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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000912057-01-506112.txt : 20010409
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ACCESSION NUMBER: 0000912057-01-506112
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010402
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: STEINWAY MUSICAL INSTRUMENTS INC
CENTRAL INDEX KEY: 0000911583
STANDARD INDUSTRIAL CLASSIFICATION: MUSICAL INSTRUMENTS [3931]
IRS NUMBER: 351910745
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-11911
FILM NUMBER: 1589432
BUSINESS ADDRESS:
STREET 1: 800 S ST STE 425
CITY: WALTHAM
STATE: MA
ZIP: 02453-1472
BUSINESS PHONE: 2195221675
MAIL ADDRESS:
STREET 1: 600 INDUSTRIAL PARKWAY
CITY: ELKHART
STATE: IN
ZIP: 46516
FORMER COMPANY:
FORMER CONFORMED NAME: SELMER INDUSTRIES INC
DATE OF NAME CHANGE: 19940209
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SELMER CO INC
CENTRAL INDEX KEY: 0000918904
STANDARD INDUSTRIAL CLASSIFICATION: MUSICAL INSTRUMENTS [3931]
IRS NUMBER: 954432228
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 033-75072-01
FILM NUMBER: 1589433
BUSINESS ADDRESS:
STREET 1: 600 INDUSTRIAL PARKWAY
CITY: ELKHART
STATE: IN
ZIP: 46516
BUSINESS PHONE: 2195221675
MAIL ADDRESS:
STREET 1: 600 INDUSTRIAL PARKWAY
CITY: ELKHART
STATE: IN
ZIP: 46516
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
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<DESCRIPTION>10-K405
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<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Ordinary Common Shares, $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements during the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant was $132,138,487 as of March 9, 2001.
Number of shares of Common Stock outstanding as of March 9, 2001:
Class A 477,953
Ordinary 8,453,547
---------
Total 8,931,500
Documents incorporated by reference: Part III - Items 10-13 - Definitive Proxy
Statement of the Registrant to be filed pursuant to Regulation 14A, Parts I-IV
- -Final Prospectus of the Registrant dated August 1, 1996 filed pursuant to Rule
424(b).
================================================================================
<PAGE>
PART I
ITEM 1 BUSINESS
General
The Company, through its operating subsidiaries, is a world leader in
the design, manufacture and marketing of high quality musical instruments. The
Steinway & Sons grand piano is considered to be the highest quality piano in the
world and has one of the most widely recognized and prestigious brand names. For
more than a century, the Steinway concert grand has been the piano of choice for
the world's greatest and most popular pianists. A survey of thirty of the
world's major symphony orchestras revealed that 97% of piano soloists chose a
Steinway grand piano during the 1999-2000 concert season. As the largest
domestic manufacturer of band and orchestral instruments, the Company offers a
complete line of brasswind, woodwind, percussion and stringed instruments and
related accessories. SELMER PARIS saxophones, BACH trumpets and trombones and
LUDWIG snare drums are considered by many to be the finest such instruments in
the world. The Company expanded its product offerings to include such well-known
names as C.G. CONN and KING brass instruments through the acquisition of United
Musical Instruments Holdings, Inc. ("UMI"). The acquisition of UMI was completed
in September 2000 with an aggregate purchase price of approximately $84 million.
The Company's net sales of $332 million for the year ended December 31, 2000
were comprised of piano sales of $183 million and band and orchestral instrument
sales of $149 million.
The piano division concentrates on the high-end grand piano segment of
the industry hand crafting its Steinway pianos in New York and Germany. The
Company also offers vertical pianos as well as two full mid-priced lines of
pianos under the Boston and Essex brand names. The Company sells its pianos
worldwide through approximately 200 independent piano dealers and six
Company-operated retail showrooms located in New York, New Jersey, London,
Munich, Hamburg and Berlin. In 2000, approximately 64% of piano sales were in
the United States, 26% in Europe and the remaining 10% primarily in Asia.
The band and orchestral division holds the leading domestic market
share in virtually all of its product lines, with such widely recognized brand
names as ARMSTRONG, BACH, CONN, GLAESEL, KING, LUDWIG, MUSSER, SCHERL & ROTH,
SELMER AND WILLIAM LEWIS & SON. Instruments are made by a highly skilled
workforce at manufacturing facilities in Indiana, Ohio, North Carolina, Illinois
and Arizona, and sold through approximately 1,800 independent dealers and
distributors. Beginner instruments accounted for 77% of band and orchestral unit
sales and 52% of instrument revenues in 2000, with advanced and professional
instruments representing the balance. In 2000, approximately 86% of band sales
were in the United States, 7% in Europe and the remaining 7% primarily in Asia.
Certain statements contained throughout this annual report are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent the
Company's present expectations or beliefs concerning future events. The Company
cautions that such statements are necessarily based on certain assumptions which
are subject to risks and uncertainties, including, but not limited to, changes
in general economic conditions, increased competition, exchange rate
fluctuations, and the availability of production capacity and qualified workers
which could cause actual results to differ materially from those indicated
herein. Further information on these factors is included in the Company's Final
Prospectus filed in August 1996, particularly the section therein entitled "Risk
Factors".
2
<PAGE>
PRODUCTS
The Company offers pianos, band and orchestral instruments and services
through the following subsidiaries and operating divisions:
STEINWAY AND SONS offers two premium-priced product lines: grand pianos
and vertical pianos. Steinway pianos differ from all others in design
specifications, materials used and the assembly process. All of Steinway's
patented designs and innovations provide the unique sound and quality of the
Steinway piano.
Grand pianos historically have accounted for the bulk of Steinway's
production. Steinway offers eight models of the grand piano ranging from the
5'1" baby grand to the largest 9' concert grand. The smaller grands are sold to
both individual and institutional customers, while the concert grands are sold
primarily to institutions. Steinway grand pianos are premium pianos in terms of
quality and price, with retail prices generally ranging from $33,600 to $86,100
in the United States. In 2000, Steinway sold 3,647 grand pianos, of which 2,649
units were shipped from its New York facility to dealers in North and Latin
America. The remaining 998 units were shipped from its German facility to
Europe, Asia and other countries.
Vertical pianos offer dealers a complete line of quality pianos to
satisfy the needs of institutions and other customers who are constrained by
space limitations but unwilling to compromise on quality. Steinway also provides
services, such as restoration, repair, replacement part sales, tuning and
regulation of pianos, at locations in New York, London, Hamburg and Berlin.
Restoration services range from minor damage repairs to complete restorations of
old pianos. Steinway recently expanded its restoration capacity to accommodate
an increased focus on the procurement and resale of used Steinway pianos.
BOSTON PIANO COMPANY offers two complete lines of grand and vertical
pianos for the mid-priced piano market. These pianos, which are designed by
Steinway and produced by Asian manufacturers, provide Steinway dealers with an
opportunity to realize better margins in this price range while capturing sales
that would have otherwise gone to a competitor. These pianos provide an
entry-level product for future Steinway grand piano customers, since Company
research indicates that 75% of Steinway customers have previously owned another
piano. The product lines also increase Steinway's business with its dealers,
making Steinway the dealer's primary supplier in many instances. The Boston line
is comprised of nine upright and grand piano models, with retail prices ranging
from $6,980 to $37,420. The Essex line is comprised of four upright and grand
piano models with retail prices ranging from $5,200 to $17,800.
KLUGE manufactures piano keys for the Company and third parties at
facilities in Poland and Germany. Approximately half of Kluge's sales are to
third parties.
THE BAND INSTRUMENT DIVISIONS manufacture brasswind and woodwind
instruments, including clarinets, flutes, piccolos, trumpets, cornets,
trombones, saxophones, oboes and bassoons, at facilities in Elkhart, Indiana,
Eastlake, Ohio and Nogales, Arizona. These divisions also manufacture
mouthpieces and distribute accessories such as oils, lubricants, polishes,
stands, batons, sax straps, mutes and reeds. Products are manufactured under the
ARMSTRONG, BACH, CONN, EMERSON, KING, SELMER and SIGNET brand names and are sold
to student, amateur and professional musicians. Suggested retail prices
generally range from $600 to $1,500 for student instruments and from $1,300 to
$8,000 for step-up and professional instruments. Products sold to professional
musicians are often customized to meet specific design options or sound
characteristics. The Company believes that specialization of products helps
maintain a competitive edge in quality and product design.
3
<PAGE>
The Company is the exclusive U.S. distributor for SELMER PARIS
products. The SELMER PARIS saxophone is generally considered to be one of the
best in the world. SELMER PARIS, in turn, has exclusive distribution rights to
certain woodwind and brasswind products in France. SELMER PARIS products
represented approximately 6% of band instrument sales in 2000.
THE PERCUSSION DIVISION manufactures acoustical and tuned percussion
instruments, including outfit drums, marching drums, concert drums, marimbas,
xylophones, vibraphones, orchestra bells, chimes, mallets and accessories.
This division manufactures its products in Monroe, North Carolina and
LaGrange, Illinois under the LUDWIG and MUSSER brand names. LUDWIG is
considered a leading brand name in drums and MUSSER has a strong market
position in tuned percussion products. Suggested retail prices range from
$650 to $4,300 for acoustical drum outfits and from $2,000 to $15,000 for
tuned percussion instruments.
THE STRINGED INSTRUMENT DIVISIONS manufacture and distribute violins,
violas, cellos and basses, and accessories such as bridges, covers, mutes, pads,
chin rests, rosins, strings, bows, cases and instrument care products. Products
are sold under the GLAESEL, HERMANN BEYER, OTTO BRUCKNER, SCHERL & ROTH and
WILLIAM LEWIS & SON brand names. Suggested retail prices generally range from
$500 to $2,000 for student instruments and from $1,000 to $10,000 for
intermediate and advanced instruments. Components are primarily imported from
several European and Asian suppliers and are assembled at factories in
Cleveland, Ohio and Elkhart, Indiana.
CUSTOMERS
The Company's core piano customer base consists of professional artists
and amateur pianists, as well as institutions such as concert halls,
conservatories, colleges, universities and music schools. Customers purchase
Steinway pianos either through one of the Company's six retail stores or through
independently owned dealerships. Approximately 80% of Steinway grand piano sales
are to individuals. These individuals are typically over 45 years old, with
income in excess of $150,000 per year and a serious interest in music. The
balance of sales to institutional customers has historically represented a
larger portion of international revenue. Over the past several years, the
Company has introduced several unique marketing programs designed to increase
institutional sales in the United States. As a result, domestic sales to
institutions increased nearly 13% in 1999 and another 7% in 2000. The Company's
largest piano dealer accounted for approximately 6% of sales in 2000, while the
top 15 accounts represented 33% of sales.
Band instrument dealers sell the majority of their instruments to
students enrolled in music education programs. Traditionally, students join
school bands or orchestras at age 10 or 11 and learn on beginner level
instruments, progressing to an advanced or professional level instrument in high
school or college. Management estimates that 85% of its domestic band sales are
generated through educational programs. The remaining domestic band sales are to
professional or amateur musicians or performing groups, including orchestras and
symphonies. The Company's largest band dealer accounted for approximately 6% of
band sales in 2000, while the top 15 accounts represented approximately 27% of
sales.
SALES AND MARKETING
PIANOS. The Company distributes its pianos primarily on a wholesale
basis through approximately 200 select dealers around the globe. These dealers
accounted for approximately 85% of pianos sold in 2000. The remaining 15% were
sold directly by Steinway & Sons at one of its company-operated retail locations
in New York, New Jersey, London, Munich, Hamburg and Berlin. Steinway's West
57th Street store in New York City, known as Steinway Hall, is one of the
largest and most famous piano stores in the
4
<PAGE>
world. The Company has a Japanese subsidiary as well as a representative office
in China to provide appropriate coverage to the expansive Asian piano market.
The Company employs district sales managers, whose responsibilities
include developing close working partnerships with domestic and international
piano dealers. These highly experienced professionals provide sales training and
technical support, as well as sales and marketing programs for consumers and
institutions. The sales managers are also responsible for promoting the Piano
Bank and Steinway Artist programs described below.
THE CONCERT AND ARTIST PIANO BANK. Virtually all major venues
throughout the world own a Steinway piano. However, to ensure all pianists, and
especially Steinway Artists, have a broad selection of instruments to meet their
individual touch and tonal preferences, Steinway maintains the famed Concert and
Artist Piano Bank (the "Piano Bank"). The Piano Bank includes approximately 360
instruments worldwide. Of these instruments, approximately 275 are located in
the United States. In New York City, the Steinway concert department has
approximately 104 concert grands available for various occasions. The balance of
the domestic-based pianos are leased to dealers around the country who actively
support the Steinway Artists program. In addition to promoting the Company's
products in the music industry, the Piano Bank provides continuous feedback on
the quality and performance of recently produced instruments from its most
critical customer, the professional pianist. The Piano Bank instruments, which
have an average age of four years, are generally sold after five years and
replaced with new pianos.
