SECTION 4.15(c) Section 4.15(c) of the
Existing Credit Agreement is hereby amended by: (i) adding immediately prior to
the last sentence thereof the words "SMI's chief executive office and its
principal place of business is located at 800 South Street, Waltham, MA 02154.
SMIT's chief executive office and its principal place of business is located at
800 South Street, Waltham, MA 02154. S&B Retail's chief executive office and
its principal place of business is located at 150 Route 17 North, Paramus, NJ
07652.", and (ii)
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<PAGE>
deleting in their entirety (A) the sentence beginning "Selmer Industries' chief
executive office" and (B) the sentence beginning "SMP's chief executive office".
3. AMENDMENTS TO SECTION 5.1. Section 5.1 of the Existing
Credit Agreement is hereby amended by: (i) deleting the phrase "corporate power"
from the first sentence thereof and by replacing it with "corporate or trust
power, as the case may be,", (ii) deleting the phrase "corporate powers" from
the second sentence thereof and by replacing it with "corporate or trust powers,
as the case may be,", and (iii) by adding immediately after the words
"certificate of incorporation" in the second sentence thereof ", declaration of
trust".
4. AMENDMENTS TO SECTION 5.2. Section 5.2 of the Existing
Credit Agreement is hereby amended by: (i) deleting the words "incorporated" and
"incorporation" from the first sentence thereof and replacing them with
"organized" and "organization", respectively.
5. AMENDMENTS TO SCHEDULE 5.2. Schedule 5.2 of the Existing
Credit Agreement is hereby amended in its entirety to read as set forth on
Schedule 5.2 hereto.
6. AMENDMENTS TO SCHEDULE 5. 4. Schedule 5.4 of the Existing
Credit Agreement is hereby amended in its entirety to read as set forth on
Schedule 5.4 hereto.
7. AMENDMENTS TO SCHEDULE 5.5. Schedule 5.5 of the Existing
Credit Agreement is hereby amended in its entirety to read as set forth on
Schedule 5.5 hereto.
8. AMENDMENTS TO SECTION 5.7. Section 5.7 of the Existing
Credit Agreement is hereby amended by: (i) deleting the first sentence thereof
and replacing it with "SMI has not been known by any name other than Steinway
Musical Instruments, Inc. and Selmer Industries, Inc. in the past five years.",
and (ii) adding "SMIT has not been known by any name other than The SMI Trust in
the past five years. S&B Retail has not been known by any name other than S&B
Retail, Inc. in the past five years." before the words "No Credit Party sells
Inventory".
9. AMENDMENTS TO SCHEDULE 5.7. Schedule 5.7 of the Existing
Credit Agreement is hereby amended in its entirety to read as set forth on
Schedule 5.7 hereto.
10. AMENDMENT TO SECTION 5.9(b). Section 5.9(b) of the Existing
Credit Agreement is hereby amended by adding immediately after the words
"permitted under Section 7.6 of this Agreement" in the last sentence thereof
"the Selmer Note, the Steinway Note, and any notes issued in respect of
transactions in which interest paid on either of them is reborrowed by the party
paying such interest,".
11. AMENDMENT OF SECTION 7.20. Section 7.20 of the Existing
Credit Agreement is hereby amended (i) by adding the words "and (ii) providing
management and other related services to its Subsidiaries" to paragraph (b)
after the words "activity incident thereto" and (ii) deleting therefrom
paragraph (c) thereof in its entirety.
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<PAGE>
ARTICLE V
Waivers
1. WAIVER. The Lender hereby waives, pursuant to Section 14.14
of the Existing Credit Agreement, any Default or Event of Default arising as a
result of the failure by either of the Borrowers or any other Credit Party, as
applicable, to comply with or to satisfy the requirements of:
(a) Section 4.3 of the Existing Credit Agreement, but only with
respect to the transfer of the Steinway Note by Selmer to SMIT and the
Inventory Transfers;
(b) Section 6.2(b) of the Existing Credit Agreement, but only
with respect to the Merger;
(c) Section 7.1(a) and (b) of the Existing Credit Agreement but,
in the case of subparagraph (a), only with respect to the Merger and, in
the case of subparagraph (b), only with respect to the transfer of the
Steinway Note to SMIT and the Inventory Transfer;
(d) Section 7.9 of the Existing Credit Agreement, but only with
respect to the Corporate Restructuring and the Inventory Transfers;
(e) Section 7.10 of the Existing Credit Agreement, but only with
respect to the Corporate Restructuring and the Inventory Transfers;
(f) Section 3a and c of the Steinway General Security Agreement
and the Boston Piano, Inc. General Security Agreement, but only with
respect to the Inventory Transfers; and
(g) Section 3a and c of the Selmer General Security Agreement,
but only with respect to the transfer of the Steinway Note to SMIT.
ARTICLE VI
Consents
1. CONSENTS. The Lender hereby consents to the following
transactions:
(a) to the transfer of the Steinway Note by Selmer to SMIT
pursuant to Section 4.6 of the Existing Credit Agreement;
(b) to the Inventory Transfers, pursuant to Section 4.6 of the
Existing Credit Agreement;
(c) to the Merger, pursuant to (i) Section 5a of each of the
Steinway General Security Agreement and the SMP General Security Agreement
and (ii) Section 5a of the SMP Pledge Agreement;
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<PAGE>
(d) to the creation of SMIT with the proceeds of the initial
public offering of SMI ordinary common stock, pursuant to Section 7.15 of
the Existing Credit Agreement; and
(e) to the prepayment of the Senior Secured Notes by Selmer with
the proceeds of the Selmer Note.
ARTICLE VII
Conditions to Effectiveness
This Amendment, and the modifications to the Credit Agreement
provided for herein, shall become effective on the date (the "FIRST AMENDMENT
EFFECTIVE DATE") on which all of the following conditions have been (or are
concurrently being) satisfied:
1. The following documents shall have been executed and
delivered by each party thereto:
(i) this Amendment;
(ii) Amendment No. 1 to Selmer Pledge Agreement;
(iii) the Steinway Pledge Agreement;
(iv) the SMIT Pledge Agreement;
(v) the SMIT Guarantee;
(vi) the SMIT Security Agreement;
(vii) the S&B Retail Guarantee;
(viii) the S&B Retail Security Agreement; and
(ix) all Uniform Commercial Code financing statements on Form
UCC-1 and Form UCC-3 required by the Lender.
2. The Lender shall have received the executed legal opinions
of Milbank, Tweed, Hadley & McCloy, special counsel to the Steinway Parties, and
Dennis M. Hanson, General Counsel to the Credit Parties, in form and substance
satisfactory to the Lender and taking into account this Amendment and the
matters contemplated hereby (including, without limitation, assurances with
respect to the validity of UCC filings in each state where Collateral is
located). Such legal opinion shall cover such matters incident to the
transactions contemplated by this Amendment and the other Amendment Documents as
the Lender may reasonably require.
3. The Lender shall have received a copy, in form and substance
reasonably satisfactory to the Lender, of the corporate resolutions of each of
the Steinway Parties other than SMIT and other appropriate documents in the case
of SMIT, in each case,
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<PAGE>
authorizing the execution, delivery and performance of this Amendment and, the
other Amendment Documents to which such Steinway Party is a party in each case
certified by the Secretary or an Assistant Secretary of the relevant Steinway
Party as of the First Amendment Effective Date, which certificates shall state
that the resolutions or authorizations thereby certified have not been amended,
modified, revoked or rescinded as of the date of such certificate.
4. The Lender shall have received a certificate of the
Secretary or an Assistant Secretary of each Steinway Party, dated the First
Amendment Effective Date, as to the incumbency and signature of the officers of
such Steinway Party executing each Amendment Document to which such Steinway
Party is a party and any certificate or other document to be delivered by it
pursuant hereto, together with evidence of the incumbency of such Secretary or
Assistant Secretary.
5. The Lender shall have received a copy, in form and substance
reasonably satisfactory to the Lender, of (i) the certificate of merger related
to the Merger, (ii) the articles of incorporation and by-laws of S&B Retail and
(iii) the declaration of trust of SMIT, in each case certified by an appropriate
officer of the party making delivery thereof.
