<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 APRIL 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 [ ]
<TABLE>
<CAPTION>
<S> <C> <C>
Number of shares of Common Stock issued and outstanding as of April 30, 1999: Class A 477,953
Ordinary 8,770,172
---------
Total 9,248,125
</TABLE>
===============================================================================
<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, 1998 and April 3, 1999.....................................................3
Condensed Consolidated Statements of Operations
Three months ended April 4, 1998 and April 3, 1999......................................4
Condensed Consolidated Statements of Cash Flows
Three months ended April 4, 1998 and April 3, 1999......................................5
Notes to Condensed Consolidated Financial Statements........................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................15
PART II. OTHER INFORMATION
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, APRIL 3,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 12,460 $ 6,809
Accounts, notes and leases receivable, net of allowance for
bad debts of $7,512 and $7,712 in 1998 and 1999, respectively 52,451 59,746
Inventories 96,527 93,851
Prepaid expenses and other current assets 2,323 2,885
Deferred tax assets 6,620 6,416
------------- -------------
Total current assets 170,381 169,707
Property, plant and equipment, net of accumulated depreciation of
$25,847 and $27,111 in 1998 and 1999, respectively 60,194 88,631
Other assets, net 19,754 19,139
Cost in excess of fair value of net assets acquired, net of accumulated
amortization of $3,728 and $3,862 in 1998 and 1999, respectively 33,598 32,323
------------- -------------
TOTAL ASSETS $ 283,927 $ 309,800
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 5,658 $ 8,238
Accounts payable 6,793 6,308
Other current liabilities 29,792 31,633
------------- -------------
Total current liabilities 42,243 46,179
Long-term debt 111,370 133,480
Deferred tax liabilities 25,146 23,748
Non-current pension liability 13,411 12,593
------------- -------------
Total liabilities 192,170 216,000
------------- -------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock 9 9
Additional paid in capital 70,245 70,321
Retained earnings 31,143 36,331
Accumulated other comprehensive income (3,976) (6,529)
Treasury stock (5,664) (6,332)
------------- -------------
Total stockholders' equity 91,757 93,800
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 283,927 $ 309,800
------------- -------------
------------- -------------
</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
------------------------------
April 4, April 3,
1998 1999
------------- ------------
<S> <C> <C>
Net sales $ 79,100 $ 83,134
Cost of sales 53,056 55,707
----------- -----------
Gross profit 26,044 27,427
Operating expenses:
Sales and marketing 9,457 10,294
General and administrative 4,214 4,289
Amortization 951 968
Other operating expense 291 129
----------- -----------
Total operating expenses 14,913 15,680
----------- -----------
Income from operations 11,131 11,747
Other (income) expense:
Interest income (328) (295)
Interest expense 3,166 3,159
----------- -----------
Total other (income) expense, net 2,838 2,864
----------- -----------
Income before income taxes 8,293 8,883
Provision for income taxes 3,826 3,695
----------- -----------
Net income $ 4,467 $ 5,188
----------- -----------
----------- -----------
Net income per share:
Basic $ .48 $ .56
----------- -----------
----------- -----------
Diluted $ .47 $ .56
----------- -----------
----------- -----------
Weighted average shares:
Basic 9,364,979 9,265,163
----------- -----------
----------- -----------
Diluted 9,528,929 9,337,044
----------- -----------
----------- -----------
</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>
Three Months Ended
----------------------------
April 4, April 3,
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,467 $ 5,188
Adjustments to reconcile net income to
cash flows from operating activities:
Depreciation and amortization 2,686 2,802
Deferred tax benefit (516) (481)
Other 79 (33)
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (5,095) (7,966)
Inventories 135 639
Prepaid expense and other current assets (194) (615)
Accounts payable (359) (386)
Accrued expenses 1,408 2,564
----------- -----------
Cash flows from operating activities 2,611 1,712
Cash flows from investing activities:
Capital expenditures (1,039) (31,588)
Proceeds from disposals of fixed assets 82 89
Changes in other assets 791 (428)
----------- -----------
Cash flows from investing activities (166) (31,927)
Cash flows from financing activities:
Net borrowings (repayments)
under lines of credit (243) 3,036
Proceeds from long-term debt 22,500
Repayments of long-term debt (279) (289)
Proceeds from issuance of stock 139 76
Purchase of treasury stock (133) (668)
----------- -----------
Cash flows from financing activities (516) 24,655
Effect of foreign exchange rate changes on cash (19) (91)
----------- -----------
Increase (decrease) in cash 1,910 (5,651)
Cash, beginning of period 5,271 12,460
----------- -----------
Cash, end of period $ 7,181 $ 6,809
----------- -----------
----------- -----------
Supplemental Cash Flow Information
Interest paid $ 142 $ 135
----------- -----------
----------- -----------
Taxes paid $ 3,848 $ 4,690
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 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 three
months ended April 4, 1998 and April 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 three
months ended April 3, 1999 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 - 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 months ended April 4,
1998 and April 3, 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Weighted average shares for basic income per share 9,364,979 9,265,163
Dilutive effect of stock options 163,950 71,881
--------- ---------
Weighted average shares for diluted income per share 9,528,929 9,337,044
--------- ---------
--------- ---------
</TABLE>
COMPREHENSIVE INCOME - Other comprehensive income includes foreign currency
translation adjustments. Total comprehensive income for the three months ended
April 4, 1998 and April 3, 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Net income $ 4,467 $ 5,188
Other comprehensive income (672) (2,553)
--------- ---------
Total comprehensive income $ 3,795 $ 2,635
--------- ---------
--------- ---------
</TABLE>
6
<PAGE>
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, April 3,
1998 1999
------------ ------------
<S> <C> <C>
Raw materials $ 15,266 $ 15,350
Work in process 35,010 33,943
Finished goods 46,251 44,558
------------ ------------
Total $ 96,527 $ 93,851
------------ ------------
------------ ------------
</TABLE>
(4) 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.