STEINWAY ARTISTS. For years, the Company has successfully used renowned
artists in its marketing programs. This form of marketing has helped solidify
brand-name recognition as well as clearly demonstrate that Steinway pianos
surpass all other brands in quality. The "Steinway Artists" program, the
endorsement of world class pianists who voluntarily select the Steinway piano,
is unique in that the Company does not pay artists to endorse its instruments.
To become a Steinway Artist, a pianist must not only meet certain performance
and professional criteria, he or she must also own a Steinway piano. The
Steinway Artist roster currently includes over 1,200 of the world's finest
pianists who perform only on Steinway pianos. In return for their endorsements,
Steinway Artists are provided with access to the Piano Bank described above.
DISTRIBUTION, SALES AND MARKETING OF THE BOSTON AND ESSEX PIANO LINES.
The Boston and Essex piano lines are targeted at the mid-priced segment of the
market. The lines provide both a broader product offering for dealers and
entry-level products for future Steinway grand piano customers. With certain
limited exceptions, the Company allows only Steinway dealers to carry the Boston
and Essex piano lines and thus ensures that these pianos will be marketed as
complementary product lines. Increased traffic generated by these pianos creates
current and future customers for Steinway. The availability of a lower-priced
Boston alternative has not negatively impacted the sales of other Steinway
pianos. The Boston piano line benefits from the "spillover" effect created by
the marketing efforts supporting Steinway's main product lines. The Company
anticipates that the recently introduced Essex piano line will experience
similar complementary benefits without negatively impacting its primary Steinway
line.
BAND AND ORCHESTRAL INSTRUMENTS. Band, orchestral and percussion
instruments and related accessories are distributed worldwide through
approximately 1,800 musical instrument dealers and distributors. These products
are marketed by district sales managers and independent sales representatives
who are responsible for sales within assigned geographic territories in the
United States and Canada. Each district sales manager is also responsible for
developing relationships with band and orchestral directors representing all
levels of music education from elementary through universities and professional
players. These individuals are the primary influence in the choice of an
instrument brand. Band directors will generally refer students to designated
dealers for the purchase of instruments.
5
<PAGE>
Management believes that its well established, long-standing relationships with
these influential music educators are an important component of its distribution
strategy.
Internationally, products are sold through dealers and distributors
located in each major country. International representatives help market the
Company's products to these dealers and distributors.
Dealers and distributors are supported through incentive programs,
advertising and promotional activities. Trade shows, educator conferences, print
media, direct mail, telemarketing, the Internet and personal sales calls are the
primary methods of reaching customers. The Company actively advertises in
consumer, educator and trade magazines and publications. In addition, Company
representatives attend several trade shows and educator conferences each year
providing opportunities to interface directly with customers.
The Company's educational director travels extensively, lecturing and
motivating students, educators and parents on the value of music in a child's
development. The Company also provides educational materials, catalogs and
product specifications to students, educators, dealers and distributors.
MUSICAL INSTRUMENT INDUSTRY
PIANOS. The overall piano industry can be best analyzed when subdivided
into three categories: high-end grand pianos, mid/low end grand pianos, and
vertical pianos. Domestic piano sales had been declining over the past two
decades primarily due to a decrease in vertical pianos. During this period,
verticals were impacted by the increase in competition stemming from electronic
alternatives and lower-cost, smaller, mass-produced grand pianos. The vertical
piano decline did not have a material adverse effect on the Company's operating
results, since the vast majority of its piano profit is realized from high-end
grand piano sales, which are more generally affected by economic cycles. Over
the past few years, the industry has experienced growth in all categories of
pianos. Management believes this trend is attributable to the strong U.S.
economy, favorable demographics and a general resurgence in music interests.
Market size and volume trends are difficult to quantify for
international markets, as there is no single source for worldwide sales data.
Steinway's strongest international markets outside the Americas are Germany,
Japan, the United Kingdom, Switzerland and France.
Korea, China and Japan are the three largest piano markets in the
world, with Japan representing the second largest grand piano market in the
world. Steinway currently has less than 2% market share in Japan, compared to an
average market share of approximately 8% in other major markets. While adverse
economic conditions in the Asian markets have recently slowed expansion
opportunities in Japan, the Company believes that its long-term prospects remain
good and continues to target this region in its distribution strategies.
BAND AND ORCHESTRAL INSTRUMENTS. The Company believes that the band and
orchestral instrument industry has historically been impacted more by
demographic trends and school budgeting than by macroeconomic cycles. The
domestic band and orchestral instrument industry experienced moderate sales
declines starting in the mid to late 1970s, which strongly correlated to a
decline in eleven year old children during the same time period. Since 1984, the
industry has experienced steady growth, consistent with the increases in both
student enrollment (grades K through 12) and school expenditures. While the
domestic market has continued to grow through the late 1990's, domestic supply
has recently outpaced the demand. Financial woes in Asia and a stronger U.S.
dollar fueled an increase of units imported into the domestic market from
offshore low cost producers as well as a decline in exports by
6
<PAGE>
domestic manufacturers. The combination of these factors has created a highly
price sensitive domestic market, where manufacturers have implemented aggressive
marketing programs in an attempt to maintain market share positions.
The Company believes the outlook for future growth remains positive.
Stable demographic trends and recent studies emphasizing the importance of music
education in a child's development are expected to contribute to the industry's
growth potential. The Company believes that parents are encouraging their
children to pursue musical instruments as a response to recent studies that show
participation in music programs increase a student's ability to excel in other
aspects of their education (e.g., college entrance test scores). In addition,
many school band directors are promoting band programs as social organizations
rather than the first step of intensive music study.
COMPETITION
The Company is the largest domestic producer of band and orchestral
instruments. New entrants into the domestic market experience difficulty
competing with the Company due to the long learning curve inherent in the
production of musical instruments, the high quality standards set by the market,
cost of tooling, significant capital requirements, lack of name-brand
recognition and the utilization of an effective distribution system. Foreign
musical instrument manufacturers have made significant strides in recent years
to improve their product quality. They now offer a broad range of quality
products at highly competitive prices and represent a significant competitive
challenge for domestic producers. The Company is focusing on raising product
quality standards, investing in new technology to increase productivity and
efficiency in the manufacturing process and developing aggressive marketing
programs to maintain its market positions.
Few manufacturers compete directly with Steinway & Sons pianos, both in
terms of quality and price. Management believes that used Steinway pianos
provide significant competition in its market segment. Because of the potential
savings associated with buying a used Steinway piano, as well as the durability
of the instrument, a relatively large market exists for used Steinways. It is
difficult to estimate the significance of used piano sales, since most are
conducted in the private aftermarket. Increased emphasis on both restoration
services and the procurement, refurbishment and sales of used Steinway pianos
has generated additional revenue over the past few years.
PATENTS AND TRADEMARKS
The Company has several trademarks and patents effective and pending in
the United States and in several foreign countries for varying lengths of time.
Steinway has pioneered the development of the modern piano with over 125 patents
granted since its founding. Piano trademarks include STEINWAY, STEINWAY & SONS,
the Lyre symbol, STEINWAY THE INSTRUMENT OF THE IMMORTALS, BOSTON, DESIGNED BY
STEINWAY & SONS, and ESSEX. Band and orchestral trademarks include SELMER, BACH,
BUNDY, SIGNET, WILLIAM LEWIS & SON, LUDWIG, MUSSER, EMERSON, CONN, KING,
ARMSTRONG, ARTLEY, BENGE, and SCHERL & ROTH. Management considers its various
patents and trademarks to be important and valuable assets.
MANUFACTURING PROCESS
The manufacturing process for musical instruments involves essentially
two main production phases: the production of component parts and instrument
assembly. Employees perform various forming, drilling, and cutting operations
during the parts production phase. Investment in new equipment
7
<PAGE>
in this area over the last several years has allowed the Company to increase its
production capacity and improve quality. Skilled craftsmen assemble component
parts for the final assembly of the instruments. Each instrument is tested or
tuned and regulated to the Company's specifications.
The manufacturing process for pianos takes up to nine months to achieve
the high quality standards expected for Steinway pianos. Raw materials are
purchased primarily in the United States and Europe.
The Company maintains a fairly constant production schedule for band
and orchestral instruments in order to minimize labor disruptions and to keep
work-in-process inventories relatively stable. Raw materials used in the
production of brasswind and woodwind instruments are purchased primarily in the
United States. Component parts are imported from Europe and Asia for stringed
and percussion instruments.
LABOR
As of December 31, 2000, the Company employed 3,060 people, consisting
of 2,344 hourly production workers and 716 salaried employees. Of the 3,060
employees, 2,503 were employed in the United States and the remaining 557 were
employed primarily in Europe.
Approximately 63% of the Company's workforce in the United States is
represented by labor unions. Collective bargaining agreements covering these
employees expire at various dates through 2003. Manufacturing employees in
Germany are represented by the workers' council which negotiates annually on
their behalf. The Company believes that its relationship with its employees is
generally good.
ITEM 2 PROPERTIES
The Company owns most of its manufacturing and warehousing facilities,
as well as the building that includes Steinway Hall. The remaining Steinway
retail stores are leased. Substantially all of the domestic real estate has been
pledged to secure the Company's debt. The following table lists the Company's
significant owned and leased facilities:
<TABLE>
<CAPTION>
APPROXIMATE
FLOOR SPACE
LOCATION OWNED/LEASED (SQUARE FEET) ACTIVITY
- -------- ------------ ------------- --------
<S> <C> <C> <C>
New York, NY Owned 449,900 Piano manufacturing; restoration center;
administrative offices; training
Owned 217,000 Piano retail store/showroom, office
rental property
Hamburg, Germany Owned 220,660 Piano manufacturing; executive offices; training
Leased 11,300 Piano retail store/showroom
Eastlake, OH Owned 160,000 Brasswind manufacturing
Elkhart, IN Owned 144,000 Brasswind manufacturing
Owned 88,000 Woodwind manufacturing; warehouse; office
Owned 77,000 Woodwind manufacturing
Owned 75,000 Warehouse
Owned 25,000 Administrative offices
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
FLOOR SPACE
LOCATION OWNED/LEASED (SQUARE FEET) ACTIVITY
- -------- ------------ ------------- -----------------------------------
<S> <C> <C> <C>
Springfield, OH Owned 110,000 Piano plate manufacturing
Nogales, AZ Owned 90,000 Band instrument manufacturing
LaGrange, IL Owned 46,000 Percussion instrument manufacturing
Leased 18,000 Timpani production
Wilkow, Poland Owned 9,740 Piano key manufacturing
Monroe, NC Leased 147,000 Drum and case manufacturing
Cleveland, OH Leased 52,000 Stringed instrument manufacturing
Munich, Germany Leased 29,000 Piano retail store/showroom
Wuppertal, Germany Leased 27,450 Piano key manufacturing
London, England Leased 20,000 Band instrument office; warehouse
</TABLE>
The Company spent $7.9 million for capital improvements in 2000. The
majority of the expenditures were used for 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.
ITEM 3 LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings regarding
environmental matters, which are described below. Further, in the ordinary
course of business, the Company is party to various legal actions that
management believes are routine in nature and incidental to the operation of its
business. While the outcome of such actions cannot be predicted with certainty,
management believes that, based on its experience in dealing with these matters,
their ultimate resolution will not have a material adverse impact on the
business, financial condition and results of operations or prospects of the
Company.
ENVIRONMENTAL MATTERS - The Company is subject to compliance with
various federal, state, local and foreign environmental laws, including those
relating to discharges to air, water and land, the handling and disposal of
solid and hazardous waste and the cleanup of properties affected by hazardous
substances. Certain environmental laws, such as the Comprehensive Environmental
Response, Compensation, and Liability Act, as amended ("CERCLA"), impose strict,
retroactive, joint and several liability upon persons responsible for releases
of hazardous substances, which responsibility is broadly construed.
As the result of an inspection in 1999, the Indiana Department of
Environmental Management ("IDEM") informed the Company that one of its
facilities was not in compliance with several air pollution control rules
regulating its use of volatile organic compounds (primarily trichloroethylene).
Immediately after the inspection, the Company took the necessary steps to return
the facility to compliance with these rules. The Company has reached an
agreement in principle with IDEM regarding the disposition of this matter,
including the assessment of certain immaterial fines. In addition, the Company
has agreed to permanently eliminate the use of trichloroethylene from its
manufacturing process. The estimated cost to be incurred in 2001 for this
capital project is expected to be less than $0.8 million.
The Company is also continuing existing environmental remediation
programs at facilities acquired in 2000. The estimated remaining cost of these
remediation programs is approximately $0.5 million and has been accrued by the
Company.
