<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 3, 1999
[ ] 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 30, 1999:
<TABLE>
<S> <C>
Class A 477,953
Ordinary 8,777,074
---------
Total 9,255,027
</TABLE>
==============================================================================
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
FORM 10Q
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets
December 31, 1998 and July 3, 1999......................................................3
Condensed Consolidated Statements of Operations
Three months and six months ended July 4, 1998 and July 3, 1999.........................4
Condensed Consolidated Statements of Cash Flows
Six months ended July 4, 1998 and July 3, 1999..........................................5
Notes to Condensed Consolidated Financial Statements........................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................................................18
SIGNATURES.................................................................................19
</TABLE>
2
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, July 3,
1998 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 12,460 $ 3,091
Accounts, notes and leases receivable, net of allowance for
bad debts of $7,512 and $7,113 in 1998 and 1999, respectively 52,451 72,240
Inventories 96,527 96,632
Prepaid expenses and other current assets 2,323 2,548
Deferred tax assets 6,620 6,354
--------------- ---------------
Total current assets 170,381 180,865
Property, plant and equipment, net of accumulated depreciation of
$25,847 and $26,620 in 1998 and 1999, respectively 60,194 87,160
Other assets, net 19,754 18,153
Cost in excess of fair value of net assets acquired, net of accumulated
amortization of $3,728 and $4,026 in 1998 and 1999, respectively 33,598 31,496
--------------- ---------------
TOTAL ASSETS $ 283,927 $ 317,674
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 5,658 $ 6,788
Accounts payable 6,793 5,794
Other current liabilities 29,792 27,106
--------------- ---------------
Total current liabilities 42,243 39,688
Long-term debt 111,370 146,635
Deferred tax liabilities 25,146 22,764
Non-current pension liability 13,411 12,012
--------------- ---------------
Total liabilities 192,170 221,099
--------------- ---------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock 9 9
Additional paid in capital 70,245 70,441
Retained earnings 31,143 40,897
Accumulated other comprehensive income (3,976) (7,855)
Treasury stock (5,664) (6,917)
--------------- ---------------
Total stockholders' equity 91,757 96,575
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 283,927 $ 317,674
=============== ===============
</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 SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
July 4, July 3. July 4, July 3,
1998 1999 1998 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 73,061 $ 76,160 $ 152,161 $ 159,294
Cost of sales 48,529 51,442 101,585 107,149
-------------- -------------- -------------- --------------
Gross profit 24,532 24,718 50,576 52,145
Operating expenses:
Sales and marketing 8,548 8,816 18,005 19,110
General and administrative 4,212 4,176 8,476 8,515
Amortization 957 989 1,908 1,957
Other operating expense 92 50 108 80
-------------- -------------- -------------- --------------
Total operating expenses 13,809 14,031 28,497 29,662
-------------- -------------- -------------- --------------
Income from operations 10,723 10,687 22,079 22,483
Interest expense, net 2,889 3,449 5,727 6,313
Other (income) expense, net (145) (411) 80 (362)
-------------- -------------- -------------- --------------
Income before income taxes 7,979 7,649 16,272 16,532
Provision for income taxes 3,694 3,083 7,520 6,778
-------------- -------------- -------------- --------------
Net income $ 4,285 $ 4,566 $ 8,752 $ 9,754
============== ============== ============== ==============
Net income per share:
Basic $ .46 $ .49 $ .93 $ 1.05
============== ============== ============== ==============
Diluted $ .45 $ .49 $ .92 $ 1.04
============== ============== ============== ==============
Weighted average shares:
Basic 9,363,932 9,236,363 9,364,456 9,250,763
============== ============== ============== ==============
Diluted 9,583,293 9,341,506 9,560,511 9,341,908
============== ============== ============== ==============
</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
-----------------------------
July 4, July 3,
1998 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,752 $ 9,754
Adjustments to reconcile net income to
cash flows from operating activities:
Depreciation and amortization 5,376 5,811
Deferred tax benefit (1,033) (1,003)
Other 186 72
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (20,041) (20,876)
Inventories (2,942) (3,573)
Prepaid expense and other current assets 662 (294)
Accounts payable (1,093) (839)
Accrued expenses (3,676) (1,423)
-------------- --------------
Cash flows from operating activities (13,809) (12,371)
Cash flows from investing activities:
Capital expenditures (2,722) (32,690)
Proceeds from disposals of fixed assets 132 138
Changes in other assets 2,342 (514)
-------------- --------------
Cash flows from investing activities (248) (33,066)
Cash flows from financing activities:
Net borrowings under lines of credit 12,953 15,415
Proceeds from long-term debt 22,500
Repayments of long-term debt (492) (658)
Proceeds from issuance of stock 414 196
Purchase of treasury stock (1,158) (1,253)
-------------- --------------
Cash flows from financing activities 11,717 36,200
Effect of foreign exchange rate changes on cash 16 (132)
-------------- --------------
Decrease in cash (2,324) (9,369)
Cash, beginning of period 5,271 12,460
-------------- --------------
Cash, end of period $ 2,947 $ 3,091
============== ==============
Supplemental Cash Flow Information
Interest paid $ 6,372 $ 6,738
============== ==============
Taxes paid $ 8,877 $ 7,881
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(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 July 4, 1998 and July 3, 1999 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,
1998, 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, 1998. The
results of operations for the six months ended July 3, 1999 are not necessarily
indicative of the results that 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.
RECLASSIFICATIONS - Certain reclassifications of 1998 amounts have been
made to conform to the 1999 financial statement presentation.
INCOME PER SHARE - Basic income per share is computed using the weighted
average number of shares outstanding during each period. Diluted income per
share reflects the effect of the Company's outstanding options using the
treasury stock method. A reconciliation of the weighted average shares used for
the basic and diluted computations for the three month and six month period
ended July 4, 1998 and July 3, 1999 is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares:
For basic income per share 9,363,932 9,236,363 9,364,456 9,250,763
Dilutive effect of stock options 219,361 105,143 196,055 91,145
----------- ---------- ---------- ----------
For diluted income per share 9,583,293 9,341,506 9,560,511 9,341,908
========== ========= ========= =========
</TABLE>
6
<PAGE>
COMPREHENSIVE INCOME - Other comprehensive income includes foreign currency
translation adjustments. Total comprehensive income for the three month and
six month periods ended July 4, 1998 and July 3, 1999 is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
--------------------------------- -------------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 4,285 $ 4,566 $ 8,752 $ 9,754
Other comprehensive income
(loss) 328 (1,326) (344) (3,879)
--------- --------- ---------- ----------
Total comprehensive income $ 4,613 $ 3,240 $ 8,408 $ 5,875
========= ========= ========== ==========
</TABLE>
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, July 3,
1998 1999
--------------- ---------------
<S> <C> <C>
Raw materials $ 15,266 $ 15,379
Work in process 35,010 33,815
Finished goods 46,251 47,438
--------------- ---------------
Total $ 96,527 $ 96,632
=============== ===============
</TABLE>
(4) OTHER (INCOME) EXPENSE, NET
Other (income) expense, net consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
July 4, July 3. July 4, July 3,
1998 1999 1998 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
West 57th Building income $ - $ (1,189) $ - $ (1,189)
West 57th Building expenses 826 826
Foreign exchange loss, net 81 73 160 202
Miscellaneous (226) (121) (80) (201)
-------------- -------------- -------------- --------------
Other (income) expense, net $ (145) $ (411) $ 80 $ (362)
============== ============== ============== ==============
</TABLE>
(5) COMMITMENTS AND CONTINGENT LIABILITIES
Certain environmental matters are pending against a subsidiary of 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 a subsidiary 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.
7
<PAGE>
(6) 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 3, July 4, July 3,
1998 1999 1998 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Current assets $ 167,938 $ 177,823
Total assets 280,991 314,136
Current liabilities 53,712 52,992
Stockholder's equity 97,080 103,034
Total revenues $ 150,701 $ 157,717
Gross profit 50,081 51,665
Net income 8,621 9,833
</TABLE>
(7) SEGMENT INFORMATION
The Company has identified two distinct and reportable segments: the piano
segment and the band and orchestral instrument segment. These segments were
selected based upon the way in which management oversees and evaluates the
results of each operation. The following tables present information about the
Company's operating segments for the three and six month periods ended July 4,
1998 and July 3, 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1998 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 $26,306 $9,043 $3,635 $38,984 $33,138 $939 $34,077 $ - $73,061
Net income 836 257 171 1,264 445 1 446 2,575 4,285
<CAPTION>
THREE MONTHS ENDED 1999 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 $29,101 $8,879 $4,401 $42,381 $32,970 $809 $33,779 $ - $76,160
Net income (loss) 1,353 281 472 2,106 (140) (3) (143) 2,603 4,566
<CAPTION>
SIX MONTHS ENDED 1998 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 $50,601 $17,658 $7,945 $76,204 $74,038 $1,919 $75,957 $ - $152,161
Net income 1,063 541 437 2,041 1,689 41 1,730 4,981 8,752
<CAPTION>
SIX MONTHS ENDED 1999 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 $55,169 $17,875 $8,856 $81,900 $75,659 $1,735 $77,394 $ - $159,294
Net income 2,085 604 717 3,406 1,034 15 1,049 5,299 9,754
</TABLE>
8
<PAGE>
(8) 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 (the "Notes") due 2005 and
available cash balances of the Company. Selmer's payment obligations under the
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").