(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>
Three Months Ended
December 31, April 3, April 4, April 3,
1998 1999 1998 1999
------------ -------- -------- -------
<S> <C> <C> <C> <C>
Current assets $ 167,938 $166,937
Total assets 280,991 306,531
Current liabilities 53,712 58,890
Stockholder's equity 97,080 99,767
Total revenues $78,126 $82,388
Gross profit 25,711 27,188
Net income 4,471 5,240
</TABLE>
7
<PAGE>
(6) 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 months ended April 4, 1998 and April
3, 1999:
<TABLE>
<CAPTION>
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 $24,295 $8,615 $4,310 $37,220 $40,900 $980 $41,880 $ - $79,100
Net income 227 284 266 777 1,244 40 1,284 2,406 4,467
1999 Piano Segment Band and Orchestral Segment
------------------------------------ ---------------------------- Other & Consol
US Germany Other Total US Other Total Elim Total
-------- ------- ------ ------ ------- ------ ------- ------ -------
Revenues from external
customers $26,068 $8,996 $4,455 $39,519 $42,689 $926 $43,615 $ - $83,134
Net income 732 323 245 1,300 1,174 18 1,192 2,696 5,188
</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 (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.
8
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
APRIL 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 $ - $ 6,350 $ 1,957 $ 1,057 $ (2,555) $ 6,809
Accounts, notes and leases
receivable, net 45,549 5,411 8,786 59,746
Inventories 33,118 34,702 27,030 (999) 93,851
Prepaid expenses and other current
current assets 225 1,965 300 395 2,885
Deferred tax assets 1,050 2,819 3,520 (973) 6,416
----------- ----------- ----------- ----------- ----------- -----------
Total current assets 225 88,032 45,189 40,788 (4,527) 169,707
Property, plant and equipment, net 105 14,361 58,937 15,228 88,631
Investment in subsidiaries 71,143 169,387 56,147 (296,677) -
Other assets, net 613 873 12,362 6,604 (1,313) 19,139
Cost in excess of fair value
of net assets acquired, net 9,299 11,083 11,941 32,323
----------- ----------- ----------- ----------- ----------- -----------
TOTAL ASSETS $ 72,086 $ 281,952 $ 183,718 $ 74,561 $(302,517) $ 309,800
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current
portion of long-term debt $ - $ - $ - $ 8,238 $ - $ 8,238
Accounts payable 144 2,572 2,038 1,554 6,308
Other current liabilities (12,372) 13,051 23,444 9,877 (2,367) 31,633
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities (12,228) 15,623 25,482 19,669 (2,367) 46,179
Long-term debt 29 110,000 25,026 980 (2,555) 133,480
Intercompany 20,652 68,072 (90,894) 2,170 -
Deferred tax liabilities 2,161 9,570 12,017 23,748
Non-current pension liability 102 12,593 (102) 12,593
----------- ----------- ----------- ----------- ----------- -----------
Total Liabilities 8,453 195,958 (30,816) 47,429 (5,024) 216,000
Stockholders' Equity 63,633 85,994 214,534 27,132 (297,493) 93,800
----------- ----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 72,086 $ 281,952 $ 183,718 $ 74,561 $ (302,517) $ 309,800
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
9
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED APRIL 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 $ $ 42,308 $ 28,471 $ 14,773 $ (2,418) $ 83,134
Cost of sales 29,800 18,781 9,467 (2,341) 55,707
----------- ----------- ----------- ------------ ------------ -----------
Gross profit - 12,508 9,690 5,306 (77) 27,427
Operating expenses:
Sales and marketing 4,269 3,815 2,231 (21) 10,294
General and administrative 721 1,327 1,085 1,156 4,289
Amortization 115 518 335 968
Other operating (income) expense (596) (40) 585 159 21 129
----------- ----------- ----------- ------------ ------------ -----------
Total operating expenses 125 5,671 6,003 3,881 - 15,680
----------- ----------- ----------- ------------ ------------ -----------
Income (loss) from operations (125) 6,837 3,687 1,425 (77) 11,747
Other (income) expense:
Interest income (210) (4,138) (18) 4,071 (295)
Interest expense 4,901 2,206 123 (4,071) 3,159
----------- ----------- ----------- ------------ ------------ -----------
Total other (income) expense, net - 4,691 (1,932) 105 - 2,864
----------- ----------- ----------- ------------ ------------ -----------
Income (loss) before income taxes (125) 2,146 5,619 1,320 (77) 8,883
Provision for (benefit of)