9
<PAGE>
On August 9, 1993, Philips Electronics North America Corporation
("Philips") agreed to continue to indemnify the Company for any and all losses,
damages, liabilities and claims relating to environmental matters resulting from
certain activities of Philips occurring prior to December 29, 1988 (the
"Environmental Indemnity Agreement"). To date, Philips has fully performed its
obligations under the Environmental Indemnity Agreement. The Environmental
Indemnity Agreement terminates on December 29, 2008. Four matters covered by the
Environmental Indemnity Agreement are currently pending. For two of these sites,
Philips has entered into Consent Orders with the Environmental Protection Agency
("EPA") or the North Carolina Department of Environment, Health and Natural
Resources, as appropriate, whereby Philips has agreed to pay required response
costs. For the third site, the EPA has notified Selmer it intends to carry out
the final remediation remedy itself. The EPA estimates that this remedy has a
present net cost of approximately $12 million. Over 40 persons or entities have
been named by the EPA as potentially responsible parties at this site. This
matter has been tendered to Philips pursuant to the Environmental Indemnity
Agreement. On October 22, 1998, the Company was joined as defendant in an action
involving a site formerly occupied by a business acquired by the Company in
Illinois. Philips has accepted the defense of this action pursuant to the terms
of the Environmental Indemnity Agreement. The potential liability of the Company
at any of these sites is affected by several factors including, but not limited
to, the method of remediation, the Company's portion of the materials in the
site relative to the other named parties, the number of parties participating
and the financial capabilities of the other potentially responsible parties once
the relative share has been determined. No assurance can be given, however, that
additional environmental issues will not require additional, currently
unanticipated investigation, assessment or remediation expenditures or that
Philips will make payments that it is obligated to make under the Environmental
Indemnity Agreement.
The Company operates manufacturing facilities at locations where
hazardous substances (including chlorinated solvents) were used. The Company
believes that an entity that formerly operated one such facility may have
released hazardous substances at such location, which is leased by the Company.
The Company has not contributed to such release. Further, the Company has a
contractual indemnity from certain stockholders of such entity. Such facility is
not the subject of a legal proceeding involving the Company and, to the
Company's knowledge, is not subject to investigation. However, no assurance can
be given that legal proceedings will not arise in the future and that such
indemnitors would make the payments described in the indemnity.
The matters described above and the Company's other liabilities and
compliance costs arising under environmental laws are not expected to have a
material impact on the Company's capital expenditures, earnings or competitive
position. However, some risk of environmental liability is inherent in the
nature of the Company's current and former businesses and the Company might, in
the future, incur material costs to meet current or more stringent compliance,
cleanup or other obligations pursuant to environmental laws.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 2000.
10
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The ordinary common stock of the Company is traded on the New York
Stock Exchange ("NYSE") under the symbol "LVB". The following table sets forth,
for the period indicated, the high and low sales price per share of the ordinary
common stock as reported on the NYSE.
<TABLE>
<CAPTION>
High Low
-------- ---------
<S> <C> <C>
Fiscal Year Ended December 31, 1999
First Quarter $ 26.00 $ 20.06
Second Quarter 27.00 21.19
Third Quarter 25.69 20.75
Fourth Quarter 21.50 15.88
Fiscal Year Ended December 31, 2000
First Quarter $ 20.94 $ 17.50
Second Quarter 20.00 14.50
Third Quarter 18.75 16.38
Fourth Quarter 19.63 16.81
</TABLE>
The Company's common stock is comprised of two classes: Class A and
Ordinary. With the exception of disparate voting power, both classes are
substantially identical. Each share of Class A common stock entitles the holder
to 98 votes. Holders of Ordinary common stock are entitled to one vote per
share. Class A common stock shall automatically convert to Ordinary common stock
if, at any time, the Class A common stock is not owned by an original Class A
holder. As of March 8, 2001, there were 373 holders of record of the Company's
Ordinary common stock and two holders of record of the Class A common stock.
The Company has no plans to pay cash dividends on the common stock. The
Company presently intends to retain earnings to reduce outstanding indebtedness
and to fund the growth of the Company's business. The payment of any future
dividends will be determined by the Board of Directors in light of conditions
then existing, including the Company's results of operations, financial
condition, cash requirements, restrictions in financing agreements, business
conditions and other factors.
The Company is restricted by the terms of its outstanding debt and
financing agreements from paying cash dividends on its common stock, and may, in
the future, enter into loan or other agreements that restrict the payment of
cash dividends on the common stock.
11
<PAGE>
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
the Company as of and for the five years ended December 31, 2000, derived from
the audited financial statements of the Company. The table should be read in
conjunction with the audited consolidated financial statements of the Company,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
<TABLE>
<CAPTION>
(In thousands except share and Years Ended December 31,
per share information) -----------------------------------------------------------------------------
1996 1997 1998 1999 2000 (1)
------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 257,903 $ 277,848 $ 293,251 $ 304,636 $ 331,698
Gross profit 84,235 93,281 98,479 100,748 104,958
Income from operations 33,124 38,249 41,813 41,140 41,689
Income before extraordinary item 7,421 13,700 16,651 17,345 16,904
Income per share before extraordinary
item:
Basic 1.00 1.45 1.78 1.88 1.89
Diluted 1.00 1.45 1.75 1.87 1.89
Weighted average shares:
Basic 7,418,580 9,426,122 9,339,896 9,213,145 8,921,091
Diluted 7,418,580 9,458,841 9,505,640 9,277,798 8,921,108
OTHER FINANCIAL DATA:
EBITDA (2) 44,520 50,175 54,072 54,822 57,352
Capital expenditures 5,199 5,634 6,264 36,192 7,890
Cash flows from:
Operating activities 5,927 13,835 14,227 15,372 13,265
Investing activities (5,039) (8,968) (5,289) (39,312) (93,798)
Financing activities (865) (3,440) (1,718) 16,304 80,584
MARGINS:
Gross profit 32.7% 33.6% 33.6% 33.1% 31.6%
EBITDA (2) 17.3 18.1 18.4 18.0 17.3
BALANCE SHEET DATA (AT YEAR END):
Cash $ 3,277 $ 5,271 $ 12,460 $ 4,664 $ 4,989
Current assets 140,353 151,622 170,381 171,954 265,453
Total assets 265,366 266,708 283,927 309,641 421,816
Current liabilities 37,720 40,429 42,243 44,959 56,575
Total debt 118,391 115,457 117,028 140,080 223,410
Stockholders' equity 67,878 75,761 91,757 98,202 113,207
</TABLE>
- ----------------
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA:
(1) The Company acquired UMI in September 2000.
(2) EBITDA represents earnings before depreciation and amortization, net
interest expense and income tax expense (benefit), adjusted to exclude
non-recurring charges. While EBITDA should not be construed as a
substitute for operating income or a better indicator of liquidity than
cash flow from operating activities, which are determined in accordance
with accounting principles generally accepted in the United States of
America, it is included herein to provide additional information with
respect to the ability of the Company to meet its future debt service,
capital expenditure and working capital requirements which the Company
believes certain investors find useful. EBITDA is not necessarily a
measure of the Company's ability to fund its cash needs.
12
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion provides an assessment of the results of
operations and liquidity and capital resources for the Company and should be
read in conjunction with the consolidated financial statements of the Company
and the notes thereto included elsewhere in this report.
OVERVIEW
The Company, through its operating subsidiaries, is one of the world's
leading manufacturers of musical instruments. The Company's strategy is to
capitalize on its strong brand names, leading market positions and quality
products. The Company's net sales of $332 million for the year ended December
31, 2000 were comprised of piano sales of $183 million and band and orchestral
instrument sales of $149 million.
Piano sales are influenced by general economic conditions, demographic
trends and general interest in music and the arts. The operating results of this
segment are primarily affected by Steinway & Sons grand piano sales. Given the
total number of these pianos sold in any year (3,647 sold in 2000), a slight
change in units sold can have a material impact on the Company's business and
operating results. Grand piano unit shipments have increased 16% from 1997 to
2000, largely attributable to the strong U.S. economy, increased selling and
marketing efforts, and recent improvements in the international markets. In
2000, approximately 64% of piano sales were in the United States, 26% in Europe
and the remaining 10% primarily in Asia.
Student band instrument sales are strongly influenced by trends in
school enrollment and general attitudes toward music and the arts. The school
instrument business is generally resistant to macroeconomic cycles and strongly
correlated to the number of school children in the United States, which after
increasing steadily over the past several years, will stabilize and remain
relatively consistent over the next few years. Beginner instruments accounted
for 77% of band and orchestral unit shipments and 52% of instrument revenues in
2000, with advanced and professional instruments representing the balance. In
2000, approximately 86% of band sales were in the United States, 7% in Europe
and the remaining 7% primarily in Asia.
Although the Company cannot accurately predict the precise effect of
inflation on its operations, it does not believe that inflation has had a
material effect on sales or results of operations in recent years. Sales to
customers outside the United States represent approximately 26% of consolidated
sales, with international piano sales accounting for over 75% of these
international sales. A significant portion of international piano sales
originate from its German manufacturing facility, resulting in sales, cost of
sales and related operating expenses denominated in Deutsche marks. While
currency translation has affected international sales, cost of sales and related
operating expenses, it has not had a material impact on operating income. The
Company utilizes financial instruments such as forward exchange contracts and
currency options to reduce the impact of exchange rate fluctuations on firm and
anticipated cash flow exposures and certain assets and liabilities denominated
in currencies other than the functional currency. The Company does not purchase
currency related financial instruments for purposes other than exchange rate
risk management.
The Company's effective tax rates vary depending on the relative
proportion of foreign to U.S. income (foreign income generally, and German
income in particular, bear higher rates of tax) and
13
<PAGE>
absorption of foreign tax credits in the U.S. In 2000, a one-time tax benefit
associated with the reduction of deferred tax balances caused by a rate
reduction in Germany lowered the Company's effective tax rate from 42% in 1999
to 38% in 2000.
The Company has historically grown through strategic acquisitions of
complementary businesses. Recent acquisitions have included the Kluge group
of companies in December 1998 and O.S. Kelly in November 1999. In January
2000, the Company acquired Pianohaus Karl Lang ("PKL") for approximately $2.3
million. PKL, located in Munich, is Germany's largest retail piano store and
is expected to strengthen Steinway's foreign distribution network. In
September 2000, the acquisition of United Musical Instruments Holdings, Inc.
("UMI") was completed with an aggregate purchase price of approximately $84.0
million, including the assumption of approximately $57.0 million of debt.
UMI, a domestic manufacturer of band and orchestral instruments, produces
instruments under the C.G. Conn, King, Armstrong, and Scherl & Roth brand
names. UMI's strength in background brass instruments is expected to
complement current product offerings and will enhance the Company's leading
market position in the other categories in which it competes. The following
discussion includes each of these businesses since its date of acquisition.
RESULTS OF OPERATIONS
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
NET SALES - Net sales increased $27.1 million (8.9%) to $331.7 million
in 2000. Piano sales increased $9.3 million (5.3%), reflecting higher Steinway
shipments which increased 14% overseas and more than 8% overall. This strong
performance by Steinway more than offset a 12% decline in Boston units which
were negatively impacted by significant price increases necessitated by the
strengthening Japanese yen. Band and orchestral sales increased $17.8 million
(13.6%). The acquisition of UMI added $19.8 million of sales, which offset a
decline in average selling prices attributable to a change in the volume
incentive program offered to band dealers. Rebate programs previously offered,
the cost of which had been included in operating expenses, were replaced with
price discount programs. Overall unit shipments increased 17%.
GROSS PROFIT - Gross profit increased $4.2 million (4.2%) to $105.0
million. Gross margins declined from 33.1% in 1999 to 31.6% in 2000. Piano
margins increased slightly, from 35.2% to 35.6%, as a result of the higher
proportion of Steinway units sold. Band instrument margins declined from 30.2%
to 26.8% primarily due to the change to a volume-based price discount program
from a rebate program. Manufacturing inefficiencies that occurred in the first
half of 2000, as well as additional costs associated with the reengineering of
two manufacturing plants, also negatively impacted gross margins.
OPERATING EXPENSES - Operating expenses increased only $3.7 million
(6.1%) despite the additions of UMI and PKL in 2000. Operating expenses
decreased as a percentage of sales from 19.6% in 1999 to 19.1% in 2000.
Operating expenses for existing operations declined primarily due to the
replacement of rebate programs which generated $3.6 million of expense in 1999.
This reduction was offset by the addition of $5.3 million in operating expenses
from UMI and PKL, as well as $1.5 million of non-recurring charges associated
with the UMI acquisition.
OTHER EXPENSE, NET - Other expense increased $2.9 million (25.4%) to
$14.3 million in 2000. This increase is the result of higher interest expenses
associated with higher average outstanding debt balances throughout the year and
the acquisition of UMI.