6. The Lender shall have received certificates from each of
Selmer, SMI and Boston Piano Co., stating that its Governing Documents have not
been amended since the May 25, 1995.
7. The Lender shall have received copies of certificates dated
as of a recent date from the Secretary of State or other appropriate authority
of such jurisdiction, evidencing the good standing of each Steinway Party in the
State of its organization and in each State where the ownership, lease or
operation of property or the conduct of business requires it to qualify as a
foreign corporation or other entity except where the failure to so qualify would
not have a Material Adverse Effect.
8. Each of the representations and warranties made by the
Borrowers, SMI or Boston Piano Co. in or pursuant to the Credit Documents shall
be true and correct in all material respects on and as of the First Amendment
Effective Date as if made on and as of such date (except to the extent the same
relate to another, earlier date, in which case they shall be true and correct in
all material respects as of such earlier date).
9. Except as provided for in Article V, no Default or Event of
Default shall have occurred and be continuing.
10. The Lender shall have received each additional document,
instrument, legal opinion or item of information reasonably requested by the
Lender, including, without limitation, a copy of any debt instrument, security
agreement or other material contract to which a Steinway Party may be a party.
11. All corporate and other proceedings, and all documents,
instruments and other legal matters in connection with the transactions
contemplated by the Amendment
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<PAGE>
Documents, the Existing Credit Agreement, the Credit Agreement and the other
Credit Documents shall be reasonably satisfactory in form and substance to the
Lender, and the Lender shall have received such other documents in respect of
any aspect or consequence of the transactions contemplated hereby or thereby as
it shall reasonably request.
ARTICLE VIII.
Miscellaneous
1. PAYMENT OF EXPENSES. Without limiting its obligations under
Section 14.13 of the Credit Agreement, the Borrowers jointly and severally agree
to pay or reimburse the Lender for all of its reasonable costs and expenses
incurred in connection with this Amendment and the other Amendment Documents,
including, without limitation, the reasonable costs and expenses of Cadwalader,
Wickersham & Taft, counsel to the Lender and expressly acknowledge that their
obligations hereunder constitute "Obligations" within the meaning of the
Existing Credit Agreement.
2. NO OTHER AMENDMENTS; CONFIRMATION. Except as expressly
amended, modified and supplemented hereby and by the documents related hereto,
the provisions of the Existing Credit Agreement and the other Credit Documents
shall remain in full force and effect.
3. AFFIRMATION BY CREDIT PARTIES. Each Credit Party hereby
consents to the execution and delivery of this Amendment and each of the other
Amendment Document to which such Credit Party is a party and reaffirms its
obligations under the Credit Documents executed by such Credit Party.
4. GOVERNING LAW; COUNTERPARTS. (a) This Amendment and the
rights and obligations of the parties hereto shall be governed by, and construed
and interpreted in accordance with, the laws of the State of New York.
(b) This Amendment may be executed by one or more of the parties
hereto on any number of separate counterparts, and all of said counterparts
taken together shall be deemed to constitute one and the same instrument. A set
of the copies of this Amendment signed by all the parties shall be lodged with
the Borrower and the Lender. This Amendment may be delivered by facsimile
transmission of the relevant signature pages hereof.
[ SIGNATURE PAGE FOLLOWS ]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed and delivered as of the day and year first above written.
THE SELMER COMPANY, INC.
By /s/ Dennis M. Hanson
-------------------------------
Name: Dennis M. Hanson
Title: V.P. -General Counsel
STEINWAY, INC.
By /s/ Dennis M. Hanson
-------------------------------
Name: Dennis M. Hanson
Title: V.P. Treasurer
STEINWAY MUSICAL INSTRUMENTS, INC.
By /s/ Dennis M. Hanson
-------------------------------
Name: Dennis M. Hanson
Title: V.P. - C.F.O
STEINWAY MUSICAL PROPERTIES, INC.
By /s/ Dennis M. Hanson
-------------------------------
Name: Dennis M. Hanson
Title: E.V.P. - C.F.O.
BOSTON PIANO COMPANY, INC.
By /s/ Dennis M. Hanson
-------------------------------
Name: Dennis M. Hanson
Title: V.P. - Treasurer
[SIGNATURE BLOCKS CONTINUED ON NEXT PAGE]
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<PAGE>
THE SMI TRUST
By /s/ Dennis M. Hanson
-------------------------------
Name: Dennis M. Hanson
Title: Trustee
S&B RETAIL, INC.
By /s/ Dennis M. Hanson
-------------------------------
Name: Dennis M. Hanson
Title: V.P. -Treasurer
BNY FINANCIAL CORPORATION
By Mary E. Duffy
-------------------------------
Name: Mary E. Duffy
Title: Vice President
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<PAGE>
SCHEDULE 5.7
TRADE NAMES
(a) The Selmer Company, Inc.
Selmer
Vincent Bach
Ludwig
Musser
Glaesel
Signet
Bundy
Omega
Buescher
H. Selmer Paris
(b) Steinway, Inc.
Steinway
Steinway & Sons
Lyre Design
Steinway Boston
Boston Designed by Steinway
<PAGE>
SECOND AMENDMENT
SECOND AMENDMENT, dated as of January 1, 1997 (this "AMENDMENT"),
to the Credit Agreement (as hereinafter defined), by and among (i) THE SELMER
COMPANY, INC., a Delaware corporation f/k/a Symphony Industries, Inc.
("SELMER"), (ii) STEINWAY, INC., a Delaware corporation ("STEINWAY" and,
together with Selmer, the "BORROWERS"), (iii) STEINWAY MUSICAL INSTRUMENTS,
INC., a Delaware corporation f/k/a Selmer Industries, Inc. ("SMI"), (iv) BOSTON
PIANO COMPANY, INC., a Massachusetts corporation ("BOSTON PIANO CO."), (v) THE
SMI TRUST, a Massachusetts business trust ("SMIT"), (vi) S&B RETAIL, INC., a
Delaware corporation ("S&B RETAIL"), and (vii) BNY FINANCIAL CORPORATION, a New
York corporation (the "LENDER").
RECITALS
The Borrowers, SMI, Boston Piano Co., SMIT, S&B Retail and the
Lender are all of the parties to the Credit Agreement, pursuant to which the
Lender is providing to the Borrowers a $60,000,000.00 credit facility, which is
secured by certain accounts receivable and other collateral of the Borrowers and
guaranteed by SMI, Boston Piano Co., SMIT and S&B Retail and the Credit Parties
have requested that the Lender reduce the rate of interest applied to advances
made under the Credit Agreement and the Lender is willing to do so, but only on
the terms and subject to the conditions set forth in this Amendment.
In consideration of the foregoing and of the mutual covenants and
undertakings herein contained, the parties hereto hereby agree that the Credit
Agreement is amended as hereinafter provided.
1. DEFINITIONS. (a) In addition to the definitions set forth in
the heading and the recitals to this Amendment, the following definitions shall
apply hereto:
"CREDIT AGREEMENT": means the Amended and Restated Revolving
Credit, Term Loan and Security Agreement, dated as of May 25, 1995, by and among
Selmer, Steinway, SMI, Steinway Musical Properties, Inc., Boston Piano Co. and
the Lender, as amended by the First Amendment, Consent Waiver and Agreement,
dated as of December 31, 1996, by and among Selmer, Steinway, SMI, Steinway
Musical Properties, Inc., Boston Piano Co., SMIT, S&B Retail and the Lender, as
amended, supplemented or otherwise modified from time to time up to and
including this Amendment.
(b) Unless otherwise indicated, capitalized terms that are used
but not defined herein shall have the meanings ascribed to them in the Credit
Agreement.
2. AMENDMENTS.: The definition of Advance Interest Rate in the
Credit Agreement is hereby amended by deleting such definition in its entirety
and substituting in lieu thereof a new definition to read in its entirety as
follows:
<PAGE>
""ADVANCE INTEREST RATE" shall mean an interest rate per annum
equal to (i) with respect to Alternate Base Rate Loans, the Alternate Base Rate
plus one percent (1%), and (ii) with respect to Eurodollar Advances, the
Eurodollar Rate plus two and one-half percent (2.5%)."