income taxes (58) 988 2,123 678 (36) 3,695
----------- ----------- ----------- ------------ ------------ -----------
Net income (loss) $ (67) $ 1,158 $ 3,496 $ 642 $ (41) $ 5,188
----------- ----------- ----------- ------------ ------------ -----------
----------- ----------- ----------- ------------ ------------ -----------
</TABLE>
10
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED APRIL 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) $ (67) $ 1,158 $ 3,496 $ 642 $ (41) $ 5,188
Adjustments to reconcile net income
(loss) to cash flows from
operating activities:
Depreciation and amortization 10 840 1,230 722 2,802
Deferred tax benefit (222) (259) (481)
Other 25 1 (59) (33)
Changes in operating assets and
liabilities:
Accounts, notes and leases
receivable (8,540) (55) 629 (7,966)
Inventories 5,480 (2,717) (2,201) 77 639
Prepaid expense and other
current assets (101) (479) 107 (142) - (615)
Accounts payable 144 867 (1,578) 181 - (386)
Accrued expenses (1,418) 2,265 1,246 507 (36) 2,564
---------- ----------- ----------- ----------- ----------- -----------
Cash flows from operating activities (1,432) 1,616 1,508 20 - 1,712
Cash flows from investing activities:
Capital expenditures (16) (217) (31,288) (67) (31,588)
Proceeds from disposals of fixed assets 89 89
Changes in other assets 315 (743) (428)
---------- ----------- ----------- ----------- ----------- -----------
Cash flows from investing activities (16) 98 (32,031) 22 - (31,927)
Cash flows from financing activities:
Net borrowings (repayments) under
lines of credit (206) 2,761 3,036 (2,555) 3,036
Proceeds from long-term debt 22,500 22,500
Repayments of long-term debt (289) (289)
Proceeds from issuance of stock 76 76
Purchase of treasury stock (668) (668)
Intercompany dividends 1,095 3,000 (4,095) -
Intercompany 2,246 543 (3,829) 1,040 -
---------- ----------- ----------- ----------- ----------- -----------
Cash flows from financing activities 1,448 1,638 24,432 (308) (2,555) 24,655
Effect of exchange rate changes on cash (91) (91)
Increase (decrease) in cash - 3,352 (6,091) (357) (2,555) (5,651)
Cash, beginning of period 2,998 8,048 1,414 12,460
---------- ----------- ----------- ----------- ----------- -----------
Cash, end of period $ - $ 6,350 $ 1,957 $ 1,057 $ (2,555) $ 6,809
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
</TABLE>
11
<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 APRIL 3, 1999 COMPARED TO THREE MONTHS ENDED APRIL 4, 1998
NET SALES - Net sales increased $4.0 million (5%) to $83.1 million in
the first quarter of 1999. Domestic sales growth of 8% offset a decline in
foreign shipments, which continue to be affected by the weak demand in Asia and
Europe. Piano sales increased $2.3 million (6%) in 1999 on an overall unit
increase of 7%. Unit volume increased 5% for Steinway grand pianos and 11% for
the Boston line. Band and orchestral instrument sales increased $1.7 million
(4%) in the first quarter of 1999. Overall instrument units were up over 3%, led
by increases of 3% and 10% in the band and stringed instrument categories,
respectively.
GROSS PROFIT - Consistent with the increase in sales, gross profit
increased by $1.4 million (5%) to $27.4 million in the first quarter of 1999.
Gross margins increased slightly to 33.0% in 1999 compared to 32.9% in 1998.
This improvement is primarily due to an increase in piano margins from 35.4% in
1998 to 36.6% in 1999. A favorable yen exchange rate, slightly offset by a shift
in the mix of Boston sales toward verticals, contributed to the increase. Band
and orchestral instrument margins were negatively impacted by higher
manufacturing costs coupled with a shift toward student band instruments,
resulting in a decline in margins from 30.7% in 1998 to 29.8% in 1999.
OPERATING EXPENSES - Operating expenses increased by $0.8 million (5%)
to $15.7 million in the first quarter of 1999. Expenses as a percentage of sales
remained at 18.9% in both periods.
INCOME FROM OPERATIONS - Income from operations increased by $0.6
million (5%) to $11.7 million in the first quarter of 1999. These improved
earnings resulted from increased sales combined with improved gross profit
margins and firm control over operating expenses.
12
<PAGE>
OTHER (INCOME) EXPENSE - Other (income) expense remained virtually
unchanged at $2.8 million in both periods.
