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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-11911
STEINWAY MUSICAL INSTRUMENTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 35-1910745
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
800 South Street, Suite 425, Waltham, Massachusetts 02154
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (781) 894-9770
and
THE SELMER COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4432228
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Industrial Parkway, Elkhart, Indiana 46516
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (219) 522-1675
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 Regulation 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. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant was $182,209,905 as of March 4, 1998.
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<S> <C> <C>
Number of shares of Common Stock outstanding as of March 4, 1998: Class A 477,953
Ordinary 8,886,441
---------
Total 9,364,394
</TABLE>
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 Steinway and Selmer subsidiaries, 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 1997 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 $278 million for the
year ended December 31, 1997 were comprised of Steinway piano sales of $145
million and Selmer band and orchestral instrument sales of $133 million.
Steinway concentrates on the high-end grand piano segment of the
industry. Steinway also offers vertical pianos as well as a full mid-priced
line of pianos under the Boston brand name. Steinway hand crafts its pianos
in New York and Germany and sells them worldwide through approximately 200
independent piano dealers and five Steinway-operated retail showrooms located
in New York, New Jersey, London, Hamburg and Berlin. In 1997, approximately
60% of Steinway's sales were in the United States, 28% in Europe and the
remaining 12% 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 a
highly skilled workforce at manufacturing facilities in Indiana, North
Carolina, Ohio and Illinois, and sold through approximately 1,600 independent
dealers. Beginner instruments accounted for 74% of Selmer's unit sales and
51% of instrument revenues in 1997 with advanced and professional instruments
representing the balance. In 1997, approximately 82% of Selmer's sales were
in the United States.
Through selected acquisitions and internal growth, the Company has
expanded into a full-line musical instrument manufacturer. The Company
acquired Emerson Musical Instruments, Inc., a manufacturer of flutes and
piccolos, on January 15, 1997.
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 subject to risks and uncertainties,
including, but not limited to, changes in general economic conditions,
exchange rate fluctuations, and the availability of production capacity which
could cause actual results to differ materially from those indicated herein.
Further information on these 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 $30,300
to $118,800 in the United States. In 1997, Steinway sold 3,134 grand pianos,
with 2,277 units shipped from its New York facility and 857 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, 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 $5,195 to $33,310.
SELMER DIVISION manufactures brasswind and woodwind instruments,
including clarinets, flutes, piccolos, trumpets, cornets, trombones,
saxophones, oboes and bassoons, at its facilities in Elkhart, Indiana. 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.
Suggested retail prices generally range from $600 to $700 for student
instruments and from $2,000 to $6,000 for step-up and professional
instruments. 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
3
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approximately 7% of Selmer's sales in 1997. While the extension of these
distribution rights is expected, the Company believes that the failure to
extend such rights would not have a material adverse effect on Selmer's
operating results.
LUDWIG/MUSSER DIVISION manufactures acoustical and tuned percussion
instruments, including outfit drums, marching drums, concert drums, marimbas,
xylophones, vibraphones, orchestra bells, chimes, mallets and accessories.
This division manufactures its products in Monroe, North Carolina and
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.
EMERSON MUSICAL INSTRUMENTS, INC. ("EMERSON"), located in Elkhart,
Indiana, manufactures a complete line of flutes and piccolos. Emerson's
instruments are sold to student, amateur and professional musicians. Product
offerings include student model flutes and piccolos, alto, bass and other
background flutes, and professional model flutes made of sterling silver or
gold.
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 85% 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 5% of sales
in 1997, while the top 15 accounts represented 29% of sales.
The majority of Selmer's net sales are 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 6% of sales in 1997, while the top 15 accounts represented
approximately 30% of sales.
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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 plant manufactured approximately 73% of Steinway pianos sold in 1997.
Approximately 88% of Steinway unit sales were sold on a wholesale basis
in 1997. The remaining 12% were sold directly by Steinway at one of its five
company-operated retail locations 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 the first quarter of 1997, Steinway established a Japanese
subsidiary, Steinway & Sons Japan Ltd., to increase its market share in
Japan, particularly at the consumer level. Steinway pianos, previously sold
in Japan exclusively through a single retailer, are now offered by 23 dealers.
STEINWAY ARTISTS. For years Steinway has successfully used renowned
artists in its marketing programs. This form of marketing has helped
solidify brand-name recognition as well as clearly demonstrate that Steinway
pianos surpass all other brands in quality. The most effective of these is
the "Steinway Artists" program - the endorsement of world class pianists who
voluntarily select the Steinway piano. Steinway's program is unique, and 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
includes over 1,000 of the world's finest pianists. Steinway Artists play
only on Steinway. In return for their endorsements, Steinway Artists are
provided with access to the Piano Bank described below.
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 350 instruments worldwide. Of these instruments,
approximately 285 are located in the United States. In New York City, the
Steinway concert department has approximately 112 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 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 at the high end of the mid-priced 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. 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.
5
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BAND AND ORCHESTRAL INSTRUMENTS. Band, orchestral and percussion
instruments and related accessories are marketed in the U.S. and Canada by
district sales managers and independent sales representatives who are
responsible for sales within assigned geographic territories. Each district
sales manager is also responsible for developing relationships with
elementary, junior high, high school and college band and orchestral
educators and professional players. These individuals are the primary
influence in the choice of an instrument brand. In general, band directors
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.
Internationally, products are sold through distributors located in each
major country. Distributors establish their own dealer networks and service
them with their own sales representatives. Selmer employs an international
representative to help distributors market the Company's products.
Dealers and distributors are supported through incentive programs,
advertising and promotional activities. Trade shows, print media, direct
mail, telemarketing, the internet and personal sales calls are the primary
methods of reaching customers. The Company actively advertises in consumer,
educator and trade magazines and publications. In addition, Selmer
executives attend several trade shows each year providing extensive
opportunities to interface directly with customers.
The Company's educational director travels extensively, lecturing and
motivating students, educators and parents on the value of music in a child's
development. The Company also provides educational materials, catalogs and
product specifications to students, educators, dealers and distributors.
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 current U.S. economic expansion. 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 and the United Kingdom.
While adverse economic conditions in the Asian markets have slowed
expansion opportunities in Japan, the Company believes that its long-term
prospects remain good. Japan is currently the second largest grand piano
market in the world. Steinway currently has less than 2% market share in
Japan, compared to an average market share of 8% in other major markets. The
Company's distribution strategy is aimed at improving its market share.
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
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macroeconomic cycles. The band and orchestral instrument industry
experienced moderate sales declines starting in the mid to late 1970s, which
strongly correlated to a decline in eleven year old children during the same
time period. Since 1984, the industry has experienced steady growth,
consistent with the increases in both student enrollment (grades K through
12) and school expenditures.
Recent cultural and social trends placing more importance on music
education as a part of a child's development have also contributed positively
to industry sales. 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 most 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.
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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MANUFACTURING PROCESS
The manufacturing process for musical instruments involves essentially
two main production phases: the production of component parts and instrument
assembly. Employees perform various forming, drilling, and cutting
operations during the parts production phase. Investment in new equipment in
this area over the last three years has allowed the Company to increase its
production capacity and improve quality. Skilled craftsmen assemble
component parts for the final assembly of the instruments. Each instrument
is tested or tuned and regulated to the Company's specifications.
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 to keep
work-in-process inventories 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, 1997, the Company employed 2,058 people, consisting
of 1,552 hourly and 506 salaried employees. Of the 2,058 employees, 1,635
were employed in the United States and the remaining 423 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. In October 1997, the Company entered into a new
collective bargaining agreement with these workers which will expire in
September 2000. 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 680 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 leased. 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>
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APPROXIMATE
FLOOR SPACE
LOCATION OWNED/LEASED (SQUARE FEET) ACTIVITY
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<S> <C> <C> <C>
New York, NY Owned 449,900 Piano manufacturing; restoration center;
executive offices; training
Leased 38,750 Steinway Hall retail store/showroom
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
Leased 17,000 Flute manufacturing
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 52,000 Stringed instrument manufacturing
London, England Leased 20,000 VBI office and warehouse
Leased 9,580 Steinway Hall retail store/showroom
Leased 5,780 Piano repair/restoration
Tokyo, Japan Leased 6,040 Warehouse and selection center
Leased 1,040 Executive offices
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 $5.6 million for capital expenditures in
1997. 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 as it modernizes its equipment and renovates its
facilities in order to expand its production capacity and piano restoration
services.
ITEM 3 LEGAL PROCEEDINGS
The Company is involved in three legal proceedings regarding
Environmental Matters, which are described below. Further, in the ordinary
course of 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 its experience 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.
ENVIRONMENTAL MATTERS - The Company is subject to compliance with
various federal, state, local and foreign environmental laws, including those
relating to discharges to air, water and land, the handling
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and disposal of solid and hazardous waste and the cleanup of properties
affected by hazardous substances. Certain environmental laws, such as the
Comprehensive Environmental Response, Compensation, and Liability Act, as
amended ("CERCLA"), impose strict, retroactive, joint and several liability
upon persons responsible for releases of hazardous substances, which
responsibility is broadly construed.
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
matters covered by the Environmental Indemnity Agreement are currently
pending. For two of these sites, Philips has entered into Consent Orders
with the Environmental Protection Agency ("EPA") or the North Carolina
Department of Environment, Health and Natural Resources, as appropriate,
whereby Philips has agreed to pay required response costs. For the third
site, the EPA has notified Selmer it intends to carry out the final
remediation remedy itself. The EPA estimates that this remedy has a present
net cost of approximately $12 million. Over 40 persons or entities have been
named by the EPA as potentially responsible parties at this site. This
matter has been tendered to Philips pursuant to the Environmental Indemnity
Agreement. The potential liability of the Company at any of these sites is
affected by several factors including, but not limited to, the method of
remediation, the Company's portion of the materials 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. 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.
The Company operates manufacturing facilities at locations where
hazardous substances (including chlorinated solvents) were used. The Company
believes that an entity that formerly operated one such facility may have
released hazardous substances at such location, which is leased by the
Company. The Company has not contributed to such release. Further, the
Company has a contractual indemnity from certain stockholders of such entity.
Such facility is not the subject of a legal proceeding involving the Company
and to the Company's knowledge, is not subject to investigation. However, no
assurance can be given that legal proceedings will not arise in the future
and that such indemnitors would make the payments described in the indemnity.
The matters described above and the Company's other liabilities and
compliance costs arising under environmental laws are not expected to have a
material impact on the Company's capital expenditures, earnings or
competitive position. However, some risk of environmental liability is
inherent in the nature of the Company's current and former businesses and the
Company might in the future incur material costs to meet current or more
stringent compliance, cleanup or other obligations pursuant to environmental
laws.
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, 1997.
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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.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
Fiscal Year Ended December 31, 1996
Third Quarter $19.00 $16.38
Fourth Quarter 18.38 16.13
Fiscal Year Ended December 31, 1997
First Quarter $19.88 $17.00
Second Quarter 19.63 15.25
Third Quarter 24.25 19.19
Fourth Quarter 25.00 22.00
</TABLE>
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 27, 1998, there were 276 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.
11
<PAGE>
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, 1997, derived from the
audited financial statements of the Company. The table should be read in
conjunction with the audited 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
---------------- ---------------------------------------------------------------------
Period Year Ended December 31,
(Dollars in thousands, except ------------------------- --------------------------------------------------------
per share information) 1/1/93 - 8/11/93 -
8/10/93 12/31/93 1994 1995 (2) 1996 1997
----------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 57,171 $ 34,339 $ 101,114 $ 189,805 $ 257,903 $ 277,848
Gross profit 17,955 5,484 31,661 50,218 84,235 93,281
Earnings (loss) from operations 5,520 (1,640) 12,472 13,102 33,020 38,932
Net income (loss) before
extraordinary item 1,405 (3,109) 2,922 (2,074) 7,421 13,700
Income (loss) per share before
extraordinary item:
Basic - (2.07) 1.95 (1.36) 1.00 1.45
Diluted - (2.07) 0.52 (1.36) 1.00 1.45
Weighted average shares:
Basic - 1,499,900 1,499,900 1,524,663 7,418,580 9,426,122
Diluted - 1,499,900 5,660,000 1,524,663 7,418,580 9,458,841
OTHER FINANCIAL DATA:
Adjusted gross profit (3) $ 17,955 $ 10,238 $ 31,925 $ 59,856 $ 84,235 $ 93,281
EBITDA (3) (4) 8,522 4,597 16,638 30,479 44,520 50,175
Capital expenditures 576 303 1,112 3,162 5,199 5,634
Cash flows from:
Operating activities (8,565) 15,102 10,973 6,663 5,927 13,835
Investing activities (577) (94,413) (1,202) (107,702) (5,039) (8,968)
Financing activities 9,512 78,648 (9,549) 104,365 (865) (3,440)
MARGINS:
Adjusted gross profit (3) 31.4% 29.8% 31.6% 31.5% 32.7% 33.6%
EBITDA (3) (4) 14.9 13.4 16.5 16.1 17.3 18.1
BALANCE SHEET DATA (AT PERIOD END):
Cash $ 716 $ 53 $ 380 $ 3,706 $ 3,277 $ 5,271
Current assets 69,563 56,736 56,265 132,380 140,353 151,622
Total assets 95,349 88,970 85,524 263,796 265,366 266,708
Current liabilities 9,907 10,174 13,388 41,767 37,720 40,429
Total debt 65,053 71,369 62,057 174,039 118,391 115,457
Partners'/Stockholders' equity 17,999 4,226 7,253 5,828 67,878 75,761
</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.
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 Steinway and Selmer subsidiaries, is one of the
world's leading manufacturers of musical instruments. The Company's net sales
and earnings from operations improved 7.7% and 17.9%, respectively, for 1997
compared to 1996. 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 $278 million for the year ended December 31, 1997 were
comprised of Steinway piano sales of $145 million and Selmer band and
orchestral instrument sales of $133 million.
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 affected by grand
piano sales. Given the total number of grand pianos sold by Steinway in any
year (3,134 sold in 1997), 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 shipments have increased 27% from
1994 to 1997, largely attributable to the economic recovery in the United
States as well as increased selling and marketing efforts. Grand piano unit
shipments to international markets have remained relatively flat over the same
period reflecting the weakness of the European economies. In 1997,
approximately 60% of Steinway's sales were in the United States, 28% in Europe
and the remaining 12% primarily in Asia.