14
<PAGE>
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
NET SALES - Net sales increased $11.4 million (3.9%) to $304.6 million
in 1999. Piano sales increased $12.5 million (7.7%). Total piano shipments
increased nearly 9%, comprised of a 14% increase in Boston units and a 3%
increase in Steinway units. Band and orchestral instrument sales decreased $1.1
million (0.8%) to $131.0 in 1999. A decline in foreign shipments and a highly
competitive domestic market, coupled with production difficulties, caused a 3%
decrease in band and orchestral instrument shipments for the year.
GROSS PROFIT - Gross profit increased $2.3 million (2.3%) to $100.7
million. Gross margins declined from 33.6% in 1998 to 33.1% in 1999. Piano
margins declined slightly, from 35.4% to 35.2%, as a result of the higher
proportion of Boston sales coupled with a yen driven cost increase on those
instruments. These negative factors were almost entirely offset by a higher mix
of retail sales and the cost savings derived from the integration of Kluge. Band
instrument margins declined from 31.3% to 30.2% primarily due to manufacturing
inefficiencies. The most significant problems occurred at the brasswind plant
where bottlenecks due to a lack of trained workers caused production levels to
decline in the second half of the year.
OPERATING EXPENSES - Operating expenses increased $2.9 million (5.2%)
to $59.6 million in 1999. Operating expenses increased as a percentage of sales
from 19.3% in 1998 to 19.6% in 1999. The majority of the increase occurred in
the sales and marketing area which was up nearly $2.0 million over the prior
year. This increase was primarily due to aggressive band instrument marketing
programs and expenses attributable to the higher level of piano sales. In
addition, Kluge, which was not part of the operations in 1998, incurred $0.6
million of operating expenses in 1999.
OTHER EXPENSE, NET - Other expense increased $0.6 million (5.9%) to
$11.4 million in 1999. This increase is the result of higher interest expenses
offset by income generated from the leasing of the Steinway Hall building.
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 was $14.2 million in 1998, $15.4 million in
1999 and $13.3 million in 2000. During 2000, the Company embarked on a major
initiative to effect fundamental changes in its band instrument manufacturing
operations. Approximately $1.8 million of expense related to the project was
incurred during the year. The long-term benefits of the project, which will be
completed by mid-2002, are expected to be improved production flow, efficiency
and quality.
Cash used for the acquisitions of Kluge, O.S. Kelly, PKL and UMI was
$1.3 million in 1998, $2.6 million in 1999 and $86.6 million in 2000,
respectively. The Company acquired the building that includes the Steinway Hall
retail showroom in New York City in March 1999 for $30.8 million. Funds for the
acquisition were provided from cash on hand and a new $22.5 million real estate
term loan provided by the Company's existing lender. This loan is due in monthly
installments of $0.2 million, including principal and interest based on a
twenty-five year amortization. The term loan bears interest at average 30-day
LIBOR plus 1.5%.
15
<PAGE>
Additional capital expenditures of $6.3 million, $5.4 million and $7.9
million in 1998, 1999 and 2000, respectively, were primarily used for purchasing
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.
Consistent with industry practice, the Company sells band instruments
almost entirely on credit utilizing the two financing programs described below.
These programs create large working capital requirements during the year when
band instrument receivable balances reach highs of approximately $65-70 million
in August and September, and lows of approximately $35-40 million in January and
February. The financing options, intended to assist dealers with the seasonality
inherent in the industry and to facilitate the rent-to-own programs offered to
students by many retailers, also allow the Company to match its production and
delivery schedules. The following forms of financing are offered to qualified
band instrument dealers:
a) RECEIVABLE DATING: Purchases made from January through August have
payment due in October. Purchases made from September to December have
payment due in January. Dealers are offered discounts for early
payment.
b) NOTE RECEIVABLE FINANCING: Qualified dealers may convert open accounts to a
note payable to the Company. The note program is offered in January and
October, and coincides with the receivable dating program. The note
receivable is secured by dealer inventories and receivables. The majority
of notes receivable are purchased by a third-party financing company, on a
full recourse basis. The Company's current arrangement, which allows the
financing company to purchase, at its option, up to an aggregate amount
outstanding at any time of $16.0 million of notes receivable, expires in
August 2001. Net notes receivable sales generated approximately $14.1
million and $10.1 million in cash in 1999 and 2000, respectively.
Unlike many of its competitors in the piano industry, the Company does
not provide extended financing arrangements to its dealers. To facilitate
long-term financing required by some dealers, financing has been arranged
through a third-party provider which generally involves no guarantee by the
Company.
On September 14, 2000, the Company entered into an amended and restated
credit agreement (the "Credit Facility") with its existing lender to accommodate
the acquisition of UMI. The Credit Facility, which expires on September 14,
2008, extended the due date of the real estate term loan, provided a new $45.0
million acquisition term loan and increased the Company's potential borrowing
capacity from $60.0 million to $120.0 million in revolving credit loans. The
acquisition term loan is repayable in monthly installments of $0.4 million for
the first five years and monthly installments of $0.6 million in years six
through eight. The acquisition term loan and revolving credit loans bear
interest at average 30-day LIBOR plus 1.75%. Borrowings are secured by a first
lien on the Company's domestic inventory, receivables, and fixed assets. As of
December 31, 2000, revolving credit loans outstanding were $43.1 million and
additional availability, based on eligible accounts receivable and inventory
balances, was approximately $68.6 million. Open account loans with foreign banks
also provide for borrowings by Steinway's foreign subsidiaries of up to 40
million Deutsche marks.
At December 31, 2000, the Company's total outstanding indebtedness
amounted to $223.4 million, consisting of $110.0 million of 11% Senior
Subordinated Notes (the "Notes"), $21.8 million on the real estate term loan,
$44.2 million on the acquisition term loan, $43.1 million under the Credit
Facility and $4.3 million of notes payable to foreign banks. Cash interest paid
was $14.2 million and $17.2 million in 1999 and 2000, respectively. All of the
Company's debt agreements contain covenants
16
<PAGE>
that place certain restrictions on the Company, including its ability to incur
additional indebtedness, to make investments in other entities, and to pay cash
dividends.
The Company's share repurchase program authorizes management to make
discretionary repurchases of its ordinary common stock up to a limit of $25.0
million. Repurchased shares are being held as treasury shares to be used for
corporate purposes. The Company repurchased 395,300 shares at a cost of $7.8
million in 1999 and 26,700 shares at a cost of $0.5 million in 2000.
Management believes that cash on hand, together with cash flows
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 the
next twelve months.
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", which was amended by SFAS No.
138, "Accounting for Certain Derivative Instruments and Hedging Activities" in
2000. These statements require 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 income or as a component of comprehensive income,
depending on the type of hedging relationship that exists. The Company will
adopt the amended standard January 1, 2001. Based on the results of the analysis
to date, management does not expect the adoption of the amended standard to have
a material effect on the Company's results of operations or financial position.
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", which
sets forth the SEC's views on appropriate revenue recognition practices. The
Company believes that its current revenue recognition practices are in
accordance with SAB No. 101.
17
<PAGE>
ITEM 7A 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. As of December 31, 2000, a 10% adverse change in
foreign currency exchange rates from market rates would increase the fair value
of the contracts by approximately $0.3 million. Gains and losses on the foreign
currency exchange contracts are defined as the difference between the contract
rate at its inception date and the current exchange rate. However, any such
gains and losses would generally be offset by corresponding losses and gains,
respectively, on the related hedged asset or liability.
The Company's interest rate exposure is limited primarily to interest
rate changes on its variable rate debt. The Credit Facility and term loans bear
interest at rates that fluctuate with changes in LIBOR. For the year ended
December 31, 2000, a hypothetical 10% increase in interest rates would have
increased the Company's interest expense by approximately $0.5 million. The
Company uses interest rate caps to manage interest rate risk on foreign debt.
The carrying value of the cap is not material and a 10% change in interest rates
would not have a material effect on the fair value of the cap.
The Company's long-term debt includes $110.0 million of Notes with a
fixed interest rate. Accordingly, there would be no immediate impact on the
Company's interest expense associated with these Notes due to fluctuations in
market interest rates. However, based on a hypothetical 10% immediate decrease
in market interest rates, the fair value of the Company's Notes, which would be
sensitive to such interest rate changes, would be increased by approximately
$1.2 million as of December 31, 2000. Such fair value changes may affect the
Company's determination whether to retain, replace or retire these Notes.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Income for the Years Ended December 31,
1998, 1999 and 2000
Consolidated Balance Sheets as of December 31, 1999 and 2000
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Steinway Musical Instruments, Inc.:
We have audited the accompanying consolidated balance sheets of Steinway Musical
Instruments, Inc. and subsidiaries as of December 31, 1999 and 2000, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2000. Our audits
also included the financial statement schedule listed in the Index at Item
14(a)(1). These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Steinway Musical Instruments, Inc.
and subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 22, 2001
19
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 293,251 $ 304,636 $ 331,698
Cost of sales 194,772 203,888 226,740
------------- ------------- -------------
Gross profit 98,479 100,748 104,958
Operating expenses:
Sales and marketing 35,533 37,527 37,342
General and administrative 16,961 17,790 19,694
Amortization 3,850 3,928 3,856
Other operating expense 322 363 887
Non-recurring charges 1,490
------------- ------------- -------------
Total operating expenses 56,666 59,608 63,269
------------- ------------- -------------
Income from operations 41,813 41,140 41,689
Other (income) expense:
Other income, net (1,155) (1,881) (1,825)
Interest income (1,071) (907) (1,291)
Interest expense 12,982 14,183 17,401
------------- ------------- -------------
Other expense, net 10,756 11,395 14,285
------------- ------------- -------------
Income before income taxes 31,057 29,745 27,404
Provision for income taxes 14,406 12,400 10,500
------------- ------------- -------------
Net income $ 16,651 $ 17,345 $ 16,904
============= ============= =============
Basic income per share $ 1.78 $ 1.88 $ 1.89
============= ============= =============
Diluted income per share $ 1.75 $ 1.87 $ 1.89
============= ============= =============
Weighted average shares:
Basic 9,339,896 9,213,145 8,921,091
Diluted 9,505,640 9,277,798 8,921,108
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, December 31,
1999 2000
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 4,664 $ 4,989
Accounts, notes and leases receivable, net of allowance for
bad debts of $6,765 and $11,377 in 1999 and 2000, respectively 56,510 93,042
Inventories 102,116 160,296
Prepaid expenses and other current assets 2,605 3,005
Deferred tax assets 6,059 4,121
--------------- ---------------
Total current assets 171,954 265,453
Property, plant and equipment, net 89,510 106,415
Other assets, net 17,308 20,645
Cost in excess of fair value of net assets acquired, net of accumulated
amortization of $4,449 and $5,231 in 1999 and 2000, respectively 30,869 29,303
--------------- ---------------
TOTAL ASSETS $ 309,641 $ 421,816
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,286 $ 9,516
Accounts payable 6,920 11,206
Other current liabilities 30,753 35,853
--------------- ---------------
Total current liabilities 44,959 56,575
Long-term debt 132,794 213,894
Deferred tax liabilities 21,569 26,316
Non-current pension liability 12,117 11,824
--------------- ---------------
Total liabilities 211,439 308,609
--------------- ---------------
Commitments and contingent liabilities
Stockholders' equity:
Class A Common Stock, $.001 par value, 5,000,000 shares authorized,
477,953 shares issued and outstanding - -
Common stock, $.001 par value, 90,000,000 shares authorized, 8,438,074
and 8,453,547 shares outstanding in 1999 and 2000, respectively 9 9
Additional paid-in capital 71,031 71,724
Retained earnings 48,488 65,392
Accumulated other comprehensive income (7,857) (9,966)
Treasury stock, at cost (632,700 and 659,400 shares in 1999
and 2000, respectively) (13,469) (13,952)
--------------- ---------------
Total stockholders' equity 98,202 113,207
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 309,641 $ 421,816
=============== ===============
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,651 $ 17,345 $ 16,904
Adjustments to reconcile net income to cash
flows from operating activities:
Depreciation and amortization 10,630 11,618 12,342
Deferred tax benefit (2,509) (2,079) (2,349)
Other 380 274 240
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (4,734) (5,028) 4,739
Inventories (6,406) (8,883) (20,242)
Prepaid expense and other current assets 775 (251) 365
Accounts payable 925 104 2,161
Other current liabilities (1,485) 2,272 (895)
------------- ------------- -------------
Cash flows from operating activities 14,227 15,372 13,265
Cash flows from investing activities:
Capital expenditures (6,264) (36,192) (7,890)
Proceeds from disposals of fixed assets 137 138 511
Changes in other assets 2,175 (615) 148
Business acquisitions (net of cash acquired) (1,337) (2,643) (86,567)
------------- ------------- -------------
Cash flows from investing activities (5,289) (39,312) (93,798)
Cash flows from financing activities:
Borrowing under lines of credit 245,774 289,715 328,486
Repayments under lines of credit (243,918) (287,846) (287,189)
Proceeds from long-term debt 22,500 45,000
Repayments of long-term debt (865) (1,046) (1,981)
Debt issuance costs (3,942)
Proceeds from issuance of stock 1,039 786 693
Purchase of treasury stock (3,748) (7,805) (483)
------------- ------------- -------------
Cash flows from financing activities (1,718) 16,304 80,584
Effects of foreign exchange rate changes on cash (31) (160) 274
------------- ------------- -------------
Increase (decrease) in cash 7,189 (7,796) 325
Cash, beginning of year 5,271 12,460 4,664
------------- ------------- -------------
Cash, end of year $ 12,460 $ 4,664 $ 4,989
============= ============= =============
Supplemental Cash Flow Information
Interest paid $ 12,991 $ 14,173 $ 17,238
Income taxes paid $ 16,469 $ 13,709 $ 14,990
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Stock Capital Earnings Income Stock Equity
-------- ---------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 9 $ 69,206 $ 14,492 $ (6,030) $ (1,916) $ 75,761
-------------
Comprehensive income:
Net income 16,651 16,651
Foreign currency translation
adjustment 2,054 2,054
-------------
Total comprehensive income 18,705
-------------
Issuance of 55,231 shares
of common stock 1,039 1,039
Purchase of 151,500 shares
of treasury stock (3,748) (3,748)
-------- ---------- ---------- ------------- ---------- -------------
Balance, December 31, 1998 9 70,245 31,143 (3,976) (5,664) 91,757
-------------
Comprehensive income:
Net income 17,345 17,345
Foreign currency translation
adjustment (3,881) (3,881)
-------------
Total comprehensive income 13,464
-------------
Issuance of 40,002 shares
of common stock 786 786
Purchase of 395,300 shares
of treasury stock (7,805) (7,805)
-------- ---------- ---------- ------------- ---------- -------------
Balance, December 31, 1999 9 71,031 48,488 (7,857) (13,469) 98,202
-------------
Comprehensive income:
Net income 16,904 16,904
Foreign currency translation
adjustment (1,988) (1,988)
Additional minimum pension liability (121) (121)
-------------
Total comprehensive income 14,795
-------------
Issuance of 42,173 shares
of common stock 693 693
Purchase of 26,700 shares
of treasury stock (483) (483)
-------- ---------- ---------- ------------- ---------- -------------
Balance, December 31, 2000 $ 9 $ 71,724 $ 65,392 $ (9,966) $ (13,952) $ 113,207
======== ========== ========== ============= ========== =============
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(1) NATURE OF BUSINESS
Steinway Musical Instruments, Inc. and subsidiaries (the "Company") is one
of the world's leading manufacturers of musical instruments. The Company,
through its wholly-owned subsidiaries, The Steinway Piano Company, Inc.