INCOME TAXES - The Company's effective tax rate was 46.1% and 41.6% in
the first quarter of 1998 and 1999, respectively. The lower effective tax rate
is due to a shift in the geographical distribution of foreign income away from
jurisdictions with higher tax rates, combined with certain tax saving strategies
that increased the utilization of foreign tax credits.
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 provided by operations in the first quarter was $2.6 million in
1998 and $1.7 million in 1999. The decrease in cash provided by operations in
1999 resulted from $0.7 million of additional cash earnings from operations
offset by $1.6 million of additional net working capital requirements. The
additional working capital requirements resulted from increased receivables
associated with higher sales offset partially by higher accrued expense
balances.
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 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 $1.0 million and $0.8 million in the
first quarter of 1998 and 1999, respectively, were primarily 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 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 April 1,
1999, bears interest at the Eurodollar rate plus 1.25% and expires April 1,
2004. As of April 3, 1999, no amounts were outstanding and availability was
approximately $59.2 million. Open account loans with foreign banks also provide
for borrowings by Steinway's foreign subsidiaries of up to 25 million Deutsche
marks ($13.8 million at the April 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.
In the first quarter of 1999, the Company repurchased 30,400 shares of its
common stock at a cost of $0.7 million.
13
<PAGE>
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 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.
14
<PAGE>
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 2000. Management is
currently evaluating the effect of adopting SFAS No. 133 on the consolidated
financial statements.
During the first quarter of 1999, the Company adopted the provisions of
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires external and
internal indirect costs of developing or obtaining internal-use software to be
capitalized as a long-lived asset and also requires training costs included in
the purchase price of computer software and costs associated with research and
development to be expensed as incurred. The adoption of SOP 98-1 did not have a
material effect on the consolidated financial statements.
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 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.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
4.1 Fourth Amendment and Agreement, dated as of April 1, 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
27.1. Steinway Musical Instruments, Inc. - Financial Data Schedule
27.2. The Selmer Company, Inc. - Financial Data Schedule
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended
April 3, 1999:
</TABLE>
<TABLE>
ITEM # DESCRIPTION FILING DATE
------ ----------- -----------
<S> <C> <C>
2, 7 A report announcing the acquisition of Steinway Hall March 30, 1999
</TABLE>
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: May 18, 1999
17
<PAGE>
Exhibit 4.1
FOURTH AMENDMENT AND AGREEMENT
FOURTH AMENDMENT AND AGREEMENT, dated as of April 1, 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, which
is secured by certain accounts receivable and other collateral of the
Borrowers and guaranteed by the other Credit Parties. On March 30, 1999,
Steinway consummated the Transactions (as hereinafter defined) and acquired
Steinway Hall (as hereinafter defined) with the proceeds of an Advance (as
defined in the Existing Credit Agreement) in the amount of $26,394,625. The
Credit Parties have requested that the Lender amend the Existing Credit
Agreement to reduce the interest rate applicable to Advances and to provide
for an additional $22,500,000 term loan facility, the proceeds of which will
be utilized to repay the outstanding principal balance of said Advance and to
finance the ownership by Steinway of Steinway Hall. Subject to the terms and
conditions hereof, the Lender is willing to amend the Existing Credit
Agreement to provide such term loan facility.
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:
"ASSOCIATE" shall mean 111 West 57th Street Associates, L.P., a New York
limited partnership.
<PAGE>
"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.
"CASH MANAGEMENT AGREEMENT" shall mean the Cash Management and
Distribution Agreement dated as of March 30, 1999 by and among Associate,
Steinway, Lender and The Prudential Insurance Company of America.
"CONSENT AND WAIVER" shall mean the Consent and Waiver, dated as of
March 30, 1999, by and among the Credit Parties and the Lender.
"ENVIRONMENTAL INDEMNITY" shall mean the Environmental and Hazardous
Substance Indemnification Agreement dated as of April 1, 1999, by Steinway to
and for the benefit of Lender.
"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, and (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; as amended, supplemented or otherwise modified
from time to time prior to the Fourth Amendment Effective Date.
"FOURTH AMENDMENT DOCUMENTS" shall mean this Fourth Amendment, the
Steinway Hall Term Loan Documents, and any other agreements, instruments and
all other documents executed or delivered pursuant to or in connection with
this Fourth Amendment and the transactions contemplated thereby.
"GROUND LEASE" shall mean that certain Ground Lease dated as of March
30, 1999, by and between Associate and Steinway.
"GROUND MORTGAGEE" shall mean the holder of any mortgage on the fee
interest in the Premises subject to the Ground Lease.
"MASTER LEASE" shall mean that certain Master Lease dated as of March
30, 1999, by and between Steinway and Associate.
"MORTGAGED PROPERTY" shall have the meaning set forth in the Steinway
Hall Mortgage.
"PARTNERSHIP INTERESTS" shall mean the .2495% interest as a general
partner and the 49.401% interest as a limited partner in Associate, that is
the subject of that certain
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<PAGE>
Partnership Interest Purchase Agreement dated March 23, 1999 by and between
Ni Reproma Inc., Manhattan 57TH Street Associates, and Steinway.