Selmer student instrument sales are strongly influenced by trends in
school enrollment and general attitudes toward 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 through 2005. Beginner instruments accounted for 74%
of Selmer's unit shipments and 51% of instrument revenues in 1997 with advanced
and professional instruments representing the balance.
Band and orchestral instrument unit shipments have grown an average of 4%
a year, and sales have grown an average of 10% a year, since 1994. The unit
and sales growth is the result of management's efforts to capitalize on the
favorable demographic trends and the generally positive attitudes towards music
education by parents. Efforts have included increasing production capacity to
meet the growing demand for its products and directing marketing programs
toward the school age population.
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 sales or results of operations in recent years. Sales to
customers outside the United States represent approximately 30% of consolidated
sales, with Steinway's international sales accounting for over 71% of these
international sales. A significant portion of Steinway's international sales
originate from its German manufacturing facility, resulting in sales, cost of
sales and related operating expenses denominated in deutsche marks. While
currency translation has
13
<PAGE>
affected international sales, cost of sales and related operating expenses,
it has not had a material impact on operating income. The Company utilizes
financial instruments such as forward exchange contracts and currency options
to reduce the impact of exchange rate fluctuations on firm and 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.
The Company's effective tax rates vary depending on the relative
proportion of foreign to U.S. income (foreign income generally bears higher
rates of tax) and absorption of foreign tax credits in the U.S. In 1997,
U.S. income increased relative to foreign income and the rate of credit
absorption increased slightly. This shift in income combined with certain
tax saving strategies reduced the Company's effective tax rate from 53% in
1996 to 48% in 1997.
RESULTS OF OPERATIONS
In May 1995, Selmer acquired Steinway for approximately $104.0 million.
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.
In January 1997, the Company acquired Emerson for approximately
$2.0 million, including assumed liabilities of $0.4 million. The acquisition
was accounted for as a purchase for financial reporting purposes.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
NET SALES - Net sales increased $19.9 million (7.7%) to $277.8 million in
1997. Piano sales increased $8.9 million (6.6%) despite the negative impact of
$7.9 million from foreign currency translation. Total piano shipments
increased nearly 19%, comprised of a 33% increase in Boston units and a 6%
increase in Steinway units. Band and orchestral instrument sales increased
$11.0 million (9.0%) in 1997. Emerson contributed $2.9 million of the band
sales increase. Total instrument shipments increased 5% for the year.
GROSS PROFIT - Gross profit increased $9.0 million (10.7%) to $93.3
million. Gross margins increased to 33.6% in 1997 compared to 32.7% in 1996.
This improvement is primarily due to greater efficiencies associated with
higher levels of piano production combined with a Yen driven reduction in costs
of the Boston piano line of approximately $2.1 million.
OPERATING EXPENSES - Operating expenses increased $3.1 million (6.1%) to
$54.3 million in 1997. Additional operating costs associated with new
subsidiaries totaled $1.6 million in 1997. After adjusting for these
additional expenses, operating costs increased only 3.1% over 1996. Overall,
operating expenses decreased as a percentage of sales from 19.9% in 1996 to
19.6% in 1997.
14
<PAGE>
EARNINGS FROM OPERATIONS - Earnings from operations increased by
$5.9 million (17.9%) to $38.9 million in 1997. These improved earnings
resulted from increased sales combined with improved gross profit margins and
firm control over operating expenses.
NET INTEREST EXPENSE - Net interest expense decreased $4.3 million
(25.3%) to $12.8 million in 1997. This decrease represents the savings
realized from the retirement of the Company's Senior Secured Notes in
September 1996.
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 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.
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.
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.
15
<PAGE>
Cash provided by operations was $6.7 million in 1995, $5.9 million in 1996
and $13.8 million in 1997. Major acquisitions have been financed 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.
Capital expenditures in 1995, 1996 and 1997 were $3.2 million,
$5.2 million and $5.6 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
as it modernizes its equipment and renovates its facilities in order to
expand its production capacity and piano restoration services.
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 $55-60 million in
August and September, and lows of approximately $25-30 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 2000. Net notes receivable sales generated
approximately $11.8 million and $15.1 million in cash in 1996 and
1997, 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 provides the Company with a potential borrowing
capacity of up to $60.0 million, based on eligible accounts receivable and
inventory. Borrowings are secured by a first lien on the Company's domestic
inventory, receivables, and fixed assets. As of December 31, 1997, no
amounts were outstanding, and availability was approximately $50.3 million.
The Facility currently bears interest at 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 25 million
deutsche marks.
At December 31, 1997, the Company's total outstanding indebtedness
amounted to $115.5 million, consisting of $110.0 million of 11% Senior
Subordinated Notes and $5.5 million of notes payable to foreign banks. Cash
interest paid was $17.7 million and $13.5 million in 1996 and 1997,
respectively. All of the Company's debt agreements contain 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.
16
<PAGE>
The Board of Directors of the Company approved a share repurchase
program in November 1997. The program authorizes management to make
discretionary repurchases of its ordinary common stock up to a limit of
$25 million. Shares purchased will be held as treasury shares to be used for
corporate purposes. During 1997, 85,900 shares were repurchased under the
program at a cost of $1.9 million.
The Company has conducted a review of its computer systems to identify
those areas that could be affected by the "Year 2000" issue. The Company
presently believes the Year 2000 problem will not pose significant operational
problems and the cost of remediating any identified problems is not anticipated
to be material to its financial position or results of operations either in the
aggregate or in any given year.
Management believes that cash on hand, together with cash flow
anticipated from operations and available borrowings under the Facility, will
be adequate to meet debt service requirements, fund continuing capital
requirements and satisfy working capital and general corporate needs through
the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share". Prior to 1997, the Company computed
income (loss) per common share using the methods outlined in Accounting
Principles Board Opinion No. 15, Earnings Per Share, and its interpretations.
Previously reported income (loss) per common share for years prior to 1997 did
not differ materially from that computed using SFAS 128.
In June 1997, the Financial Accounting Standards Board (FASB) released
SFAS No. 130, "Reporting Comprehensive Income", which the Company will be
required to adopt in 1998. SFAS 130 requires that the Company provide a
prominent display of the components of items of other comprehensive income.
The only item that the Company currently records as other comprehensive income
is the change in cumulative translation adjustment resulting from changes in
exchange rates and the effect of those changes upon translation of the
financial statements of the Company's foreign operations. Adoption will not
have an effect on reported results of operations or financial position.
In June 1997, the FASB released SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS 131 requires that a company
disclose segmented information about its businesses based upon the way in which
management oversees and evaluates the results of such businesses. The Company
has elected to early adopt the provisions of SFAS 131 in 1997.
In February 1998, the FASB released SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits", which the
Company will be required to adopt in 1998. SFAS 132 will require additional
disclosure concerning changes in the Company's pension obligations and assets
and eliminates certain other disclosures no longer considered useful.
Adoption will not have any effect on reported results of operations or
financial position.
17
<PAGE>
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997
Notes to Consolidated Financial Statements
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Steinway Musical Instruments, Inc.
We have audited the accompanying consolidated financial statements of Steinway
Musical Instruments, Inc. and subsidiaries as of December 31, 1996 and 1997 and
for each of the three years in the period ended December 31, 1997, listed on
page 18. 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, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 27, 1998
19
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 3,277 $ 5,271
Accounts, notes and leases receivable, net of allowance for
bad debts of $7,120 and $7,504 in 1996 and 1997, respectively 45,563 47,377
Inventories 82,950 87,954
Prepaid expenses and other current assets 2,867 4,832
Deferred tax asset 5,696 6,188
-------- --------
Total current assets 140,353 151,622
Property, plant and equipment, net 62,101 58,629
Other assets, net 26,291 22,891
Cost in excess of fair value of net assets acquired, net of accumulated
amortization of $1,894 and $2,734 in 1996 and 1997, respectively 36,621 33,566
-------- --------
TOTAL ASSETS $265,366 $266,708
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 2,354 $ 3,338
Accounts payable 6,453 5,668
Other current liabilities 28,913 31,423
-------- --------
Total current liabilities 37,720 40,429
Long-term debt 116,037 112,119
Deferred taxes 30,003 26,279
Non-current pension liability 13,728 12,120
-------- --------
Total liabilities 197,488 190,947
Commitments and Contingent Liabilities
Stockholders' equity:
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, 8,944,984
and 8,889,641 shares outstanding in 1996 and 1997, respectively 9 9
Additional paid-in capital 68,729 69,206
Retained earnings 792 14,492
Accumulated translation adjustment (1,652) (6,030)
Treasury stock - (1,916)
-------- --------
Total stockholders' equity 67,878 75,761
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $265,366 $266,708
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 189,805 $ 257,903 $ 277,848
Cost of sales 139,587 173,668 184,567
---------- ---------- ----------
Gross profit 50,218 84,235 93,281
Operating expenses:
Sales and marketing 21,001 29,206 32,441
Provision for doubtful accounts 797 760 742
General and administrative 11,612 16,363 17,531
Amortization 3,041 4,388 3,869
Other expense 665 498 (234)
---------- ---------- ----------
Total operating expenses 37,116 51,215 54,349
---------- ---------- ----------
Earnings from operations 13,102 33,020 38,932
Other (income) expense:
Other income, principally interest and late charges (583) (763) (728)
Interest and amortization of debt discount 14,923 17,870 13,504
---------- ---------- ----------
Other expense, net 14,340 17,107 12,776
---------- ---------- ----------
Income (loss) before income taxes (1,238) 15,913 26,156
Provision for income taxes 836 8,492 12,456
---------- ---------- ----------
Income (loss) before extraordinary item (2,074) 7,421 13,700
Extraordinary item - Early extinguishment
of debt (net of tax benefit of $2,640) 4,368 -
---------- ---------- ----------
Net income (loss) $ (2,074) $ 3,053 $ 13,700
---------- ---------- ----------
---------- ---------- ----------
Basic income (loss) per share:
Income (loss) before extraordinary item $ (1.36) $ 1.00 $ 1.45
Extraordinary item (.59)
---------- ---------- ----------
Net income (loss) $ (1.36) $ .41 $ 1.45
---------- ---------- ----------
---------- ---------- ----------
Diluted income (loss) per share:
Income (loss) before extraordinary item $ (1.36) $ 1.00 $ 1.45
Extraordinary item (.59)
---------- ---------- ----------
Net income (loss) $ (1.36) $ .41 $ 1.45
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares:
Basic 1,524,663 7,418,580 9,426,122
Diluted 1,524,663 7,418,580 9,458,841
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Retained Accumulated
Preferred Common Paid in Earnings Translation Treasury
Stock Stock Warrants Capital (Deficit) Adjustment Stock
--------- ------ -------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 1 $ - $ 2,335 $ 4,999 $ (187) $ 105 $ -
Net loss (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 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) -
Net income 13,700
Foreign currency translation
adjustment (4,378)
Issuance of 30,557 shares of
common stock 477
Purchase of 85,900 shares of
treasury stock (1,916)
----- --- ------- ------- -------- -------- --------
Balance, December 31, 1997 $ - $ 9 $ - $69,206 $14,492 $(6,030) $(1,916)
----- --- ------- ------- -------- -------- --------
----- --- ------- ------- -------- -------- --------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
---------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,074) $ 3,053 $ 13,700
Adjustments to reconcile net income (loss) to cash
flows from operating activities:
Depreciation and amortization 7,739 10,970 10,581
Provision for doubtful accounts 797 760 742
Deferred tax benefit (5,083) (3,123) (3,012)
Early extinguishment of debt 4,368
Other 370 274 143
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (4,203) (4,606) (3,098)
Inventories 7,664 (5,786) (7,298)
Prepaid expense and other current assets (701) (127) (909)
Accounts payable 1,354 (1,712) (685)
Accrued expenses 800 1,856 3,671
---------- --------- ----------
Cash flows from operating activities 6,663 5,927 13,835
Cash flows from investing activities:
Capital expenditures (3,162) (5,199) (5,634)
Proceeds from disposals of fixed assets 51 51 44
Changes in other assets (1,801) 109 (1,772)
Business acquisition (net of cash acquired) (102,790) - (1,606)
---------- --------- ----------
Cash flows from investing activities (107,702) (5,039) (8,968)
Cash flows from financing activities:
Borrowing under lines of credit 147,993 195,222 227,185
Repayments under lines of credit (148,486) (196,754) (228,304)
Proceeds from issuance of long-term debt 110,000 4,717
Proceeds from issuance of stock 630 60,773 477
Purchase of treasury stock (1,916)
Repayments of long-term debt (5,772) (64,823) (882)
---------- --------- ----------
Cash flows from financing activities 104,365 (865) (3,440)
Effects of foreign exchange rate changes on cash - (452) 567
---------- --------- ----------
Increase (decrease) in cash 3,326 (429) 1,994
Cash, beginning of year 380 3,706 3,277
---------- --------- ----------
Cash, end of year $ 3,706 $ 3,277 $ 5,271
---------- --------- ----------
---------- --------- ----------
Supplemental Cash Flow Information
Interest paid $ 13,399 $ 17,665 $ 13,508
Income taxes paid $ 5,532 $ 11,145 $ 13,751
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(1) NATURE OF BUSINESS
Steinway Musical Instruments, Inc. and subsidiaries (the "Company") is
one of the world's leading manufacturers of musical instruments. The
Company, through its wholly-owned subsidiaries The Steinway Piano Company,
Inc. (Steinway) and The Selmer Company, Inc. (Selmer), manufactures and
distributes products within the musical instrument industry. Steinway
produces the highest quality piano in the world and has one of the most
highly recognized and prestigious brand names. Selmer is the leading
domestic manufacturer of band and orchestral instruments and related
accessories, including a complete line of brasswind, woodwind, percussion and
stringed instruments. Selmer Paris saxophones, Bach trumpets and trombones
and Ludwig snare drums are considered by many to be the finest such
instruments in the world. In May 1995, Selmer purchased the assets of
Steinway for approximately $104 million. In January 1997, the Company
purchased the assets of Emerson Musical Instruments, Inc. for approximately
$2.0 million. Each acquisition has been accounted for as a purchase for
financial reporting purposes. The consolidated financial statements of the
Company include the results of operations for each business since its date of
acquisition.