("Steinway"), The Selmer Company, Inc. ("Selmer") and United Musical Instruments
Holdings, Inc. ("UMI"), manufactures and distributes products within the musical
instrument industry. Steinway produces the highest quality piano in the world
and has one of the most highly recognized and prestigious brand names. Selmer
and UMI are the leading domestic manufacturers of band and orchestral
instruments and related accessories, including a complete line of brasswind,
woodwind, percussion and stringed instruments. Selmer Paris saxophones, Bach
trumpets and trombones, C.G. Conn and King brasswind instruments and Ludwig
snare drums are considered by many to be the finest such instruments in the
world.
(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. Significant intercompany balances have been eliminated in
consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
REVENUE RECOGNITION - Revenue is generally recognized upon shipment. The
Company provides for the estimated costs of warranties, discounts and returns at
the time of sale.
INVENTORIES - Inventories are stated at the lower of cost or market. The
cost of approximately 76% of inventories has been determined by the first-in,
first-out ("FIFO") method. The cost of the remaining inventories has been
determined by the last-in, first-out ("LIFO") method.
DEPRECIATION AND AMORTIZATION - Property, plant and equipment are recorded
at cost or at fair value in the case of assets acquired through business
acquisitions. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets. Leasehold improvements are
amortized using the straight-line method over the estimated useful lives of the
improvements or the remaining term of the respective lease, whichever is
shorter. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Building and improvements 15-40 years
Leasehold improvements 5-15 years
Machinery, equipment and tooling 3-10 years
Office furniture and fixtures 3-10 years
Concert and artist and rental pianos 15 years
</TABLE>
Cost in excess of fair value acquired is amortized on a straight-line basis
over 40 years. Trademarks acquired are recorded at appraised value and are
amortized on a straight-line basis over 10 years. Deferred financing costs are
amortized on a straight-line basis over the repayment periods of the underlying
debt, which approximates the effective interest method.
24
<PAGE>
When conditions indicate a need to evaluate recoverability, the Company
evaluates the recoverability of its long-lived assets by comparison of the
estimated future undiscounted cash flows expected to be generated by those
assets to their carrying value. To date, no impairment losses have been noted or
recorded as a result of this evaluation process.
ADVERTISING - Advertising costs are expensed as incurred. Advertising
expense was $6,497, $6,676 and $7,684 for the years ended December 31, 1998,
1999 and 2000, respectively.
INCOME TAXES - Income taxes are provided using an asset and liability
approach to financial accounting and reporting for income taxes. Deferred income
tax assets and liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
FOREIGN CURRENCY TRANSLATION - Assets and liabilities of non-U.S.
operations are translated into U.S. dollars at year-end rates, and revenues and
expenses at average rates of exchange prevailing during the year. The resulting
translation adjustments are reported as a separate component of comprehensive
income. Foreign currency transaction gains and losses are recognized in the
consolidated statements of income currently.
FOREIGN EXCHANGE CONTRACTS - The Company enters into foreign exchange
contracts as a hedge against foreign currency transactions. These contracts are
not used for trading or speculative purposes. Gains and losses arising from
fluctuations in exchange rates are recognized at the end of each reporting
period. Such gains and losses directly offset the foreign exchange gains or
losses associated with the hedged receivable or payable. Gains and losses on
foreign exchange contracts which exceed the related balance sheet or firm
purchase commitment exposure are included in foreign currency gain or loss in
the consolidated statements of income. The Company does have credit risk to the
extent the counterparties are unable to fulfill their obligations on the foreign
exchange contracts. However, the Company enters into these contracts with
reputable institutions and the Company believes there is not a significant risk
of loss.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
INCOME PER COMMON SHARE - Basic income per common share is computed using
the weighted average number of common shares outstanding during each year.
Diluted income per common share reflects the effect of the Company's outstanding
options (using the treasury stock method), except when such items would be
antidilutive.
A reconciliation of the weighted average shares used for the basic and diluted
computations is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares for basic income per share 9,339,896 9,213,145 8,921,091
Dilutive effect of stock options 165,744 64,653 17
--------- --------- ---------
Weighted average shares for diluted income per share 9,505,640 9,277,798 8,921,108
========= ========= =========
</TABLE>
25
<PAGE>
Options to purchase 0, 30,500 and 618,800 shares of common stock at prices
ranging from $18.84 to $21.94 per share were outstanding during the years ended
December 31, 1998, 1999 and 2000, respectively, but were not included in the
computation of diluted net income per share because the options' exercise prices
were greater than the average market price of the common shares.
ENVIRONMENTAL MATTERS - Potential environmental liabilities are accounted
for in accordance with Statement of Financial Accounting Standards ("SFAS") No.
5, "Accounting for Contingencies", which requires a liability to be recorded
when it is probable that a loss has been incurred and its amount can reasonably
be estimated (see Note 12).
SEGMENT REPORTING - The Company has determined that it has two distinct
reportable segments: the piano segment and the band and orchestral instrument
segment. The Company considers these two segments reportable as they are managed
separately and the operating results of each segment are regularly reviewed and
evaluated separately by the Company's senior management.
COMPREHENSIVE INCOME - Comprehensive income is comprised of net income,
foreign currency translation adjustments and additional minimum pension
liabilities and is reported in the consolidated statements of stockholders'
equity for all periods presented.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board released SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which was amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Hedging Activities" in 2000. These statements
require 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 income or as a component of comprehensive income, depending on the type of
hedging relationship that exists. The Company will adopt the amended standard
January 1, 2001. Based on the results of the analysis to date, management does
not expect the adoption of the amended standard to have a material effect on the
Company's results of operations or financial position.
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", which sets
forth the SEC's views on appropriate revenue recognition practices. The Company
believes that its current revenue recognition practices are in accordance with
SAB No. 101.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform to the current year presentation.
(3) ACQUISITIONS
During the year ended December 31, 2000, the Company completed the
following acquisitions, both of which have been accounted for as purchases. The
results of the acquired businesses have been included with those of the Company
from the date of acquisition. The purchase price paid has been allocated to the
assets acquired and liabilities assumed based upon their estimated fair values.
Certain of these estimates are preliminary and could change upon completion of
the estimation process.
In January 2000, the Company acquired Pianohaus Karl Lang, located in
Munich, Germany, for approximately $2.3 million. The purchase price was
allocated primarily to fixed assets.
In September 2000, the Company completed the acquisition of UMI pursuant to
a stock purchase agreement dated as of July 20, 2000. The purchase price
aggregated $27 million in cash, funded through
26
<PAGE>
borrowings on the Company's lines of credit and a term loan. In addition, the
Company assumed approximately $57 million of debt, which was paid at closing
with funds from the lines of credit and the term loan.
The preliminary purchase price allocation for UMI is as follows:
<TABLE>
<S> <C>
Inventories $ 40,041
Receivables and current assets 41,734
Property, plant and equipment 17,510
Trademarks 3,564
Accounts payable and other current liabilities (18,622)
---------------
Purchase price $ 84,227
==============
</TABLE>
In connection with the acquisition, inventories were written up by $11
million to net realizable value. Prior to the acquisition, UMI had utilized the
LIFO method of determining cost; the Company will continue to utilize this
method for UMI inventories, and such inventory items will constitute a separate
pool for accounting and tax purposes.
Had the acquisition of UMI been consummated on January 1, 1999, it is
estimated that the unaudited pro forma results of operations would have been as
follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 2000
<S> <C> <C>
Revenues $ 368,090 $ 379,369
Net income 18,222 18,522
Earnings per share:
Basic $ 1.98 $ 2.08
Diluted $ 1.96 $ 2.08
</TABLE>
(4) INVENTORIES
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Raw materials $ 15,791 $ 20,961
Work in process 37,921 53,711
Finished goods 48,404 85,624
------------- -------------
Total $ 102,116 $ 160,296
============= =============
</TABLE>
Inventories held by UMI (see Note 3) are accounted for using the LIFO
method. If the FIFO method of inventory valuation had been used to value all
inventories, inventories would have been $3,270 lower than reported at December
31, 2000. As a result of using the LIFO valuation method, net earnings were
$2,017 higher in 2000. For financial reporting purposes, the fair value of UMI
inventories as of the acquisition date constitutes the base layer for purposes
of applying the LIFO method. This layer includes the $11 million allocated to
state opening inventories at net realizable value.
27
<PAGE>
(5) PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Land $ 16,680 $ 18,378
Buildings and improvements 53,979 62,930
Leasehold improvements 1,870 1,864
Machinery, equipment and tooling 32,185 40,381
Office furniture and fixtures 6,242 7,786
Concert and artist and rental pianos 10,510 11,327
Construction in progress 646 509
------------- -------------
122,112 143,175
Less accumulated depreciation and amortization 32,602 36,760
------------- -------------
Total $ 89,510 $ 106,415
============= =============
</TABLE>
(6) OTHER ASSETS, NET
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Trademarks $ 19,718 $ 22,213
Deferred financing costs 9,294 13,234
Other assets 2,578 2,235
------------- -------------
31,590 37,682
Less accumulated amortization 14,282 17,037
------------- -------------
Total $ 17,308 $ 20,645
============= =============
</TABLE>
(7) OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Accrued payroll and related benefits $ 12,157 $ 15,266
Current portion of pension liability 502 685
Accrued warranty expense 2,330 2,355
Accrued income taxes 1,882 1,678
Accrued interest 1,518 1,675
Other accrued expenses 12,364 14,194
------------- -------------
Total $ 30,753 $ 35,853
============= =============
</TABLE>
28
<PAGE>
(8) OTHER (INCOME) EXPENSE, NET
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
West 57th Building income $ - $ (3,516) $ (4,653)
West 57th Building expenses 2,452 3,254
Foreign exchange (gain) loss, net (384) (116) 462
Miscellaneous (771) (701) (888)
------------- ------------- -------------
Total $ (1,155) $ (1,881) $ (1,825)
============= ============= =============
</TABLE>
(9) INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
U.S. Federal:
Current $ 10,210 $ 8,067 $ 7,097
Deferred (870) (276) (780)
U.S. State and local:
Current 1,420 1,533 1,310
Deferred (124) (54) (65)
Foreign:
Current 5,076 4,092 4,442
Deferred (1,306) (962) (1,504)
------------- ------------- -------------
Total $ 14,406 $ 12,400 $ 10,500
============= ============= =============
</TABLE>
The components of income before income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
U.S. operations $ 24,151 $ 23,062 $ 20,075
Non-U.S. operations 6,906 6,683 7,329
------------- ------------- -------------
Total $ 31,057 $ 29,745 $ 27,404
============= ============= =============
</TABLE>
The Company's provision for income taxes differed from that using the
statutory U.S. federal rate as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Statutory federal rate applied to earnings before
income taxes $ 10,870 $ 10,412 $ 9,591
Increase in income taxes resulting from:
Foreign income taxes (net of federal benefit) 2,084 1,278 1,280
State income taxes (net of federal benefit) 933 996 802
Change in tax rate in Germany (570)
Other 519 (286) (603)
------------- ------------- -------------
Provision for income taxes $ 14,406 $ 12,400 $ 10,500
============= ============= =============
</TABLE>
29
<PAGE>
In 2000, Germany passed certain legislation which reduced the rate at which
certain of the Company's operations will pay tax, commencing in 2001. Upon
passage of the legislation, the Company recognized a reduction of $570 in its
deferred tax liabilities based on changes in the rates. This legislation has no
impact on taxes currently payable.