"PREMISES" shall have the meaning set forth in the Ground Lease.
"SMP" shall mean Steinway Musical Properties, Inc.
"SPACE LEASE AMENDMENT" shall mean that certain First Amendment of Lease
dated as of March 30, 1999, between Associate as landlord and Steinway as
tenant.
"STEINWAY HALL" shall mean any and all buildings, structures, fixtures,
additions, enlargements, extensions, modifications, repairs, replacements and
improvements now or hereafter located on the Premises or any part thereof.
"STEINWAY HALL ALR" shall mean the Assignment of Leases and Rents, dated
as of April 1, 1999, from Steinway to Lender.
"STEINWAY HALL MORTGAGE" shall mean the Mortgage, Leasehold Mortgage,
Assignment of Leases and Rents and Security Agreement, dated as of April 1,
1999 from Steinway to Lender.
"STEINWAY HALL TERM LOAN DOCUMENTS" shall mean the Steinway Hall Term
Note, the Steinway Hall Mortgage, the Cash Management Agreement, the Steinway
Hall ALR, the Environmental Indemnity and the other "Loan Documents" as
defined in the Steinway Hall Term Note.
"STEINWAY HALL TERM NOTE" shall mean the Term Note made as of April 1,
1999, by the Borrowers, payable to the order of Lender.
"STEINWAY HALL TRANSACTION DOCUMENTS" shall mean the Ground Lease, the
Master Lease and all of the documents required to be delivered under Section
7 of the Redemption and Lease Agreement dated as of March 23, 1999 by and
between Steinway and Associates.
"TRANSACTIONS" shall mean (i) the purchase of the Partnership Interests,
(ii) the redemption of the Partnership Interests in exchange for the
unencumbered leasehold interest in the Premises and all of the unencumbered
fee interest in Steinway Hall, (iii) the execution of the Ground Lease, (iv)
the execution of the Master Lease, and (v) the execution of the Space Lease
Amendment.
(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.
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<PAGE>
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 Fourth 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, Mortgaged
Property, 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 attached hereto, 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 Fourth 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 Fourth 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 IV 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.
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<PAGE>
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:
"CASH MANAGEMENT AGREEMENT" shall mean the Cash Management and
Distribution Agreement dated as of March 30, 1999 by and among 111 West 57th
Street Associates, L.P., Steinway, Lender and The Prudential Insurance
Company of America.
"CONSENT AND WAIVER" shall mean the Consent and Waiver, dated as of
March 30, 1999, by and among the Credit Parties and the Lender.
"ENVIRONMENTAL INDEMNITY" shall mean the Environmental and Hazardous
Substance Indemnification Agreement dated as of April 1, 1999, by Steinway to
and for the benefit of Lender.
"FOURTH AMENDMENT" shall mean the Fourth Amendment, dated as of April 1,
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.
"PARTNERSHIP INTERESTS" shall mean the .2495% interest as a general
partner and the 49.401% interest as a limited partner in 111 West 57th Street
Associates, L.P., a New York limited partnership, that is the subject of that
certain Partnership Interest Purchase Agreement dated March 23, 1999 by and
between Ni Reproma Inc., Manhattan 57TH Street Associates, and Steinway.
"STEINWAY HALL" shall mean any and all buildings, structures, fixtures,
additions, enlargements, extensions, modifications, repairs, replacements and
improvements now or hereafter located on the Premises or any part thereof.
"STEINWAY HALL ALR" shall mean the Assignment of Leases and Rents, dated
as of April 1, 1999, from Steinway to Lender.
"STEINWAY HALL MORTGAGE" shall mean the Mortgage, Leasehold Mortgage,
Assignment of Leases and Rents and Security Agreement, dated as of April 1,
1999 from Steinway to Lender.
"STEINWAY HALL TERM LOAN" as defined in Section 12.6.
"STEINWAY HALL TERM LOAN COMMITMENT" shall mean as to the Lender, its
obligation to make the Steinway Hall Term Loan to the Borrowers pursuant to
Section 12.6 in an amount equal to the lesser of (i) $22,500,000 and (ii) 75%
of appraised fair market value of Steinway Hall.
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<PAGE>
"STEINWAY HALL TERM LOAN DOCUMENTS" shall mean the Steinway Hall Term
Note, the Steinway Hall Mortgage, the Cash Management Agreement, the Steinway
Hall ALR, the Environmental Indemnity and the other "Loan Documents" as
defined in the Steinway Hall Term Note.
"STEINWAY HALL TERM NOTE" shall mean the Term Note made as of April 1,
1999, by the Borrowers, payable to the order of Lender.
(b) Section 1.1 of the Existing Credit Agreement is hereby amended by:
(i) deleting the words "plus one percent (1%)" where they appear in clause
(i) of the definition of "Advance Interest Rate"; and (ii) by deleting the
words "plus two and one-half percent (2.5%)" where they appear at the end of
clause (ii) of said definition and replacing them with the words "plus one
and one-quarter percent (1 1/4%)".