3. EFFECTIVENESS. This Amendment shall be effective as of
January 1, 1997.
4. REPRESENTATIONS. (a) Each of the Credit Parties hereby
represents and warrants as follows:
(i) It has full power, authority and legal right, to enter into
this Amendment and perform all of its respective obligations hereunder. The
execution, delivery and performance hereof are within its powers and have been
duly authorized, are not in contravention of any law(s) which might have a
material adverse effect upon it, the Collateral, its operations, financial
condition or prospects, or in contravention of the terms of its by-laws,
certificate of incorporation, declaration of trust or other documents relating
to its formation, as applicable, or to the conduct of its business or of any
material agreement or undertaking to which it is a party or by it is bound, and
will not conflict with or result in any breach of any of the provisions of or
constitute a default under or result in the creation of any Lien, upon any of
its assets, under the provisions of any agreement, charter, instrument, by-law,
declaration of trust or other instrument to which it is a party or by which it
or its assets may be bound.
(ii) It is duly organized and in good standing under the laws of
its respective state of organization and it is qualified to do business and is
in good standing in the states listed on SCHEDULE 5.2 of the Credit Agreement,
which constitute all states in which qualification and good standing are
necessary for it to conduct its businesses and own its properties and where the
failure to so qualify would have a material adverse effect on it or its
businesses.
(iii) This Amendment has been duly executed and delivered on its
behalf and this Amendment constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles (whether enforcement is sought by proceedings in
equity or at law).
(iv) Each of the Credit Documents is on the date hereof in full
force and effect.
(v) After giving effect to the amendments provided for herein,
the representations and warranties contained in the Credit Agreement and the
other Basic Documents will be true and correct in all material respects as if
made on and as of the date hereof and that no Default or Event of Default will
have occurred and be continuing.
5. NO OTHER AMENDMENTS. Except as expressly amended hereby, the
Credit Agreement, the Notes and the other Basic Documents shall remain in full
force and effect in
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<PAGE>
accordance with their respective terms, without any waiver, amendment or
modification of any provision thereof.
6. COUNTERPARTS. This Amendment may be executed by one or more of
the parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
7. EXPENSES. The Borrowers agree to pay and reimburse the Lender
for all of the out-of-pocket costs and expenses reasonably incurred by the
Lender in connection with the preparation, execution and delivery of this
Amendment, including, without limitation, the reasonable fees and disbursements
of Cadwalader, Wickersham & Taft, counsel to the Lender.
8. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed and delivered as of the day and year first above written.
THE SELMER COMPANY, INC.
By /s/ Dana D. Messina
-------------------------------
Name: Dana D. Messina
Title:
STEINWAY, INC.
By /s/ Dana D. Messina
-------------------------------
Name: Dana D. Messina
Title:
STEINWAY MUSICAL INSTRUMENTS, INC.
By /s/ Dana D. Messina
-------------------------------
Name: Dana D. Messina
Title:
BOSTON PIANO COMPANY, INC.
By /s/ Dana D. Messina
-------------------------------
Name: Dana D. Messina
Title:
THE SMI TRUST
By/s/ Dana D. Messina
-------------------------------
Name: Dana D. Messina
Title:
[SIGNATURE BLOCKS CONTINUED ON NEXT PAGE]
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<PAGE>
S&B RETAIL, INC.
By /s/ Dana D. Messina
-------------------------------
Name: Dana D. Messina
Title:
BNY FINANCIAL CORPORATION
By /s/ Mary E. Duffy
-------------------------------
Name: MARY E. DUFFY
Title: VICE PRESIDENT
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<PAGE>
THIRD AMENDMENT, CONSENT, WAIVER AND AGREEMENT
THIRD AMENDMENT, CONSENT, WAIVER AND AGREEMENT, dated as of
January 31, 1997 (this "AMENDMENT"), to the Existing Credit Agreement (as
hereinafter defined), by and among (i) THE SELMER COMPANY, INC., a Delaware
corporation f/k/a Symphony Industries, Inc. ("SELMER"), (ii) STEINWAY, INC., a
Delaware corporation ("STEINWAY" and, together with Selmer, the "BORROWERS"),
(iii) STEINWAY MUSICAL INSTRUMENTS, INC., a Delaware corporation f/k/a Selmer
Industries, Inc. ("SMI"), (iv) BOSTON PIANO COMPANY, INC., a Massachusetts
corporation ("BOSTON PIANO CO."), (v) THE SMI TRUST, a Massachusetts business
trust ("SMIT"), (vi) S&B RETAIL, INC., a Delaware corporation ("S&B RETAIL"),
(vii) EMERSON MUSICAL INSTRUMENTS, INC., a Delaware corporation ("EMERSON"),
(viii) THE STEINWAY PIANO COMPANY, INC., a Delaware corporation ("SPC") and (ix)
BNY FINANCIAL CORPORATION, a New York corporation (the "LENDER").
RECITALS
The Borrowers, SMI, Boston Piano Co., SMIT, S&B Retail and Lender
have entered into the Existing Credit Agreement, pursuant to which the Lender is
providing to the Borrowers a $60,000,000.00 credit facility, which is secured by
certain accounts receivable and other collateral of the Borrowers and guaranteed
by SMI, Boston Piano Co., S&B Retail and SMIT. The Credit Parties (as defined
in the Existing Credit Agreement) have requested the Lender's consent to certain
transactions which are proposed to be effected or have been effected on or
before January 31, 1997 (such transactions, collectively, the "CORPORATE
RESTRUCTURING"), namely, (i) the creation by Selmer of SPC, (ii) the creation by
Selmer of Steinway & Sons Japan, Ltd. ("S&S JAPAN"), a corporation organized
under the laws of Japan, (iii) the transfer by Steinway to Selmer of Steinway's
ownership interest in Boston Piano Co., Steinway & Sons ("STEINWAY & SONS"), S&B
Retail, and Boston Piano GmbH ("BOSTON PIANO GMBH"), (iv) the contribution by
Selmer of Steinway, Boston Piano Co., Steinway & Sons, S&B Retail, Boston Piano
GmbH, and S&S Japan to SPC, (v) the creation of Emerson by SMI and (vii) the
purchase by Emerson of certain assets of Emerson Musical Instruments, Inc., an
Indiana corporation (the "Asset Purchase"). Pursuant to Section 6.13 of the
Existing Credit Agreement, Steinway is required to cause Emerson and SPC to
become Credit Parties and each of Emerson and SPC desire to do so. In addition,
to enable the Steinway Parties (as hereinafter defined) to effectuate the
Corporate Restructuring, the Credit Parties have requested that the Lender waive
certain provisions of the Existing Credit Agreement and the other Credit
Documents (as hereinafter defined). Subject to the terms and conditions hereof,
the Lender is willing to consent to the Corporate Restructuring and to waive
such provisions of the Existing Credit Agreement and the other Credit Documents.
<PAGE>
In consideration of the foregoing and of the mutual covenants and
undertakings herein contained, the parties hereto hereby agree that the Existing
Credit Agreement is amended as hereinafter provided.
ARTICLE I
Definitions
1. DEFINITIONS. (a) In addition to the definitions set forth
in the heading and the recitals to this Amendment, the following definitions
shall apply hereto:
"AGREEMENT" or "THIS AGREEMENT": means the Amended and Restated
Revolving Credit, Term Loan and Security Agreement, dated as of May 25, 1995, by
and among Selmer, Steinway, SMI, Steinway Musical Properties, Inc. ("SMP"),
Boston Piano Co. and the Lender, as amended, supplemented or otherwise modified
from time to time up to and including this Amendment.