(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 all of its direct and indirect
wholly-owned subsidiaries, including Selmer and Steinway. Significant
intercompany balances have been eliminated in consolidation.
REVENUE RECOGNITION - Revenue is generally recognized upon 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. In May 1995, Steinway inventories
were adjusted up by approximately $9,638 to reflect their fair market value
on the date of acquisition. Cost of sales for the year ended December 31,
1995 included the impact of this adjustment.
24
<PAGE>
DEPRECIATION AND AMORTIZATION - Property, plant and equipment are
recorded at cost or at fair value in the case of assets acquired through
business acquisitions. Depreciation is provided using the straight-line
method over the estimated useful lives of the respective assets. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the improvements or the remaining term of the respective
lease, whichever is shorter. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Building and improvements 15-30 years
Leasehold improvements 5-15 years
Machinery, equipment and tooling 3-10 years
Office furniture and fixtures 3-10 years
Concert and artist and rental pianos 15 years
</TABLE>
Cost in excess of fair value acquired is amortized over 40 years.
Trademarks acquired are recorded at appraised value and are amortized over 10
years. Deferred financing costs are amortized on a straight-line basis over
the repayment periods of the underlying debt.
The Company periodically evaluates the recoverability of its long-lived
assets by comparison of the expected future undiscounted cash flows expected
to be generated by those assets to their carrying value. To date, no
impairment losses have been noted or recorded as a result of this evaluation
process.
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 Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees".
INCOME (LOSS) PER COMMON SHARE - In 1997, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share".
Prior to 1997, the Company computed income (loss) per common share using the
methods outlined in APB Opinion No. 15, "Earnings Per Share", and its
interpretations. Previously reported income (loss) per common share for years
prior to 1997 did not differ materially from that computed using SFAS 128.
Under SFAS 128, basic income (loss) per common share is computed using the
weighted average number of common shares outstanding during each year.
Diluted income (loss) per common share reflects the effect of the Company's
outstanding options (using the treasury stock method), except where such
items would be antidilutive.
25
<PAGE>
A reconciliation of weighted average shares used for the basic computation
and that used for the diluted computation is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares for basic 1,524,663 7,418,580 9,426,122
Dilutive effect of stock options and warrants - - 32,719
--------- --------- ---------
Weighted average shares for diluted 1,524,663 7,418,580 9,458,841
--------- --------- ---------
--------- --------- ---------
</TABLE>
ENVIRONMENTAL MATTERS - Potential environmental liabilities are
accounted for in accordance with SFAS 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. See Note 10.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board (FASB) released SFAS No. 130, "Reporting Comprehensive
Income", which the Company will be required to adopt in 1998. SFAS 130
requires that the Company provide a prominent display of the components of
items of other comprehensive income. The only item that the Company
currently records as other comprehensive income is the change in cumulative
translation adjustment resulting from changes in exchange rates and the
effect of those changes upon translation of the financial statements of the
Company's foreign operations. Adoption will not have an effect on reported
results of operations or financial position.
In June 1997, the FASB released SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS 131 requires that a
company disclose segmented information about its businesses based upon the
way in which management oversees and evaluates the results of such
businesses. The Company has elected to early adopt the provisions of SFAS
131 in 1997. See Note 14.
In February 1998, the FASB released SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits", which the
Company will be required to adopt in 1998. SFAS 132 will require additional
disclosure concerning changes in the Company's pension obligations and assets
and eliminates certain other disclosures no longer considered useful.
Adoption will not have any effect on reported results of operations or
financial position.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
Raw materials $12,114 $11,944
Work in process 33,428 35,309
Finished goods 37,408 40,701
------- -------
Total $82,950 $87,954
------- -------
------- -------
</TABLE>
26
<PAGE>
(4) PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
Land $17,835 $16,914
Building and improvements 20,080 19,691
Leasehold improvements 779 1,318
Machinery, equipment and tooling 19,526 22,036
Office furniture and fixtures 5,033 5,629
Concert and artist and rental pianos 11,470 10,740
Construction in progress 1,282 1,832
------- -------
76,005 78,160
Less accumulated depreciation and amortization 13,904 19,531
------- -------
Total $62,101 $58,629
------- -------
------- -------
</TABLE>
(5) OTHER ASSETS, NET
Other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
Trademarks $21,746 $20,146
Deferred financing costs 8,504 8,504
Other assets 2,044 2,897
------- -------
32,294 31,547
Less accumulated amortization 6,003 8,656
------- -------
Total $26,291 $22,891
------- -------
------- -------
</TABLE>
(6) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
Accrued payroll and related benefits $12,547 $13,118
Current portion of pension liability 1,823 1,978
Accrued promotional expenses 2,834 2,600
Accrued warranty expense 1,855 2,102
Accrued income taxes 1,547 1,622
Accrued interest 1,512 1,513
Other accrued expenses 6,795 8,490
------- -------
Total $28,913 $31,423
------- -------
------- -------
</TABLE>
27
<PAGE>
(7) INCOME TAXES
The components of the provision for income tax are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. Federal:
Current $ 2,439 $ 5,726 $ 9,361
Deferred (1,684) (935) (1,114)
U.S. State and local:
Current 574 712 1,256
Deferred (321) (197) (147)
Foreign:
Current 2,906 5,177 4,851
Deferred (3,078) (1,991) (1,751)
-------- -------- --------
Total $ 836 $ 8,492 $12,456
-------- -------- --------
-------- -------- --------
</TABLE>
The Company's provision for income tax differed from that using the
statutory U.S. federal rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1995 1996 1997
------- ------ -------
<S> <C> <C> <C>
Statutory federal rate applied to earnings before
income taxes $ (433) $5,570 $ 9,155
Increase (decrease) in income taxes resulting from:
Foreign income taxes (net of federal benefit) (172) 2,092 2,040
State income taxes (net of federal benefit) (49) 477 726
Valuation allowance on foreign tax credits 1,277
Other 213 353 535
------- ------ -------
Provision for income tax $ 836 $8,492 $12,456
------- ------ -------
------- ------ -------
</TABLE>
The components of net deferred taxes are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Uniform capitalization adjustment to inventory $ 2,084 $ 2,453
Allowance for doubtful accounts 1,198 1,538
Accrued expenses and other current assets and liabilities 4,357 4,484
Foreign tax credits 18,777 14,488
Other 130 -
Valuation allowances (15,113) (12,091)
--------- ---------
Total deferred tax assets 11,433 10,872
Deferred tax liabilities
Pension contributions (1,586) (1,635)
Fixed assets (21,570) (18,770)
Intangibles (12,584) (10,558)
--------- ---------
Total deferred tax liabilities (35,740) (30,963)
--------- ---------
Net deferred taxes $(24,307) $(20,091)
--------- ---------
--------- ---------
</TABLE>
28
<PAGE>
Valuation allowances provided relate to excess foreign tax credits generated
over expected credit absorption. Of these valuation allowances, $6,373 relate
to the acquisition of Steinway. Should the related tax benefits be recognized
in the future, the effect of removing the valuation allowances would generally
be a decrease in goodwill. During 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. During 1997, valuation allowances
decreased primarily due to the write-off of expired foreign tax credits.
Foreign tax credit carryforwards expire in varying amounts through 2002.
(8) NOTES PAYABLE AND LONG TERM DEBT
Notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
--------- --------
<S> <C> <C>
Senior Debt, bearing interest at the Eurodollar rate plus 2.5% due
March 31, 2000 (8.65% and 8.45%) $ 2,573 $ -
11% Senior Subordinated Notes, due May 15, 2005 (see Note 17) 110,000 110,000
Note payable to a foreign bank, due in monthly installments
of principal and interest of DM 127 ($71 at the
December 31, 1997 exchange rate) through June 1, 2001
at an interest rate of 6.25% 4,454 2,967
Open account loans, payable on demand to a foreign bank 1,364 2,490
--------- --------
Total 118,391 115,457
Less current portion 2,354 3,338
--------- --------
Long-term debt $116,037 $112,119
--------- --------
--------- --------
</TABLE>
Scheduled maturities of long-term debt as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
1998 $ 3,338
1999 848
2000 848
2001 423
2002 -
Thereafter 110,000
--------
Total $115,457
--------
--------
</TABLE>
The open account loans provide for borrowings by foreign subsidiaries of
up to DM 25,000 ($14,000 at the December 31, 1997 exchange rate) payable on
demand. A portion of the open account loan can be converted into a maximum of
1,000 GBP ($1,650 at the December 31, 1997 exchange rate) for use by the
Company's UK subsidiary and 363,000 Yen ($2,780 at the December 31, 1997
exchange rate) for use by the Company's Japanese subsidiary. Demand borrowings
bear interest at rates of 6.0 to 6.5% for the deutsche mark loans, 8.0% for
British pounds sterling loans, and 1.45% for Japanese yen loans. Term
borrowings bear interest at Libor plus .75%.
29
<PAGE>
The Company's domestic, seasonal borrowing requirements are accommodated
through a senior revolving credit facility with a domestic bank (the
"Facility"). The Facility provides the Company with a potential borrowing
capacity of up to $60.0 million, based on eligible accounts receivable and
inventory balances. The Facility, as amended on January 1, 1997, bears
interest at the Eurodollar rate plus 2.5%. Borrowings are collateralized by
the Company's domestic accounts receivable, inventory and fixed assets. As of
December 31, 1997, no amounts were outstanding, and availability was
approximately $50.3 million.
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. 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 remained
outstanding on December 31, 1996.
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 1997, the Company
issued 29,557 shares 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.
30
<PAGE>
Activity under the Stock Plan and the Purchase Plan as of December 31,
1996 and 1997, and changes during the years ending on those dates is as
follows:
<TABLE>
<CAPTION>
1996 1997
-------------------- --------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Options Price Options Price
-------------------- --------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year - 566,990 $18.94
Granted 566,990 $18.94 65,297 19.15
Exercised - (30,557) 15.62
Canceled, forfeited or expired - (15,000) 19.00
------- -------
Outstanding at end of year 566,990 18.94 586,730 19.14
------- -------
------- -------
Options exercisable at year end - 108,300
Weighted average fair value of
options granted during the year $6.11 $5.99
</TABLE>
The following table sets forth information regarding options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Weighted Average
--------------------------------------------
Range of Number Exercise Price
Number Exercise Currently Exercise Remaining for Currently
of Options Prices Exercisable Price Life (Years) Exercisable
- ---------- -------- ----------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
12,730 $18.30 - $18.30 .6 -
574,000 $18.65 to 21.94 108,300 19.16 8.6 $19.00
------- -------
586,730 108,300 19.14 8.4 19.00
------- -------
------- -------
</TABLE>
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 as follows:
<TABLE>
<CAPTION>
1996 1997
------ -------
<S> <C> <C>
Income before extraordinary item $7,126 $13,005
Net income 2,758 13,005
Basic income per common share:
Before extraordinary item $ .96 $ 1.38
Net income .37 1.38
Diluted income per common share:
Before extraordinary item $ .96 $ 1.37
Net income .37 1.37
</TABLE>
31
<PAGE>
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 are as follows:
<TABLE>
<CAPTION>
1996 1997
------------ -------------
<S> <C> <C>
Range of risk-free interest rates 5.64 - 6.36% 5.57% - 6.18%
Range of expected life of option grants (in years) 1 to 6 1 to 6
Expected volatility of underlying stock 16.4% 16.4%
</TABLE>
The fair value of option grants made in 1996 and 1997 pursuant to the
Stock Plan were $6.15 and $7.61, respectively, per option. The fair value of
grants made pursuant to the Purchase Plan, including the option feature, were
$4.04 and $4.95 in 1996 and 1997, respectively.
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 CONTINGENT LIABILITIES
LEASE COMMITMENTS - The Company has entered into various operating
leases for certain facilities and equipment, some of which have noncancelable
terms, expiring at various times through 2016 with various renewal options.
Minimum lease payments under noncancelable leases for the years ending
December 31, are as follows:
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
1998 $ 2,891
1999 3,392
2000 3,266
2001 3,012
2002 2,742
Thereafter 13,950
-------
Total $29,253
-------
-------
</TABLE>
Rent expense was $2,202, $3,176 and $3,145 for the years ended December
31, 1995, 1996 and 1997, 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 $11.8 and $15.1 million from the
sales of such notes for the years ended December 31, 1996 and 1997,
respectively. Approximately $7.1 and $9.2 million of these notes remain
outstanding as of December 31, 1996 and 1997, respectively.
32
<PAGE>
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. Plan assets are invested primarily in common stocks and fixed income
securities.
The components of net pension expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 651 $ 837 $ 943
Interest cost on projected benefit obligation 739 1,102 1,355
Return on plan assets (993) (1,776) (3,121)
Net amortization 621 814 2,069
------ ------- -------
Net pension expense $1,018 $ 977 $ 1,246
------ ------- -------
------ ------- -------
</TABLE>
The funded status of the pension plan is as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Accumulated benefit obligation (including vested benefit
obligation of approximately $14,175 and $17,469 at
December 31, 1996 and 1997, respectively) $14,711 $19,683
------- -------
------- -------
Projected benefit obligation $15,620 $20,678
Plan assets at fair value 14,883 19,066
------- -------
Projected benefit obligation in excess of plan assets 737 1,612
Unrecognized net gain 1,097 1,051
Unrecognized prior service cost (776) (2,010)
Recognition of minimum liability 629
------- -------
Net accrued pension cost 1,058 1,282
Less amount currently payable 1,058 1,282
------- -------
Net long-term accrued pension cost $ - $ -
------- -------
------- -------
</TABLE>
33
<PAGE>
The projected benefit obligation was determined using an assumed
discount rate of 7.5% and 7.0% in 1996 and 1997, respectively. The assumed
long-term rate of compensation increase was 4%. The assumed long-term rate
of return on plan assets was 8.5%.
The Company also sponsors 401(k) retirement savings plans for eligible
employees. Discretionary employer contributions, as determined annually by
the Board of Directors, are made to one of these plans. The 1996 and 1997
contribution approximated $327 and $368, respectively.
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.