At December 31, 2000, accumulated retained earnings of non-U.S. subsidiaries
totaled $2,244. No provision for U.S. income and foreign withholding taxes has
been made because it is expected that such earnings will be reinvested
indefinitely.
The components of net deferred taxes are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Deferred tax assets:
Uniform capitalization adjustment to inventory $ 2,581 $ 2,488
Allowance for doubtful accounts 1,459 3,037
Book tax differences in LIFO reserves on inventory (6,007)
Accrued expenses and other current assets and liabilities 2,843 4,085
Foreign tax credits 15,681 12,955
Valuation allowances (14,233) (12,366)
------------- -------------
Total deferred tax assets 8,331 4,192
Deferred tax liabilities:
Pension contributions 279 175
Fixed assets (16,808) (19,764)
Intangibles (7,312) (6,798)
------------- -------------
Total deferred tax liabilities (23,841) (26,387)
------------- -------------
Net deferred taxes $ (15,510) $ (22,195)
============= =============
</TABLE>
Valuation allowances provided relate to excess foreign tax credits
generated over expected credit absorption. Of these valuation allowances, $4,612
and $4,051 relate to the acquisition of Steinway as of December 31, 1999 and
2000, respectively. Should the related tax benefits be recognized in the future,
the effect of removing the valuation allowances associated with the acquisition
of Steinway would generally be a decrease in goodwill. During 1999, the
valuation allowance decreased due to the effects of currency exchange offset by
an increase of $1,056 due to the generation of additional excess foreign tax
credits. During 2000, the valuation allowance decreased by $1,867 primarily due
to expiration of foreign tax credits which were written off against the related
reserves. Foreign tax credit carryforwards expire in varying amounts through
2005.
30
<PAGE>
(10) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Senior debt $ 692 $ 43,087
Term loans (see Note 12) 22,286 66,025
11% Senior Subordinated Notes (see Note 19) 110,000 110,000
Note payable to a foreign bank 1,177 367
Open account loans, payable on demand to a foreign bank 5,925 3,931
------------- -------------
Total 140,080 223,410
Less current portion 7,286 9,516
------------- -------------
Long-term debt $ 132,794 $ 213,894
============= =============
</TABLE>
Scheduled maturities of long-term debt as of December 31, 2000 are as
follows:
<TABLE>
<CAPTION>
Amount
-------------
<S> <C>
2001 $ 9,516
2002 5,307
2003 5,332
2004 5,360
2005 115,390
Thereafter 82,505
-------------
Total $ 223,410
=============
</TABLE>
On September 14, 2000, the Company entered into an amended and restated
credit agreement (the "Credit Facility") with its existing lender to accommodate
the acquisition of UMI. The Credit Facility, which expires on September 14,
2008, extended the due date of the real estate term loan, provided a new $45.0
million acquisition term loan and increased the Company's potential borrowing
capacity for its domestic seasonal borrowing requirements from $60.0 million to
$120.0 million in revolving credit loans. The real estate term loan is payable
in monthly installments of $170, based on a twenty-five year amortization, and
includes interest at average 30-day LIBOR plus 1.5%. This term loan is
collateralized by all of the Company's interests in the Steinway Hall property.
The acquisition term loan is repayable in monthly installments of $0.4 million
for the first five years and monthly installments of $0.6 million in years six
through eight. The acquisition term loan and revolving credit loans bear
interest at average 30-day LIBOR plus 1.75%. Borrowings are collateralized by
the Company's domestic accounts receivable, inventory and fixed assets. As of
December 31, 2000, revolving credit loans outstanding were $43.1 million and
additional availability based on eligible accounts receivable and inventory
balances was approximately $68.6 million.
The 11% Senior Subordinated Notes, due May 15, 2005, became redeemable at
the Company's option, in whole or in part, beginning June 1, 2000. The
redemption prices (expressed as percentages of the principal amount) plus
accrued and unpaid interest to the applicable redemption date, are as follows if
redeemed during the twelve-month period beginning on June 1 of the years
indicated below:
<TABLE>
<S> <C>
2000 104.125%
2001 102.750%
2002 101.375%
2003 and thereafter 100.000%
</TABLE>
31
<PAGE>
The note payable to a foreign bank is due in monthly installments of DM 127
($61 at the December 31, 2000 exchange rate) through June 1, 2001, and bears
interest at 6.25%.
The open account loans provide for borrowings by foreign subsidiaries of up
to DM 40,000 ($19,273 at the December 31, 2000 exchange rate) payable on demand.
A portion of the open account loan can be converted into a maximum of L1,049
($1,566 at the December 31, 2000 exchange rate) for use by the Company's UK
branch and Y396,704 ($3,469 at the December 31, 2000 exchange rate) for use by
the Company's Japanese subsidiary. Demand borrowings bear interest at rates of
8.2-8.35% for the Deutsche mark loans, 5.7-5.85% for Euromoney-market short-term
loans (DM based) and 1.695% for Japanese yen loans. The Company has also
purchased two interest rate caps. One cap limits the base interest rate to 5% on
DM 5,000 ($2,409 at the December 31, 2000 exchange rate) declining to DM 1,000
($481 at the December 31, 2000 exchange rate) in 2004. The other cap limits the
base interest rate to 6.25% on DM 3,000 ($1,446 at the December 31, 2000
exchange rate) and expires in 2005.
All of the Company's debt agreements contain certain financial covenants
which, among other things, require the maintenance of certain financial ratios
and net worth, place certain limitations on additional borrowings and capital
expenditures, and prohibit the payment of cash dividends. The Company is in
compliance with all such covenants.
(11) STOCKHOLDERS' EQUITY
The Company's common stock is comprised of two classes: Class A and
Ordinary. With the exception of disparate voting power, both classes are
substantially identical. Each share of Class A common stock entitles the holder
to 98 votes. Holders of Ordinary common stock are entitled to one vote per
share. Class A common stock shall automatically convert to Ordinary common stock
if, at any time, the Class A common stock is not owned by an original Class A
holder.
EMPLOYEE STOCK PURCHASE PLAN - The Company has an employee stock purchase
plan (the "Purchase Plan") under which substantially all employees may purchase
common stock through payroll deductions at a purchase price equal to 85% of the
lower of the fair market values as of the beginning or end of each twelve-month
offering period. Stock purchases under the Purchase Plan are limited to 5% of an
employee's annual base earnings. During 1998, 1999 and 2000, 30,431, 29,502 and
31,773 shares, respectively, were issued under the Purchase Plan. Of the 500,000
shares originally reserved for issuance under the Purchase Plan, 378,737 shares
remain reserved for future issuance as of December 31, 2000.
STOCK PLAN - The 1996 stock plan (the "Stock Plan") provides for the
granting of 778,250 stock options (including incentive stock options and
non-qualified stock options), stock appreciation rights and other stock awards
to certain key employees, consultants and advisors of the Company and its
subsidiaries. Common stock reserved for issuance under the Stock Plan was
731,550 shares as of December 31, 2000.
32
<PAGE>
Option activity for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
------------------------ ------------------------ -----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise Of Exercise of Exercise
Options Price Options Price Options Price
----------- ------------ ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 586,730 $ 19.14 562,344 $ 19.31 536,020 $ 19.26
Granted 41,645 20.72 36,078 22.19 152,851 18.13
Exercised (55,231) 18.61 (40,002) 22.80 (42,173) 16.43
Canceled, forfeited or expired (10,800) 19.00 (22,400) 18.97 (14,300) 19.21
----------- ---------- ----------
Outstanding at end of year 562,344 19.31 536,020 19.26 632,398 19.09
=========== ========== ==========
Exercisable at end of year 200,700 $ 19.09 300,800 $ 19.14 382,700 $ 19.17
</TABLE>
The following table sets forth information regarding outstanding and
exercisable options at December 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
of Remaining Exercise Of Exercise
Range of Exercise Prices Options Contract Life Price Options Price
- ------------------------ --------------- --------------- ----------- -------------------------------
<S> <C> <C> <C> <C> <C>
$15.49 13,598 .6 years $15.49
$18.84 to 21.94 618,800 6.3 19.17 382,700 $19.17
--------------- ---------------
632,398 6.2 19.09 382,700 19.17
=============== ===============
</TABLE>
STOCK-BASED COMPENSATION EXPENSE - As described in Note 2, the Company uses
the intrinsic value method to measure compensation expense associated with
grants of stock options to employees. Had the Company used the fair value method
to measure compensation, as set forth in SFAS No. 123, "Accounting for
Stock-Based Compensation", reported net income and net income per share would
have been as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1999 2000
-------------- ------------- -------------
<S> <C> <C> <C>
Net income $15,929 $16,465 $15,933
Basic income per share $1.71 $1.79 $1.79
Diluted income per share $1.68 $1.77 $1.79
</TABLE>
The fair value of options on their grant date, including the valuation of
the option feature implicit in the Purchase Plan, was measured using the
Black-Scholes option pricing model. Key assumptions used to apply this pricing
model are as follows:
<TABLE>
<CAPTION>
1998 1999 2000
--------------- --------------- ---------------
<S> <C> <C> <C>
Range of risk-free interest rates 4.66-5.35% 4.99-5.10% 6.05-6.41%
Range of expected life of option grants (in years) 1 to 6 1 to 6 1 to 6
Expected volatility of underlying stock 26.4% 26.8% 26.0%
</TABLE>
33
<PAGE>
The weighted average fair value of options on their grant date, including the
valuation of the option feature implicit in the Purchase Plan, is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
--------------- --------------- ---------------
<S> <C> <C> <C>
Stock Plan $7.69 $7.79 $7.64
Purchase Plan $7.41 $6.10 $4.79
</TABLE>
It should be noted that the Black-Scholes option pricing model was designed
to value readily tradable options with relatively short lives and no vesting
restrictions. In addition, option valuation models require the input of highly
subjective assumptions including the expected price volatility. Because the
options granted are not tradable and have contractual lives of up to ten years,
and because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of the options
issued under the Company's Stock Plan and Purchase Plan.
(12) COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENTS - The Company leases various facilities and equipment
under noncancelable operating lease arrangements. These leases expire at various
times through 2016 with various renewal options. Rent expense was $3,638, $3,921
and $3,979 for the years ended December 31, 1998, 1999 and 2000, respectively.
In March 1999, the Company acquired the building that includes the Steinway
Hall retail store on West 57th Street in New York City for approximately $30.8
million. The Company entered into a ninety-nine year land lease as part of the
transaction. Annual rent payable under the land lease is $2,170 in the first ten
years, $2,790 for the subsequent ten year period and will be adjusted every
twenty years thereafter to the greater of the existing rent or 4% of the fair
market value of the land and building combined. The Company also entered into a
ten year master lease whereby all of the Company's interest in the land and
building was leased back to the owner of the land. Rental expense and rental
income associated with these leases was $1,874 and $3,516, respectively, for the
year ended December 31, 1999 and $2,480 and $4,653, respectively, for the year
ended December 31, 2000 and are included, along with other real estate costs, in
other income/expense (see Note 8).