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 3, 1999
(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 $ - $ - $ 2,032 $ 1,059 $ - $ 3,091
Accounts, notes and leases receivable,
net 58,166 5,789 8,285 72,240
Inventories 34,635 36,761 26,380 (1,144) 96,632
Prepaid expenses and other current
assets 193 1,400 406 549 2,548
Deferred tax assets 1,050 2,819 3,458 (973) 6,354
----------- ----------- ----------- ----------- ----------- -----------
Total current assets 193 95,251 47,807 39,731 (2,117) 180,865
Property, plant and equipment, net 107 13,940 58,514 14,599 87,160
Investment in subsidiaries 71,143 169,387 56,147 (296,677) -
Other assets, net 613 873 11,921 6,059 (1,313) 18,153
Cost in excess of fair value
of net assets acquired, net 9,232 11,006 11,258 31,496
----------- ----------- ----------- ----------- ----------- -----------
TOTAL ASSETS $ 72,056 $ 288,683 $ 185,395 $ 71,647 $(300,107) $ 317,674
=========== =========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current
portion of long-term debt $ - $ - $ - $ 6,788 $ - $ 6,788
Accounts payable 10 2,317 2,522 945 5,794
Other current liabilities (12,894) 7,741 25,081 9,594 (2,416) 27,106
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities (12,884) 10,058 27,603 17,327 (2,416) 39,688
Long-term debt 88 119,976 25,840 731 146,635
Intercompany 21,764 70,550 (96,011) 3,697 -
Deferred tax liabilities 2,161 9,342 11,261 22,764
Non-current pension liability 102 12,012 (102) 12,012
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities 8,968 202,847 (33,226) 45,028 (2,518) 221,099
Stockholders' equity 63,088 85,836 218,621 26,619 (297,589) 96,575
----------- ----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 72,056 $ 288,683 $ 185,395 $ 71,647 $(300,107) $ 317,674
=========== =========== =========== =========== =========== ===========
</TABLE>
10
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JULY 3, 1999
(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 $ - $ 74,783 $ 59,630 $ 29,308 $ (4,427) $ 159,294
Cost of sales 52,753 39,472 19,129 (4,205) 107,149
----------- ----------- ----------- ------------ ------------ -----------
Gross profit - 22,030 20,158 10,179 (222) 52,145
Operating expenses:
Sales and marketing 7,531 7,518 4,123 (62) 19,110
General and administrative 1,438 2,692 2,150 2,235 8,515
Amortization 230 1,074 653 1,957
Other operating (income) expense (1,171) (166) 894 461 62 80
----------- ----------- ------------ ------------ ----------- -----------
Total operating expenses 267 10,287 11,636 7,472 - 29,662
----------- ----------- ----------- ------------ ------------ -----------
Income (loss) from operations (267) 11,743 8,522 2,707 (222) 22,483
Interest expense, net 9,520 (3,461) 254 6,313
Other (income) expense, net (131) (231) (362)
----------- ----------- ----------- ------------ ------------ -----------
Income (loss) before income taxes (267) 2,223 12,114 2,684 (222) 16,532
Provision for (benefit of) income
taxes (120) 1,223 4,531 1,229 (85) 6,778
----------- ----------- ----------- ------------ ------------ -----------
Net income (loss) $ (147) $ 1,000 $ 7,583 $ 1,455 $ (137) $ 9,754
=========== =========== =========== ============ ============ ===========
</TABLE>
11
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JULY 3, 1999
(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) $ (147) $ 1,000 $ 7,583 $ 1,455 $ (137) $ 9,754
Adjustments to reconcile net income
(loss) to cash flows from operating
activities:
Depreciation and amortization 20 1,682 2,707 1,402 5,811
Deferred tax benefit (450) (553) (1,003)
Other 50 45 (23) 72
Changes in operating assets and
liabilities:
Accounts, notes and leases
receivable (21,182) (436) 742 (20,876)
Inventories 3,963 (4,830) (2,928) 222 (3,573)
Prepaid expense and other current
assets (69) 86 1 (312) (294)
Accounts payable 10 612 (1,094) (367) (839)
Accrued expenses (1,940) (3,045) 2,883 764 (85) (1,423)
---------- ----------- ----------- ----------- ----------- -----------
Cash flows from operating activities (2,126) (16,834) 6,409 180 - (12,371)
Cash flows from investing activities:
Capital expenditures (28) (523) (31,773) (366) (32,690)
Proceeds from disposals of fixed assets 138 138
Changes in other assets 267 (781) (514)
---------- ----------- ----------- ----------- ----------- -----------
Cash flows from investing activities (28) (256) (32,554) (228) - (33,066)
Cash flows from financing activities:
Net borrowings (repayments) under
lines of credit (147) 9,976 3,740 1,846 15,415
Proceeds from long-term debt 22,500 22,500
Repayments of long-term debt (165) (493) (658)
Proceeds from issuance of stock 196 196
Purchase of treasury stock (1,253) (1,253)
Intercompany dividends 1,095 3,000 (4,095) -
Intercompany 3,358 3,021 (8,946) 2,567 -
---------- ----------- ----------- ----------- ----------- -----------
Cash flows from financing activities 2,154 14,092 20,129 (175) - 36,200
Effect of exchange rate changes on cash (132) (132)
Decrease in cash - (2,998) (6,016) (355) - (9,369)
Cash, beginning of period 2,998 8,048 1,414 12,460
---------- ----------- ----------- ----------- ----------- -----------
Cash, end of period $ - $ - $ 2,032 $ 1,059 $ - $ 3,091
========== =========== =========== =========== =========== ===========
</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, 1998 and its Final Prospectus filed in August 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 3, 1999 COMPARED TO THREE MONTHS ENDED JULY 4, 1998
NET SALES - Net sales increased $3.1 million (4%) to $76.2 million in
the second quarter of 1999. This growth occurred primarily in domestic shipments
as foreign markets continue to be affected by weak demand in Asia and Europe.
Piano sales increased $3.4 million (9%) in the second quarter of 1999. Overall
piano shipments increased 3%, with Steinway & Sons units increasing 5% over the
prior year period. Band and orchestral instrument sales decreased $0.3 million
(1%) in the second quarter of 1999. Modest price realization, coupled with
improved delivery of higher priced student instruments, resulted in an increase
in overall average selling prices in the quarter. These higher prices
essentially offset a 12% decline in band units, as virtually all of the decline
was in lower priced clarinets and flutes.
GROSS PROFIT - Gross profit increased by $0.2 million (1%) to $24.7
million in the second quarter of 1999. Gross margins decreased from 33.6% in
1998 to 32.5% in 1999. Piano margins decreased from 35.3% in 1998 to 34.9% in
1999 as a result of a stronger yen increasing costs of the Boston line. Band and
orchestral instrument margins were adversely affected by both competitive
pricing constraints and a higher mix of lower margin instruments. This resulted
in a decline in band margins from 31.6% in 1998 to 29.4% in 1999.
OPERATING EXPENSES - Operating expenses increased by $0.2 million (2%)
to $14.0 million in the second quarter of 1999. Expenses as a percentage of
sales decreased from 18.9% in 1998 to 18.4% in 1999.
INCOME FROM OPERATIONS - Income from operations remained flat at $10.7
million in both periods.
13
<PAGE>
INCOME TAXES - The Company's effective tax rate was 46.3% and 40.3% in
the second quarter of 1998 and 1999, respectively. A statutory rate reduction in
Germany, as well as a shift in the geographical distribution of income away from
jurisdictions with higher tax rates, lowered the effective tax rate of the
Company.
