<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 4, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-11911
STEINWAY MUSICAL INSTRUMENTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 35-1910745
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
800 South Street, Suite 425
Waltham, Massachusetts 02453
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (781) 894-9770
and
THE SELMER COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4432228
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Industrial Parkway, Elkhart, Indiana 46516
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (219) 522-1675
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements during the past 90 days.
Yes [X] No [ ]
Number of shares of Common Stock issued and outstanding as of July 31, 1998:
<TABLE>
<S> <C>
Class A 477,953
Ordinary 8,869,841
---------
Total 9,347,794
</TABLE>
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<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
FORM 10Q
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets
December 31, 1997 and July 4, 1998......................................................3
Condensed Consolidated Statements of Operations
Three months and six months ended June 28, 1997 and July 4, 1998........................4
Condensed Consolidated Statements of Cash Flows
Six months ended June 28, 1997 and July 4, 1998.........................................5
Notes to Condensed Consolidated Financial Statements.........................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................................13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................16
SIGNATURES..................................................................................17
</TABLE>
2
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JULY 4,
1997 1998
----------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 5,271 $ 2,947
Accounts, notes and leases receivable, net of allowance for
bad debts of $7,504 and $7,975 in 1997 and 1998, respectively 47,377 67,118
Inventories 87,954 90,387
Prepaid expenses and other current assets 4,832 2,449
Deferred tax asset 6,188 6,157
----------------- ------------------
Total current assets 151,622 169,058
Property, plant and equipment, net of accumulated depreciation of
$19,531 and $22,711 in 1997 and 1998, respectively 58,629 57,763
Other assets, net 22,891 20,894
Cost in excess of fair value of net assets acquired, net of accumulated
amortization of $2,734 and $3,179 in 1997 and 1998, respectively 33,566 32,961
----------------- ------------------
TOTAL ASSETS $ 266,708 $ 280,676
----------------- ------------------
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 3,338 $ 2,153
Accounts payable 5,668 4,593
Other current liabilities 31,423 27,445
----------------- ------------------
Total current liabilities 40,429 34,191
Long-term debt 112,119 125,622
Deferred taxes 26,279 25,107
Non-current pension liability 12,120 12,331
----------------- ------------------
Total liabilities 190,947 197,251
Commitments and Contingent Liabilities
Stockholders' equity:
Common stock 9 9
Additional paid in capital 69,206 69,620
Retained earnings 14,492 23,244
Accumulated translation adjustment (6,030) (6,374)
Treasury stock (1,916) (3,074)
----------------- ------------------
Total stockholders' equity 75,761 83,425
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 266,708 $ 280,676
----------------- ------------------
----------------- ------------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------- ------------------------------------
June 28, July 4, June 28, July 4,
1997 1998 1997 1998
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 69,775 $ 73,061 $ 143,501 $ 152,161
Cost of sales 46,734 48,529 96,839 101,585
---------------- ---------------- ----------------- ----------------
Gross profit 23,041 24,532 46,662 50,576
Operating Expenses:
Sales and marketing 8,045 8,548 16,866 18,005
General and administrative 4,364 4,162 8,617 8,376
Amortization 969 957 1,953 1,908
Other (income) expense 10 (3) 164 288
---------------- ---------------- ----------------- ----------------
Total Operating Expenses 13,388 13,664 27,600 28,577
---------------- ---------------- ----------------- ----------------
Earnings from operations 9,653 10,868 19,062 21,999
Interest expense, net 3,217 2,889 6,256 5,727
---------------- ---------------- ----------------- ----------------
Income before income taxes 6,436 7,979 12,806 16,272
Provision for income taxes 2,970 3,694 5,902 7,520
---------------- ---------------- ----------------- ----------------
Net income 3,466 $ 4,285 $ 6,904 $ 8,752
---------------- ---------------- ----------------- ----------------
---------------- ---------------- ----------------- ----------------
Net income per share:
Basic $ .37 $ .46 $ .73 $ .93
---------------- ---------------- ----------------- ----------------