"EXISTING CREDIT AGREEMENT": means the Amended and Restated
Revolving Credit, Term Loan and Security Agreement, dated as of May 25, 1995, by
and among Selmer, Steinway, SMI, SMP, Boston Piano Co. and the Lender, as
amended by the First Amendment, Consent Waiver and Agreement, dated as of
December 31, 1996, by and among Selmer, Steinway, SMI, SMP, Boston Piano Co.,
SMIT, S&B Retail and the Lender, and as amended by the Second Amendment dated as
of January 1, 1997, by and among Selmer, Steinway, SMI, Boston Piano Co., SMIT,
S&B Retail and the Lender, as amended, supplemented or otherwise modified from
time to time prior to the Third Amendment Effective Date.
"STEINWAY PARTIES": the collective reference to Selmer, Steinway,
SMI, Boston Piano Co., SMIT, S&B Retail, Emerson and SPC.
(b) Unless otherwise indicated, capitalized terms that are used
but not defined herein shall have the meanings ascribed to them in the Existing
Credit Agreement.
ARTICLE II
Representations
1. REPRESENTATIONS. (a) Each of the Steinway Parties hereby
represents and warrants as follows:
(i) It has full power, authority and legal right, to enter into
this Amendment and perform all of its respective obligations hereunder. The
execution, delivery and performance hereof are within its powers and have been
duly authorized, are not in contravention of any law(s) which might have a
material adverse effect upon it, the Collateral, its operations, financial
condition or prospects, or in contravention of the terms of its by-laws,
certificate of incorporation, declaration of trust or other documents relating
to its formation, as applicable, or to the conduct of its business or of any
material agreement or undertaking to which it is a party or by it is bound, and
will not conflict with or result in any breach of any of the provisions of or
constitute a default under or result in the creation of any Lien, upon any
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<PAGE>
of its assets, under the provisions of any agreement, charter, instrument, by-
law, declaration of trust or other instrument to which it is a party or by which
it or its assets may be bound.
(ii) It is duly organized and in good standing under the laws of
its respective state of organization and it is qualified to do business and is
in good standing in the states listed on SCHEDULE 5.2 hereof, which constitute
all states in which qualification and good standing are necessary for it to
conduct its businesses and own its properties and where the failure to so
qualify would have a material adverse effect on it or its businesses.
(iii) This Agreement has been duly executed and delivered on its
behalf and this Agreement constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles (whether enforcement is sought by proceedings in
equity or at law).
(iv) The conditions contained in Article VII hereof have been
satisfied.
(b) Each of the Credit Parties represents that each of the
Credit Documents is on the date hereof in full force and effect.
(c) Each of Emerson and SPC hereby make each of the
representations and warranties in the Agreement as of the Third Amendment
Effective Date.
ARTICLE III
Addition of Credit Parties
1. ACKNOWLEDGMENT AND EXPRESS ASSUMPTION OF OBLIGATIONS. Each
of Emerson and SPC acknowledges and agrees that from and after the Third
Amendment Effective Date it will be a "Credit Party" within the meaning of, and
for all purposes under, the Agreement and expressly agrees to assume all of the
obligations thereof and to be bound by the Agreement to the extent set forth in
Section 14.22(b) of the Agreement.
ARTICLE IV
Amendments to Existing Credit Agreement
1. AMENDMENTS TO SECTION 1. (a) Section 1.1 of the Existing
Credit Agreement is hereby amended by inserting the following new definitions
therein in the appropriate alphabetical order:
"AMENDMENT NO. 1 TO SMI PLEDGE AGREEMENT": that certain
Amendment No. 1 to Amended and Restated General Security and Stock
Pledge Agreement, dated as of the date hereof, from SMI to the Lender,
pursuant to which SMI pledges to the Lender all of the Emerson Stock.
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<PAGE>
"AMENDMENT NO. 2 TO SELMER PLEDGE AGREEMENT": that
certain Amendment No. 2 to Selmer Pledge Agreement, dated as of the
date hereof, from Selmer to the Lender, pursuant to which Selmer
pledges to the Lender all of the SPC Stock.
"EMERSON" Emerson Musical Instruments, Inc., a Delaware
corporation.
"EMERSON GUARANTEE": shall mean that certain
Guarantee, dated as of the date hereof, of Emerson to the Lender,
pursuant to which Emerson guarantees all of the Obligations of the
Borrowers under this Agreement, as the same may be amended
supplemented or otherwise modified from time to time.
"EMERSON SECURITY AGREEMENT": shall mean that certain
General Security Agreement, dated as of the date hereof, from Emerson
to the Lender securing Emerson's obligations to the Lender under the
Emerson Guarantee, as the same may be amended, supplemented or
otherwise modified from time to time.
"EMERSON STOCK": shall mean all of the Capital Stock of
Emerson, together with all stock certificates, options or rights of
any nature whatsoever which may be issued or granted in respect
thereof while this Agreement is in effect.
"EMERSON TRADEMARK ASSIGNMENT": shall mean that certain
assignment by Emerson to the Lender of all of its right, title and
interest in and to all of its existing and future trademarks and
trademark applications, substantially in the form of EXHIBIT K to this
Agreement, together with related Uniform Commercial Code financing
statements and Federal government filings and recordings of the
Lender's interest therein as the Lender in its reasonable discretion
may deem necessary or desirable, as amended, supplemented or otherwise
modified from time to time.
"FIRST AMENDMENT DOCUMENTS": the First Amendment,
Amendment No. 1 to Selmer Pledge Agreement, the Steinway Pledge
Agreement, the SMIT Guarantee, the SMIT Security Agreement, the SMIT
Pledge Agreement, the S&B Retail Guarantee, the S&B Retail Security
Agreement, any other agreements, instruments and all other documents
executed or delivered pursuant to or in connection with the First
Amendment and the transactions contemplated thereby.
"S&S JAPAN" Steinway & Sons Japan, Ltd., a corporation
organized under the laws of Japan.
"S&S JAPAN STOCK": shall mean all of the Capital Stock
of S&S Japan, together with all stock certificates, options or rights
of any nature whatsoever which may be issued or granted in respect
thereof while this Agreement is in effect.
"SECOND AMENDMENT": the Second Amendment, dated as of
January 1, 1997, by and among Selmer, Steinway, SMI, Boston Piano Co.,
SMIT, S&B Retail, and the Lender in respect of this Agreement.
"SPC": The Steinway Piano Company, Inc. a Delaware
corporation.
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<PAGE>
"SPC GUARANTEE": shall mean that certain Guarantee,
dated as of the date hereof, of SPC to the Lender, pursuant to which
SPC guarantees all of the Obligations of the Borrowers under this
Agreement, as the same may be amended supplemented or otherwise
modified from time to time.
"SPC PLEDGE AGREEMENT" shall mean that certain Pledge
Agreement, dated the date hereof, from SPC to the Lender, pursuant to
which SPC pledges (i) 100% of the Capital Stock of Steinway, Boston
Piano Co., Steinway & Sons and S&B Retail and (ii) 65% of the Capital
Stock of Boston Piano GmbH and S&S Japan to secure SPC's obligations
under the SPC Guarantee, as the same may be amended, supplemented or
otherwise modified from time to time.
"SPC SECURITY AGREEMENT": shall mean that certain
General Security Agreement, dated as of the date hereof, from SPC to
the Lender securing SPC's obligations to the Lender under the SPC
Guarantee, as the same may be amended, supplemented or otherwise
modified from time to time.
"SPC STOCK": shall mean all of the Capital Stock of
SPC, together with all stock certificates, options or rights of any
nature whatsoever which may be issued or granted in respect thereof
while this Agreement is in effect.
"THIRD AMENDMENT": the Third Amendment, Consent, Waiver
and Agreement, dated as of January 31, 1997, by and among Selmer,
Steinway, SMI, Boston Piano Co., SMIT, S&B Retail, Emerson, SPC and
the Lender in respect of this Agreement.
"THIRD AMENDMENT DOCUMENTS": the Third Amendment,
Amendment No. 2 to Selmer Pledge Agreement, Amendment No. 1 to the SMI
Pledge Agreement, the SPC Pledge Agreement, the SPC Guarantee, the SPC
Security Agreement, the Emerson Guarantee, the Emerson Security
Agreement, the Emerson Trademark Assignment, any other agreements,
instruments and all other documents executed or delivered pursuant to
or in connection with the Third Amendment and the transactions
contemplated thereby.