SIX MONTHS ENDED JULY 3, 1999 COMPARED TO SIX MONTHS ENDED JULY 4, 1998
NET SALES - Net sales increased $7.1 million (5%) to $159.3 million in
the first six months of 1999. Piano sales increased $5.7 million (7%) in 1999 on
unit increases of 3% for Steinway grand pianos and 6% for the Boston line. Band
and orchestral instrument sales increased $1.4 million (2%) in the first six
months of 1999 as a result of a shift in unit sales toward higher priced
instruments. This offset an overall unit decline in band instruments of 3%.
GROSS PROFIT - Consistent with the increase in sales, gross profit
increased by $1.6 million (3%) to $52.2 million in the first six months of 1999.
Gross margins declined from 33.2% in 1998 to 32.7% in 1999. Band and orchestral
instrument margins were negatively impacted by a shift toward lower margin
instruments, as well as competitive pricing constraints, resulting in a decline
in margins from 31.1% in 1998 to 29.6% in 1999. Piano margins increased slightly
from 35.4% in 1998 to 35.7% in 1999.
OPERATING EXPENSES - Operating expenses increased by $1.2 million (4%)
to $29.7 million in the first six months of 1999. Expenses as a percentage of
sales decreased slightly from 18.7% in 1998 to 18.6% in 1999.
INCOME FROM OPERATIONS - Income from operations increased by $0.4
million (2%) to $22.5 million in the first six months of 1999. These improved
earnings resulted from increased sales and firm control over operating expenses.
INCOME TAXES - The Company's effective tax rate was 46.2% and 41.0% in
the first six months of 1998 and 1999, respectively. A statutory rate reduction
in Germany, as well as a shift in the geographical distribution of income away
from jurisdictions with higher tax rates, lowered the effective tax rate of the
Company.
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 was $13.8 million in
1998 and $12.4 million in 1999. The decrease in cash used in operations in 1999
resulted from $1.0 million of additional cash earnings from operations and $0.4
million of non-cash expenses. The net working capital requirements were $27.0
million in both years.
During the first quarter of 1999, the Company acquired the Steinway
Hall building located on West 57th Street in New York City for approximately
$30.8 million. Funds for the acquisition were provided from cash on hand and a
new $22.5 million mortgage loan provided by the Company's existing
14
<PAGE>
lender. This loan, which has a five year term, is due in monthly installments
of $0.2 million based on a twenty-five year amortization, and bears interest
at the 30-day Libor rate plus 1.5%.
Additional capital expenditures of $2.7 million and $1.9 million in the
first six months of 1998 and 1999, respectively, were primarily used for the
purchase of new machinery and building improvements. The Company expects to
maintain this level of capital spending in the future as it continues to
modernize its equipment and renovate its facilities in order to improve its
production efficiency.
The Company's domestic, seasonal borrowing requirements are
accommodated through a committed, revolving credit facility with a domestic bank
(the "Credit Facility"). The Credit Facility provides the Company with a
potential borrowing capacity of up to $60 million, based on eligible accounts
receivable and inventory balances. The Credit Facility, as amended on May 21,
1999, bears interest at the Eurodollar rate plus 1.25% and expires April 1,
2004. As of July 3, 1999, $13.6 million was outstanding and availability was
approximately $45.6 million. Open account loans with foreign banks also provide
for borrowings by Steinway's foreign subsidiaries of up to 30 million Deutsche
marks ($15.7 million at the July 3, 1999 exchange rate).
The Company's long-term financing consists primarily of $110 million of
Senior Subordinated Notes and the $22.5 million mortgage loan. 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.
Beginning on June 1, 2000, the Senior Subordinated Notes may be redeemed at the
Company's option, in whole or in part, at 104.125% of the principal amount plus
accrued and unpaid interest thereon to the applicable redemption date.
The Company repurchased 25,500 shares of its common stock at a cost of
$0.6 million during the second quarter of 1999. A total of 55,900 shares have
been repurchased in 1999 at a cost of $1.3 million.
Management believes that cash on hand, together with cash flow
anticipated from operations and available borrowings under the Credit Facility,
will be adequate to meet debt service requirements, fund continuing capital
requirements and satisfy working capital and general corporate needs through
1999.
YEAR 2000 COMPLIANCE - The Year 2000 issue is the result of computer
programs being written using two digits rather than four digits to define the
applicable year. Computer programs and hardware that are date sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000. The
Company's products, which are finely crafted instruments, do not contain
software programs and therefore this issue will not affect their functionality.
However, it could cause some disruptions of internal operations, including,
among other things, a temporary inability to process transactions or engage in
normal business activities.
The Company has focused its Year 2000 review in the following areas:
(1) information technology ("IT") systems such as hardware and software; (2)
non-IT systems such as manufacturing, distribution and facility equipment
containing embedded microprocessors; and (3) the readiness of third-parties such
as suppliers and customers. An inventory of all IT and non-IT systems has been
taken and efforts are underway to insure that the appropriate testing and
remediation or replacement occurs.
Virtually all of the Company's critical manufacturing and accounting
information systems have been tested for Year 2000 compliance. Many of the
critical information systems were replaced over the
15
<PAGE>
past two years with Year 2000 compliant programs in the normal course of
business. The Company intends to replace or upgrade non-compliant IT hardware
and software systems by the end of the third quarter of 1999.
Preliminary testing of non-IT systems and equipment indicates that many
of these systems rely on time intervals rather than dates in their operation.
The Company is contacting the manufacturers of the non-IT equipment used in
production to obtain assurances as to whether the manufacturers' systems are
Year 2000 compliant. Testing and remediation of these systems will continue
throughout 1999.
The Company has communicated with major suppliers and customers to
determine the extent to which the Company may be vulnerable if a supplier fails
to correct their own Year 2000 issue. Most suppliers and customers who have
replied to our inquiries indicated that they expect to be Year 2000 compliant on
a timely basis. There can be no assurance, however, that third parties will
address the Year 2000 issue in a timely manner.
Based on its review to date, the Company believes the Year 2000 problem
will not pose significant internal operational disruptions. Events beyond the
Company's reasonable control could adversely affect the Company's ability to
produce and deliver its products in a timely manner. These events could include
failure of infrastructure systems, including power, heat and water; disruptions
in distribution channels; or the inability of suppliers and customers to engage
in normal business activities. In the third quarter of 1999, the Company will
develop a contingency plan based on the magnitude and probability that
operational disruptions may still occur on January 1, 2000. The Company
currently believes that the risk of disruption will be minimal since its
operations are geographically dispersed and rely on a large supplier and
customer base.
The Company does not expect the costs associated with its Year 2000
compliance to be material. Internal employees, whose salaries and wages are
included in normal operating expenses, have modified many of the Company's
information technology systems. Less than $1 million has been spent to date and
future costs are not anticipated to be material to its financial position or
results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. This statement requires that all derivatives be recognized at fair
value in the balance sheet, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
The statement will be effective for the Company in fiscal 2001. Management is
currently evaluating the effect of adopting SFAS No. 133 on the consolidated
financial statements.
16
<PAGE>
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is subject to market risk associated with changes in
foreign currency exchange rates and interest rates. The Company mitigates its
foreign currency exchange rate risk by maintaining foreign currency cash
balances and holding forward foreign currency contracts. These contracts are
used as a hedge against intercompany transactions and are not used for trading
or speculative purposes. The fair value of the forward foreign currency exchange
contracts is sensitive to changes in foreign currency exchange rates. The impact
of an adverse change in foreign currency exchange rates would not be materially
different than that disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
The Company's Credit Facility and mortgage loan bear interest at rates
that fluctuate with changes in the Eurodollar rate and the Libor rate,
respectively. Substantially all of the Company's long-term debt, except the
mortgage loan referred to above, is at fixed interest rates. Accordingly, the
Company's interest expense on its Credit Facility and mortgage loan and the fair
value of its fixed long-term debt is sensitive to changes in market interest
rates. The effect of an adverse change in market interest rates on the Company's
interest expense and the fair value of its long-term debt would not be
materially different than that disclosed in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
17
<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 11, 1999,
the Board of Directors was re-elected in its entirety. The votes cast for each
nominee were as follows:
<TABLE>
<CAPTION>
For Against
<S> <C> <C>
Kyle Kirkland 53,541,340 3,106
Dana D. Messina 53,541,378 3,068
Thomas T. Burzycki 53,541,429 3,017
Bruce A. Stevens 53,541,442 3,004
Peter McMillan 53,541,329 3,117
</TABLE>
The proposal to ratify Deloitte & Touche, LLP to serve as the Company's
independent public accountants for the fiscal year ending December 31, 1999 was
approved with 53,538,420 votes cast for, 776 votes against, and 5,250
abstentions.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit # Description