---------------- ---------------- ----------------- ----------------
Diluted $ .37 $ .45 $ .73 $ .92
---------------- ---------------- ----------------- ----------------
---------------- ---------------- ----------------- ----------------
Weighted average shares outstanding:
Basic 9,422,937 9,363,932 9,422,937 9,364,456
---------------- ---------------- ----------------- ----------------
---------------- ---------------- ----------------- ----------------
Diluted 9,422,937 9,583,293 9,422,937 9,560,511
---------------- ---------------- ----------------- ----------------
---------------- ---------------- ----------------- ----------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------
June 28, July 4,
1997 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,904 $ 8,752
Adjustments to reconcile net income to
cash flows from operating activities:
Depreciation and amortization 5,366 5,376
Deferred tax benefit (1,152) (1,033)
Other 368 186
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (22,499) (20,041)
Inventories (2,726) (2,942)
Prepaid expense and other current assets (746) 662
Accounts payable (390) (1,093)
Accrued expenses (53) (3,676)
---------------- ----------------
Cash flows from operating activities (14,928) (13,809)
Cash flows from investing activities:
Capital expenditures (1,871) (2,722)
Proceeds from disposals of fixed assets 33 132
Acquisition of business (net of cash acquired) (1,606) -
Changes in other assets (1,391) 2,342
---------------- ----------------
Cash flows from investing activities (4,835) (248)
Cash flows from financing activities:
Net borrowings under lines of credit 18,880 12,953
Repayments of long-term debt (453) (492)
Proceeds from issuance of stock - 414
Purchase of treasury stock - (1,158)
---------------- ----------------
Cash flows from financing activities 18,427 11,717
Effect of foreign exchange rate changes on cash (18) 16
---------------- ----------------
Decrease in cash (1,354) (2,324)
Cash, beginning of period 3,277 5,271
---------------- ----------------
Cash, end of period $ 1,923 $ 2,947
---------------- ----------------
---------------- ----------------
Supplemental Cash Flow Information
Interest paid $ 6,554 $ 6,372
---------------- ----------------
---------------- ----------------
Taxes paid $ 6,332 $ 8,877
---------------- ----------------
---------------- ----------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of
Steinway Musical Instruments, Inc. and subsidiaries (the "Company") for the
six months ended June 28, 1997 and July 4, 1998 are unaudited. In the opinion
of management, these statements have been prepared on the same basis as the
audited consolidated financial statements as of and for the year ended
December 31, 1997, and include all adjustments which are of a normal and
recurring nature, necessary for the fair presentation of financial position,
results of operations and cash flows for the interim period. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997. The results of operations for the six
months ended July 4, 1998 are not necessarily indicative of the results which
may be expected for the entire year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of
the Company include the accounts of all of its direct and indirect
wholly-owned subsidiaries, including The Selmer Company, Inc. ("Selmer") and
The Steinway Piano Company, Inc. ("Steinway"). Significant intercompany
balances have been eliminated in consolidation.
INCOME PER SHARE - The Company has computed income per share in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". Previously reported income per share did not differ
from that computed using SFAS 128.
A reconciliation of weighted average shares used for the basic and
diluted computations for the three and six month periods ended June 28, 1997
and July 4, 1998 is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares for basic 9,422,937 9,363,932 9,422,937 9,364,456
Dilutive effect of stock options - 219,361 - 196,055
--------- ---------- --------- ---------
Weighted average shares for diluted 9,422,937 9,583,293 9,422,937 9,560,511
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS - During the first quarter of 1998, the
Company adopted SFAS No. 130, "Reporting 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. Comprehensive net
income for the first six months of 1997 and 1998 was $3,442 and $8,408,
respectively.
6
<PAGE>
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, July 4,
1997 1998
------------------ -----------------
<S> <C> <C>
Raw materials $ 11,944 $ 13,450
Work in process 35,309 34,953
Finished goods 40,701 41,984
------------------ -----------------
Total $ 87,954 $ 90,387
------------------ -----------------
------------------ -----------------
</TABLE>
(4) COMMITMENTS AND CONTINGENT LIABILITIES
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.