(c) 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 Term Note (if any), the Steinway Hall Term Note, the
Guarantees, the Cash Management Agreement, the Environmental Indemnity, the
Consent and Waiver, the Letter of Credit Documents and the Security Documents.
(d) Section 1.1 of the Existing Credit Agreement is hereby amended by
deleting the definition of "Security Documents" in its entirety and replacing
it with the following:
"SECURITY DOCUMENTS" shall be the collective reference to this
Agreement, the General Security Agreements (together with related Uniform
Commercial Code financing statements), the Mortgage Amendments, the New York
Mortgage, the Lockbox Documentation, the Selmer Collateral Assignment, the
SMP Collateral Assignment, the Trademark Assignments, the Copyright
Assignments, the Patent Assignments, the Selmer Industries Pledge Agreement,
the Selmer Pledge Agreement, the SMIT Pledge Agreement, the SMIT Security
Agreement, the S&B Retail Security Agreement, the SMP Pledge Agreement, the
SPC Pledge Agreement, the SPC Security Agreement, the Emerson Security
Agreement, the Steinway Hall Mortgage, the Steinway Hall ALR and any other
mortgage, pledge agreement, security agreement or other security document
executed and delivered by a Subsidiary of Selmer which becomes a Credit Party
pursuant to Section 6.13 of this Agreement.
2. AMENDMENTS TO SECTION 12. (a) Section 12.4 of the Existing Credit
Agreement is hereby amended by deleting the words "Section 6.15" where they
appear in the second line of said section and replacing them with the words
"Section 6.14".
(b) Section 12 of the Existing Credit Agreement is hereby amended by
incorporating at the end thereof the following sections:
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<PAGE>
"12.6 TERM LOAN COMMITMENT. Subject to the terms and conditions hereof,
the Lender agrees to make a term loan (the "STEINWAY HALL TERM LOAN") to the
Borrowers on any Business Day prior to 11:59 p.m., New York City time, April
1, 1999 in an amount equal to the Steinway Hall Term Loan Commitment.
12.7 NOTE. The Steinway Hall Term Loan shall be evidenced by Steinway
Hall Term Note and shall be governed by the provisions hereof and of the
Steinway Hall Term Loan Documents, all of which are incorporated by reference
herein. In the event of any clear discrepancy between the provisions hereof
and the provisions of the Steinway Hall Term Loan Documents, with respect
only to the Steinway Hall Term Loan, the Steinway Hall Term Loan Documents
shall prevail.
12.8 PROCEDURE FOR TERM LOAN BORROWING. If Steinway determines to borrow
the Steinway Hall Term Loan, Steinway shall give the Lender irrevocable
notice (which notice must be received by the Lender prior to 12:00 noon, New
York City time) at least two (2) Business Days prior to the requested
borrowing date, requesting that the Lender make the Steinway Hall Term Loan
on the requested borrowing date.
12.9 USE OF PROCEEDS OF TERM LOAN. The Steinway Hall Term Loan shall be
used to repay in full the outstanding balance of the Advance made for the
acquisition of the Partnership Interests, which were redeemed and exchanged
for Steinway Hall, and to finance the ownership by Steinway of Steinway Hall."
3. AMENDMENT TO SECTION 13. Section 13.1 of the Existing Credit
Agreement is hereby amended by deleting it in its entirety and replacing it
with the following:
"13.1 TERM. This Agreement shall inure to the benefit of and shall be
binding upon the respective successors and permitted assigns of each of the
Credit Parties and the Lender. Furthermore, this Agreement shall continue in
full force and effect until April 1, 2004 (the "TERMINATION DATE") unless
renewed in accordance with this Section 13.1. This Agreement may be renewed
automatically for an unlimited number of one-year periods after the
Termination Date (each a "RENEWAL PERIOD"), PROVIDED (a) the Lender has not
previously terminated this Agreement in accordance with the other provisions
of this Agreement or (b) the Credit Parties have not given written notice of
termination (i) with respect to the first Renewal Period, at least sixty days
prior to the Termination Date and (ii) with respect to any subsequent Renewal
Period, at least sixty days prior to the Business Day preceding the day on
which such Renewal Period expires. Notwithstanding anything herein to the
contrary, (i) the Lender may terminate this Agreement earlier upon the
occurrence and continuance of an Event of Default, whereupon the Lender may
terminate this Agreement effective immediately at any time without any notice
and (ii) the Credit Parties may terminate this Agreement at any time prior to
the Termination Date upon sixty days' prior written notice to the Lender and
upon payment in full of all Obligations owing to the Lender, as well as an
early termination fee equal to the
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<PAGE>
product of (a) the percentage as described in the chart below and (b) the sum
of the Maximum Loan Amount and the then outstanding principal balance of the
Steinway Hall Term Loan.