- --------- -----------
<S> <C>
4.1 Fifth Amendment, Consent, Waiver and Agreement, dated as of May 21,
1999, 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
10.1 Employment Agreement, dated January 4, 1999, between Steinway Musical
Instruments, Inc. and Dana D. Messina
10.2 Employment Agreement, dated January 4, 1999, between Steinway Musical
Instruments, Inc. and Kyle R. Kirkland
27.1. Steinway Musical Instruments, Inc. - Financial Data Schedule
27.2 The Selmer Company, Inc. - Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended July 3, 1999.
18
<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 16, 1999
19
<PAGE>
EXHIBIT 4.1
EXECUTION COPY
FIFTH AMENDMENT, CONSENT, WAIVER AND AGREEMENT
FIFTH AMENDMENT, CONSENT, WAIVER AND AGREEMENT, dated as of May 21,
1999 (this "AMENDMENT"), to the Existing Credit Agreement (as hereinafter
defined), by and among (i) THE SELMER COMPANY, INC., a Delaware corporation
f/k/a Symphony Industries, Inc. ("SELMER"), (ii) STEINWAY, INC., a Delaware
corporation ("STEINWAY" and, together with Selmer, the "BORROWERS"), (iii)
STEINWAY MUSICAL INSTRUMENTS, INC., a Delaware corporation f/k/a Selmer
Industries, Inc. ("SMI"), (iv) BOSTON PIANO COMPANY, INC., a Massachusetts
corporation ("BOSTON PIANO CO."), (v) THE SMI TRUST, a Massachusetts business
trust ("SMIT"), (vi) S&B RETAIL, INC., a Delaware corporation ("S&B RETAIL"),
(vii) EMERSON MUSICAL INSTRUMENTS, INC., a Delaware corporation ("EMERSON"),
(viii) THE STEINWAY PIANO COMPANY, INC., a Delaware corporation ("SPC"; and
together with the foregoing parties, the "CREDIT PARTIES") and (ix) BNY
FINANCIAL CORPORATION, a New York corporation (the "LENDER").
RECITALS
The Borrowers and the other Credit Parties and Lender have entered
into the Existing Credit Agreement, pursuant to which the Lender is providing to
the Borrowers a $60,000,000.00 revolving credit and term loan facility and a
$22,500,000 term loan facility, which are secured by certain accounts receivable
and other collateral of the Borrowers and guaranteed by the other Credit
Parties. The Credit Parties have requested that the Lender: (i) permit them to
use net cash balances to prepay amounts owing to SMIT under the SMIT Notes (as
defined below) and from time to time reborrow any amounts so repaid; (ii)
consent to the DM 3.100.000 loan by SMIT to Boston Piano GmbH; and (iii) waive
certain provisions of the Existing Credit Agreement and the other Credit
Documents which would otherwise prohibit the consummation of some or all of the
Transactions (as defined below). Subject to the terms and conditions hereof, the
Lender is willing to permit such prepayments and reborrowings, permit such loan
and to waive such provisions of the Existing Credit Agreement and the other
Credit Documents.
In consideration of the foregoing and of the mutual covenants and
undertakings herein contained, the parties hereto hereby agree that the Existing
Credit Agreement is amended as hereinafter provided.
ARTICLE I
Definitions
1. DEFINITIONS. (a) In addition to the definitions set forth in the
heading and the recitals to this Amendment, the following definitions shall
apply hereto:
"AGREEMENT" shall mean the Amended and Restated Revolving Credit, Term
Loan and Security Agreement, dated as of May 25, 1995, by and among Selmer,
Steinway, SMI, SMP, Boston Piano Co. and the Lender, as amended, supplemented or
otherwise modified from time to time up to and including this Amendment.
"BOSTON PIANO LOAN" shall mean that certain DM 3.100.000 loan from
SMIT to Boston Piano GmbH, as evidenced by that certain Promissory Note, dated
May 21, 1999 from Boston Piano GmbH to SMIT.
"CURRENT INTEREST NOTES" shall mean (i) that certain Demand Promissory
Note of Selmer to SMIT dated December 16, 1998 in an aggregate principal amount
of $12,836,076, (ii) that certain Demand Promissory Note of Steinway to SMIT
dated March 24, 1999 in an aggregate principal amount
<PAGE>
of $2,933,000 and (iii) that certain Demand Promissory Note of Steinway to SMIT
dated March 29, 1999 in an aggregate principal amount of $621,000.
"EXISTING CREDIT AGREEMENT" shall mean the Amended and Restated
Revolving Credit, Term Loan and Security Agreement, dated as of May 25, 1995, by
and among Selmer, Steinway, SMI, SMP, Boston Piano Co. and the Lender, as
amended by: (i) the First Amendment, Consent, Waiver and Agreement, dated as of
December 31, 1996, to the Existing Credit Agreement (as defined therein) by and
among Selmer, Steinway, SMI, SMP, Boston Piano Co., SMIT, S&B Retail and the
Lender; (ii) the Second Amendment, dated as of January 1, 1997, to the Existing
Credit Agreement (as defined therein), by and among Selmer, Steinway, SMI,
Boston Piano Co., SMIT, S&B Retail and the Lender; (iii) the Third Amendment,
Consent, Waiver And Agreement, dated as of January 31, 1997, to the Existing
Credit Agreement (as defined therein), by and among the Credit Parties and the
Lender and (iv) the Fourth Amendment and Agreement, dated as of April 1, 1999,
to the Existing Credit Agreement (as defined therein), by and among the Credit
Parties and the Lender as amended, supplemented or otherwise modified from time
to time prior to the Fifth Amendment Effective Date.
"FIFTH AMENDMENT DOCUMENTS" shall mean this Amendment, and all other
agreements, instruments and documents, if any, executed or delivered pursuant to
or in connection with this Amendment and the transactions contemplated hereby
and thereby.
"SELMER NOTE" shall mean that certain Promissory Note of Selmer to
SMIT dated September 4, 1996, in an aggregate principal amount of
$62,305,000.00, a copy of which is attached hereto as Exhibit I.
"SELMER REVOLVING INTEREST NOTE" shall mean that certain Revolving
Promissory Note dated May 21, 1999, in an aggregate principal amount not to
exceed $30,000,000 by Selmer to SMIT.
"SELMER PREPAYMENTS/REBORROWINGS" shall mean Selmer's use of net cash
balances in excess of $500,000.00 from time to time to prepay amounts owing to
SMIT under the Selmer Note and Selmer's reborrowing from time to time of any
amounts so repaid.
"SMIT REVOLVING INTEREST NOTES" shall mean the Selmer Revolving
Interest Note and the Steinway Revolving Interest Note.
"SMIT NOTES" shall mean the Selmer Note, the Steinway Note, and the
SMIT Revolving Interest Notes.
"STEINWAY NOTE" shall mean that certain Promissory Note of Steinway
Musical Properties, Inc. to the Selmer Company, Inc., dated May 25, 1995, in an
aggregate principal amount of $80,000,000.00 a copy of which is attached hereto
as Exhibit II.
"STEINWAY REVOLVING INTEREST NOTE" shall mean that certain
Revolving Promissory Note, dated May 21, 1999, in an aggregate principal
amount not to exceed $30,000,000 by Steinway to SMIT.
"STEINWAY PREPAYMENTS/REBORROWINGS" shall mean Steinway's use of
net cash balances in excess of $500,000.00 from time to time to prepay
amounts owing to SMIT under the Steinway Note and Steinway's reborrowing from
time to time of any amounts so repaid.
"TRANSACTIONS" shall mean the collective reference to (i) the
Selmer Prepayments/Reborrowings; (ii) the Steinway Prepayments/Reborrowings
and (iii) the Boston Piano Loan, in each instance to the extent and as more
fully described in this Amendment.
-2-
<PAGE>
(b) Unless otherwise indicated, capitalized terms that are used but
not defined herein shall have the meanings ascribed to them in the Existing
Credit Agreement.
ARTICLE II
Representations
1. REPRESENTATIONS. Each of the Credit Parties hereby represents and
warrants as follows:
(a) It has full power, authority and legal right, to enter into this
Amendment and each of the other Fifth Amendment Documents to which it is a party
and perform all of its respective obligations hereunder and thereunder. The
execution, delivery and performance hereof and thereof are within its powers and
have been duly authorized, are not in contravention of any law(s) which might
have a material adverse effect upon it, the Collateral, its operations,
financial condition or prospects, or in contravention of the terms of its
by-laws, certificate of incorporation, declaration of trust or other documents
relating to its formation, as applicable, or to the conduct of its business or
of any material agreement or undertaking to which it is a party or by it is
bound, and will not conflict with or result in any breach of any of the
provisions of, or constitute a default under, or result in the creation of any
Lien upon any of its assets under, the provisions of any agreement, charter,
instrument, by-law, declaration of trust or other instrument to which it is a
party or by which it or its assets may be bound.