(5) SUMMARIZED FINANCIAL INFORMATION
The Company is a holding company whose only material asset consists of
its investment in its wholly-owned subsidiary, Selmer. Summarized financial
information for Selmer and its subsidiaries is as follows:
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------
December 31, July 4, June 28, July 4,
1997 1998 1997 1998
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Current assets $ 149,022 $ 166,285
Total assets 263,725 277,489
Current liabilities 46,664 43,327
Stockholder's equity 78,302 86,579
Total revenues $ 142,003 $ 150,701
Gross profit 46,307 50,081
Net income 7,011 8,621
</TABLE>
<PAGE>
(6) SEGMENT INFORMATION
The Company has adopted the provisions of 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. Consistent with this approach, the Company has identified two
distinct and reportable segments: the piano segment and the band and
orchestral instrument segment.
The following tables present information about the Company's operating
segments for the three months and six months ended June 28, 1997 and July 4,
1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED 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 $21,429 $9,538 $2,997 $33,964 $35,023 $788 $35,811 $ - $69,775
Segment net income 53 179 110 342 793 25 818 2,306 3,466
THREE MONTHS ENDED 1998 Piano Segment Band and Orchestral Segment
------------------------------------------- ----------------------------------- Other & Consol
US Germany Other Total US Other Total Elim Total
-- ------- ----- ----- -- ----- ----- ---- -----
Revenues from external
customers $26,306 $9,043 $3,635 $38,984 $33,138 $939 $34,077 $ - $73,061
Segment net income 836 257 171 1,264 445 1 446 2,575 4,285
SIX MONTHS ENDED 1997 Piano Segment Band and Orchestral Segment
------------------------------------------- ----------------------------------- Other & Consol
US Germany Other Total US Other Total Elim Total
-- ------- ----- ----- -- ----- ----- ---- -----
Revenues from external
customers $41,289 $20,060 $4,680 $66,029 $75,918 $1,554 $77,472 $ - $143,501
Segment net income (loss) (305) 166 112 (27) 2,282 79 2,361 4,570 6,904
SIX MONTHS ENDED 1998 Piano Segment Band and Orchestral Segment
------------------------------------------- ----------------------------------- Other & Consol
US Germany Other Total US Other Total Elim Total
-- ------- ----- ----- -- ----- ----- ---- -----
Revenues from external
customers $50,601 $17,658 $7,945 $76,204 $74,038 $1,919 $75,957 $ - $152,161
Segment net income 1,063 541 437 2,041 1,689 41 1,730 4,981 8,752
</TABLE>
(7) SUMMARY OF MERGER AND GUARANTEES
The acquisition of Steinway in May 1995 was funded by Selmer's issuance
of $105 million of 11% Senior Subordinated Notes 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 direct and indirect wholly-owned subsidiaries of the
Company, each a "Guarantor" (the "Guarantor Subsidiaries"). These
subsidiaries, together with the operating divisions of Selmer, represent all
of the operations of the Company conducted in the United States. The
remaining subsidiaries, which do not guarantee the Notes, represent foreign
operations (the "Non Guarantor Subsidiaries").
8
<PAGE>
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.
9
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
JULY 4, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
----------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ - $ 346 $ 1,319 $ 1,282 $ - $ 2,947
Accounts, notes and leases receivable, net - 55,015 6,335 5,768 - 67,118
Inventories - 34,488 31,994 24,610 (705) 90,387
Prepaid expenses and other current assets 196 1,272 407 574 - 2,449
Deferred tax asset - 1,060 2,420 3,650 (973) 6,157
----------- ---------- ------------ ------------ ------------ ------------
Total current assets 196 92,181 42,475 35,884 (1,678) 169,058
Property, plant and equipment, net 83 15,192 27,137 15,351 - 57,763
Investment in subsidiaries 71,143 168,557 56,147 - (295,847) -
Other assets, net 613 1,756 12,942 6,896 (1,313) 20,894
Cost in excess of fair value
of net assets acquired, net - 9,502 11,313 12,146 - 32,961
----------- ---------- ------------ ------------ ------------ ------------
TOTAL ASSETS $72,035 $287,188 $150,014 $70,277 $(298,838) $280,676
----------- ---------- ------------ ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current
portion of long-term debt $ - $ - $ - $ 2,153 $ - $ 2,153
Accounts payable 92 1,612 1,796 1,093 - 4,593
Other current liabilities (9,373) 9,569 18,194 10,415 (1,360) 27,445
----------- ---------- ------------ ------------ ------------ ------------
Total current liabilities (9,281) 11,181 19,990 13,661 (1,360) 34,191