<TABLE>
<CAPTION>
<S> <C>
January 1, 1999 - December 31, 1999: 2%
January 1, 2000 - July 31, 2003: 1%
August 1, 2003 - end of the Term: 0%
</TABLE>
For all purposes hereof, the "Term" of this Agreement shall mean the period
from and including the date of this Agreement through and including: (i) the
Termination Date, and as renewed in accordance with the terms of this Section
13.1; or (ii) the effective date of termination hereof, as determined in
accordance with the foregoing early termination provisions."
4. AMENDMENT TO SCHEDULE 5.2. Schedule 5.2 to the Existing Credit
Agreement is hereby amended by deleting it in its entirety and replacing it
with Schedule 5.2 attached hereto.
ARTICLE IV
Conditions to Effectiveness
The Lender's commitment to make the Steinway Hall Term Loan, this
Amendment, and the modifications to the Credit Agreement provided for herein,
shall become effective on the date (the "FOURTH 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 Fourth Amendment Documents.
2. The Lender shall have received the executed legal opinions of
Milbank, Tweed, Hadley & McCloy, special counsel to the Credit Parties, and
Dennis M. Hanson, General Counsel to the Credit Parties, in form and
substance satisfactory to the Lender and taking into account this Amendment
and the other Fourth Amendment Documents and the matters contemplated hereby
(including, without limitation, assurances with respect to the validity of
UCC filings). Such legal opinion shall cover such matters incident to the
transactions contemplated by this Amendment and the other Fourth Amendment
Documents as the Lender may reasonably require.
3. The Lender shall have received a copy, in form and substance
reasonably satisfactory to the Lender, of the corporate resolutions of each
of the Credit Parties, in each case, authorizing the execution, delivery and
performance of this Amendment and the other Fourth Amendment Documents to
which such Credit Party is a party, in each case certified by the Secretary
or an Assistant Secretary of the relevant Credit Party as of the Fourth
Amendment Effective Date, which certificates shall state that the resolutions
or authorizations
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<PAGE>
thereby certified have not been amended, modified, revoked or rescinded as of
the date of such certificate.
4. The Lender shall have received a certificate of the Secretary or an
Assistant Secretary of each Credit Party, dated the Fourth Amendment
Effective Date, as to the incumbency and signature of the officers of such
Credit Party executing each of the Fourth Amendment Documents to which such
Credit Party is a party and any certificate or other document to be delivered
by it pursuant hereto, together with evidence of the incumbency of such
Secretary or Assistant Secretary.
5. The Lender shall have received: (i) true and complete copies of the
certificate of incorporation and by-laws of each Borrower and SMI, certified
as of the Fourth Amendment Effective Date as complete and correct copies
thereof by the Secretary or an Assistant Secretary of such Credit Party; and
(ii) certificates from each other Credit Party, stating that its Governing
Documents have not been amended since the date of certification of the most
recent certified copies thereof delivered by such Credit Party to Lender.
6. The Lender shall have received copies of certificates dated as of a
recent date from the Secretary of State or other appropriate authority of
such jurisdiction, evidencing the good standing of each Credit Party in the
State of its organization and in each State where the ownership, lease or
operation of property or the conduct of business requires it to qualify as a
foreign corporation or other entity except where the failure to so qualify
would not have a Material Adverse Effect.
7. 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 Fourth 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).
8. No Default or Event of Default shall have occurred and be continuing.
9. 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.
10. 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 Steinway Hall Term Loan 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.
11. The Lender shall have received a copy of the Master Lease and the
Ground Lease, each certified by the Secretary or an Assistant Secretary of
the Borrower as of
-9-
<PAGE>
the Fourth Amendment Effective Date, all of which shall be in form and
substance satisfactory to the Lender in the Lender's sole discretion.
12. The Lender shall have received the following documents, reports or
other materials, all of which shall be obtained at the Borrowers' expense,
and all of which must be satisfactory to the Lender in the Lender's sole
discretion: (a) an ALTA form of mortgagee's policy of title insurance, with
such endorsements as the Lender shall require, insuring the Lender's first
lien on Steinway's leasehold interest in the Premises and fee interest in
Steinway Hall in an amount equal to the amount of the Steinway Hall Term Loan
Commitment, and containing only such exceptions as the Lender shall approve;
(b) an ALTA/ASCM as-built survey of the Premises and Steinway Hall, certified
to Lender and to the title insurance company issuing the foregoing title
insurance policy; (c) an engineering report and a Phase I environmental site
assessment report and survey of asbestos-containing materials (and such
further tests and reports as are recommended therein); (d) certificates of
property casualty, liability, rent loss and other insurance as required in
the Steinway Hall Mortgage; (e) U.C.C., litigation and tax lien searches of
the Borrowers; (f) copies of certificate(s) of occupancy and other evidence
of compliance of Steinway Hall with all applicable zoning, building,
environmental and other applicable laws and regulations; (g) tenant estoppel
certificates and subordination, non-disturbance and attornment agreements
from major tenants of Steinway Hall; (h) a subordination, non-disturbance and
attornment agreement with the lessee under the Master Lease, an
inter-creditor agreement with the Ground Mortgagee and such other third-party
agreements as the Lender shall deem reasonably necessary in connection with
the Steinway Hall Term Loan; (i) an appraisal of Steinway Hall and (j)
monthly balance sheets, income statements, profit and loss statements and
cash flow statements for the twelve months prior to the Fourth Amendment
Effective Date.