"THIRD AMENDMENT EFFECTIVE DATE": the date on which
all of the conditions precedent to the effectiveness of the Third
Amendment set forth in Article VII of the Third Amendment are first
satisfied or waived.
(b) Section 1.1 of the Existing Credit Agreement is hereby
amended by deleting clause (i) of the definition of "Change in Control" in its
entirety and replacing it with the following language:
"(i) Selmer fails to be a wholly-owned subsidiary
of SMI, SPC fails to be a wholly owned subsidiary
of Selmer, and Steinway fails to be a wholly owned
subsidiary of SPC,".
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<PAGE>
(c) Section 1.1 of the Existing Credit Agreement is hereby
amended by deleting the definition of "Amendment Documents" in its entirety.
(d) Section 1.1 of the Existing Credit Agreement is hereby
amended by adding "all SPC Stock, all Emerson Stock, 65% of all S&S Japan Stock"
to subparagraph (e) of the definition of "Collateral" after the words "all S&B
Retail Stock."
(e) Section 1.1 of the Existing Credit Agreement is hereby
amended by deleting the definition of "Credit Documents" in its entirety and
replacing it with the following:
"shall be the collective reference to this
Agreement, the First Amendment, the Second
Amendment, the Third Amendment, the Guarantees,
the Letter of Credit Documents and the Security
Documents."
(f) Section 1.1 of the Existing Credit Agreement is hereby
amended by adding "the SPC Pledge Agreement, the SPC Security Agreement, the
Emerson Security Agreement," to the definition of "Security Documents" after the
words "the S&B Retail Pledge Agreement."
(g) Section 1.1 of the Existing Credit Agreement is hereby
amended by adding "the Emerson Trademark Assignment," to the definition of
"Trademark Assignments" after the words "the SMP Trademark Assignment."
2. AMENDMENTS TO SECTION 4.15(c). Section 4.15(c) of the
Existing Credit Agreement is hereby amended by: (i) adding immediately prior to
the last sentence thereof the words "SPC's chief executive office and its
principal place of business is located at 600 Industrial Parkway, Elkhart
Indiana 46516. Emerson's chief executive office and its principal place of
business is located at 28135 West Hively Avenue, Elkhart, Indiana 46517."
3. AMENDMENTS TO SCHEDULE 4.5. Schedule 4.5 of the Existing
Credit Agreement is hereby amended in its entirety to read as set forth on
Schedule 4.5 hereto.
4. AMENDMENTS TO SCHEDULE 5.2. Schedule 5.2 of the Existing
Credit Agreement is hereby amended in its entirety to read as set forth on
Schedule 5.2 hereto.
5. AMENDMENTS TO SCHEDULE 5.4. Schedule 5.4 of the Existing
Credit Agreement is hereby amended in its entirety to read as set forth on
Schedule 5.4 hereto.
6. AMENDMENTS TO SCHEDULE 5.5. Schedule 5.5 of the Existing
Credit Agreement is hereby amended in its entirety to read as set forth on
Schedule 5.5 hereto.
7. AMENDMENTS TO SECTION 5.7. Section 5.7 of the Existing
Credit Agreement is hereby amended by adding "SPC has not been known by any name
other than The Steinway Piano Company, Inc. in the past five years. Emerson has
not been known by any name other than Emerson Musical Instruments, Inc. in the
past five years." before the words "No Credit Party sells Inventory".
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<PAGE>
8. AMENDMENTS TO SCHEDULE 5.7. Schedule 5.7 of the Existing
Credit Agreement is hereby amended in its entirety to read as set forth on
Schedule 5.7 hereto.
9. AMENDMENTS TO SCHEDULE 5.10. Schedule 5.10 of the Existing
Credit Agreement is hereby amended in its entirety to read as set forth on
Schedule 5.10 hereto.
ARTICLE V
Waivers
1. WAIVER. The Lender hereby waives, pursuant to Section 14.14
of the Existing Credit Agreement, any Default or Event of Default arising as a
result of the failure by either of the Borrowers or any other Credit Party, as
applicable, to comply with or to satisfy the requirements of:
(a) Section 4.3 of the Existing Credit Agreement, but only with
respect to the transfer to SPC of the Steinway Stock, the Boston Piano Co.
Stock, the Steinway and Sons Stock, the S&B Retail Stock, the Boston Piano
GmbH Stock and the S&S Japan Stock;
(b) Section 7.1(a) and (b) of the Existing Credit Agreement but,
in the case of subparagraph (a), only with respect to the Asset Purchase,
and in the case of subparagraph (b), only with respect to the transfer to
SPC of the Steinway Stock, the Boston Piano Co. Stock, the Steinway and
Sons Stock, the S&B Retail Stock, the Boston Piano GmbH Stock and the S&S
Japan Stock;
(d) Section 7.9 of the Existing Credit Agreement, but only with
respect to the Corporate Restructuring;
(e) Section 7.10 of the Existing Credit Agreement, but only with
respect to the Corporate Restructuring; and
(f) Section 3a and c of the Steinway General Security and Stock
Pledge Agreement and the Selmer General Security and Stock Pledge
Agreement, but only with respect to the transfer to SPC of the Steinway
Stock, the Boston Piano Co. Stock, the Steinway and Sons Stock, the S&B
Retail Stock, the Boston Piano GmbH Stock and the S&S Japan Stock.
ARTICLE VI
Consents
1. CONSENTS. The Lender hereby consents to the following
transactions:
(a) to the transfer to SPC of the Steinway Stock, the Boston
Piano Co. Stock, the Steinway and Sons Stock, the S&B Retail Stock, the
Boston Piano GmbH Stock and the S&S Japan Stock, pursuant to Sections 4.3
and 4.6 of the Existing Credit Agreement; and
-7-
<PAGE>
(b) to the Corporate Restructuring (including, without
limitation, the Asset Purchase), pursuant to Sections 7.9 and 7.10 of the
Existing Credit Agreement.
ARTICLE VII
Conditions to Effectiveness
This Amendment, and the modifications to the Credit Agreement
provided for herein, shall become effective on the date (the "THIRD AMENDMENT
EFFECTIVE DATE") on which all of the following conditions have been (or are
concurrently being) satisfied:
1. The following documents shall have been executed and
delivered by each party thereto:
(i) this Amendment;
(ii) Amendment No. 2 to Selmer Pledge Agreement;
(iii) Amendment No. 1 to SMI Pledge Agreement;
(iv) the SPC Pledge Agreement;
(v) the SPC Security Agreement;
(vi) the SPC Guarantee;
(vii) the Emerson Security Agreement;
(viii) the Emerson Guarantee;
(ix) the Emerson Trademark Assignment; and
(x) all Uniform Commercial Code financing statements on Form
UCC-1 required by the Lender.
2. The Lender shall have received the executed legal opinions
of Milbank, Tweed, Hadley & McCloy, special counsel to the Steinway Parties, and
Dennis M. Hanson, General Counsel to the Credit Parties, in form and substance
satisfactory to the Lender and taking into account this Amendment and the
matters contemplated hereby (including, without limitation, assurances with
respect to the validity of UCC filings in each state where Collateral is
located). Such legal opinion shall cover such matters incident to the
transactions contemplated by this Amendment and the other Third Amendment
Documents as the Lender may reasonably require.
3. The Lender shall have received a copy, in form and substance
reasonably satisfactory to the Lender, of the corporate resolutions of each of
the Steinway Parties, in each case, authorizing the execution, delivery and
performance of this Amendment and the other Third Amendment Documents to which
such Steinway Party is a party, in each case certified by the Secretary or an
Assistant Secretary of the relevant Steinway Party as of
-8-
<PAGE>
the Third Amendment Effective Date, which certificates shall state that the
resolutions or authorizations thereby certified have not been amended, modified,
revoked or rescinded as of the date of such certificate.