Long-term debt 102 121,061 2,854 1,605 - 125,622
Intercompany 14,787 67,313 (84,360) 2,260 - -
Deferred taxes - 1,787 10,268 13,052 - 25,107
Non-current pension liability - 995 - 12,331 (995) 12,331
----------- ---------- ------------ ------------ ------------ ------------
Total liabilities 5,608 202,337 (51,248) 42,909 (2,355) 197,251
Stockholders' equity 66,427 84,851 201,262 27,368 (296,483) 83,425
----------- ---------- ------------ ------------ ------------ ------------
Total $72,035 $287,188 $150,014 $70,277 $(298,838) $280,676
----------- ---------- ------------ ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------ ------------
</TABLE>
10
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JULY 4, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ - $ 73,323 $ 55,754 $ 27,522 $ (4,438) $ 152,161
Cost of sales - 50,590 37,220 18,098 (4,323) 101,585
------------- ------------- ------------- ------------- -------------- -------------
Gross profit - 22,733 18,534 9,424 (115) 50,576
Operating expenses:
Sales and marketing - 7,024 6,974 4,069 (62) 18,005
General and administrative 1,389 2,802 2,117 2,068 - 8,376
Amortization - 230 1,037 641 - 1,908
Other (income) expense (1,336) 11 1,247 304 62 288
------------- ------------- ------------- ------------- -------------- -------------
Total operating expenses 53 10,067 11,375 7,082 - 28,577
------------- ------------- ------------- ------------- -------------- -------------
Earnings (loss) from operations (53) 12,666 7,159 2,342 (115) 21,999
Interest (income) expense:
Interest income (197) (408) (7,930) (32) 7,925 (642)
Interest expense - 9,622 4,474 198 (7,925) 6,369
------------- ------------- ------------- -------------- ------------- -------------
Interest expense, net (197) 9,214 (3,456) 166 - 5,727
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before income taxes 144 3,452 10,615 2,176 (115) 16,272
Provision for (benefit of) income taxes 73 1,740 4,566 1,157 (16) 7,520
------------- ------------- ------------- ------------- -------------- -------------
Net income (loss) $ 71 $ 1,712 $ 6,049 $ 1,019 $ (99) $ 8,752
------------- ------------- ------------- ------------- -------------- -------------
------------- ------------- ------------- ------------- -------------- -------------
</TABLE>
11
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JULY 4, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
--------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 71 $ 1,712 $ 6,049 $ 1,019 $ (99) $ 8,752
Adjustments to reconcile net income (loss)
to cash flows from operating activities:
Depreciation and amortization 16 1,666 2,354 1,340 - 5,376
Deferred tax benefit - - (473) (560) - (1,033)
Other - 115 93 (22) - 186
Changes in operating assets and liabilities:
Accounts, notes and leases receivable - (21,419) (252) 1,630 - (20,041)
Inventories (3) 3,399 (3,381) (3,072) 115 (2,942)
Prepaid expense and other current assets 205 332 (50) 175 - 662
Accounts payable (237) (241) (318) (297) - (1,093)
Accrued expenses (2,730) (4,079) 3,069 80 (16) (3,676)
--------- -------- ------------ ------------ ------------ ------------
Cash flows from operating activities (2,678) (18,515) 7,091 293 - (13,809)
Cash flows from investing activities:
Capital expenditures (5) (1,365) (1,178) (174) - (2,722)
Proceeds from disposals of fixed assets - - - 132 - 132
Changes in other assets 283 639 - 1,420 - 2,342
--------- -------- ------------ ------------ ------------ ------------
Cash flows from investing activities 278 (726) (1,178) 1,378 - (248)
Cash flows from financing activities:
Net borrowings (repayments) under
lines of credit 52 13,314 651 (1,064) - 12,953
Repayments of long-term debt - - - (492) - (492)
Proceeds from sale of stock 414 - - - - 414
Purchase of treasury stock (1,158) - - - - (1,158)
Intercompany dividend - - 800 (800) - -
Intercompany 3,092 4,239 (7,958) 627 - -
--------- -------- ------------ ------------ ------------ ------------
Cash flows from financing activities 2,400 17,553 (6,507) (1,729) - 11,717
Effect of exchange rate changes on cash - - - 16 - 16
Decrease in cash - (1,688) (594) (42) - (2,324)
Cash, beginning of period - 2,034 1,913 1,324 - 5,271
--------- -------- ------------ ------------ ------------ ------------
Cash, end of period $ - $ 346 $ 1,319 $ 1,282 $ - $ 2,947
--------- -------- ------------ ------------ ------------ ------------
--------- -------- ------------ ------------ ------------ ------------
</TABLE>
12
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
INTRODUCTION
The Company, through its Steinway and Selmer subsidiaries, is one of the
world's leading manufacturers of musical instruments.