(b) It is duly organized and in good standing under the laws of its
respective state of organization and it is qualified to do business and is in
good standing in the states listed on SCHEDULE 5.2 of the Existing Credit
Agreement, which constitute all states in which qualification and good standing
are necessary for it to conduct its businesses and own its properties and where
the failure to so qualify would have a material adverse effect on it or its
businesses.
(c) This Amendment and each of the other Fifth Amendment Documents to
which it is a party have been duly executed and delivered on its behalf and this
Amendment and each of the other Fifth Amendment Documents to which it is a party
constitute its legal, valid and binding obligation, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general equitable principles
(whether enforcement is sought by proceedings in equity or at law).
(d) The conditions contained in Article VI hereof have been satisfied.
(e) Each of the Credit Documents is on the date hereof in full force
and effect.
(f) No Default or Event of Default has occurred and is continuing.
ARTICLE III
Amendments to Existing Credit Agreement
1. AMENDMENTS TO SECTION 1. (a) Section 1.1 of the Existing Credit
Agreement is hereby amended by inserting the following new definitions therein
in the appropriate alphabetical order:
"BLOCKED ACCOUNT AGREEMENT" shall mean that certain Blocked
Account Agreement, dated as of the date hereof, by and among SMIT,
BNYFC and The Bank of New York, as the same may be amended,
supplemented or modified from time to time.
"BOSTON PIANO LOAN" shall mean that certain DM 3.100.000
loan from SMIT to Boston Piano GmbH, as evidenced by that certain
Promissory Note, dated May 21, 1999 from Boston Piano GmbH to SMIT.
-3-
<PAGE>
"FIFTH AMENDMENT" shall mean the Fifth Amendment,
dated as of May 21, 1999, to the Existing Credit Agreement (as defined
therein), by and among Selmer, Steinway, SMI, Boston Piano Co., SMIT,
S&B Retail, Emerson, SPC and the Lender.
"FIFTH AMENDMENT DOCUMENTS" shall mean the Fifth Amendment,
the Blocked Account Agreement, the First Amendment to Pledge
Agreement, dated as of May 21, 1999 by and between SMIT and the
Lender, and all other agreements, instruments and documents, if any,
executed or delivered pursuant to or in connection with the Fifth
Amendment and the transactions contemplated thereby.
"FIFTH AMENDMENT EFFECTIVE DATE" shall mean the date on
which all of the conditions precedent to the effectiveness of the
Fifth Amendment set forth in Article VI of the Fifth Amendment are
first satisfied or waived.
"SELMER REVOLVING INTEREST NOTE" shall mean that certain
Revolving Promissory Note dated May 21, 1999, in an aggregate
principal amount not to exceed $30,000,000.00 by Selmer to SMIT.
"SELMER PREPAYMENTS/REBORROWINGS" shall mean Selmer's
use of net cash balances in excess of $500,000.00 from time to time to
prepay amounts owing to SMIT under the Selmer Note and Selmer's
reborrowing from time to time of any amounts so repaid.
"SMIT REVOLVING INTEREST NOTES" shall mean the Selmer
Revolving Interest Note and the Steinway Revolving Interest Note.
"SMIT NOTES" shall mean the Selmer Note, the Steinway
Note, and the SMIT Revolving Interest Notes.
"SMIT BLOCKED ACCOUNT" shall mean that certain Account No.
_____________ at The Bank of New York.
"STEINWAY REVOLVING INTEREST NOTE" shall mean that certain
revolving Promissory Note, dated May 21, 1999, in an aggregate
principal amount not to exceed $30,000,000.00 by Steinway to SMIT.
"STEINWAY PREPAYMENTS/REBORROWINGS" shall mean
Steinway's use of net cash balances in excess of $500,000.00 from time
to time to prepay amounts owing to SMIT under the Steinway Note and
Steinway's reborrowing from time to time of any amounts so repaid.
(b) Section 1.1 of the Existing Credit Agreement is hereby amended by
deleting the definition of "Credit Documents" in its entirety and replacing it
with the following:
"CREDIT DOCUMENTS" shall be the collective reference to this
Agreement, the First Amendment, the Second Amendment, the Third
Amendment, the Fourth Amendment, the Fifth Amendment, the Term Note
(if any), the Guarantees, the Letter of Credit Documents and the
Security Documents.
2. AMENDMENT TO SECTION 4.15(h). Section 4.15(h) is hereby amended by
inserting the words "including, but not limited to, the SMIT Blocked Account"
after the words " or other blocked accounts" into the fifth line of said
section.
3. AMENDMENTS TO SECTION 7. (a) Section 7.15 of the Existing
Credit Agreement is hereby amended by (i) deleting the word "or" between
"terminated," and "(iii) the exchange" in the second sentence thereof and (ii)
incorporating at the end of the second sentence thereof the following:
-4-
<PAGE>
", or (iv) the Selmer Prepayments/Reborrowings and the Steinway
Prepayments/Reborrowings, PROVIDED that (A) BNYFC must receive oral notice of
any such prepayment or reborrowing, to be immediately followed by a writing from
the Borrower making such prepayment or reborrowing in the form attached hereto
as EXHIBIT 7.15; (B) the amount of any such prepayment or reborrowing shall not
exceed the difference between (I) the net cash balance available for any such
prepayment or reborrowing MINUS (II) any Advances outstanding under this
Agreement, (C) at the time such prepayment or reborrowing is requested no
Default or Event of Default shall have occurred and be continuing; (D) any such
prepayment or reborrowing shall be subject to BNYFC's prior written approval, in
its sole and absolute discretion; and (E) from and after the date hereof, all
payments and/or prepayments of principal and/or interest made by Selmer or
Steinway under the SMIT Notes shall be made to the SMIT Blocked Account which
shall at all times be subject to a Blocked Account Agreement."
(b) Section 7 is hereby amended by incorporating at the end thereof
the following section:
"7.21. INTEREST NOTES. At any time permit either of the Selmer
Revolving Interest Note or the Steinway Revolving Interest Note to have a
balance in excess of $30,000,000."
4. AMENDMENT TO EXHIBIT 7.15. Exhibit 7.15 shall read as set forth on
Exhibit 7.15 attached hereto.
ARTICLE IV
Waivers
The Lender hereby waives, pursuant to Section 14.14 of the Existing
Credit Agreement, any Default or Event of Default arising as a result of the
failure by either of the Borrowers or any other Credit Party, as applicable, to
comply with or to satisfy the requirements of:
1. Section 7.5 of the Agreement, but only with respect to the Boston
Piano Loan; and
2. Section 4.3 of the Agreement, but only with respect to the Boston
Piano Loan.
ARTICLE V
Consents
The Lender hereby consents to the Transactions.
ARTICLE VI
Conditions to Effectiveness
This Amendment, and the modifications to the Credit Agreement provided
for herein, shall become effective on the date (the "FIFTH AMENDMENT EFFECTIVE
DATE") on which all of the following conditions have been (or are concurrently
being) satisfied:
1. The following documents shall have been duly executed and delivered
by each party thereto:
(i) this Amendment; and
(ii) the other Fifth Amendment Documents.
2. Each of the representations and warranties made by the Credit
Parties in or pursuant to the Credit Documents shall be true and correct in all
material respects on and as of the Fifth
-5-
<PAGE>
Amendment Effective Date as if made on and as of such date (except to the extent
the same relate to another, earlier date, in which case they shall be true and
correct in all material respects as of such earlier date).
3. No Default or Event of Default shall have occurred and be
continuing.
4. The Lender shall have received each additional document,
instrument, legal opinion or item of information reasonably requested by the
Lender, including, without limitation, a copy of any debt instrument, security
agreement or other material contract to which a Credit Party may be a party.
5. All corporate and other proceedings, and all documents, instruments
and other legal matters in connection with the transactions contemplated by the
Existing Credit Agreement, the Credit Agreement, this Amendment and the other
Fifth Amendment Documents shall be reasonably satisfactory in form and substance
to the Lender, and the Lender shall have received such other documents in
respect of any aspect or consequence of the transactions contemplated hereby or
thereby as it shall reasonably request.
6. The replacement of the Current Interest Notes with the SMIT
Revolving Interest Notes.