4. The Lender shall have received a certificate of the
Secretary or an Assistant Secretary of each Steinway Party, dated the Third
Amendment Effective Date, as to the incumbency and signature of the officers of
such Steinway Party executing each Third Amendment Document to which such
Steinway Party is a party and any certificate or other document to be delivered
by it pursuant hereto, together with evidence of the incumbency of such
Secretary or Assistant Secretary.
5. The Lender shall have received a copy, in form and substance
reasonably satisfactory to the Lender, of (i) the articles of incorporation and
by-laws of SPC and (ii) the articles of incorporation and by-laws of Emerson, in
each case certified by an appropriate officer of the party making delivery
thereof.
6. The Lender shall have received certificates from each of
Steinway, Selmer, SMI, Boston Piano Co., SMIT and S&B Retail, stating that its
Governing Documents have not been amended since December 31, 1996.
7. The Lender shall have received copies of certificates dated
as of a recent date from the Secretary of State or other appropriate authority
of such jurisdiction, evidencing the good standing of each Steinway Party in the
State of its organization and in each State where the ownership, lease or
operation of property or the conduct of business requires it to qualify as a
foreign corporation or other entity except where the failure to so qualify would
not have a Material Adverse Effect.
8. Each of the representations and warranties made by the
Borrowers, SMI, Boston Piano Co., SMIT or S&B Retail in or pursuant to the
Credit Documents shall be true and correct in all material respects on and as of
the Third Amendment Effective Date as if made on and as of such date (except to
the extent the same relate to another, earlier date, in which case they shall be
true and correct in all material respects as of such earlier date).
9. Except as provided for in Article V, no Default or Event of
Default shall have occurred and be continuing.
10. The Lender shall have received each additional document,
instrument, legal opinion or item of information reasonably requested by the
Lender, including, without limitation, a copy of any debt instrument, security
agreement or other material contract to which a Steinway Party may be a party.
11. All corporate and other proceedings, and all documents,
instruments and other legal matters in connection with the transactions
contemplated by the Third Amendment Documents, the Existing Credit Agreement,
the Credit Agreement and the other Credit Documents shall be reasonably
satisfactory in form and substance to the Lender, and the
-9-
<PAGE>
Lender shall have received such other documents in respect of any aspect or
consequence of the transactions contemplated hereby or thereby as it shall
reasonably request.
ARTICLE VIII.
Miscellaneous
1. PAYMENT OF EXPENSES. Without limiting its obligations under
Section 14.13 of the Agreement, the Borrowers jointly and severally agree to pay
or reimburse the Lender for all of its reasonable costs and expenses incurred in
connection with this Amendment and the other Third Amendment Documents,
including, without limitation, the reasonable costs and expenses of Cadwalader,
Wickersham & Taft, counsel to the Lender and expressly acknowledge that their
obligations hereunder constitute "Obligations" within the meaning of the
Existing Credit Agreement.
2. NO OTHER AMENDMENTS; CONFIRMATION. Except as expressly
amended, modified and supplemented hereby and by the documents related hereto,
the provisions of the Existing Credit Agreement and the other Credit Documents
shall remain in full force and effect.
3. AFFIRMATION BY CREDIT PARTIES. Each Credit Party hereby
consents to the execution and delivery of this Amendment and each of the other
Amendment Document to which such Credit Party is a party and reaffirms its
obligations under the Credit Documents executed by such Credit Party.
4. GOVERNING LAW; COUNTERPARTS. (a) This Amendment and the
rights and obligations of the parties hereto shall be governed by, and construed
and interpreted in accordance with, the laws of the State of New York.
(b) This Amendment may be executed by one or more of the parties
hereto on any number of separate counterparts, and all of said counterparts
taken together shall be deemed to constitute one and the same instrument. A set
of the copies of this Amendment signed by all the parties shall be lodged with
each of the Borrowers and the Lender. This Amendment may be delivered by
facsimile transmission of the relevant signature pages hereof.
[ SIGNATURE PAGE FOLLOWS ]
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed and delivered as of the day and year first above written.
THE SELMER COMPANY, INC.
By
--------------------------------
Name:
Title:
STEINWAY, INC.
By
--------------------------------
Name:
Title:
STEINWAY MUSICAL INSTRUMENTS, INC.
By
--------------------------------
Name:
Title:
BOSTON PIANO COMPANY, INC.
By
--------------------------------
Name:
Title:
THE SMI TRUST
By
--------------------------------
Name:
Title:
[SIGNATURE BLOCKS CONTINUED ON NEXT PAGE]
-11-
<PAGE>
S&B RETAIL, INC.
By
--------------------------------
Name:
Title:
EMERSON MUSICAL INSTRUMENTS, INC.
By
--------------------------------
Name:
Title:
THE STEINWAY PIANO COMPANY
By
--------------------------------
Name:
Title:
BNY FINANCIAL CORPORATION
By
--------------------------------
Name:
Title:
-12-
<PAGE>
EMPLOYMENT AGREEMENT OF MICHAEL VICKREY
This Employment Agreement (this "Agreement") is entered into on this 17th
day of December, 1996, by and between The Selmer Company, Inc., a Delaware
corporation (the "COMPANY"), and Michael Vickrey (the "EXECUTIVE").
R E C I T A L S
A. The Executive is currently employed by The Selmer Company, Inc..
B. The Company would like to employ the Executive, and the Executive
would like to be employed by the Company.
In consideration of the foregoing and of mutual covenants, agreements, and
representations herein contained, the parties hereto agree as follows:
A G R E E M E N T
1. TERM OF EMPLOYMENT. The Company agrees to employ the Executive, and
the Executive hereby agrees to accept employment, commencing on January 1, 1997
(the "COMMENCEMENT DATE"), and terminating December 31, 1997, unless otherwise
terminated in accordance with the terms set forth in PARAGRAPH 7 of this
Agreement (including any extensions, the "TERM").
2. DUTIES AND RESPONSIBILITIES.
a. The Executive shall be employed as the Executive Vice President
and Chief Financial Officer of the Company, and shall perform such duties as are
from time to time assigned to him by the Board of Directors of the Company (the
"BOARD") or the President of the Company and that are normally associated with
such position. The Executive shall report to the President of the Company.
b. In addition, the Executive's duties and responsibilities shall
include those ordinarily and customarily performed by a person holding such
position, and shall include primary responsibility for all financial matters of
the Company. The Executive shall be entitled to office and support staff
consistent with such position.
c. During the period of his employment hereunder, the Executive
agrees to devote his entire business time, attention, energies and his best
efforts to the performance of his duties.
3. COMPENSATION.
a. For all services to be performed by the Executive during the
Term, the Company shall pay to him, together with other compensation as
hereinafter provided, an annual salary of $100,000 (subject to such deductions
and withholdings as may be required by law or by further agreement with the
Executive), commencing on the Commencement Date, payable in arrears biweekly.
b. In addition, each year the Executive shall be eligible to receive
an annual bonus in the sole and absolute discretion of the Board.
<PAGE>
c. The Executive shall be eligible to receive annual salary
increases based on his performance of his duties, but any such increases shall
be in the sole and absolute discretion of the Board.
4. BENEFITS. In addition to any other items of compensation provided for
in this Agreement, the Executive shall be entitled to the following benefits
(the "BENEFITS"):
a. The Executive shall be entitled to participate in (i) any retirement,
life insurance, health, medical, disability or other plans or benefits, whether
insured or self-insured, which the Company in its sole and absolute discretion
may make available generally from time to time to its executives and (ii) any
bonus plans, incentive or otherwise, which the Company, in its sole absolute
discretion, may establish from time to time for its executives.
b. The Executive shall be entitled to vacation in accordance with the
Seller's current vacation policy during each year of this Agreement.
c. The Executive shall be entitled to a leased automobile and all out-of-
pocket expenses for the upkeep and maintenance of the automobile. It is
estimated that 25% of such aggregate costs shall be deemed the Executive's
personal expenses and therefore subject to income tax to him, which shall be
adjusted in keeping with Internal Revenue Services practices. Any income taxes
due as a result of this paragraph may be reimbursed to him by the Company
consistent with current Company practices.
d. The Executive and the Company may enter into separate agreements in
the future on terms and conditions mutually satisfactory to both parties
regarding the purchase of additional equity securities of Selmer Industries,
Inc.