Future minimum lease payments for the Company's noncancelable operating
leases, excluding the land lease discussed above, and future rental income under
the master lease for the years ending December 31 are as follows:
<TABLE>
<CAPTION>
Lease Rental
Payments Income
----------------- -----------------
<S> <C> <C>
2001 $ 3,972 $ 4,653
2002 3,528 4,653
2003 3,426 4,653
2004 3,119 4,653
2005 2,966 4,653
Thereafter 7,128 13,959
----------------- -----------------
Minimum total $ 24,139 $ 37,224
================= =================
</TABLE>
34
<PAGE>
NOTES RECEIVABLE SOLD WITH RECOURSE - The Company sells notes receivable on
a recourse basis to a financing company under a facility that expires in August
2001. Pursuant to the terms of the facility, the financing company may, at its
option, purchase up to an aggregate principal amount outstanding at any time of
$16 million of the Company's notes receivable. The Company received proceeds of
approximately $14.1 million and $10.1 million from the sales of such notes
during the years ended December 31, 1999 and 2000, respectively. Other current
liabilities include a recourse obligation of $1.4 million and $1.1 million as of
December 31, 1999 and 2000, respectively, for the notes sold with recourse.
ENVIRONMENTAL MATTERS - The Company is continuing existing environmental
remediation projects at facilities acquired in 2000. Management believes that
established reserves, which approximated $500 at December 31, 2000 and are
included in other current liabilities, are adequate to cover the remaining cost
of these remediation projects. Other environmental matters are pending against
the Company, which might result in monetary damages, the amount of which, if
any, cannot be determined at the present time. Philips Electronics, a previous
owner of the Company, has agreed to hold the Company harmless from any financial
liability arising from these environmental matters which were pending as of
December 29, 1988. Management believes that these matters will not have a
material adverse impact on the Company's consolidated results of operations or
financial condition.
LITIGATION - In the ordinary course of its business, the Company is party
to various legal actions that management believes are routine in nature and
incidental to the operation of its business. While the outcome of such actions
cannot be predicted with certainty, management believes that, based on the
experience of the Company in dealing with these matters, the ultimate resolution
of these matters will not have a material adverse impact on the financial
condition or consolidated results of operations of the Company.
(13) RETIREMENT PLANS
The Company has defined benefit pension plans covering the majority of its
employees, including certain employees in foreign countries. Plan assets are
invested primarily in common stocks and fixed income securities. The Company
makes contributions generally equal to the minimum amounts required by federal
laws and regulations. Foreign plans are funded in accordance with the
requirements of regulatory bodies governing each plan.
35
<PAGE>
The following table sets forth the funded status and amounts recognized as
of December 31, 1999 and 2000 for the Company's domestic and foreign defined
benefit pension plans:
<TABLE>
<CAPTION>
Domestic Plans Foreign Plans
1999 2000 1999 2000
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning of year $ 23,599 $ 22,049 $ 17,785 $ 16,304
Service cost 1,256 1,133 528 517
Interest cost 1,528 1,883 1,006 916
Plan participants' contributions 23 23
Amendments 130 1,978
Actuarial (gain) loss (3,633) 46 (115) (143)
Foreign currency exchange rate changes (2,063) (1,040)
Acquisition 4,886 123
Benefits paid (854) (1,030) (837) (754)
-------------- -------------- ------------- -------------
Benefit obligation, end of year 22,049 30,968 16,304 15,923
-------------- -------------- ------------- -------------
Change in plan assets:
Fair value of plan assets, beginning of year 23,048 27,084 3,548 3,996
Return on plan assets 3,067 (785) 526 (336)
Acquisition 3,938
Employer contribution 1,800 1,685 805 731
Employee contributions 23 23 50 47
Foreign currency exchange rate changes (96) (300)
Benefits paid (854) (1,030) (837) (754)
-------------- -------------- ------------- -------------
Fair value of plan assets, end of year 27,084 30,915 3,996 3,384
-------------- -------------- ------------- -------------
Funded status 5,035 (53) (12,308) (12,539)
Unrecognized net actuarial (gain) loss (6,569) (3,292) (311) 173
Unrecognized prior service cost 1,708 3,323
-------------- -------------- ------------- -------------
Net amount recognized $ 174 $ (22) $ (12,619) $ (12,366)
============== ============== ============= =============
Amounts recognized in the balance sheet consist of:
Prepaid (accrued) benefit cost $ 174 $ (143) $ (12,619) $ (12,366)
Additional minimum pension liability 121
-------------- -------------- ------------- -------------
Net amount recognized $ 174 $ (22) $ (12,619) $ (12,366)
============== ============== ============= =============
</TABLE>
<TABLE>
<CAPTION>
Domestic Plans Foreign Plans
1998 1999 2000 1998 1999 2000
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Weighted average assumptions
as of December 31:
Discount rate 7.0% 7.75% 7.75% 5.5-6.5% 5.75-6.5% 5.75-6.5%
Expected return on assets 8.5 8.5 9.0 6.5 6.75 6.75
Rate of compensation increase 4.0 4.0 4.0 2.5-4.0 2.5-4.5 2.5-4.5
</TABLE>
36
<PAGE>
The components of net pension expense for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Domestic Plans:
Service cost $ 1,155 $ 1,256 $ 1,133
Interest cost 1,437 1,528 1,883
Expected return on plan assets (1,490) (1,778) (2,323)
Amortization of prior service cost 216 216 362
Recognized actuarial (gain) loss 18 14 (122)
------------- ------------- -------------
Net pension expense $ 1,336 $ 1,236 $ 933
============= ============= =============
Foreign Plans:
Service cost $ 456 $ 528 $ 517
Interest cost 1,014 1,006 916
Expected return on plan assets (289) (225) (232)
------------- ------------- -------------
Net pension expense $ 1,181 $ 1,309 $ 1,201
============= ============= =============
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $11,994, $11,510 and $0, respectively, as of December
31, 1999 and $16,467, $15,974 and $3,912, respectively, as of December 31, 2000.
The Company provides postretirement health care and life insurance benefits
to eligible hourly retirees and their dependents. The health care plan is
contributory, with retiree contributions adjusted every three years as part of a
union contract agreement. The plans are unfunded and the Company pays part of
the health care premium and the full amount of the life insurance cost.
The following table sets forth the funded status of the Company's
postretirement benefit plans and accrued postretirement benefit cost reflected
in the Company's consolidated balance sheet at year end:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning of year $ 1,343 $ 1,233
Service cost 41 47
Interest cost 88 106
Actuarial (gain) loss (188) 165
Benefits paid (51) (63)
------------- -------------
Benefit obligation, end of year 1,233 1,488
Fair value of plan assets - -
------------- -------------
Funded status (1,233) (1,488)
Unrecognized net actuarial gain (193) (28)
Unrecognized prior service cost 703 652
------------- -------------
Accrued postretirement benefit cost $ (723) $ (864)
============= =============
</TABLE>
The assumed weighted average discount rate as of December 31 was 6.75% in
1998 and 7.75% in 1999 and 2000. The annual assumed rate of increase in the per
capita cost of covered health care benefits is 8.5% for retirees under age 65 in
2000 and is assumed to decrease gradually to 5.5% in 2006, and remain at that
level thereafter.
37
<PAGE>
Net postretirement benefit costs are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Service cost $ 39 $ 42 $ 47
Interest cost 87 88 107
Amortization of transition obligation 50 50 50
------------- ------------- -------------
Net postretirement benefit cost $ 176 $ 180 $ 204
============= ============= =============
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1% 1%
Increase Decrease
-------- --------
<S> <C> <C>
Effect on total of service and interest cost components $ 9 $ (8)
Effect on the postretirement benefit obligation 70 (62)
</TABLE>
The Company also sponsors 401(k) retirement savings plans for eligible
employees. Discretionary employer contributions, as determined annually by the
Board of Directors, are made to one of these plans. The 1998, 1999 and 2000
contribution approximated $433, $477 and $590, respectively.
(14) RELATED PARTY TRANSACTIONS
The principals of Kirkland Messina LLC, a merchant banking firm, control
85% of the voting power of the Company's common stock. Kirkland Messina LLC and
its principals received annual payments of $400 in 1998 for ongoing management
and other services to the Company. In 1999, the management agreements were
terminated and the principals entered into employment agreements with the
Company.
(15) FOREIGN EXCHANGE CONTRACTS
At December 31, 1999, the Company's German divisions, whose functional
currency is the Deutsche mark, had forward contracts and purchased options to
sell Y392,665 and L1,100 and to buy $430 in order to manage any currency
exchange fluctuations on its intercompany transactions. These instruments
matured at various dates through November 2000.
At December 31, 2000, these instruments, maturing at various dates through
April 2002, consisted of forward contracts and purchased options to sell Y37,252
and L1,600. The Company's only use of purchased options is to manage currency
exchange fluctuations.
38
<PAGE>
(16) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair values of financial
instruments are made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Values of Financial Instruments". The estimated fair
values have been developed using appropriate methodologies; however,
considerable judgment is required to develop these estimates. Accordingly, the
estimates presented herein are not necessarily indicative of amounts that could
be realized in a current market exchange. Use of different assumptions or
methodologies could have a significant effect on these estimates. The net
carrying value and estimated fair value of the Company's financial instruments
is as follows at December 31:
<TABLE>
<CAPTION>
1999 2000
------------------------------ -------------------------------
Net Carrying Estimated Net Carrying Estimated
Value Fair Value Value Fair Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial liabilities:
Long-term debt $140,080 $145,556 $223,410 $226,554
Foreign currency contracts (199) (228)
Interest rate caps 44 16
</TABLE>
The carrying amount of cash, accounts, notes and leases receivable, and
accounts payable approximate fair value because of the short maturity of these
instruments.
The estimated fair value of existing long-term debt is based on rates
currently available to the Company for debt with similar terms and remaining
maturities.
The estimated fair value of foreign currency contracts (used for hedging
purposes) has been determined as the difference between the current spot rate
and the contract rate multiplied by the notional amount of the contract or upon
the estimated fair value of purchased option contracts. The net carrying value
of these contracts approximates zero as any gains or losses on the contracts are
generally offset by losses or gains on the related hedged asset or liability.
39
<PAGE>
(17) SEGMENT INFORMATION
As discussed in Note 2, the Company has identified two distinct and
reportable segments: the piano segment and the band and orchestral instrument
segment. The Company considers these two segments reportable as they are managed
separately and the operating results of each segment are regularly reviewed and
evaluated separately by the Company's senior management.
The accounting policies of each segment are the same as those described in
Note 2. Intercompany transactions are generally recorded at cost plus a
predetermined markup.
The following tables present information about the Company's operating segments:
<TABLE>
<CAPTION>
1998 Piano Segment Band and Orchestral Segment
------------------------------------- ----------------------------- Other & Consol
U.S. Germany Other Total U.S. Other Total Elim Total
------ ------- ------ ------- ------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from external
customers 104,209 40,753 16,162 161,124 127,943 4,184 132,127 293,251
Interest income 31 19 50 824 824 197 1,071
Interest expense 8,887 221 227 9,335 19,597 19,597 (15,950) 12,982
Depreciation and amortization 4,427 2,573 186 7,186 3,392 14 3,406 38 10,630
Income tax expense 3,884 2,707 696 7,287 1,025 37 1,062 6,057 14,406
Net income 3,008 2,405 1,004 6,417 485 57 542 9,692 16,651
Capital expenditures 3,164 387 36 3,587 2,663 2,663 14 6,264
Total assets 91,960 66,774 9,556 168,290 277,107 2,962 280,069 (164,432) 283,927
<CAPTION>
1999 Piano Segment Band and Orchestral Segment
------------------------------------- ----------------------------- Other & Consol
U.S. Germany Other Total U.S. Other Total Elim Total
------ ------- ------ ------- ------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from external
customers 117,428 39,115 17,041 173,584 126,781 4,271 131,052 304,636
Interest income 15 18 33 820 820 54 907
Interest expense 10,247 358 215 10,820 20,035 20,035 (16,672) 14,183
Depreciation and amortization 5,435 2,568 187 8,190 3,383 3,383 45 11,618
Income tax expense (benefit) 4,305 2,455 731 7,491 (510) 12 (498) 5,407 12,400
Net income (loss) 4,332 2,287 1,175 7,794 (1,124) 23 (1,101) 10,652 17,345
Capital expenditures 34,064 861 209 35,134 1,012 1,012 46 36,192
Total assets 128,466 55,902 11,964 196,332 278,712 3,444 282,156 (168,847) 309,641
<CAPTION>
2000 Piano Segment Band and Orchestral Segment
------------------------------------- ----------------------------- Other & Consol
U.S. Germany Other Total U.S. Other Total Elim Total
------ ------- ------ ------- ------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from external
customers 123,528 38,630 20,686 182,844 143,904 4,950 148,854 331,698
Interest income 16 25 41 1,250 1,250 1,291
Interest expense 11,372 454 219 12,045 23,020 23,020 (17,664) 17,401
Depreciation and amortization 6,074 2,343 218 8,635 3,659 3,659 48 12,342
Income tax expense (benefit) 3,972 1,735 1,192 6,899 (671) (132) (803) 4,404 10,500
Net income (loss) 4,723 2,837 1,514 9,074 (3,076) (266) (3,342) 11,172 16,904
Capital expenditures 4,524 1,053 39 5,616 2,184 55 2,239 35 7,890
Total assets 144,014 54,008 11,444 209,466 407,958 3,868 411,826 (199,476) 421,816
</TABLE>
40
<PAGE>
(18) SUMMARIZED FINANCIAL INFORMATION
The Company is a holding company whose only material asset consists of its
investment in its wholly-owned subsidiary, The Selmer Company, Inc. Summarized
financial information for The Selmer Company, Inc. and subsidiaries is as
follows:
<TABLE>
<CAPTION>
1998 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Current assets $ 167,938 $ 169,295 $ 264,198
Total assets 280,991 306,516 420,150
Current liabilities 53,712 58,569 73,550
Stockholder's equity 97,080 110,811 126,820
Net sales 290,948 301,765 329,004
Gross profit 97,776 100,051 104,372
Net income 16,724 17,612 18,118
</TABLE>
(19) SUMMARY OF MERGER AND GUARANTEES
On May 25, 1995, Selmer acquired Steinway pursuant to an Agreement and Plan
of Merger dated as of April 11, 1995. The total purchase price of approximately
$104 million, including fees and expenses, was funded by Selmer's issuance of
$105 million of 11% Senior Subordinated Notes (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, UMI 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.