Certain statements contained in the following Discussion and Analysis of
Financial Condition and Results of Operations are "forward-looking
statements" within the meaning of Section 21E of the Securities and Exchange
Act of 1934, as amended. These forward-looking statements represent the
Company's present expectations or beliefs concerning future events. The
Company cautions that such statements are necessarily based on certain
assumptions which are subject to risks and uncertainties, including, but not
limited to, changes in general economic conditions, increased competition,
exchange rate fluctuations, and the availability of production capacity which
could cause actual results to differ materially from those indicated herein.
Further information on these risk factors is included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 and its Final
Prospectus filed in August 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 4, 1998 COMPARED TO THREE MONTHS ENDED JUNE 28, 1997
NET SALES - Net sales increased $3.3 million (5%) to $73.1 million in
the second quarter of 1998. Piano sales, fueled by strong domestic demand,
continued growth of the Boston line and improved foreign shipments, increased
$5.0 million (15%) for the quarter. Total piano shipments increased 23%
overall, with both Steinway and Boston shipments increasing over 20%. Band
and orchestral instrument sales decreased $1.7 million (5%) for the second
quarter of 1998 on a 7% decrease in unit shipments. Weak demand and the
strengthening of the U.S. dollar caused export sales to the Far East to
decline 37%, accounting for nearly half of the total sales decline. In
addition, growth in domestic markets was slowed as the Company's competitors
reduced selling prices in an effort to sell domestically those inventories
that had been produced originally for foreign markets. Finally, inadequate
production levels of the new student saxophone continue to negatively impact
sales.
GROSS PROFIT - Consistent with the increase in sales, gross profit
increased by $1.5 million (6%) to $24.5 million in the second quarter of
1998. Gross margins increased from 33.0% in 1997 to 33.6% in 1998. Piano
margins, which increased from 33.5% in 1997 to 35.3% in 1998, have been
primarily affected by yen driven cost reductions in the Boston piano line.
Favorable instrument mix and price realization have also contributed to the
improvement in piano margins. Band and orchestral instrument margins have
been negatively impacted by manufacturing inefficiencies experienced with the
production of the new student saxophone, resulting in a decline in margins
from 32.6% in 1997 to 31.6% in 1998.
OPERATING EXPENSES - Operating expenses increased by $0.3 million (2%)
to $13.7 million in the second quarter of 1998. Expenses decreased as a
percentage of sales from 19.2% in 1997 to 18.7% in 1998.
13
<PAGE>
EARNINGS FROM OPERATIONS - Earnings from operations increased by $1.2
million (13%) to $10.9 million in the second quarter of 1998. 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 $0.3 million in
the second quarter of 1998 to $2.9 million. Lower outstanding balances on
the Company's lines of credit accounted for the decrease.
SIX MONTHS ENDED JULY 4, 1998 COMPARED TO SIX MONTHS ENDED JUNE 28, 1997
NET SALES - Net sales increased $8.7 million (6%) to $152.2 million in
the first six months of 1998. Strong domestic demand for pianos helped offset
a more competitive environment for band instruments. Piano sales increased
$10.2 million (15%) to $76.2 million in 1998 on a 21% increase in unit
shipments. Band and orchestral instrument sales decreased $1.5 million (2%)
to $76.0 million reflecting a 5% decrease in unit shipments. The band
instrument decline can be attributed to weaker export sales where shipments
to the Far East were down $2.2 million from 1997.