ARTICLE VII
Miscellaneous
1. PAYMENT OF EXPENSES. Without limiting its obligations under Section
14.13 of the Agreement, the Borrowers jointly and severally agree to pay or
reimburse the Lender for all of its reasonable costs and expenses incurred in
connection with this Amendment and the other Fifth Amendment Documents,
including, without limitation, the reasonable costs and expenses of Cadwalader,
Wickersham & Taft, counsel to the Lender and expressly acknowledge that their
obligations hereunder constitute "Obligations" within the meaning of the
Existing Credit Agreement.
2. NO OTHER AMENDMENTS; CONFIRMATION. Except as expressly amended,
modified and supplemented hereby and by the documents related hereto, the
provisions of the Existing Credit Agreement and the other Credit Documents shall
remain in full force and effect.
3. AFFIRMATION BY CREDIT PARTIES. Each Credit Party hereby consents to
the execution and delivery of this Amendment and each of the other Fifth
Amendment Documents to which such Credit Party is a party and reaffirms its
obligations under the Credit Documents executed by such Credit Party.
4. GOVERNING LAW; COUNTERPARTS. (a) This Amendment and the rights and
obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.
(b) This Amendment may be executed by one or more of the parties
hereto on any number of separate counterparts, and all of said counterparts
taken together shall be deemed to constitute one and the same instrument. A set
of the copies of this Amendment signed by all the parties shall be lodged with
each of the Borrowers and the Lender. This Amendment may be delivered by
facsimile transmission of the relevant signature pages hereof.
[ SIGNATURE PAGES FOLLOW ]
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered as of the day and year first above written.
THE SELMER COMPANY, INC.
By /s/ Dennis M. Hanson
---------------------------------------------
Name: Dennis M. Hanson
Title: Vice President
STEINWAY, INC.
By /s/ Dennis M. Hanson
---------------------------------------------
Name: Dennis M. Hanson
Title: Vice President
STEINWAY MUSICAL INSTRUMENTS, INC.
By /s/ Dennis M. Hanson
---------------------------------------------
Name: Dennis M. Hanson
Title: Vice President
BOSTON PIANO COMPANY, INC.
By /s/ Dennis M. Hanson
---------------------------------------------
Name: Dennis M. Hanson
Title: Vice President
THE SMI TRUST
By /s/ Dennis M. Hanson
---------------------------------------------
Name: Dennis M. Hanson
Title: Trustee
[SIGNATURE BLOCKS CONTINUED ON NEXT PAGE]
-7-
<PAGE>
S&B RETAIL, INC.
By /s/ Dennis M. Hanson
---------------------------------------------
Name: Dennis M. Hanson
Title: Vice President
EMERSON MUSICAL INSTRUMENTS, INC.
By /s/ Dennis M. Hanson
---------------------------------------------
Name: Dennis M. Hanson
Title: Vice President
THE STEINWAY PIANO COMPANY
By /s/ Dennis M. Hanson
---------------------------------------------
Name: Dennis M. Hanson
Title: Vice President
BNY FINANCIAL CORPORATION
By /s/ James Belanger
---------------------------------------------
Name: James Belanger
Title: Vice President
-8-
<PAGE>
EXHIBIT 7.15
[Selmer Company, Inc.]
[Steinway, Inc.]
800 South Street
Suite 425
Waltham, Massachusetts 02154-4139
BNY Financial Corporation
4201 Wilshire Boulevard
Room 450
Los Angeles, California 90010
As discussed in our phone conversation of ___________________,
and as permitted under the provision of Section 7.15 of the Amended and Restated
Revolving Credit, Term Loan and Security Agreement, dated as of May 25, 1995, by
and among Selmer, Steinway, SMI, SMP, Boston Piano Co. and the Lender, as
amended, supplemented or otherwise modified from time to time (the "AGREEMENT"),
the undersigned requests that the Lender effect a [prepayment] [reborrowing]
under the [Selmer] [Steinway] Note in the amount of $__________. After giving
effect to such [prepayment] [reborrowing], the following are the outstanding
balances of the SMIT Notes
Selmer Note:
Selmer Revolving Interest Note:
Steinway Note:
Steinway Revolving Interest Note:
All capitalized terms used herein shall have the meaning
ascribed to them in the Agreement.
[THE SELMER COMPANY, INC.]
[STEINWAY, INC.]
By
---------------------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT OF DANA D. MESSINA
This Employment Agreement (this "AGREEMENT") is entered into as of this
4th day of January, 1999, by and between Steinway Musical Instruments, Inc., a
Massachusetts corporation (the "COMPANY"), and Dana D. Messina (the
"EXECUTIVE").
1. TERM OF EMPLOYMENT. The Company agrees to employ the Executive, and
the Executive hereby agrees to accept employment, commencing on the date hereof,
and terminating December 31, 2006, unless otherwise terminated in accordance
with the terms set forth in PARAGRAPH 7 of this Agreement (including any
extensions, the "TERM").
2. DUTIES AND RESPONSIBILITIES. The Executive shall be employed as the
President and Chief Executive Officer of the Company, and shall perform such
duties as are from time to time assigned to him by the Board of Directors of the
Company (the "BOARD") and that are normally associated with such position.
3. COMPENSATION.
a. For all services to be performed by the Executive during the
Term, the Company shall pay to him, together with other compensation as
hereinafter provided, an annual salary of $200,000 (subject to such deductions
and withholdings as may be required by law or by further agreement with the
Executive), payable in arrears biweekly.
b. The Executive shall be eligible to receive annual salary
increases based on his performance of his duties, but any such increases shall
be in the sole and absolute discretion of the Board.
4. BENEFITS. In addition to any other items of compensation provided
for in this Agreement, the Executive shall be entitled to the following benefits
(the "BENEFITS"):
a. The Executive shall be entitled to participate in any
retirement, life insurance, health, medical, disability or other plans or
benefits, whether insured or self-insured, which the Company in its sole and
absolute discretion may make available generally from time to time to its
executives. The Company shall also reimburse the Executive for all medical
expenses incurred which are not otherwise covered by an existing benefit plan.
b. The Executive shall be entitled to vacation in accordance with
the Company's current vacation policy during each year of this Agreement.
5. REIMBURSEMENT OF EXPENSES. The Executive shall be entitled to be
reimbursed for all reasonable travel and entertainment expenses that are (a)
incurred by him in the performance of his duties hereunder and (b) evidenced by
appropriate documentation.
6. RESTRICTIVE COVENANTS. The Executive acknowledges that certain of
the Company's products and services are proprietary in nature and have been
manufactured, assembled and marketed through the use of customer lists, supplier
lists, trade secrets, methods of operation and other confidential information
possessed by the Company and disclosed in confidence to the Executive (the
"TRADE SECRETS"), which may not be easily accessible to other persons in the
trade. The Executive also acknowledges that he will have substantial and ongoing
contact with the Company's customers and suppliers and will thereby gain
knowledge of
<PAGE>
customer needs and references, sources of equity funding, sources of supply,
methods of assembly and other valuable information necessary for the success of
the Company's business. Therefore, except as provided in SUBPARAGRAPHS (a) AND
(d) below, and except as provided in PARAGRAPH 8, during the time the Executive
is employed under the provisions of this Agreement and until the date of the
second anniversary of the termination of the executive's employment, the
Executive shall not, without the prior written consent of the Company:
a. During the Term, engage in any business activity that competes
with the Company in the manufacturing of musical instruments or other business
in which the Company is engaged, or exploits or utilizes any of the Trade
Secrets; PROVIDED, HOWEVER, that the Executive may invest in any publicly-traded
company that is similar in nature to the business in which the Company is
engaged, provided that such investment shall not exceed 5% of the equity
interest in such company on a fully diluted basis;
b. Solicit any person employed by the Company or any affiliate of
the Company, appointed as a representative of the Company, or any affiliate of
the Company, to join him as a partner, co-venturer, employee, investor or
otherwise, in any substantial business activity whatsoever;
c. Intentionally disclose or reveal any Trade Secrets or other
confidential information of the Company to anyone which disclosure results in
harm to the Company; or
d. Become employed by or associated with, any entity that owns,
operates, manages or has a substantial interest in any business activity that
competes with the Company in the manufacturing of musical instruments or other
significant business in which the Company is engaged, or exploits or utilizes
any of the Trade Secrets; PROVIDED, HOWEVER, if the Executive's employment is
terminated by the Company other than for Cause (as defined herein), said period
for the purposes of this SUBPARAGRAPH d shall be reduced to one year after the
termination of his employment.