Net postretirement benefit costs are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
Service cost $ 32 $ 31 $ 37
Interest cost 79 72 86
Amortization of transition obligation 50 50 50
Net amortization and deferral (6) (8) -
----- ----- ----
Net postretirement benefit cost $155 $145 $173
----- ----- ----
----- ----- ----
</TABLE>
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,
-----------------
1996 1997
------ ------
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees $ 274 $ 388
Active Employees 738 878
------ ------
1,012 1,266
Unrecognized net obligation at date of adoption of SFAS No. 106 (853) (803)
Unrecognized net gain 181 3
------ ------
Accrued postretirement benefit cost, included
in other current liabilities $ 340 $ 466
------ ------
------ ------
</TABLE>
The annual assumed rate of increase in the per capita cost of covered
health care benefits is 9.5% for retirees under age 65 in 1998 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, 1997 by $71 and the aggregate of the
service and interest cost components of the net periodic postretirement
benefit cost for the year then ended by $9.
34
<PAGE>
The discount rate used in determining the accumulated postretirement
benefit obligation as of January 1 and the net periodic postretirement
benefit cost was 7.5% in 1996 and 1997. The December 31 liability was
determined using an assumed discount rate of 7.5% and 7.0% in 1996 and 1997,
respectively.
FOREIGN PLANS - The foreign divisions of the Company's Steinway
subsidiary have separate pension plans which provide retirement benefits for
all hourly and certain salaried employees. Unfunded accrued pension costs
are included in liabilities. The plans are funded in accordance with the
requirements of regulatory bodies governing each plan.
The components of net pension cost for the Company's foreign divisions
are as follows:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Service cost - benefits earned during the period $ 497 $ 464
Interest cost on projected benefit obligation 1,157 1,025
Return on plan assets (175) (248)
Net amortization and deferral (47) -
------ ------
Net pension cost $1,432 $1,241
------ ------
------ ------
</TABLE>
The following table sets forth the funded status and obligations of the
plans for the foreign divisions as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Accumulated benefit obligation (including vested benefit
obligation of approximately $15,049 and $13,072 at
December 31, 1996 and 1997, respectively) $15,813 $13,918
Projected benefit obligation $17,270 $15,200
Plan assets at fair value 2,730 3,001
------- -------
Projected benefit obligation in excess of plan assets 14,540 12,199
Unrecognized net gain (loss) (47) 617
------- -------
Net accrued pension cost 14,493 12,816
Less amount currently payable 765 696
------- -------
Net long-term accrued pension cost $13,728 $12,120
------- -------
------- -------
</TABLE>
The weighted average discount rates and rates of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation ranged from 6.5% to 7.25% and from 2.5% to 5.5%,
respectively. The expected long-term rate of return on assets was 9.5%.
35
<PAGE>
(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.
At December 31, 1997, these instruments, maturing at various dates
through December 1998, consisted of forward contracts and purchased options
to sell 430,900 Japanese Yen and 1,060 British pounds sterling and to buy
3,195 U.S. dollars. The Company uses only purchased options as part of this
hedging program.
(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, beginning in 1996, Kirkland Messina LLC and its
principals received annual payments of $400 for ongoing management and other
services to the Company.
36
<PAGE>
(14) SEGMENT INFORMATION
The Company has elected to early adopt the provisions of SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" in
1997. SFAS 131 requires that a company disclose segmented information about
its businesses based upon the way in which management oversees and evaluates
the results of such businesses. Consistent with this approach, the Company
has identified two distinct and reportable segments: the piano segment and
the band and orchestral instrument segment. The Company considers these two
segments reportable under SFAS 131 criteria as they are managed separately
and the operating results of each segment are regularly reviewed and
evaluated separately by the Company's senior management.
The accounting policies of each segment are the same as those described
in Note 2. Intercompany transactions are generally recorded at cost plus a
predetermined markup.
The following tables present information about the Company's operating
segments:
<TABLE>
<CAPTION>
1995 Piano Segment Band and Orchestral Segment
-------------------------------------- --------------------------- Other & Consol
US Germany Other Total US Other Total Elim Total
------ ------ ----- ------- ------- ----- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from external
customers 43,352 33,718 3,828 80,898 104,917 3,990 108,907 - 189,805
Interest revenue - 21 1 22 561 - 561 - 583
Interest expense 5,209 426 138 5,773 9,150 - 9,150 - 14,923
Depreciation and amortization 2,650 1,864 79 4,593 3,146 - 3,146 - 7,739
Income tax expense (benefit) (2,014) 222 69 (1,723) 2,530 29 2,559 - 836
Segment net income (loss) (4,057) (1,346) 131 (5,272) 3,138 60 3,198 - (2,074)
Capital expenditures 810 603 70 1,483 1,639 40 1,679 - 3,162
Segment assets 93,613 80,101 3,682 177,396 190,101 3,496 193,597 (107,197) 263,796
</TABLE>
<TABLE>
<CAPTION>
1996 Piano Segment Band and Orchestral Segment
-------------------------------------- --------------------------- Other & Consol
US Germany Other Total US Other Total Elim Total
------ ------ ----- ------- ------- ----- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from external
customers 77,245 52,538 6,531 136,314 118,030 3,559 121,589 - 257,903
Interest revenue - 60 4 64 8,888 - 8,888 (8,189) 763
Interest expense 8,904 750 (127) 9,527 19,257 - 19,257 (10,914) 17,870
Depreciation and amortization 4,553 3,070 126 7,749 3,205 15 3,220 1 10,970
Income tax expense (benefit) (838) 3,501 276 2,939 4,611 17 4,628 925 8,492
Segment net income (loss)
before extraordinary items (1,458) 1,234 407 183 5,548 26 5,574 1,664 7,421
Extraordinary items - - - - 4,368 - 4,368 - 4,368
Capital expenditures 1,832 264 59 2,155 3,044 - 3,044 - 5,199
Segment assets 91,451 75,117 4,866 171,434 260,353 3,057 263,410 (169,478) 265,366
</TABLE>
<TABLE>
<CAPTION>
1997 Piano Segment Band and Orchestral Segment
-------------------------------------- --------------------------- Other & Consol
US Germany Other Total US Other Total Elim Total
------ ------ ----- ------- ------- ----- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from external
customers 91,173 40,575 13,531 145,279 128,780 3,789 132,569 - 277,848
Interest revenue - 141 20 161 567 - 567 - 728
Interest expense 9,269 225 283 9,777 19,228 - 19,228 (15,501) 13,504
Depreciation and amortization 4,577 2,621 164 7,362 3,173 14 3,187 32 10,581
Income tax expense 1,544 2,358 430 4,332 2,492 61 2,553 5,571 12,456
Segment net income (loss) (577) 2,018 721 2,162 2,277 110 2,387 9,151 13,700
Capital expenditures 1,919 389 276 2,584 3,013 - 3,013 37 5,634
Segment assets 89,502 60,595 9,046 159,143 273,651 2,721 276,372 (168,807) 266,708
</TABLE>
37
<PAGE>
(15) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair values of financial
instruments are made in accordance with the requirements of SFAS No. 107
"Disclosures about Fair Values of Financial Instruments". The estimated fair
values have been developed using appropriate methodologies; however,
considerable judgment is required to develop these estimates. Accordingly,
the estimates presented herein are not necessarily indicative of amounts that
could be realized in a current market exchange. Use of different assumptions
or methodologies could have a significant effect on these estimates.
<TABLE>
<CAPTION>
1996 1997
------------------------- -------------------------
Net Carrying Estimated Net Carrying Estimated
Value Fair Value Value Fair Value
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Financial liabilities
Notes payable and long term debt $118,391 $128,401 $115,457 $125,266
Foreign currency contracts 0 (143) 0 350
</TABLE>
The carrying amount of cash, accounts, notes and leases receivable, and
accounts payable approximate fair value because of the short maturity of
these instruments.
The estimated fair value of existing notes payable and long-term debt is
based on rates currently available to the Company for debt with similar terms
and remaining maturities.
The estimated fair value of foreign currency contracts (used for hedging
purposes) has been determined as the difference between the current spot rate
and the contract rate multiplied by the notional amount of the contract or
upon the estimated fair value of purchased option contracts. The net
carrying value of these contracts approximates zero as any gains or losses on
the contracts is generally offset by losses or gains on the related hedged
asset or liability.
(16) SUMMARIZED FINANCIAL INFORMATION
The Company is a holding company whose only material asset consists of
its investment in its wholly-owned subsidiary, The Selmer Company, Inc.
Summarized financial information for The Selmer Company, Inc. and
subsidiaries is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current assets $132,380 $140,335 $149,022
Total assets 263,796 265,348 263,725
Current liabilities 41,767 37,673 46,664
Stockholder's equity 5,198 68,718 78,302
Net sales 189,805 257,903 275,037
Gross profit 50,218 84,235 92,641
Net income (loss) (2,074) 2,988 13,962
</TABLE>
38
<PAGE>
(17) SUMMARY OF MERGER AND GUARANTEES
On May 25, 1995, Selmer acquired Steinway pursuant to an Agreement and
Plan of Merger dated as of April 11, 1995. The total purchase price of
approximately $104 million, including fees and expenses, was funded by
Selmer's issuance of $105 million of 11% Senior Subordinated Notes due 2005
and available cash balances of the Company.
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.
39
<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>
40
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1997
(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 $ - $ 2,034 $ 1,913 $ 1,324 $ - $ 5,271
Accounts, notes and leases
receivable, net 33,661 6,167 7,549 47,377
Inventories 37,887 28,756 21,901 (590) 87,954
Prepaid expenses and other
current assets 684 1,604 357 2,187 4,832
Deferred tax asset 1,060 2,420 3,681 (973) 6,188
------- -------- -------- --------- ---------- --------
Total current assets 684 76,246 39,613 36,642 (1,563) 151,622
Property, plant and equipment, net 91 15,313 27,142 16,083 58,629
Investment in subsidiaries 71,143 168,557 25,449 (265,149) -
Other assets, net 613 2,489 13,826 7,441 (1,478) 22,891
Cost in excess of fair value
of net assets acquired, net 9,638 11,466 12,462 33,566
------- -------- -------- --------- ---------- --------
TOTAL ASSETS $ 72,531 $272,243 $117,496 $ 72,628 $ (268,190) $266,708
------- -------- -------- --------- ---------- --------
------- -------- -------- --------- ---------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current
portion of long-term debt $ - $ - $ - $ 3,338 $ - $ 3,338
Accounts payable 329 1,853 2,114 1,372 5,668
Other current liabilities (6,643) 13,648 15,125 10,637 (1,344) 31,423
------- -------- -------- --------- ---------- --------
Total current liabilities (6,314) 15,501 17,239 15,347 (1,344) 40,429
Long-term debt 50 107,747 2,203 2,119 112,119
Intercompany 11,695 63,074 (76,402) 1,633 -
Deferred taxes 1,787 10,741 13,751 26,279
Non-current pension liability 995 12,285 (1,160) 12,120
------- -------- -------- --------- ---------- --------
Total liabilities 5,431 189,104 (46,219) 45,135 (2,504) 190,947
Stockholders' equity 67,100 83,139 163,715 27,493 (265,686) 75,761
------- -------- -------- --------- ---------- --------
Total $ 72,531 $272,243 $117,496 $ 72,628 $ (268,190) $266,708
------- -------- -------- --------- ---------- --------
------- -------- -------- --------- ---------- --------
</TABLE>
41
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
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>
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>
42
<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>
43
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(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 $ - $127,175 $ 99,498 $57,895 $ (6,720) $277,848
Cost of sales 84,001 68,802 38,363 (6,599) 184,567
-------- --------- --------- -------- ---------- ---------
Gross profit - 43,174 30,696 19,532 (121) 93,281
Operating expenses:
Sales and marketing 12,539 12,307 7,758 (163) 32,441
Provision for doubtful accounts 192 223 327 742
General and administrative 3,063 6,464 3,760 4,244 17,531
Amortization 459 2,072 1,338 3,869
Other expense (2,287) 54 2,016 (180) 163 (234)
-------- --------- --------- -------- ---------- ---------
Total operating expenses 776 19,708 20,378 13,487 - 54,349
-------- --------- --------- -------- ---------- ---------
Earnings (loss) from operations (776) 23,466 10,318 6,045 (121) 38,932
Other (income) expense:
Other income (553) (15,515) (161) 15,501 (728)
Interest expense 19,228 9,269 508 (15,501) 13,504
-------- --------- --------- -------- ---------- ---------
Other expense, net - 18,675 (6,246) 347 - 12,776
-------- --------- --------- -------- ---------- ---------
Income (loss) before income taxes (776) 4,791 16,564 5,698 (121) 26,156
Provision for (benefit of) income taxes (512) 2,491 7,681 2,849 (53) 12,456
-------- --------- --------- -------- ---------- ---------
Net income (loss) $ (264) $ 2,300 $ 8,883 $ 2,849 $ (68) $ 13,700
-------- --------- --------- -------- ---------- ---------
-------- --------- --------- -------- ---------- ---------
</TABLE>
44
<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 47 184 797
Deferred tax provision (benefit) 780 (2,785) (3,078) (5,083)
Other 329 71 (30) 370
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (1,443) (1,147) (1,613) (4,203)
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
----- ---------- --------- -------- ----- ----------
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)
Business acquisition (net of cash acquired) (104,461) 1,548 123 (102,790)
----- ---------- --------- -------- ----- ----------
Cash flows from investing activities - (107,293) 494 (903) - (107,702)
Cash flows from financing activities:
Borrowing under lines of credit 105,187 42,441 365 147,993
Repayments under lines of credit (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 -
----- ---------- --------- -------- ----- ----------
Cash flows from financing activities - 103,494 907 (36) - 104,365
Effect of exchange rate changes on cash -
Increase 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>
45
<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
Deferred tax provision (benefit) 285 (1,417) (1,991) (3,123)
Early extinguishment of debt 4,368 - - 4,368
Other 291 - (17) 274
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
--------- ---------- --------- -------- ----- ---------
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
--------- ---------- --------- -------- ----- ---------
Cash flows from investing activities - (3,079) (1,860) (100) - (5,039)
Cash flows from financing activities:
Borrowing under lines of credit 113,728 81,160 334 195,222
Repayments under lines of credit (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 -
--------- ---------- --------- -------- ----- ---------
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>
46
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(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) $ (264) $ 2,300 $ 8,883 $ 2,849 $(68) $ 13,700
Adjustments to reconcile net income (loss)
to cash flows from operating activities:
Depreciation and amortization 29 3,136 4,617 2,799 10,581
Provision for doubtful accounts 192 223 327 742
Deferred tax provision (benefit) 262 (1,360) (1,914) (3,012)
Other 59 92 (8) 143
Changes in operating assets and liabilities:
Accounts, notes and leases receivable 25 (4,142) (218) 1,237 (3,098)
Inventories (13) (3,180) (2,309) (1,917) 121 (7,298)
Prepaid expense and other current assets (454) (144) 533 (844) (909)
Accounts payable 291 (896) (460) 380 (685)
Accrued expenses (7,441) 2,993 6,643 1,529 (53) 3,671
--------- ---------- --------- ------- ----- ---------
Cash flows from operating activities (7,827) 580 16,644 4,438 - 13,835
Cash flows from investing activities:
Capital expenditures (37) (2,951) (1,981) (665) (5,634)
Proceeds from disposals of fixed assets 4 9 31 44
Changes in other assets (14) (73) (67) (1,618) (1,772)
Business acquisition, net of cash acquired (1,730) (619) 124 619 (1,606)
--------- ---------- --------- ------- ----- ---------
Cash flows from investing activities (1,781) (3,639) (1,915) (1,633) - (8,968)
Cash flows from financing activities:
Borrowing under lines of credit 118,969 106,762 1,454 227,185
Repayments under lines of credit (85) (121,222) (106,997) (228,304)
Proceeds from issuance of stock 477 477
Purchase of treasury stock (1,916) (1,916)
Repayments of long-term debt (882) (882)
Intercompany dividends 7,203 (4,603) (2,600) -
Intercompany 11,114 493 (10,198) (1,409) -
--------- ---------- --------- ------- ----- ---------
Cash flows from financing activities 9,590 5,443 (15,036) (3,437) - (3,440)
Effect of exchange rate changes on cash - - - 567 567
Increase (decrease) in cash (18) 2,384 (307) (65) - 1,994
Cash, beginning of year 18 (350) 2,220 1,389 3,277
--------- ---------- --------- ------- ----- ---------
Cash, end of year $ - $ 2,034 $ 1,913 $ 1,324 $ - $ 5,271
--------- ---------- --------- ------- ----- ---------
--------- ---------- --------- ------- ----- ---------
</TABLE>
47
<PAGE>
(18) 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, 1996 and
1997.