GROSS PROFIT - Consistent with the increase in sales, gross profit
increased by $3.9 million (8%) to $50.6 million in the first six months of
1998. Gross margins increased to 33.2% in 1998 compared to 32.5% in 1997.
This improvement is primarily due to an increase in piano margins from 32.5%
in 1997 to 35.4% in 1998. Extremely strong retail piano sales combined with
yen driven cost reductions in the Boston piano line contributed to the
increase. Band and orchestral instrument margins were negatively impacted by
the manufacturing inefficiencies experienced with the introduction of the new
student saxophone, resulting in a decline in margins from 32.5% in 1997 to
31.1% in 1998.
OPERATING EXPENSES - Operating expenses increased by $1.0 million (4%)
to $28.6 million in the first six months of 1998. Expenses decreased as a
percentage of sales from 19.2% in 1997 to 18.8% in 1998.
EARNINGS FROM OPERATIONS - Earnings from operations increased by $2.9
million (15%) to $22.0 million in the first six months of 1998. 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 $0.5 million in
the first six months of 1998 to $5.7 million. Lower outstanding balances on
the Company's lines of credit accounted for the reduction.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily upon cash provided by operations,
supplemented as necessary by seasonal borrowings under its working capital
line, to finance its operations, repay long-term indebtedness and fund
capital expenditures.
Cash used in operations in the first six months decreased $1.1 million
from $14.9 million in 1997 to $13.8 million in 1998. Increased cash earnings
from operations of $1.8 million in 1998 were offset by additional working
capital requirements of $0.7 million. Working capital changes include $4.4
million
14
<PAGE>
used to lower current liability balances, and $3.7 million provided from
lower accounts receivable and other current asset balances.
Capital expenditures were $1.9 million and $2.7 million for the first
six months of 1997 and 1998, respectively. These capital expenditures were
mainly used for the purchase of new machinery and building improvements. The
Company expects to increase its level of capital expenditures in the future
as it modernizes its equipment and renovates its facilities in order to
expand its production capacity and piano restoration services.
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 million, based on eligible accounts receivable and
inventory balances. As of July 4, 1998, $14.0 million was outstanding, with
additional availability of approximately $45.2 million. Open account loans
with foreign banks also provide for borrowings by Steinway's foreign
subsidiaries of up to 25 million deutsche marks ($13,736 at the July 4, 1998
exchange rate).
The Company's long-term financing consists primarily of $110 million of
Senior Subordinated Notes. The Company's debt agreements contain restrictive
covenants that place certain restrictions on the Company, including
restrictions to the Company's ability to incur additional indebtedness, to
make investments in other entities, or to pay cash dividends.
The Company repurchased 41,000 shares of its common stock at a cost of
$1,158 during the first six months 1998, of which 35,000 shares were
repurchased during the second quarter at a cost of $1,025.
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
1998.
NEW ACCOUNTING PRONOUNCEMENTS
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting 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. Comprehensive net income for the first six months of 1997 and
1998 was $3,442 and $8,408, respectively.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on June 12,
1998, the Board of Directors was re-elected in its entirety with 53,129,583
votes cast for re-election and 14,300 votes withheld.
The proposal to ratify Deloitte & Touche, LLP to serve as the
Company's independent public accountants for the fiscal year ending December 31,
1998 was approved with 53,123,269 votes case for, 1,920 votes against, and
18,694 abstentions.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
(a) Exhibits
Exhibit 27.1. Steinway Musical Instruments, Inc. - Financial Data Schedule
Exhibit 27.2 The Selmer Company, Inc. - Financial Data Schedule
(b) Reports on Form 8-K
</TABLE>
The Company did not file any reports on Form 8-K during the quarter
ended July 4, 1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized.
STEINWAY MUSICAL INSTRUMENTS, INC.
/s/ Dana D. Messina
------------------------------
Dana D. Messina
Director, President and Chief Executive Officer
/s/ Dennis M. Hanson
------------------------------
Dennis M. Hanson
Vice President and Chief Financial Officer
THE SELMER COMPANY, INC.
/s/ Thomas T. Burzycki
------------------------------
Thomas T. Burzycki
Director, President and Chief Executive Officer
/s/ Michael R. Vickrey
------------------------------
Michael R. Vickrey
Executive Vice President and Chief
Financial Officer
Date: August 14, 1998
<TABLE> <S> <C>
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<NAME> THE SELMER COMPANY INC.
<MULTIPLIER> 1,000
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