7. TERMINATION.
a. The Company shall have the option to terminate the Executive's
employment for "CAUSE", which shall be defined as follows: (i) any felony
committed by the Executive in connection with the performance of the Executive's
duties to the Company that causes damage to the Company or any of its
properties, assets or businesses; (ii) any fraud, misappropriation or
embezzlement by the Executive involving properties, assets or funds of the
Company; (iii) a conviction of the Executive, or plea of NOLO CONTENDERE by the
Executive, to any crime or offense involving monies or other property of the
Company; or (iv) the violation by the Executive of any non-competition or
confidentiality agreement with the Company. In the event of termination of the
Executive's employment for Cause, any obligation of the Company to provide any
compensation and Benefits to him, as herein set forth, shall cease immediately
except as provided in PARAGRAPH 11.
b. In the event of termination of the Executive's employment by
reason of death or permanent disability, he and/or his estate shall be entitled
to his salary and Benefits under the terms of this Agreement for a period of six
months following the date of his death or the date upon which he becomes
permanently disabled, in addition to any other benefits provided by the Company.
<PAGE>
c. In the event of termination of the Executive's employment by
reason of his registration, written notice of which shall be given by him to the
Company at least sixty days prior thereto, he shall be entitled to his salary
and Benefits hereunder up to the date of such termination, subject to extension
of Benefits required by any governmental laws and regulations.
8. NON-RENEWAL. If the Company does not offer to renew this Employment
Agreement at the expiration of the Term upon the same terms hereof or upon
modified terms as mutually agreed upon by the Executive and the Company, the
terms of PARAGRAPH 6(d) shall not apply and the Company shall pay to the
Executive a severance benefit on the date of the non-renewal of not less than
five times his latest annual salary plus bonus in consideration for which the
Executive agrees that he will not become employed by or associated with any
entity which owns, operates, manages, or has a substantial interest in any
business activity that competes with the Company as a manufacturer of musical
instruments for a period of five years after the date of the non-renewal.
9. INDEMNIFICATION. The Company agrees to indemnify the Executive to
the same extent that the Company agrees to indemnify other officers and
directors of the Company in their capacity as such. The Company further agrees
that such indemnification shall survive the Executive's resignation, termination
or expiration of this Agreement, with respect to actions taken by him during his
employment with the Company, unless such actions could have been grounds for
termination for Cause.
10. EMPLOYMENT BENEFITS TO CONTINUE AFTER TERMINATION. If the
Executive's employment is terminated by the Company with or without Cause, or by
resignation, he shall be entitled to continue to participate in any health and
medical plans maintained by the Company at his employee rate if he so elects and
pays the premium cost of such insurer in advance to the Company until such time
as he becomes a participant in another plan or for an additional period of time
in accordance with governmental laws and regulations. The Company is not
obligated to maintain any such benefit plans under this Agreement
11. LIMITATION ON ASSIGNMENT. The Company agrees that if the assets of
the business are transferred to any other entity the Executive shall have the
right to have this contract assigned to such entity.
12. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the parties in connection with the subject matter hereof
and supersedes any and all prior agreements or understandings between the
parties including that certain agreement dated August 1, 1996 among the parties
hereto and Kirkland Messina, Inc. This Agreement may only be changed by a
written instrument duly executed by each party.
13. BINDING NATURE OF AGREEMENT ASSIGNMENT. This Agreement shall be
binding upon the parties hereto, the heirs and legal representatives of the
Executive and the successors and assigns of the Company.
14. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Massachusetts, without giving
effect to the conflict of laws principles thereof.
<PAGE>
15. CONSTRUCTION AND JURISDICTION.
a. If any legal action relating to or other proceeding is brought
by any party for the enforcement of this Agreement, or because of an alleged
dispute, breach or default in connection with any provisions of this Agreement,
such action shall be commenced in the Commonwealth of Massachusetts, and the
parties hereto agree that such Commonwealth shall have exclusive jurisdiction
thereof; PROVIDED, HOWEVER, if any court in said Commonwealth shall decline to
afford injunctive relief to the Company on account of the breach or threatened
breach of this Agreement by the Executive, the Company shall be entitled to seek
such relief from any other court of competent jurisdiction, wherever located.
b. The prevailing party shall be entitled to recover reasonably
attorney's fees and other reasonable costs incurred in such action or proceeding
in addition to any other relief to which it may be entitled.
c. The parties hereby further agree that, in connection
therewith, service of process by registered or certified mail or in person shall
confer jurisdiction over them.
16. SERVERABILITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the other provisions hereof, and this
Agreement shall be construed in all respects as if such invalid or unenforceable
provision or provisions were omitted.
17. SECTION HEADINGS. The section headings herein have been inserted for
convenience of reference only and shall in no way modify or restrict any of the
terms or provisions hereof.
18. WAIVER OF BREACH. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver by
said party of any other or subsequent breach.
19. NOTICES. All notices and other communications required or permitted
to be given under the terms of this Agreement shall be given in writing and
shall be deemed to have been duly given (a) when delivered personally, (b) if
sent by telecopy, when receipt thereof is acknowledged at the telecopy number
listed below for the receiving party, (b) the day following the day on which the
same has been delivered prepaid for overnight delivery to a national air courier
service or (d) three days following deposit in the United States mail,
registered or certified, postage prepaid, in each case addressed as follows (or
to such other addresses that may have been designated by the respective parties
hereto for this purpose):
If to the Company:
Steinway Musical Instruments, Inc.
800 South Street, Suite 425
Waltham, Massachusetts 02453-1472
Fax: (781) 894-9803
Attention: Dennis M. Hanson
<PAGE>
With a copy to:
Milbank, Tweed, Hadley & McCloy
601 South Figueroa Street, 30t Floor
Los Angeles, California 90017
Fax: (213) 629-5063
Attention: Neil Wertlieb
If to the Executive:
Dana D. Messina
11100 Santa Monica Blvd, Suite 825
Los Angeles, California 90025
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
Steinway Musical Instruments, Inc.
/s/ Dennis M. Hanson
---------------------
Dennis M. Hanson
Vice President
/s/ Dana D. Messina
---------------------
Dana D. Messina
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT OF KYLE R. KIRKLAND
This Employment Agreement (this "AGREEMENT") is entered into as of this
4th day of January, 1999, by and between Steinway Musical Instruments, Inc., a
Massachusetts corporation (the "COMPANY"), and Kyle R. Kirkland (the
"EXECUTIVE").
1. TERM OF EMPLOYMENT. The Company agrees to employ the Executive, and
the Executive hereby agrees to accept employment, commencing on the date hereof,
and terminating December 31, 2006, unless otherwise terminated in accordance
with the terms set forth in PARAGRAPH 7 of this Agreement (including any
extensions, the "TERM").
2. DUTIES AND RESPONSIBILITIES. The Executive shall be employed as the
Chairman of the Board of the Company, and shall perform such duties as are from
time to time assigned to him by the Board of Directors of the Company (the
"BOARD") and that are normally associated with such position.
3. COMPENSATION.
a. For all services to be performed by the Executive during the
Term, the Company shall pay to him, together with other compensation as
hereinafter provided, an annual salary of $200,000 (subject to such deductions
and withholdings as may be required by law or by further agreement with the
Executive), payable in arrears biweekly.
b. The Executive shall be eligible to receive annual salary
increases based on his performance of his duties, but any such increases shall
be in the sole and absolute discretion of the Board.
4. BENEFITS. In addition to any other items of compensation provided
for in this Agreement, the Executive shall be entitled to the following benefits
(the "BENEFITS"):
a. The Executive shall be entitled to participate in any
retirement, life insurance, health, medical, disability or other plans or
benefits, whether insured or self-insured, which the Company in its sole and
absolute discretion may make available generally from time to time to its
executives. The Company shall also reimburse the Executive for all medical
expenses incurred which are not otherwise covered by an existing benefit plan.
b. The Executive shall be entitled to vacation in accordance with
the Company's current vacation policy during each year of this Agreement.
5. REIMBURSEMENT OF EXPENSES. The Executive shall be entitled to be
reimbursed for all reasonable travel and entertainment expenses that are (a)
incurred by him in the performance of his duties hereunder and (b) evidenced by
appropriate documentation.