<TABLE>
<CAPTION>
Year Ended December 31, 1996
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 69,049 $ 64,367 $ 61,460 $ 63,027
Gross profit 21,720 20,967 19,662 21,886
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
Income (loss) per common share,
basic and diluted
Income before extraordinary item $ .27 $ .29 $ .14 $ .31
Extraordinary item (.52)
--------- --------- --------- ---------
Net income (loss) $ .27 $ .29 $ (.38) $ .31
Weighted average common shares,
basic and diluted 5,957,127 5,957,127 8,337,127 9,422,937
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 73,726 $ 69,775 $ 64,554 $ 69,793
Gross profit 23,621 23,041 21,246 25,373
Net income 3,438 3,466 2,702 4,094
Basic income per common share $ .36 $ .37 $ .29 $ .43
Diluted income per common share .36 .37 .28 .43
Weighted average common shares:
Basic 9,422,937 9,422,937 9,438,852 9,419,763
Diluted 9,422,937 9,422,937 9,504,485 9,527,650
</TABLE>
48
<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, 1997, 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, 1997, 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, 1997, 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, 1997, 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.
49
<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:
<TABLE>
<CAPTION>
Sequential
(1) Financial Statements Page Number
-------------------- -----------
<S> <C>
Independent Auditors' Report 19
Consolidated Balance Sheets as of December 31, 1996 and 1997 20
Consolidated Statements of Operations for the
Years Ended December 31, 1995, 1996 and 1997 21
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997 22
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995, 1996 and 1997 23
Notes to Consolidated Financial Statements 24
</TABLE>
(3) EXHIBITS: The Exhibits listed below are filed as part of, or
incorporated by reference into this Report.
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page Number
------- ----------- -----------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of Registrant (8)
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 (8)
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 (8)
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, S&B Retail, Inc., Emerson Musical Instruments,
Inc., The Steinway Piano Company, Inc., and BNY Financial
Corporation (8)
50
<PAGE>
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 May 8, 1989, between Steinway
Musical Properties, Inc. and Thomas Kurrer (5)
10.3 Employment Agreement, dated as of May 1, 1995, between
Steinway Musical Properties, Inc. and Bruce Stevens (5)
10.4 Employment Agreement Renewal and Amendment dated January 1,
1997 by and between Steinway Musical Instruments, Inc.
and Bruce Stevens (8)
10.5 Employment Agreement, dated as of May 1, 1995, between Steinway
Musical Properties, Inc. and Dennis Hanson (5)
10.6 Employment Agreement Renewal and Amendment dated January 1,
1997 by and between Steinway Musical Instruments, Inc.
and Dennis Hanson (8)
10.7 Agreement, dated as of August 1996, between the Registrant,
Kirkland Messina Inc., and Dana Messina (6)
10.8 Agreement, dated as of August 1996, between the Registrant,
Kirkland Messina Inc., and Kyle Kirkland (6)
10.9 Environmental Indemnification and Non-Competition Agreement,
dated as of August 9, 1993, between The Selmer Company, Inc.
and Philips Electronics North American Corporation (1)
10.10 Master Note Purchase and Repurchase Agreement, dated
August 31, 1997, by and between Textron Financial Corporation
and The Selmer Company, Inc.
10.11 Master Note Purchase and Repurchase Agreement, dated
August 31, 1997, by and between Textron Financial Corporation
and Emerson Musical Instruments, Inc.
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)
21.1 List of Subsidiaries of the Registrants
23.1 Independent Auditors' Consent - Deloitte & Touche LLP
27.1 Steinway Musical Instruments, Inc. - Financial Data Schedule
27.2 The Selmer Company, Inc. - Financial Data Schedule
</TABLE>
51
<PAGE>
- -------------------
(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.
(8) Previously filed with the Commission on March 27, 1997 as an
exhibit to the Registrant's Annual Report on Form 10-K.
(b) Reports on Form 8-K
The Company did not file any current reports on Form 8-K during the
quarter ending December 31, 1997.
52
<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, 1998 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:
SIGNATURE TITLE
/s/ Dana D. Messina Director and Chief Executive Officer March 27, 1998
-------------------- (Principal Executive Officer)
Dana D. Messina
/s/ Dennis M. Hanson Chief Financial Officer March 27, 1998
--------------------- (Principal Financial Officer)
Dennis M. Hanson
/s/ Michael R. Vickrey Executive Vice President March 27, 1998
----------------------- (Principal Accounting Officer)
Michael R. Vickrey
/s/ Kyle R. Kirkland Chairman of the Board March 27, 1998
---------------------
Kyle R. Kirkland
/s/ Thomas T. Burzycki Director March 27, 1998
-----------------------
Thomas T. Burzycki
/s/ Bruce Stevens Director March 27, 1998
------------------
Bruce Stevens
/s/ Peter McMillan Director March 27, 1998
-------------------
Peter McMillan
53
<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, 1998 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:
SIGNATURE TITLE
/s/ Thomas Burzycki Director, President and March 27, 1998
-------------------- Chief Executive Officer
Thomas Burzycki (Principal Executive Officer)
/s/ Michael R. Vickrey Executive Vice President March 27, 1998
----------------------- and Chief Financial Officer
Michael R. Vickrey (Principal Financial and
Accounting Officer)
/s/ Kyle R. Kirkland Director March 27, 1998
---------------------
Kyle R. Kirkland
/s/ Dana D. Messina Director March 27, 1998
--------------------
Dana D. Messina
54
<PAGE>
MASTER NOTE PURCHASE AND REPURCHASE AGREEMENT
This Master Note Purchase and Repurchase Agreement (this "Agreement") is
executed as of August 31, 1997 by The Selmer Company, Inc. with an address of
600 Industrial Parkway, Elkhart, IN 46516 ("Selmer") and Textron Financial
Corporation with an address of 6120 Earle Brown Drive, Brooklyn Center, MN
55430 ("TFC").
RECITALS
A. Selmer manufactures and distributes musical instruments ("Selmer
Products") and extends credit to selected retail dealers of Selmer Products
("Dealers"), facilitating the acquisition of Selmer Products by such Dealers
(the "Floor Plan");
B. In order to secure the Floor Plan, among other security, Selmer
establishes a first priority security interest in the Selmer Products financed
pursuant to the Floor Plan;
C. Selmer, from time to time, pursuant to powers of attorney granted to
Selmer by Dealers, executes promissory notes on behalf of Dealers evidencing
all or a portion of the outstanding indebtedness under the Floor Plan (the
"Notes");
D. Selmer and TFC intend that TFC will, from time to time, in an amount
not to exceed an aggregate of $14 Million at any time outstanding and with full
recourse to Selmer, purchase the Notes and take an assignment of all security
for, and all other rights of Selmer associated with, such Notes and the
indebtedness evidenced thereby; and
E. Selmer shall be obligated to repurchase the Notes under the
circumstances set forth in this agreement.
AGREEMENT
In reliance upon the various representations, warranties and covenants set
forth in this Agreement, Selmer and TFC agree as follows:
ARTICLE I - PURCHASE OF NOTES
1.1 PURCHASE OF NOTES. Provided that Selmer is in compliance with, and
is not in breach of, any of its warranties, covenants or other obligations set
forth in this Agreement (and will not be in breach of, or in non-compliance
with, such obligations following the purchase hereinafter described), TFC will
purchase Eligible Notes (as hereinafter defined) from Selmer in an aggregate
amount at any time outstanding not to exceed $14 Million. The purchase price
for each Eligible Note shall be equal to the outstanding principal balance of
such Eligible Note at the time of purchase (the "Purchase Price").
1.2 ELIGIBLE NOTES. An "Eligible Note" is a Note which:
( a ) is not in default;
( b ) conforms to the documentation requirements set forth in
Section 1.4;
( c ) is for a term not to exceed twenty-four (24) months;
<PAGE>
2
( d ) provides for full straight line amortization of the
principal balance thereof (or some other amortization of principal acceptable
to TFC); and
( e ) is from a Dealer with which TFC has not had a prior
unsatisfactory relationship.
In order for TFC to make a determination as to the eligibility of a Note,
Selmer shall submit a list of Dealers to TFC and update such list on a regular
basis. In addition, if TFC's purchase of a Note would result in the aggregate
amount of outstanding principal under all Notes purchased by TFC with respect
to the subject Dealer exceeding $150,000.00, such Note shall not be an
"Eligible Note" unless TFC determines that the creditworthiness of such Dealer
is acceptable.
1.3 MINIMUM YIELD ON PURCHASED NOTES. To the extent that any Eligible
Note purchased by TFC (a "Purchased Note") accrues interest in any month at a
rate (the "Note Rate") less than the Minimum Acceptable Interest Rate (as
hereinafter defined), Selmer agrees to pay to TFC, on or before the twentieth
(20th) day of the following month, the difference between the amount of
interest accrued during such month at the Note Rate and the amount of interest
which would have accrued during such month at the Minimum Acceptable Interest
Rate. The Minimum Acceptable Interest Rate shall be a variable rate per annum,
adjusted monthly, equal to Prime plus three and one-quarter percent (3.25%).
Prime for any month shall be the greater of: (a) the prime commercial rate of
interest per annum published by the index bank referenced in the Purchased
Notes on the last day of the preceding month, or (b) Seven percent (7.0%) per
annum. Unless otherwise specified in the Purchased Notes, all interest
calculations under the Purchased Notes shall be done using a year of 360 days
and the actual number of days elapsed in the computation period.
1.4 REQUEST FOR PURCHASE OF A NOTE. Selmer may, from time to time,
request that TFC purchase Notes. Selmer shall not sell any Note to any other
party unless Selmer has first requested that TFC purchase such Note. Any
such request shall be made by submitting, for each Note, a completed Request
for Purchase of a Note in the form attached hereto as EXHIBIT 1.4(A); and the
sole original of such Note in the form attached hereto as EXHIBIT 1.4(B)
("Original Note"). In addition, TFC shall have the right to receive copies of
the bookkeeping counterpart of all invoices identifying the indebtedness
evidenced by such Original Note (the "Invoices") and upon such request made by
TFC, Selmer shall deliver the Invoices within seven (7) business days. Such
Original Note shall have been executed on behalf of the Dealer obligated
thereon by an authorized officer of The Selmer Company, Inc., pursuant to a
valid power of attorney, and shall be endorsed to TFC by Selmer as shown in
EXHIBIT 1.4(B). The Invoices and supporting material shall collectively
identify the Selmer Products being sold pursuant thereto by model and serial
number, except for various accessory Selmer Products which do not bear serial
numbers and which will not, in the aggregate, constitute more than five percent
(5.0%) of the value of the Selmer Products identified on the Invoices.
Provided that the Original Note is an Eligible Note, TFC shall pay the Purchase
Price for such Note to Selmer, or Selmer's designee, in immediately available
funds, by wire transfer, within ten (10) calendar days following TFC's receipt
of the foregoing documents in acceptable form. If TFC determines that any Note
submitted for purchase is not an Eligible Note, TFC shall return all documents
associated with such submission to Selmer within five days (5) following TFC's
receipt of the foregoing documents.
1.5 ASSIGNMENT OF SECURITY AND OTHER RIGHTS. In connection with each
Purchased Note, Selmer assigns to TFC all of Selmer's rights to payment of the
indebtedness evidenced by such Purchased Note, all of Selmer's rights
associated with Selmer Products identified on the Invoices, an undivided joint
interest in all other security or such indebtedness in which Selmer has an
interest, and an undivided joint interest rights of Selmer associated with such
indebtedness. The rights of Selmer described in the foregoing sentence
include, but are not limited to, Selmer's rights under the Security Agreement
and Power of Attorney entered into by Selmer with the
<PAGE>
3
applicable Dealer, any Guaranty and Waiver By Individual(s) or similar
instrument(s) executed in connection therewith, and Selmer's interest under
policies of insurance covering Selmer Products owned by the applicable Dealer.