5. REIMBURSEMENT OF EXPENSES. The Executive shall be entitled to be
reimbursed for all reasonable travel and entertainment expenses that are (a)
incurred by him in the performance of his duties hereunder and (b) evidenced by
appropriate documentation.
6. RESTRICTIVE COVENANTS. The Executive acknowledges that certain of the
Company's products and services are proprietary in nature and have been
manufactured, assembled and marketed through the use of customer lists, supplier
lists, trade secrets, methods of operation and other confidential information
possessed by the Company and disclosed in confidence to the Executive (the
"TRADE SECRETS"), which may not be easily accessible to other persons in the
trade. The executive also acknowledges that he will have substantial and
ongoing contact with the Company's customers and suppliers and will thereby gain
knowledge of customer needs and preferences, sources of equity funding, sources
of supply,, methods of assembly and other valuable information necessary for the
success of the Company's business. Therefore, except as provided in
SUBPARAGRAPHS (a) AND (d) below, and except as provided in PARAGRAPH 8, during
the time the Executive is employed under the provisions of this Agreement and
until the date of the second anniversary of the termination of the Executive's
employment, the Executive shall not, without the prior written consent of the
Company:
a. during the Term, engage in any business activity that competes
with the Company in the manufacturing of band and orchestra instruments or other
business in which the Company is engaged, or exploits or utilizes any of the
Trade Secretes; PROVIDED, HOWEVER, that the Executive may invest in any
publicly-traded company that is similar in nature to the business in which the
Company is engaged, provided that such investment shall not exceed 5% of the
equity interest in such company on a fully diluted basis;
b. solicit any person employed by the Company or any affiliate of
the Company, appointed as a representative of the Company, or any affiliate of
the Company, to
<PAGE>
join him as a partner, co-venturer, employee, investor or otherwise, in any
substantial business activity whatsoever;
c. disclose or reveal any Trade Secrets or other confidential
information of the Company to anyone; or
d. become employed by or associated with, any entity that owns,
operates, manages or has a substantial interest in any business activity that
competes with the Company in the manufacturing of band or orchestra instruments
or other significant business in which the Company is engaged, or exploits or
utilizes any of the Trade Secrets; PROVIDED, HOWEVER, if the Executive's
employment is terminated by the Company other than for Cause, as defined herein,
said period for the purposes of this SUBPARAGRAPH d shall be reduced to one
year after the termination of his employment.
7. TERMINATION.
a. The Company shall have the option to terminate the Executive's
employment for "CAUSE", which shall be defined as follows: (i) any criminal act
or criminal omission by the Executive that causes damage to the Company or any
of its properties, assets, businesses, officers, directors, stockholders or
employees; (ii) any fraud, misappropriation or embezzlement by the Executive
involving properties, assets or funds of the Company; (iii) a conviction of the
Executive, or plea of NOLO CONTENDERE by the Executive, to any crime or offense
involving monies or other property of the Company or any other felony or
criminal act involving moral turpitude; (iv) the violation by the Executive of
any non-competition or confidentiality agreement with the Company; or (v) the
Executive's intoxication while engaged in the performance of his duties to the
Company or drug addiction. In the event of termination of the Executive's
employment for Cause, any obligation of the Company to provide any compensation
and Benefits to him, as herein set forth, shall cease immediately except as
provided in PARAGRAPH 11.
b. Notwithstanding any other provisions of this Agreement, the
Company may, in its sole and absolute discretion, elect to terminate the
Executive's employment at any time upon 10 days' written notice; PROVIDED,
however, if such should happen, the Company shall pay the Executive at the time
of termination a sum equal to (i) his salary for the balance of the Term, and
(ii) $100,000, in full satisfaction of all its obligations to him under the
provisions of this Agreement and any other severance or other benefit plan of
the Company. In the event of a breach of PARAGRAPH 6 of this Agreement by the
Executive after his receipt of this payment, in addition to any other remedies
at law or in equity, the Executive, recognizing that the harm to the Company
caused by a breach of PARAGRAPH 6 hereof may not be remediable in damages,
consents to injunctive relief in respect of such breach.
c. In the event of termination of the Executive's employment by
reason of death or permanent disability, he and/or his estate shall be entitled
to his salary and Benefits under the terms of this Agreement for a period of six
months following the date of his death or the date upon which he becomes
permanently disabled, in addition to any other benefits provided by the Company.
d. In the event of termination of the Executive's employment by
reason of his resignation, written notice of which shall be given by him to the
Company at least sixty days prior thereto, he shall be entitled to his salary
and Benefits hereunder up to the date of such termination, subject to extension
of Benefits required by any governmental laws and regulations.
<PAGE>
8. NON-RENEWAL. If the Company does not offer to renew this Employment
Agreement at the expiration of the Term upon the same terms hereof or upon
modified terms as mutually agreed upon by the Executive and the Company, the
terms of PARAGRAPH 6(d) shall not apply and the Company shall pay to the
Executive a severance benefit on the date of the non-renewal of not less than
$100,000 in consideration for which the Executive agrees that he will not become
employed by or associated with any entity which owns, operates, manages, or has
a substantial interest in any business activity that competes with the Company
as a manufacturer of band and/or orchestral instruments for a period of one year
after the date of the non-renewal.
9. INDEMNIFICATION. The Company agrees to indemnity the Executive to the
same extent that the Company agrees to indemnity other officers and directors of
the Company in their capacity as such. The Company further agrees that such
indemnification shall survive the Executive's resignation, termination or
expiration of this Agreement, with respect to actions taken by him during his
employment with the Company, unless such actions could have been grounds for
termination for Cause.
10. TERMINATION IN EVENT OF SALE OF COMPANY. If (a) all or substantially
all of the Company's voting stock or assets is sold while the Executive is
employed hereunder, and such purchaser (the "PURCHASER") does not choose to
continue the Executive's employment or to hire him, as the case may be; or (b)
if the Executive does not choose to be employed by the Purchaser upon the
employment terms offered to him by the Purchaser and resigns as a result, in
either event of (a) or (b) the Company shall pay him on the date of such sale,
or on the date of the Executive's resignation, as the case may be, a sum equal
to $100,000 plus the balance of his salary computed over the balance of the Term
of this Agreement. The Executive agrees that if he receives any payment under
this paragraph he will not accept employment with the Purchaser or its
affiliates for a period of one year plus the remaining term of this Agreement as
of the date of termination. No other payments shall be due to the Executive
under any of the Company's other severance or other plans or arrangements or
hereunder, and this Agreement shall be terminated and of no further force or
effect.
11. EMPLOYMENT BENEFITS TO CONTINUE AFTER TERMINATION. If the Executive's
employment is terminated by the Company with or without Case, or by resignation,
he shall be entitled to continue to participate in any health and medical plans
maintained by the Company at his employee rate if he so elects and pays the
premium cost of such insurer in advance to the Company until such time as he
becomes a participant in another plan or for an additional period of time in
accordance with governmental laws and regulations. The Company is not obligated
to maintain any such benefit plans under this Agreement.
12. LIMITATION ON ASSIGNMENT. The Company agrees that if the assets of
the business are transferred to any other entity the Executive shall have the
right to have this contract assigned to such entity.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties in connection with the subject matter hereof, supersedes any
and all prior agreements or understandings between the parties and may only be
changed by agreement in writing between the parties and may only be changed by
agreement in writing between the parties.
14. BINDING NATURE OF AGREEMENT; ASSIGNMENT. This Agreement shall be
binding upon the parties hereto, the heirs and legal representatives of the
Executive and the successors and assigns of the Company.
<PAGE>
15. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Indiana, without giving effect to the
conflict of laws principles thereof.