13. All of the Transactions and all other transactions contemplated by
the Steinway Hall Transaction Documents shall have been consummated in
accordance with the terms and conditions of all of the Steinway Hall
Transaction Documents without amendment, modification or waiver of any
provision thereof except as otherwise consented thereto by the Lender in its
sole discretion.
ARTICLE V
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 Steinway Hall Term Loan
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; PROVIDED, however, that the
fees of Cadwalader, Wickersham & Taft in connection with this Amendment, the
other Steinway Hall Term Loan Documents and the Consent and Waiver shall not
be in excess of $100,000, without the express written consent of the
Borrower, which consent shall not be unreasonably withheld.
-10-
<PAGE>
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 Steinway
Hall Term Loan Documents to which such Credit Party is a party and reaffirms
its obligations under the Credit Documents executed by such Credit Party.
Without in any way limiting the foregoing, each of the Credit Parties other
than the Borrowers affirms that its Guarantee applies to the Steinway Hall
Term Note in addition to all other Obligations.
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 ]
-11-
<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/s DENNIS M. HANSON
---------------------------------------
Name: Dennis M. Hanson
Title: V.P.
STEINWAY, INC.
By s/s DENNIS M. HANSON
---------------------------------------
Name: Dennis M. Hanson
Title: V.P.
STEINWAY MUSICAL INSTRUMENTS, INC.
By s/s DENNIS M. HANSON
---------------------------------------
Name: Dennis M. Hanson
Title: V.P.
BOSTON PIANO COMPANY, INC.
By s/s DENNIS M. HANSON
---------------------------------------
Name: Dennis M. Hanson
Title: V.P.
THE SMI TRUST
By s/s DENNIS M. HANSON
---------------------------------------
Name: Dennis M. Hanson
Title: Trustee
[SIGNATURE BLOCKS CONTINUED ON NEXT PAGE]
-12-
<PAGE>
S&B RETAIL, INC.
By s/s DENNIS M. HANSON
---------------------------------------
Name: Dennis M. Hanson
Title: V.P.
EMERSON MUSICAL INSTRUMENTS, INC.
By s/s DENNIS M. HANSON
---------------------------------------
Name: Dennis M. Hanson
Title: V.P.
THE STEINWAY PIANO COMPANY
By s/s DENNIS M. HANSON
---------------------------------------
Name: Dennis M. Hanson
Title: V.P.
BNY FINANCIAL CORPORATION
By s/s FRANK IMPERATO
---------------------------------------
Name: Frank Imperato
Title: V.P.
-13-
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-03-1999
<CASH> 6,809
<SECURITIES> 0
<RECEIVABLES> 67,458
<ALLOWANCES> 7,712
<INVENTORY> 93,851
<CURRENT-ASSETS> 169,707
<PP&E> 115,742
<DEPRECIATION> 27,111
<TOTAL-ASSETS> 309,800
<CURRENT-LIABILITIES> 46,179
<BONDS> 133,480
0
0
<COMMON> 9
<OTHER-SE> 93,791
<TOTAL-LIABILITY-AND-EQUITY> 309,800
<SALES> 83,134
<TOTAL-REVENUES> 83,134
<CGS> 55,707
<TOTAL-COSTS> 14,531
<OTHER-EXPENSES> 1,097
<LOSS-PROVISION> 52
<INTEREST-EXPENSE> 2,864
<INCOME-PRETAX> 8,883
<INCOME-TAX> 3,695
<INCOME-CONTINUING> 5,188
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,188
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
<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> 0000918904
<NAME> THE SELMER COMPANY INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-03-1999
<CASH> 6,806
<SECURITIES> 0
<RECEIVABLES> 66,515
<ALLOWANCES> 7,661
<INVENTORY> 92,282
<CURRENT-ASSETS> 166,937
<PP&E> 115,009
<DEPRECIATION> 26,812
<TOTAL-ASSETS> 306,531
<CURRENT-LIABILITIES> 58,890
<BONDS> 133,451
0
0
<COMMON> 0
<OTHER-SE> 99,767
<TOTAL-LIABILITY-AND-EQUITY> 306,531
<SALES> 82,388
<TOTAL-REVENUES> 82,388
<CGS> 55,200
<TOTAL-COSTS> 13,649
<OTHER-EXPENSES> 1,638
<LOSS-PROVISION> 51
<INTEREST-EXPENSE> 2,870
<INCOME-PRETAX> 8,980
<INCOME-TAX> 3,740
<INCOME-CONTINUING> 5,240
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<EPS-PRIMARY> 5,240.00
<EPS-DILUTED> 5,240.00
</TABLE>