The collection of writings evidencing the rights described in this Section,
including the Purchased Notes, are hereinafter referred to as the "Chattel
Paper."
1.6 PERFECTION AND PROTECTION OF TFC'S INTEREST IN PURCHASED CHATTEL
PAPER. TFC shall perfect its interest in all purchased Chattel Paper by filing
an appropriate UCC-1 Financing Statement identifying the Chattel Paper to be
purchased. In addition, all original instruments executed between Selmer and
the Dealers associated with purchased Chattel Paper, pursuant to which such
Dealers have granted a security interest in Selmer Products to Selmer, shall be
conspicuously stamped with the legend set forth at EXHIBIT 1.6 hereto.
1.7 ALTERATION OF CHATTEL PAPER AND WAIVER OF RIGHTS. For so long as
there are outstanding amounts owing to TFC under a Purchased Note or
Purchased Notes, Selmer agrees not to amend, supplement or otherwise alter,
or waive any rights under, any of the purchased Chattel Paper associated
therewith without TFC's prior consent. TFC agrees not to amend, supplement
or otherwise alter, or waive any rights under, any purchase Chattel Paper
without Selmer's prior consent, except for purchased Chattel Paper assocated
with a Purchased Note or Purchased Notes for which Selmer has failed to honor
its repurchase obligations under this Agreement.
ARTICLE II - REPURCHASE OF NOTES
2.1 REPURCHASE OF NOTES. Selmer shall be obligated, if requested by TFC,
to repurchase all or a portion of the Purchased Notes under the following
circumstances:
(a) Selmer shall be obligated, if requested by TFC, to repurchase
all of the Purchased Notes relating to a particular Dealer if any of the
following occur: (i) such Dealer defaults in the payment of principal and/or
interest under the applicable Purchased Note(s) and such obligation(s) is past
due more than ninety (90) days; (ii) such Dealer is otherwise in default under
the terms of the applicable Purchased Note(s); or (iii) Selmer breaches the
terms of any warranty contained in Sections 3.4 and 3.5 of this Agreement as
such warranty relates to such Dealer or the applicable Purchased Notes; and
(b) Selmer shall be obligated, if requested by TFC, to repurchase
ALL Purchased Notes if Selmer: (i) breaches any provision of this Agreement,
other than the warranties set forth in Section 3.4 and 3.5 of this
agreement; (ii) is in default under the terms and conditions of any loan,
lease, or similar agreement pursuant to which Selmer's aggregate obligations
are $1 Million or more and all applicable grace periods for the cure of such
default have expired; or (iii) is the subject of a bankruptcy, receivership
or similar proceeding which, if involuntary, is not dismissed within thirty
(30) days following its commencement.
In the event that Selmer is obligated to repurchase a Purchased Note
because of a circumstance set forth in the foregoing Subparagraph (a), Clause
(i) or Clause (ii), Selmer shall have the right to cause such Dealer to cure
such default (in its entirety) within thirty (30) days following receipt of
notice from TFC of the occurrence of such circumstance. In the event that
Selmer is obligated to repurchase some or all of the Purchased Notes because of
a circumstance set forth in the foregoing Subparagraph (a), Clause (iii), or
Subparagraph (b), Clause (i) (expect for Selmer's breach of the warranties
and/or obligations set forth in Sections 1.3, 2.2, 4.1, 4.2(b) and 4.4(b) of
this Agreement), Selmer shall have the right to cure such breach within thirty
(30) days following receipt of notice from TFC of the occurrence of such
breach.
<PAGE>
4
2.2 REPURCHASE PRICE. The Repurchase Price for a Purchased Note shall
be equal to all principal, accrued interest and other charges owing to TFC
pursuant to such Purchased Note, and owing to TFC by Selmer pursuant to
Section 1.3, as of the date that Selmer pays the Repurchase Price to TFC.
Selmer shall pay the Repurchase Price for a Purchased Note to TFC within
fifteen (15) days following receipt of notice from TFC that Selmer is
required to repurchase such Purchased Note.
2.3 REASSIGNMENT OF RIGHTS. In connection with Selmer's repurchase of
a Purchased Note, TFC shall reassign to Selmer all of TFC's rights in the
Chattel Paper associated therewith previously assigned to TFC by Selmer. TFC
warrants that such assignment of rights shall be free and clear of the
interest of any party claiming such interest through TFC. TFC shall endorse
the applicable Original Note to Selmer, without recourse, and shall return
such Original Note to Selmer together with the Invoices related thereto.
ARTICLE III - WARRANTIES OF SELMER
Selmer continuously warrants to TFC as follows:
3.1 ORGANIZATION. Selmer is a corporation duly organized, validity
existing and in good standing under the laws of the State of Delaware and has
all requisite power and authority to own, operate and lease its properties
and to carry on its business as presently being conducted. Selmer is duly
qualified to do business and is in good standing in each jurisdiction in
which the property owned, leased or operated by Selmer, or the nature of the
business conducted by Selmer, makes such qualification necessary, except
where the failure to be so qualified would not have an adverse effect on the
financial condition or business prospects of Selmer (an "Adverse Effect").
3.2 AUTHORIZATION. Selmer has the power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. Selmer has duly approved and authorized the execution and delivery
of this Agreement, and no other proceedings on the part of Selmer are
necessary in connection therewith. This Agreement constitutes a valid and
binding obligation of Selmer, enforceable against Selmer in accordance with
its terms.
3.3 AUTHORITY. The compliance by Selmer with the provisions hereof
will not: ( a ) violate any provision of the charter documents or by-laws of
Selmer; ( b ) violate any provision of, constitute a default under (or an
event which, with notice or lapse of time or both, would constitute a default
under), or result in the creation of any lien, security interest, charge of
encumbrance upon any of the properties of Selmer, pursuant to the terms of
any agreement, instrument or other obligation to which Selmer is party or by
which any of Selmer's properties are bound; ( c ) violate any order, rule or
regulation of any court or governmental authority; or ( d ) require the
consent of, or notice to, any governmental or regulatory authority.
3.4 PURCHASED CHATTEL PAPER. All of the documents associated with
purchased Chattel Paper contained in Selmer's credit or documentation files
are, in all material respects, what they purport to be and, as appropriate,
are valid and binding obligations of the Dealer associated therewith,
enforceable against such Dealer in accordance with their terms, except: (a)
as enforcement may be limited by bankruptcy or other similar laws affecting
the enforcement of creditors' rights generally; and (b) that the remedy of
specific performance and other forms of equitable relief are subject to
judicial discretion. Selmer has good and marketable title to the purchased
Chattel Paper and to the indebtedness evidenced thereby, free and clear of
all defenses, set-offs, counterclaims, liens and encumbrances of every kind
and nature. Each Purchased Note constitutes a bona fide loan by Selmer to
the applicable Dealer, in an amount equal to the Purchase Price for such
Eligible Note. Selmer has not accepted interest, or any other similar
amounts, from any Dealer obligated on
<PAGE>
5
any Purchased Note in advance of any due date occurring after the date that
Selmer completes a Request for Purchase of a Note with respect thereto.
3.5 PRIORITY OF LIENS AND INSURANCE. Selmer has a perfected security
interest in all Selmer Products owned by each Dealer associated with a
Purchased Note. Selmer has a first priority security interest in each of the
Selmer Products which is identified on the Invoices. Each Dealer associated
with a Purchased Note has obtained property insurance covering its inventory
of Selmer Products for their full replacement value and naming Selmer as Loss
Payee.
3.6 REPORTS AND INFORMATION. All reports and information delivered or
conveyed by Selmer to TFC pertaining to the Purchased Notes are accurate and
complete in all material respects.
3.7 LITIGATION. There are no proceedings before any court or
governmental authority (each a "Proceeding") pending or, to the best of
Selmer's knowledge, threatened against Selmer which, if adversely determined,
would have an Adverse Effect. Selmer is not subject to any judgment or other
order entered in any law suit or proceeding which would have an Adverse
Effect.
3.8 COMPLIANCE WITH LAWS. The Purchased Notes have been entered into
by Selmer in accordance with all applicable laws and other requirements of
governmental authorities (including, but not limited to, usury, equal credit
opportunity and similar laws or regulations), except where the failure to
comply with such laws, regulations or other requirements would not have an
Adverse Effect.
ARTICLE IV - AFFIRMATIVE AND NEGATIVE COVENANTS OF SELMER
Selmer covenants and agrees with TFC as follows:
4.1 FINANCIAL STATEMENTS. Selmer shall deliver to TFC, within one
hundred twenty (120) days following the close of each of Steinway Musical
Instruments, Inc. and Subsidiaries ("Parent") fiscal years, Parent's
financial statements, certified by a recognized firm of certified public
accountants as having been prepared in accordance with generally accepted
accounting principles and as presenting fairly the financial condition of
Parent and Selmer as of the date thereof and for the period then ended.
Selmer shall deliver to TFC such other financial information as TFC shall
reasonably request, including, within forty-five (45) days following the
close of each of Parent's fiscal quarters, Parent's financial statements,
certified by the chief financial officer of Parent and/or Selmer as having
been prepared in accordance with generally accepted accounting principles and
in a manner consistent with the normal accounting practices of Selmer. Each
time that Selmer delivers Parent's financial statements to TFC, Selmer shall
also deliver a certificate from the chief financial officer of Parent and/or
Selmer indicating whether Selmer was in compliance with the provisions of
Section 4.6 of this Agreement as of the date of such financial statements.
4.2 BOOKS AND RECORDS. Selmer shall: (a) keep accurate and complete
records pertaining to the purchased Chattel Paper, and (b) permit TFC, upon
reasonable notice and at reasonable times, to audit the credit and
documentation files of a Dealer associated with purchased Chattel Paper, or
an Eligible Note which Selmer has requested that TFC purchase.
4.3 ADDITIONAL DOCUMENTATION. Selmer shall execute and deliver to TFC
all additional documents which TFC may, from time to time, determine are
necessary or appropriate to evidence or perfect TFC's interest in the
purchased Chattel Paper.
<PAGE>
6
4.4 EXISTENCE, NAME AND PRINCIPAL PLACE OF BUSINESS. Selmer shall:
(a) maintain its existence in good standing, and (b) deliver to TFC written
notice, at least sixty (60) days in advance, of any proposed change in
Selmer's name or the location of Selmer's principal place of business.
4.5 BREACH OR DEFAULT. Selmer shall notify TFC as soon as reasonably
possible upon the occurrence of any circumstance which puts Selmer in breach
of any of Selmer's covenants, warranties or agreements contained in this
Agreement.
4.6 FINANCIAL COVENANTS. Selmer (as represented in Parent's financial
statements) shall not permit its: (a) Tangible Net Worth (as hereinafter
defined) to be less than $50 Million, or (b) the ratio of its Adjusted
Indebtedness (as hereinafter defined) to Tangible Net Worth to be greater
than 2.0 to 1.0. "Tangible Net Worth" means the shareholders equity of
Selmer, increased by Selmer's Subordinated Debt (as hereinafter defined), and
reduced by Selmer's intangible assets. "Subordinated Debt" includes in the
Senior Subordinated Notes (in the original principal amount of $110 Million)
and any other indebtedness of Selmer owing to a party which has subordinated
its right to payment of such indebtedness to the right of TFC to payment
under this Agreement. "Adjusted Indebtedness" means Selmer's total
liabilities, reduced by unfunded pension liability and the reserves for
recourse notes.
ARTICLE V - MISCELLANEOUS
5.1 TERM OF AGREEMENT. This Agreement shall be in effect for a period
of three (3) years from the date hereof. TFC may terminate this Agreement if
Selmer is, at any time, obligated to repurchase all Purchased Notes. Any
termination or expiration of this Agreement shall not affect the obligations
of Selmer and TFC under this Agreement with respect to Chattel Paper
purchased by TFC from Selmer.
5.2 POWER OF ATTORNEY. Selmer irrevocably appoints TFC, and any person
designated by TFC, for so long as any obligation remains outstanding under
any Purchased Note, as Selmer's true and lawful attorney-in-fact to:
(a) endorse, in TFC's or Selmer's name, any draft or other order for the payment
of money payable to Selmer and related to the purchased Chattel Paper, and
(b) execute, in TFC's or Selmer's name, all other instruments and documents
necessary or appropriate to enable TFC to enforce TFC's rights in the
purchased Chattel Paper against any associated Dealer.
5.3 INTEGRATION, MODIFICATION AND COURSE OF DEALING. This Agreement
constitutes the entire agreement of Selmer and TFC relative to the subject
matter hereof. No modification of, or supplement to, this Agreement shall
bind Selmer or TFC unless in writing and signed by an authorized officer of
Selmer or TFC, as appropriate. No course of dealing and no delay or failure
of Selmer or TFC to exercise any right, power or privilege under this
Agreement will affect any other or future exercise of such right, power or
privilege.
5.4 ASSIGNMENT AND DELEGATION. Selmer shall have the right, from time
to time, to sell, assign or otherwise transfer its entire interest in this
Agreement to any entity which it controls, is controlled by, or is under
common control with Selmer. Selmer may not assign or transfer any of its
rights or delegate any of its obligations under this Agreement under any
other circumstances. TFC shall have the right, from time to time, to sell,
assign or otherwise transfer its interest in this Agreement and the purchased
Chattel Paper, either in whole or in part, to any entity which controls, is
controlled by, or is under common control with TFC.
5.5 NOTICES. All notices, requests, demands and other communications
made pursuant to this Agreement (the "Notices") shall be in writing and shall
be sent by certified mail, return receipt requested. All of the Notices
shall be sent to TFC (Attention: Vice President - Operations) or Selmer
(Attention: Vice President
<PAGE>
7
of Finance) at the address for such party set forth at the end of this
Agreement or to such other address as such party shall designate from time to
time.
5.6 BINDING EFFECT AND GOVERNING LAW. This Agreement shall not be
deemed to create any right in any party except as provided herein and shall
inure to the benefit of, and by binding upon, the successors and assigns of
Selmer and TFC. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF RHODE ISLAND, WITHOUT REFERENCE TO
APPLICABLE CONFLICT ON LAW PRINCIPLES.