16. CONSTRUCTION AND JURISDICTION.
a. If any legal action relating to or other proceeding is brought by
any party for the enforcement of this Agreement, or because of an alleged
dispute, breach or default in connection with any provisions of this Agreement,
such action shall be commenced in the State of Indiana, and the parties hereto
agree that such State shall have exclusive jurisdiction thereof; provided,
however, if any court in said State shall decline to afford injunctive relief to
the Company on account of the breach or threatened breach of this Agreement by
the Executive, the Company shall be entitled to seek such relief from any other
court of competent jurisdiction, wherever located.
b. The prevailing party shall be entitled to recover reasonable
attorney's fees and other reasonable costs incurred in such action or proceeding
in addition to any other relief to which it may be entitled.
c. The parties hereby further agree that, in connection therewith,
service of process by registered or certified mail or in person shall confer
jurisdiction over them.
17. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the other provisions hereof, and this Agreement
shall be construed in all respects as if such invalid or unenforceable provision
or provisions were omitted.
18. SECTION HEADINGS. The section headings herein have been inserted for
convenience of reference only and shall in no way modify or restrict any of the
terms or provisions hereof.
19. WAIVER OF BREACH. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver by
said party of any other or subsequent breach.
20. NOTICES. All notices and other communications required or permitted
to be given under the terms of this Agreement shall be given in writing and
shall be deemed to have been duly given (a) when delivered personally, (b) if
sent by telecopy, when receipt thereof is acknowledged at the telecopy number
listed below for the receiving party, (c) the day following the day on which the
same has been delivered prepaid for overnight delivery to a national air courier
service or (d) three days following deposit in the United States Mail,
registered or certified, postage prepaid, in each case addressed as follows (or
to such other addresses that may have been designated by the respective parties
hereto for this purpose):
If to the Company:
The Selmer Company, Inc.
Kirkland Messina, Inc.
11100 Santa Monica Boulevard - Suite 825
Los Angeles, CA 90025
Attention: Dana Messina
<PAGE>
With a copy to:
Milbank, Tweed, Hadley & McCloy
601 South Figueroa Street
30th Floor
Los Angeles, California 90017
Attention: Eric H. Schunk, Esq.
The Selmer Company, Inc.
600 Industrial Parkway
Elkhart, IN 46515
Attention: Thomas Burzycki
If to the Executive:
Mr. Michael Vickrey
P.O. Box 308
Union, Michigan 49130
IN WITNESS WHEREOF, the parties have executed this agreement on the day and year
first above written.
The Selmer Company, Inc.
--------------------------
By: Dana D. Messina
--------------------------
Michael Vickrey
<PAGE>
EMPLOYMENT AGREEMENT RENEWAL AND AMENDMENT
This Employment Agreement Renewal and Amendment (the "Amendment") is entered
into on this 1st day of January, 1997 by and between Steinway Musical
Instruments, Inc., a Delaware Corporation with an office and place of business
at 800 South Street, Waltham, MA (the "Company") and Bruce A. Stevens (the
"Executive").
RECITALS
WHEREAS, the Executive entered into an Employment Agreement with Steinway
Musical Properties, Inc. ("SMP") dated May 1, 1995, (the "Agreement") and
WHEREAS, the Agreement was assigned from SMP to the Company in accordance with
paragraph 12 thereof, and
WHEREAS, the Company and Executive wish to renew the Agreement for an additional
Term and provide for future renewals,
NOW THEREFORE, in consideration of the mutual covenants contained herein, the
parties hereto agree as follows:
AMENDMENT
1. TERM OF EMPLOYMENT. The Term of employment as defined in the Agreement is
hereby extended to December 31, 1997.
2. FUTURE RENEWALS. The Term shall automatically renew on an annual basis
unless the Company provides the Executive with written notice of its intent not
to renew at least sixty (60) days prior to the expiration of the then current
Term.
3. OTHER MATTERS. Except as specifically amended herein all terms and
conditions of the Agreement remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment on the day and year
first written above.
Steinway Musical Instruments, Inc.
By: /s/ Dana D. Messina
---------------------------
Dana D. Messina
President
Executive
/s/ Bruce A. Stevens
---------------------------
Bruce A. Stevens
<PAGE>
EMPLOYMENT AGREEMENT RENEWAL AND AMENDMENT
This Employment Agreement Renewal and Amendment (the "Amendment") is entered
into on this 1st day of January, 1997 by and between Steinway Musical
Instruments, Inc., a Delaware Corporation with an office and place of business
at 800 South Street, Waltham, MA (the "Company") and Dennis M. Hanson, (the
"Executive").
RECITALS
WHEREAS, the Executive entered into an Employment Agreement with Steinway
Musical Properties, Inc. ("SMP") dated May 1, 1995, (the "Agreement") and
WHEREAS, the Agreement was assigned from SMP to the Company in accordance with
paragraph 12 thereof, and
WHEREAS, the Company and Executive wish to renew the Agreement for an additional
Term and provide for future renewals,
NOW THEREFORE, in consideration of the mutual covenants contained herein, the
parties hereto agree as follows:
AMENDMENT
1. TERM OF EMPLOYMENT. The Term of employment as defined in the Agreement is
hereby extended to December 31, 1997.
2. FUTURE RENEWALS. The Term shall automatically renew on an annual basis
unless the Company provides the Executive with written notice of its intent not
to renew at least sixty (60) days prior to the expiration of the then current
Term.
3. OTHER MATTERS. Except as specifically amended herein all terms and
conditions of the Agreement remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment on the day and year
first written above.
Steinway Musical Instruments, Inc.
By: /s/ Dana D. Messina
---------------------------
Dana D. Messina
President
Executive
/s/ Dennis M. Hanson
---------------------------
Dennis M. Hanson
<PAGE>
Exhibit 12.1
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Predecessor Company
------------------------- ---------------------------------------------
Year Ended Period Year Ended December 31,
---------------------- -------------------------------------
December 31, 1/1/93 - 8/11/93 -
1992 8/10/93 12/31/93 1994 1995 1996
----------- -------- --------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 2,343 $1,405 ($3,109) $ 2,922 ($ 2,074) $ 7,421
Income tax 93 43 (1,559) 1,798 836 8,492
Interest expense 7,626 4,432 3,254 8,255 14,923 17,870
Amortization of deferred debt cost 1,106 676 239 629 872 1,056
Estimated interest component
of operating leases 369 221 115 323 734 1,058
------- ------ ------ ------- ------- -------
Adjusted net income (loss) $11,537 $6,777 ($1,060) $13,927 $15,291 $35,897
------- ------ ------ ------- ------- -------
------- ------ ------ ------- ------- -------
Fixed charges
Interest expense $ 7,626 $4,432 $3,254 $ 8,255 $14,923 $17,870
Amortization of deferred debt cost 1,106 676 239 629 872 1,056
Estimated interest component
of operating leases 369 221 115 323 734 1,058
------- ------ ------ ------- ------- -------
Total $ 9,101 $5,329 $3,608 $ 9,207 $16,529 $19,984
------- ------ ------ ------- ------- -------
------- ------ ------ ------- ------- -------
Ratio of earnings to fixed charges 1.3 1.3 1.5 1.8
Deficiency $4,668 $ 1,238
</TABLE>
<PAGE>
Exhibit 21.1
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
STEINWAY MUSICAL INSTRUMENTS, INC., a Delaware corporation
THE SELMER COMPANY, INC., a Delaware corporation
VINCENT BACH INTERNATIONAL, a corporation organized under the laws of
the United Kingdom
H & A SELMER, LTD., a corporation organized under the laws of Canada
THE STEINWAY PIANO COMPANY, a Delaware corporation
STEINWAY, INC., a Delaware corporation
STEINWAY & SONS, a New York corporation
BOSTON PIANO COMPANY, a Massachusetts corporation
BOSTON PIANO GMBH, a corporation organized under the laws of
Germany
S & B RETAIL, INC., a Delaware Corporation
STEINWAY & SONS JAPAN, LTD., a corporation organized under the
laws of Japan
THE SMI TRUST, a Massachusetts business trust
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-11465 of Steinway Musical Instruments, Inc. on Form S-8 of our report dated
March 7, 1997, appearing in the Annual Report on Form 10-k of Steinway Musical
Instruments, Inc. for the year ended December 31, 1996.
Deloitte & Touche LLP
Chicago, Illinois
March 27, 1997
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