6. RESTRICTIVE COVENANTS. The Executive acknowledges that certain of
the Company's products and services are proprietary in nature and have been
manufactured, assembled and marketed through the use of customer lists, supplier
lists, trade secrets, methods of operation and other confidential information
possessed by the Company and disclosed in confidence to the Executive (the
"TRADE SECRETS"), which may not be easily accessible to other persons in the
trade. The Executive also acknowledges that he will have substantial and ongoing
contact with the Company's customers and suppliers and will thereby gain
knowledge of
<PAGE>
customer needs and references, sources of equity funding, sources of supply,
methods of assembly and other valuable information necessary for the success of
the Company's business. Therefore, except as provided in SUBPARAGRAPHS (a) AND
(d) below, and except as provided in PARAGRAPH 8, during the time the Executive
is employed under the provisions of this Agreement and until the date of the
second anniversary of the termination of the executive's employment, the
Executive shall not, without the prior written consent of the Company:
a. During the Term, engage in any business activity that competes
with the Company in the manufacturing of musical instruments or other business
in which the Company is engaged, or exploits or utilizes any of the Trade
Secrets; PROVIDED, HOWEVER, that the Executive may invest in any publicly-traded
company that is similar in nature to the business in which the Company is
engaged, provided that such investment shall not exceed 5% of the equity
interest in such company on a fully diluted basis;
b. Solicit any person employed by the Company or any affiliate of
the Company, appointed as a representative of the Company, or any affiliate of
the Company, to join him as a partner, co-venturer, employee, investor or
otherwise, in any substantial business activity whatsoever;
c. Intentionally disclose or reveal any Trade Secrets or other
confidential information of the Company to anyone which disclosure results in
harm to the Company; or
d. Become employed by or associated with, any entity that owns,
operates, manages or has a substantial interest in any business activity that
competes with the Company in the manufacturing of musical instruments or other
significant business in which the Company is engaged, or exploits or utilizes
any of the Trade Secrets; PROVIDED, HOWEVER, if the Executive's employment is
terminated by the Company other than for Cause (as defined herein), said period
for the purposes of this SUBPARAGRAPH d shall be reduced to one year after the
termination of his employment.
7. TERMINATION.
a. The Company shall have the option to terminate the Executive's
employment for "CAUSE", which shall be defined as follows: (i) any felony
committed by the Executive in connection with the performance of the Executive's
duties to the Company that causes damage to the Company or any of its
properties, assets or businesses; (ii) any fraud, misappropriation or
embezzlement by the Executive involving properties, assets or funds of the
Company; (iii) a conviction of the Executive, or plea of NOLO CONTENDERE by the
Executive, to any crime or offense involving monies or other property of the
Company; or (iv) the violation by the Executive of any non-competition or
confidentiality agreement with the Company. In the event of termination of the
Executive's employment for Cause, any obligation of the Company to provide any
compensation and Benefits to him, as herein set forth, shall cease immediately
except as provided in PARAGRAPH 11.
b. In the event of termination of the Executive's employment by
reason of death or permanent disability, he and/or his estate shall be entitled
to his salary and Benefits under the terms of this Agreement for a period of six
months following the date of his death or the date upon which he becomes
permanently disabled, in addition to any other benefits provided by the Company.
<PAGE>
c. In the event of termination of the Executive's employment by
reason of his registration, written notice of which shall be given by him to the
Company at least sixty days prior thereto, he shall be entitled to his salary
and Benefits hereunder up to the date of such termination, subject to extension
of Benefits required by any governmental laws and regulations.
8. NON-RENEWAL. If the Company does not offer to renew this Employment
Agreement at the expiration of the Term upon the same terms hereof or upon
modified terms as mutually agreed upon by the Executive and the Company, the
terms of PARAGRAPH 6(d) shall not apply and the Company shall pay to the
Executive a severance benefit on the date of the non-renewal of not less than
five times his latest annual salary plus bonus in consideration for which the
Executive agrees that he will not become employed by or associated with any
entity which owns, operates, manages, or has a substantial interest in any
business activity that competes with the Company as a manufacturer of musical
instruments for a period of five years after the date of the non-renewal.
9. INDEMNIFICATION. The Company agrees to indemnify the Executive to
the same extent that the Company agrees to indemnify other officers and
directors of the Company in their capacity as such. The Company further agrees
that such indemnification shall survive the Executive's resignation, termination
or expiration of this Agreement, with respect to actions taken by him during his
employment with the Company, unless such actions could have been grounds for
termination for Cause.
10. EMPLOYMENT BENEFITS TO CONTINUE AFTER TERMINATION. If the
Executive's employment is terminated by the Company with or without Cause, or by
resignation, he shall be entitled to continue to participate in any health and
medical plans maintained by the Company at his employee rate if he so elects and
pays the premium cost of such insurer in advance to the Company until such time
as he becomes a participant in another plan or for an additional period of time
in accordance with governmental laws and regulations. The Company is not
obligated to maintain any such benefit plans under this Agreement
11. LIMITATION ON ASSIGNMENT. The Company agrees that if the assets of
the business are transferred to any other entity the Executive shall have the
right to have this contract assigned to such entity.
12. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the parties in connection with the subject matter hereof
and supersedes any and all prior agreements or understandings between the
parties including that certain agreement dated August 1, 1996 among the parties
hereto and Kirkland Messina, Inc. This Agreement may only be changed by a
written instrument duly executed by each party.
13. BINDING NATURE OF AGREEMENT ASSIGNMENT. This Agreement shall be
binding upon the parties hereto, the heirs and legal representatives of the
Executive and the successors and assigns of the Company.
14. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Massachusetts, without giving
effect to the conflict of laws principles thereof.
<PAGE>
15. CONSTRUCTION AND JURISDICTION.
a. If any legal action relating to or other proceeding is brought
by any party for the enforcement of this Agreement, or because of an alleged
dispute, breach or default in connection with any provisions of this Agreement,
such action shall be commenced in the Commonwealth of Massachusetts, and the
parties hereto agree that such Commonwealth shall have exclusive jurisdiction
thereof; PROVIDED, HOWEVER, if any court in said Commonwealth shall decline to
afford injunctive relief to the Company on account of the breach or threatened
breach of this Agreement by the Executive, the Company shall be entitled to seek
such relief from any other court of competent jurisdiction, wherever located.
b. The prevailing party shall be entitled to recover reasonably
attorney's fees and other reasonable costs incurred in such action or proceeding
in addition to any other relief to which it may be entitled.
c. The parties hereby further agree that, in connection
therewith, service of process by registered or certified mail or in person shall
confer jurisdiction over them.
16. SERVERABILITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the other provisions hereof, and this
Agreement shall be construed in all respects as if such invalid or unenforceable
provision or provisions were omitted.
17. SECTION HEADINGS. The section headings herein have been inserted for
convenience of reference only and shall in no way modify or restrict any of the
terms or provisions hereof.
18. WAIVER OF BREACH. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver by
said party of any other or subsequent breach.
19. NOTICES. All notices and other communications required or permitted
to be given under the terms of this Agreement shall be given in writing and
shall be deemed to have been duly given (a) when delivered personally, (b) if
sent by telecopy, when receipt thereof is acknowledged at the telecopy number
listed below for the receiving party, (b) the day following the day on which the
same has been delivered prepaid for overnight delivery to a national air courier
service or (d) three days following deposit in the United States mail,
registered or certified, postage prepaid, in each case addressed as follows (or
to such other addresses that may have been designated by the respective parties
hereto for this purpose):
If to the Company:
Steinway Musical Instruments, Inc.
800 South Street, Suite 425
Waltham, Massachusetts 02453-1472
Fax: (781) 894-9803
Attention: Dennis M. Hanson
<PAGE>
With a copy to:
Milbank, Tweed, Hadley & McCloy
601 South Figueroa Street, 30t Floor
Los Angeles, California 90017
Fax: (213) 629-5063
Attention: Neil Wertlieb
If to the Executive:
Kyle R. Kirkland
11100 Santa Monica Blvd, Suite 825
Los Angeles, California 90025
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
Steinway Musical Instruments, Inc.
/s/ Dennis M. Hanson
----------------------
Dennis M. Hanson
Vice President
/s/ Kyle R. Kirkland
----------------------
Kyle R. Kirkland
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION AND CONDENSED 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUL-03-1999
<CASH> 3091
<SECURITIES> 0
<RECEIVABLES> 79353
<ALLOWANCES> 7113
<INVENTORY> 96632
<CURRENT-ASSETS> 180865
<PP&E> 113780
<DEPRECIATION> 26620
<TOTAL-ASSETS> 317674
<CURRENT-LIABILITIES> 39688
<BONDS> 146635
0
0
<COMMON> 9
<OTHER-SE> 96566
<TOTAL-LIABILITY-AND-EQUITY> 317674
<SALES> 159294
<TOTAL-REVENUES> 159294
<CGS> 107149
<TOTAL-COSTS> 27,521
<OTHER-EXPENSES> 1675
<LOSS-PROVISION> 104
<INTEREST-EXPENSE> 6313
<INCOME-PRETAX> 16532
<INCOME-TAX> 6778
<INCOME-CONTINUING> 9754
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9754
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.04
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CONDENSED CONSOLIDATED
BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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<CIK> 0000918904
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