The undersigned, pursuant to due corporate and/or partnership authority,
have caused this Agreement to be executed as of the date set forth above.
TFC:
TEXTRON FINANCIAL CORPORATION
By: s/Gary R. Kamrath
----------------------------------------
Print Name: Gary R. Kamrath
-------------------------------
Print Title: Vice President
-------------------------------
Address: 6120 Earle Brown Drive
Brooklyn Center, MN 55430
SELMER:
THE SELMER COMPANY, INC.
By: s/Michael R. Vickrey
----------------------------------------
Print Name: Michael R. Vickrey
-------------------------------
Print Title: Executive V.P. - Finance
-------------------------------
Address: 600 Industrial Parkway
Elkhart, IN 46516
<PAGE>
EXHIBIT 1.6
The Selmer Company, Inc. has assigned a portion of its rights under this
agreement to Textron Financial Corporation ("TFC") in connection with TFC's
purchase of certain indebtedness secured hereby.
<PAGE>
MASTER NOTE PURCHASE AND REPURCHASE AGREEMENT
This Master Note Purchase and Repurchase Agreement (this "Agreement") is
executed as of August 31, 1997 by Emerson Musical Instruments, Inc. with an
address of 28135 West Hively, Elkhart, IN 46517 ("Emerson") and Textron
Financial Corporation with an address of 6120 Earle Brown Drive, Brooklyn
Center, MN 55430 ("TFC").
RECITALS
A. Emerson manufactures and distributes musical instruments ("Emerson
Products") and extends credit to selected retail dealers of Emerson Products
("Dealers"), facilitating the acquisition of Emerson Products by such Dealers
(the "Floor Plan");
B. In order to secure the Floor Plan, among other security, Emerson
establishes a first priority security interest in the Emerson Products financed
pursuant to the Floor Plan;
C. Emerson, from time to time, pursuant to powers of attorney granted to
Emerson by Dealers, executes promissory notes on behalf of Dealers evidencing
all or a portion of the outstanding indebtedness under the Floor Plan (the
"Notes");
D. Emerson and TFC intend that TFC will, from time to time, in an amount not
to exceed an aggregate of $1 Million at any time outstanding and with full
recourse to Emerson, purchase the Notes and take an assignment of all security
for, and all other rights of Emerson associated with, such Notes and the
indebtedness evidenced thereby; and
E. Emerson shall be obligated to repurchase the Notes under the circumstances
set forth in this agreement.
AGREEMENT
In reliance upon the various representations, warranties and covenants set
forth in this Agreement, Emerson and TFC agree as follows:
ARTICLE I - PURCHASE OF NOTES
1.1 PURCHASE OF NOTES. Provided that Emerson is in compliance with, and is
not in breach of, any of its warranties, covenants or other obligations set
forth in this Agreement (and will not be in breach of, or in non-compliance
with, such obligations following the purchase hereinafter described), TFC will
purchase Eligible Notes (as hereinafter defined) from Emerson in an aggregate
amount at any time outstanding not to exceed $1 Million. The purchase price
for each Eligible Note shall be equal to the outstanding principal balance of
such Eligible Note at the time of purchase (the "Purchase Price").
1.2 ELIGIBLE NOTES. An "Eligible Note" is a Note which:
( a ) is not in default;
( b ) conforms to the documentation requirements set forth in
Section 1.4;
( c ) is for a term not to exceed twenty-four (24) months;
( d ) provides for full straight line amortization of the
principal balance thereof (or some
other amortization of principal acceptable to TFC); and
( e ) is from a Dealer with which TFC has not had a prior
unsatisfactory relationship.
<PAGE>
2
In order for TFC to make a determination as to the eligibility of a Note,
Emerson shall submit a list of Dealers to TFC and update such list on a
regular basis. In addition, if TFC's purchase of a Note would result in the
aggregate amount of outstanding principal under all Notes purchased by TFC
with respect to the subject Dealer exceeding $150,000.00, such Note shall
not be an "Eligible Note" unless TFC determines that the creditworthiness of
such Dealer is acceptable.
1.3 MINIMUM YIELD ON PURCHASED NOTES. To the extent that any Eligible Note
purchased by TFC (a "Purchased Note") accrues interest in any month at a rate
(the "Note Rate") less than the Minimum Acceptable Interest Rate (as
hereinafter defined), Emerson agrees to pay to TFC, on or before the
twentieth (20th) day of the following month, the difference between the
amount of interest accrued during such month at the Note Rate and the amount
of interest which would have accrued during such month at the Minimum
Acceptable Interest Rate. The Minimum Acceptable Interest Rate shall be a
variable rate per annum, adjusted monthly, equal to Prime plus three and
one-quarter percent (3.25%). Prime for any month shall be the greater of:
(a) the prime commercial rate of interest per annum published by the index bank
referenced in the Purchased Notes on the last day of the preceding month, or
(b) Seven percent (7.0%) per annum. Unless otherwise specified in the
Purchased Notes, all interest calculations under the Purchased Notes shall be
done using a year of 360 days and the actual number of days elapsed in the
computation period.
1.4 REQUEST FOR PURCHASE OF A NOTE. Emerson may, from time to time, request
that TFC purchase Notes. Emerson shall not sell any Note to any other party
unless Emerson has first requested that TFC purchase such Note. Any such
request shall be made by submitting, for each Note, a completed Request for
Purchase of a Note in the form attached hereto as EXHIBIT 1.4(a); and the sole
original of such Note in the form attached hereto as EXHIBIT 1.4(b)
("Original Note"). In addition, TFC shall have the right to receive copies of
the bookkeeping counterpart of all invoices identifying the indebtedness
evidenced by such Original Note (the "Invoices") and upon such request made by
TFC, Emerson shall deliver the Invoices within seven (7) business days. Such
Original Note shall have been executed on behalf of the Dealer obligated
thereon by an authorized officer of Emerson Musical Instruments, Inc., pursuant
to a valid power of attorney, and shall be endorsed to TFC by Emerson as shown
in EXHIBIT 1.4(b). The Invoices and supporting material shall collectively
identify the Emerson Products being sold pursuant thereto by model and serial
number, except for various accessory Emerson Products which do not bear serial
numbers and which will not, in the aggregate, constitute more than five percent
(5.0%) of the value of the Emerson Products identified on the Invoices.
Provided that the Original Note is an Eligible Note, TFC shall pay the
Purchase Price for such Note to Emerson, or Emerson's designee, in immediately
available funds, by wire transfer, within ten (10) calendar days following
TFC's receipt of the foregoing documents in acceptable form. If TFC determines
that any Note submitted for purchase is not an Eligible Note, TFC shall return
all documents associated with such submission to Emerson within five days (5)
following TFC's receipt of the foregoing documents.
1.5 ASSIGNMENT OF SECURITY AND OTHER RIGHTS. In connection with each
Purchased Note, Emerson assigns to TFC all of Emerson's rights to payment of
the indebtedness evidenced by such Purchased Note, all of Emerson's rights
associated with Emerson Products identified on the Invoices, an undivided
joint interest in all other security or such indebtedness in which Emerson
has an interest, and an undivided joint interest rights of Emerson associated
with such indebtedness. The rights of Emerson described in the foregoing
sentence include, but are not limited to, Emerson's rights under the Security
Agreement and Power of Attorney entered into by Emerson with the applicable
Dealer, any Guaranty and Waiver By Individual(s) or similar instrument(s)
executed in connection therewith, and Emerson's interest under policies of
insurance covering Emerson Products owned by the applicable Dealer. The
collection of writings evidencing the rights described in this Section,
including the Purchased Notes, are hereinafter referred to as the "Chattel
Paper."
<PAGE>
3
1.6 PERFECTION AND PROTECTION OF TFC'S INTEREST IN PURCHASED CHATTEL PAPER.
TFC shall perfect its interest in all purchased Chattel Paper by filing an
appropriate UCC-1 Financing Statement identifying the Chattel Paper to be
purchased. In addition, all original instruments executed between Emerson and
the Dealers associated with purchased Chattel Paper, pursuant to which such
Dealers have granted a security interest in Emerson Products to Emerson, shall
be conspicuously stamped with the legend set forth at EXHIBIT 1.6 hereto.
1.7 ALTERATION OF CHATTEL PAPER AND WAIVER OF RIGHTS. For so long as there
are outstanding amounts owing to TFC under a Purchased Note or Purchased
Notes, Emerson agrees not to amend, supplement or otherwise alter, or waive
any rights under, any of the purchased Chattel Paper associated therewith
without TFC's prior consent. TFC agrees not to amend, supplement or
otherwise alter, or waive any rights under, any purchase Chattel Paper
without Emerson's prior consent, except for purchased Chattel Paper
associated with a Purchased Note or Purchased Notes for which Emerson has
failed to honor its repurchase obligations under this Agreement.
ARTICLE II - REPURCHASE OF NOTES
2.1 REPURCHASE OF NOTES. Emerson shall be obligated, if requested by TFC,
to repurchase all or a portion of the Purchased Notes under the following
circumstances:
(a) Emerson shall be obligated, if requested by TFC, to repurchase all of
the Purchased Notes relating to a particular Dealer if any of the following
occur: (i) such Dealer defaults in the payment of principal and/or interest
under the applicable Purchased Note(s) and such obligation(s) is past due
more than ninety (90) days; (ii) such Dealer is otherwise in default under
the terms of the applicable Purchased Note(s); or (iii) Emerson breaches the
terms of any warranty contained in Sections 3.4 and 3.5 of this Agreement as
such warranty relates to such Dealer or the applicable Purchased Notes; and
(b) Emerson shall be obligated, if requested by TFC, to repurchase ALL
Purchased Notes if Emerson: (i) breaches any provision of this Agreement, other
than the warranties set forth in Section 3.4 and 3.5 of this agreement;
(ii) is in default under the terms and conditions of any loan, lease, or similar
agreement pursuant to which Emerson's aggregate obligations are $1 Million or
more and all applicable grace periods for the cure of such default have
expired; or (iii) is the subject of a bankruptcy, receivership or similar
proceeding which, if involuntary, is not dismissed within thirty (30) days
following its commencement.
In the event that Emerson is obligated to repurchase a Purchased Note because
of a circumstance set forth in the foregoing Subparagraph (a), Clause (i) or
Clause (ii), Emerson shall have the right to cause such Dealer to cure such
default (in its entirety) within thirty (30) days following receipt of notice
from TFC of the occurrence of such circumstance. In the event that Emerson is
obligated to repurchase some or all of the Purchased Notes because of a
circumstance set forth in the foregoing Subparagraph (a), Clause (iii), or
Subparagraph (b), Clause (i) (expect for Emerson's breach of the warranties
and/or obligations set forth in Sections 1.3, 2.2, 4.1, 4.2(b) and 4.4(b) of
this Agreement), Emerson shall have the right to cure such breach within thirty
(30) days following receipt of notice from TFC of the occurrence of such
breach.
2.2 REPURCHASE PRICE. The Repurchase Price for a Purchased Note shall be
equal to all principal, accrued interest and other charges owing to
TFC pursuant to such Purchased Note, and owing to TFC by Emerson pursuant to
Section 1.3, as of the date that Emerson pays the Repurchase Price to TFC.
Emerson shall pay the Repurchase Price for a Purchased Note to TFC within
fifteen (15) days following receipt of notice from TFC that Emerson is required
to repurchase such Purchased Note.
<PAGE>
4
2.3 REASSIGNMENT OF RIGHTS. In connection with Emerson's repurchase of a
Purchased Note, TFC shall reassign to Emerson all of TFC's rights in the
Chattel Paper associated therewith previously assigned to TFC by Emerson. TFC
warrants that such assignment of rights shall be free and clear of the interest
of any party claiming such interest through TFC. TFC shall endorse the
applicable Original Note to Emerson, without recourse, and shall return such
Original Note to Emerson together with the Invoices related thereto.
ARTICLE III - WARRANTIES OF EMERSON
Emerson continuously warrants to TFC as follows:
3.1 ORGANIZATION. Emerson is a corporation duly organized, validity existing
and in good standing under the laws of the State of Delaware and has all
requisite power and authority to own, operate and lease its properties and to
carry on its business as presently being conducted. Emerson is duly qualified
to do business and is in good standing in each jurisdiction in which the
property owned, leased or operated by Emerson, or the nature of the business
conducted by Emerson, makes such qualification necessary, except where the
failure to be so qualified would not have an adverse effect on the financial
condition or business prospects of Emerson (an "Adverse Effect").
3.2 AUTHORIZATION. Emerson has the power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. Emerson
has duly approved and authorized the execution and delivery of this
Agreement, and no other proceedings on the part of Emerson are necessary in
connection therewith. This Agreement constitutes a valid and binding
obligation of Emerson, enforceable against Emerson in accordance with its
terms.
3.3 AUTHORITY. The compliance by Emerson with the provisions hereof will not:
( a ) violate any provision of the charter documents or by-laws of Emerson;
( b ) violate any provision of, constitute a default under (or an event
which, with notice or lapse of time or both, would constitute a default under),
or result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties of Emerson, pursuant to the terms of any agreement,
instrument or other obligation to which Emerson is party or by which any of
Emerson's properties are bound; ( c ) violate any order, rule or regulation of
any court or governmental authority; or ( d ) require the consent of, or notice
to, any governmental or regulatory authority.
3.4 PURCHASED CHATTEL PAPER. All of the documents associated with purchased
Chattel Paper contained in Emerson's credit or documentation files are, in all
material respects, what they purport to be and, as appropriate, are valid and
binding obligations of the Dealer associated therewith, enforceable against
such Dealer in accordance with their terms, except: (a) as enforcement may be
limited by bankruptcy or other similar laws affecting the enforcement of
creditors' rights generally; and (b) that the remedy of specific performance
and other forms of equitable relief are subject to judicial discretion.
Emerson has good and marketable title to the purchased Chattel Paper and to
the indebtedness evidenced thereby, free and clear of all defenses, set-offs,
counterclaims, liens and encumbrances of every kind and nature. Each Purchased
Note constitutes a bona fide loan by Emerson to the applicable Dealer, in an
amount equal to the Purchase Price for such Eligible Note. Emerson has not
accepted interest, or any other similar amounts, from any Dealer obligated on
any Purchased Note in advance of any due date occurring after the date that
Emerson completes a Request for Purchase of a Note with respect thereto.
3.5 PRIORITY OF LIENS AND INSURANCE. Emerson has a perfected security
interest in all Emerson Products owned by each Dealer associated with a
Purchased Note. Emerson has a first priority security interest in each of the
Emerson Products which is identified on the Invoices. Each Dealer associated
with a Purchased Note
<PAGE>
5
has obtained property insurance covering its inventory of Emerson Products for
their full replacement value and naming Emerson as Loss Payee.
3.6 REPORTS AND INFORMATION. All reports and information delivered or
conveyed by Emerson to TFC pertaining to the Purchased Notes are accurate and
complete in all material respects.
3.7 LITIGATION. There are no proceedings before any court or governmental
authority (each a "Proceeding") pending or, to the best of Emerson's knowledge,
threatened against Emerson which, if adversely determined, would have an
Adverse Effect. Emerson is not subject to any judgment or other order entered
in any law suit or proceeding which would have an Adverse Effect.
3.8 COMPLIANCE WITH LAWS. The Purchased Notes have been entered into by
Emerson in accordance with all applicable laws and other requirements of
governmental authorities (including, but not limited to, usury, equal credit
opportunity and similar laws or regulations), except where the failure to
comply with such laws, regulations or other requirements would not have an
Adverse Effect.
ARTICLE IV - AFFIRMATIVE AND NEGATIVE COVENANTS OF EMERSON
Emerson covenants and agrees with TFC as follows:
4.1 BOOKS AND RECORDS. Emerson shall: (a) keep accurate and complete
records pertaining to the purchased Chattel Paper, and (b) permit TFC, upon
reasonable notice and at reasonable times, to audit the credit and
documentation files of a Dealer associated with purchased Chattel Paper, or
an Eligible Note which Emerson has requested that TFC purchase.
4.2 ADDITIONAL DOCUMENTATION. Emerson shall execute and deliver to TFC all
additional documents which TFC may, from time to time, determine are
necessary or appropriate to evidence or perfect TFC's interest in the
purchased Chattel Paper.
4.3 EXISTENCE, NAME AND PRINCIPAL PLACE OF BUSINESS. Emerson shall: (a)
maintain its existence in good standing, and (b) deliver to TFC written notice,
at least sixty (60) days in advance, of any proposed change in Emerson's name
or the location of Emerson's principal place of business.
4.4 BREACH OR DEFAULT. Emerson shall notify TFC as soon as reasonably
possible upon the occurrence of any circumstance which puts Emerson in breach
of any of Emerson's covenants, warranties or agreements contained in this
Agreement.
ARTICLE V - MISCELLANEOUS
5.1 TERM OF AGREEMENT. This Agreement shall be in effect for a period of
three (3) years from the date hereof. TFC may terminate this Agreement if
Emerson is, at any time, obligated to repurchase all Purchased Notes. Any
termination or expiration of this Agreement shall not affect the obligations of
Emerson and TFC under this Agreement with respect to Chattel Paper purchased by
TFC from Emerson.
5.2 POWER OF ATTORNEY. Emerson irrevocably appoints TFC, and any person
designated by TFC, for so long as any obligation remains outstanding under any
Purchased Note, as Emerson's true and lawful attorney-in-fact to: (a) endorse,
in TFC's or Emerson's name, any draft or other order for the payment of money
payable to Emerson and related to the purchased Chattel Paper, and (b) execute,
in TFC's or Emerson's name, all other instruments and documents necessary or
appropriate to enable TFC to enforce TFC's rights in the purchased Chattel
Paper against any associated Dealer.
<PAGE>
6
5.3 INTEGRATION, MODIFICATION AND COURSE OF DEALING. This Agreement
constitutes the entire agreement of Emerson and TFC relative to the subject
matter hereof. No modification of, or supplement to, this Agreement shall
bind Emerson or TFC unless in writing and signed by an authorized officer of
Emerson or TFC, as appropriate. No course of dealing and no delay or failure
of Emerson or TFC to exercise any right, power or privilege under this
Agreement will affect any other or future exercise of such right, power or
privilege.
5.4 ASSIGNMENT AND DELEGATION. Emerson shall have the right, from time to
time, to sell, assign or otherwise transfer its entire interest in this
Agreement to any entity which it controls, is controlled by, or is under
common control with Emerson. Emerson may not assign or transfer any of its
rights or delegate any of its obligations under this Agreement under any
other circumstances. TFC shall have the right, from time to time, to sell,
assign or otherwise transfer its interest in this Agreement and the purchased
Chattel Paper, either in whole or in part, to any entity which controls, is
controlled by, or is under common control with TFC.
5.5 NOTICES. All notices, requests, demands and other communications made
pursuant to this Agreement (the "Notices") shall be in writing and shall
be sent by certified mail, return receipt requested. All of the Notices shall
be sent to TFC (Attention: Vice President - Operations) or Emerson (Attention:
Vice President of Finance) at the address for such party set forth at the end
of this Agreement or to such other address as such party shall designate from
time to time.
5.6 BINDING EFFECT AND GOVERNING LAW. This Agreement shall not be deemed to
create any right in any party except as provided herein and shall inure to the
benefit of, and by binding upon, the successors and assigns of Emerson and TFC.
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF RHODE ISLAND, WITHOUT REFERENCE TO APPLICABLE CONFLICT ON LAW
PRINCIPLES.
The undersigned, pursuant to due corporate and/or partnership authority, have
caused this Agreement to be executed as of the date set forth above.
TFC:
TEXTRON FINANCIAL CORPORATION
By: s/Gary R. Kamrath
--------------------------------
Print Name: Gary R. Kamrath
--------------------------------
Print Title: Vice President
--------------------------------
Address: 6120 Earle Brown Drive
Brooklyn Center, MN 55430
EMERSON:
EMERSON MUSICAL INSTRUMENTS, INC.
By: s/M.R. Vickrey
--------------------------------
Print Name: M.R. Vickrey
--------------------------------
Print Title: Treasurer
--------------------------------
Address: 28135 West Hively
Elkhart, IN 46517
<PAGE>
EXHIBIT 1.6
Emerson Musical Instruments, Inc. has assigned a portion of its rights under
this agreement to Textron Financial Corporation ("TFC") in connection with
TFC's purchase of certain indebtedness secured hereby.
<PAGE>
TFC TEXTRON
THE FIRST CHOICE
CONTINUING GUARANTEE
Re: EMERSON MUSICAL INSTRUMENTS, INC.
("DEBTOR")
GUARANTEE (this "Guarantee") dated as of August 31, 1997, executed by the
undersigned ("Guarantor") in favor of Textron Financial Corporation ("TFC").
Guarantor, in order to induce TFC to enter into the Master Note and
Repurchase Agreement with Debtor dated August 31, 1997 and to extend credit
to Debtor's dealers from time to time, and for other valuable consideration,
the receipt of which is hereby acknowledged, does hereby unconditionally and
irrevocably, except as hereinafter provided, guarantee to TFC, without offset
or deduction, the prompt payment and performance when due, whether by
acceleration or otherwise, of all indebtedness, obligations and liabilities,
direct or indirect, matured or unmatured, primary or secondary, certain or
contingent, whether now in existence or hereafter created, of Debtor owing to
TFC (the payments, duties, agreements, covenants and obligations of Debtor
hereby guaranteed are hereinafter referred to, individually, as an
"Obligation" and, collectively, as the "Obligations"). This Guarantee is a
guarantee of payment, not of collection, and of the punctual and faithful
performance by Debtor of each and every Obligation.
In the event debtor does not or is unable to pay or perform any Obligation, for
any reason, or an event of default has occurred under any Obligation
(including, without limitation, the liquidation, bankruptcy, assignment for the
benefit of creditors, or other similar proceedings affecting the status,
existence, assets or obligations of Debtor), Guarantor hereby agrees that it
will pay directly to TFC, as a primary obligor, the sums which Debtor is
obligated to pay to TFC, whether by acceleration or otherwise, and provide
for and bring about promptly when due such payment and the performance of such
Obligations. Guarantor acknowledges that it is fully aware of, and consents
to the terms and conditions of, the Obligations that are in existence as of the
date hereof.
This Guarantee is a continuing guarantee and shall continue to apply without
regard to the form or the amount of the Obligations. In the event that the
Obligations are at any time paid and performed in full and TFC does not
have any outstanding loan or lease commitment to Debtor of any kind whatsoever,
Guarantor may revoke this Guarantee by written notice to TFC; provided,
however, that such revocation shall not be effective with respect to any
Obligation arising or incurred by Debtor prior to TFC's receipt of such notice.
The liability of Guarantor under this Guarantee shall be absolute and
unconditional and shall not be released or discharged for any reason
whatsoever, including, without limitation, the following: (i) the waiver by TFC
of the performance or observance by Debtor of any Obligation or any default
thereunder, (ii) the extension of time for payment by Debtor of any sums or any
part thereof owing or payable to TFC, the extension, amendment or renewal of
any agreement creating an Obligation or the substitution for such agreement of
new contracts containing different terms, (iii) any failure, omission, or
delay of TFC to enforce, assert or exercise any right power or remedy conferred
on TFC, or any action on the part of TFC granting extension or indulgence in
any provided, however, that unless and until all Obligations shall have been
performed, Guarantor shall not claim or enforce any right of subrogation,
reimbursement or indemnity against Debtor, or any other right or remedy against
Debtor which might otherwise arise on account of any loan or payment made by
Guarantor or act or thing done by guarantor on account of or in accordance with
this Guarantee or otherwise. This Guarantee shall not be deemed to create any
right in any party except as provided herein nor be construed in any respect
to be a contract in whole or in part for the benefit of any other party except
the successors and assigns of TFC. This Guarantee shall inure to the benefit
of and be binding upon the successors and assigns of Guarantor and TFC.
Guarantor agrees that TFC may, without the consent of, or notice to,
Guarantor, assign its rights hereunder to any other person or entity to which
any Obligations are transferred, assigned or negotiated. Guarantor shall be
liable for all reasonable attorneys' fees and other fees, costs and expenses of
TFC incurred in connection with the enforcement by TFC of its rights hereunder.
Page 1 of 2
<PAGE>
TFC TEXTRON
THE FIRST CHOICE
(ASSISTANT) SECRETARY'S CERTIFICATE
The undersigned, Dennis M. Hanson ,
------------------------------------------------------------
Secretary of EMERSON MUSICAL INSTRUMENTS, INC. (the "Company"), in order to
induce Textron Financial Corporation ("TFC") and/or Textron Capital Corporation
("TCC") to enter into the Agreement(s) (as hereinafter defined), certifies to
TFC and TCC that:
1. The Company is duly organized, validly existing and in good standing
under the laws of the State or Commonwealth of DELAWARE; the Company has full
corporate power and authority to execute, enter into and deliver the
MASTER NOTE AND REPURCHASE AGREEMENT dated AUGUST 31, 1997, between the
Company and TFC and/or TCC (the "Agreement(s)"); and all corporate action
necessary to authorize the execution, delivery and performance of the
Agreement(s) has been taken and such action has not been modified or
rescinded in any respect.
2. Each of the following persons is a duly elected (or appointed), qualified
and acting officer of the Company, having full power and authority to act alone
on behalf of the Company with respect to the Agreement(s), including any future
modification(s) thereof, and to execute and deliver such other instruments and
agreements in connection therewith as he or she may deem necessary or proper;
and the signature appearing opposite his or her name below is his or her
genuine signature:
NAME OFFICE SIGNATURE
Michael R. Vickrey Treasurer s/Michael R. Vickrey
- -------------------- -------------------- ---------------------------
- -------------------- -------------------- ---------------------------
- -------------------- -------------------- ---------------------------
IN WITNESS WHEREOF, the undersigned has hereunto signed his or her name and
imprinted the seal of the Company as of the date set forth below.
s/Dennis M. Hanson
------------------------------
Secretary
September 2, 1997 [SEAL]
- ----------------
1044P (Gen.)
(Asst.) Secretary's Certificate
<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
EMERSON MUSICAL INSTRUMENTS, INC., a Delaware corporation
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' 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 February 27, 1998, appearing in the Annual Report on Form 10-K of
Steinway Musical Instruments, Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATION AND CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000911583
<NAME> STEINWAY MUSICAL INSTRUMENTS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5271
<SECURITIES> 0
<RECEIVABLES> 54881
<ALLOWANCES> 7504
<INVENTORY> 87954
<CURRENT-ASSETS> 151622
<PP&E> 78160
<DEPRECIATION> 19531
<TOTAL-ASSETS> 266708
<CURRENT-LIABILITIES> 40429
<BONDS> 115457
0
0
<COMMON> 9
<OTHER-SE> 75752
<TOTAL-LIABILITY-AND-EQUITY> 266708
<SALES> 277848
<TOTAL-REVENUES> 277848
<CGS> 184567
<TOTAL-COSTS> 49972
<OTHER-EXPENSES> 3635
<LOSS-PROVISION> 742
<INTEREST-EXPENSE> 12776
<INCOME-PRETAX> 26156
<INCOME-TAX> 12456
<INCOME-CONTINUING> 13700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13700
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.45
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000918904
<NAME> THE SELMER COMPANY INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5260
<SECURITIES> 0
<RECEIVABLES> 54255
<ALLOWANCES> 7454
<INVENTORY> 86678
<CURRENT-ASSETS> 149022
<PP&E> 77666
<DEPRECIATION> 19355
<TOTAL-ASSETS> 263725
<CURRENT-LIABILITIES> 46664
<BONDS> 115457
0
0
<COMMON> 0
<OTHER-SE> 78302
<TOTAL-LIABILITY-AND-EQUITY> 263725
<SALES> 275037
<TOTAL-REVENUES> 275037
<CGS> 182396
<TOTAL-COSTS> 46521
<OTHER-EXPENSES> 5694
<LOSS-PROVISION> 707
<INTEREST-EXPENSE> 12790
<INCOME-PRETAX> 26929
<INCOME-TAX> 12967
<INCOME-CONTINUING> 13962
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13962
<EPS-PRIMARY> 13962.00
<EPS-DILUTED> 13962.00
</TABLE>