41
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ - $ 127,261 $ 113,785 $ 61,099 $ (8,894) $ 293,251
Cost of sales 87,482 75,875 39,977 (8,562) 194,772
----------- ----------- ------------ ------------ ------------ ------------
Gross profit - 39,779 37,910 21,122 (332) 98,479
Operating expenses:
Sales and marketing 13,190 14,321 8,157 (135) 35,533
General and administrative 2,892 5,926 3,955 4,188 16,961
Amortization 459 2,072 1,319 3,850
Other operating (income) expense (2,297) (182) 1,796 870 135 322
----------- ----------- ------------ ------------ ------------ ------------
Total operating expenses 595 19,393 22,144 14,534 - 56,666
----------- ----------- ------------ ------------ ------------ ------------
Income (loss) from operations (595) 20,386 15,766 6,588 (332) 41,813
Other (income) expense:
Other income (200) (50) (905) (1,155)
Interest income (197) (813) (15,961) (50) 15,950 (1,071)
Interest expense 19,597 8,887 448 (15,950) 12,982
----------- ----------- ------------ ------------ ------------ ------------
Other (income) expense, net (397) 18,784 (7,124) (507) - 10,756
----------- ----------- ------------ ------------ ------------ ------------
Income (loss) before income taxes (198) 1,602 22,890 7,095 (332) 31,057
Provision for (benefit of) income
taxes (99) 1,000 10,065 3,534 (94) 14,406
----------- ----------- ------------ ------------ ------------ ------------
Net income (loss) $ (99) $ 602 $ 12,825 $ 3,561 $ (238) $ 16,651
=========== =========== ============ ============ ============ ============
</TABLE>
42
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ - $ 125,482 $ 125,646 $ 62,783 $ (9,275) $ 304,636
Cost of sales 87,536 84,303 41,236 (9,187) 203,888
----------- ----------- ------------ ------------ ------------ ------------
Gross profit - 37,946 41,343 21,547 (88) 100,748
Operating expenses:
Sales and marketing 14,492 15,030 8,152 (147) 37,527
General and administrative 3,137 5,706 4,540 4,407 17,790
Amortization 459 2,187 1,282 3,928
Other operating (income) expense (2,552) (302) 2,147 923 147 363
----------- ----------- ------------ ------------ ------------ ------------
Total operating expenses 585 20,355 23,904 14,764 - 59,608
----------- ----------- ------------ ------------ ------------ ------------
Income (loss) from operations (585) 17,591 17,439 6,783 (88) 41,140
Other (income) expense:
Other income (50) (1,194) (637) (1,881)
Interest income (803) (16,743) (33) 16,672 (907)
Interest expense 20,035 10,247 573 (16,672) 14,183
----------- ----------- ------------ ------------ ------------ ------------
Other (income) expense, net (50) 19,232 (7,690) (97) - 11,395
----------- ----------- ------------ ------------ ------------ ------------
Income (loss) before income taxes (535) (1,641) 25,129 6,880 (88) 29,745
Provision for (benefit of) income
taxes (249) (522) 9,911 3,290 (30) 12,400
----------- ----------- ------------ ------------ ------------ ------------
Net income (loss) $ (286) $ (1,119) $ 15,218 $ 3,590 $ (58) $ 17,345
=========== =========== ============ ============ ============ ============
</TABLE>
43
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ - $ 122,848 $ 152,976 $ 68,545 $ (12,671) $ 331,698
Cost of sales 89,758 104,911 44,453 (12,382) 226,740
----------- ----------- ------------ ------------ ------------ ------------
Gross profit - 33,090 48,065 24,092 (289) 104,958
Operating expenses:
Sales and marketing 10,790 16,873 9,795 (116) 37,342
General and administrative 3,409 5,336 6,628 4,321 19,694
Amortization 274 2,470 1,112 3,856
Other operating (income) expense (2,717) 90 2,352 1,046 116 887
Non-recurring charges 1,290 200 1,490
----------- ----------- ------------ ------------ ------------ ------------
Total operating expenses 1,982 16,490 28,523 16,274 - 63,269
----------- ----------- ------------ ------------ ------------ ------------
Income (loss) from operations (1,982) 16,600 19,542 7,818 (289) 41,689
Other (income) expense:
Other income (1,418) (407) (1,825)
Interest income (764) (18,150) (41) 17,664 (1,291)
Interest expense 21,635 12,757 673 (17,664) 17,401
----------- ----------- ------------ ------------ ------------ ------------
Other (income) expense, net - 20,871 (6,811) 225 - 14,285
----------- ----------- ------------ ------------ ------------ ------------
Income (loss) before income taxes (1,982) (4,271) 26,353 7,593 (289) 27,404
Provision for (benefit of) income
taxes (931) (833) 9,521 2,917 (174) 10,500
----------- ----------- ------------ ------------ ------------ ------------
Net income (loss) $ (1,051) $ (3,438) $ 16,832 $ 4,676 $ (115) $ 16,904
=========== =========== ============ ============ ============ ============
</TABLE>
44
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
---------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ - $ 1,875 $ 2,591 $ 1,152 $ (954) $ 4,664
Accounts, notes and leases receivable, net 40,987 5,364 10,159 56,510
Inventories 41,543 36,056 25,527 (1,010) 102,116
Prepaid expenses and other current assets 487 1,464 296 358 2,605
Deferred tax assets 560 2,743 3,729 (973) 6,059
----------- ----------- ------------ ------------ ------------ ------------
Total current assets 487 86,429 47,050 40,925 (2,937) 171,954
Property, plant and equipment, net 103 12,976 61,850 14,581 89,510
Investment in subsidiaries 71,143 169,387 25,449 (265,979) -
Other assets, net 613 872 11,636 5,515 (1,328) 17,308
Cost in excess of fair value
of net assets acquired, net 9,097 10,853 10,919 30,869
----------- ----------- ------------ ------------ ------------ ------------
TOTAL ASSETS $ 72,346 $278,761 $ 156,838 $ 71,940 $ (270,244) $ 309,641
=========== =========== ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ - $ - $ 576 $ 6,710 $ - $ 7,286
Accounts payable 188 2,550 2,950 1,232 6,920
Other current liabilities (13,301) 7,877 28,983 9,672 (2,478) 30,753
----------- ----------- ------------ ------------ ------------ ------------
Total current liablilites (13,113) 10,427 32,509 17,614 (2,478) 44,959
Long-term debt 204 110,000 23,152 392 (954) 132,794
Intercompany 28,268 72,177 (105,424) 4,979 -
Deferred tax liabilities 2,440 9,243 9,886 21,569
Non-current pension liability 12,117 12,117
----------- ----------- ------------ ------------ ------------ ------------
Total liabilities 15,359 195,044 (40,520) 44,988 (3,432) 211,439
Stockholders' equity 56,987 83,717 197,358 26,952 (266,812) 98,202
----------- ----------- ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 72,346 $ 278,761 $ 156,838 $ 71,940 $ (270,244) $ 309,641
=========== =========== ============ ============ ============ ============
</TABLE>
45
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent Of Notes Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ - $ 264 $ 2,398 $ 2,327 $ - $ 4,989
Accounts, notes and leases receivable,
net 38,185 44,391 10,466 93,042
Inventories 48,479 87,748 25,368 (1,299) 160,296
Prepaid expenses and other current
assets 217 1,740 734 314 3,005
Deferred tax assets 2,398 2,916 3,500 (4,693) 4,121
----------- ----------- ------------ ----------- ------------ -----------
Total current assets 217 91,066 138,187 41,975 (5,992) 265,453
Property, plant and equipment, net 91 12,450 79,668 14,206 106,415
Investment in subsidiaries 71,143 195,906 25,449 (292,498) -
Other assets, net 613 720 16,432 4,314 (1,434) 20,645
Cost in excess of fair value
of net assets acquired, net 8,826 10,547 9,930 29,303
----------- ----------- ------------ ----------- ------------ -----------
TOTAL ASSETS $ 72,064 $ 308,968 $ 270,283 $ 70,425 $(299,924) $ 421,816
=========== =========== ============ =========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ - $ - $ 5,218 $ 4,298 $ - $ 9,516
Accounts payable 142 2,598 6,699 1,767 11,206
Other current liabilities (17,185) 1,946 45,871 11,017 (5,796) 35,853
----------- ----------- ------------ ----------- ------------ -----------
Total current liabilities (17,043) 4,544 57,788 17,082 (5,796) 56,575
Long-term debt 185 138,619 75,090 213,894
Intercompany 32,776 80,721 (118,788) 5,291 -
Deferred tax liabilities 4,805 14,473 7,038 26,316
Non-current pension liability 682 11,824 (682) 11,824
----------- ----------- ------------ ----------- ------------ -----------
Total liabilities 15,918 228,689 29,245 41,235 (6,478) 308,609
Stockholders' equity 56,146 80,279 241,038 29,190 (293,446) 113,207
----------- ----------- ------------ ----------- ------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 72,064 $ 308,968 $ 270,283 $ 70,425 $(299,924) $ 421,816
=========== =========== ============ =========== ============ ===========
</TABLE>
46
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent of Notes Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (99) $ 602 $ 12,825 $ 3,561 $ (238) $ 16,651
Adjustments to reconcile net income
(loss) to cash flows from operating activities:
Depreciation and amortization 35 3,334 4,488 2,773 10,630
Deferred tax provision (benefit) 384 (1,348) (1,545) (2,509)
Other 152 190 38 380
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (3,458) 635 (1,911) (4,734)
Inventories (29) (711) (3,555) (2,443) 332 (6,406)
Prepaid expense and other current assets 277 118 (50) 430 775
Accounts payable (329) (148) 1,502 (100) 925
Other current liabilities (4,311) (3,126) 7,073 (1,027) (94) (1,485)
----------- ----------- ----------- ----------- ------------ ------------
Cash flows from operating activities (4,456) (2,853) 21,760 (224) - 14,227
Cash flows from investing activities:
Capital expenditures (14) (2,503) (3,324) (423) (6,264)
Proceeds from disposals of fixed assets 5 132 137
Changes in other assets 283 437 1,455 2,175
Business acquisition, net of cash acquired (1,337) (1,337)
----------- ----------- ----------- ----------- ------------ ------------
Cash flows from investing activities 269 (2,061) (3,324) (173) - (5,289)
Cash flows from financing activities:
Borrowing under lines of credit 185 123,112 120,621 1,856 245,774
Repayments under lines of credit (120,859) (123,059) (243,918)
Repayments of long-term debt (865) (865)
Proceeds from issuance of stock 1,039 1,039
Purchase of treasury stock (3,748) (3,748)
Intercompany dividends 800 (800) -
Intercompany 6,711 3,625 (10,663) 327 -
----------- ----------- ----------- ----------- ------------ ------------
Cash flows from financing activities 4,187 5,878 (12,301) 518 - (1,718)
Effect of exchange rate changes on cash (31) (31)
Increase in cash - 964 6,135 90 - 7,189
Cash, beginning of year 2,034 1,913 1,324 5,271
----------- ----------- ----------- ----------- ------------ ------------
Cash, end of year $ - $ 2,998 $ 8,048 $ 1,414 $ - $ 12,460
=========== =========== =========== =========== ============ ============
</TABLE>
47
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent Of Notes Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (286) $ (1,119) $ 15,218 $ 3,590 $ (58) $ 17,345
Adjustments to reconcile net income (loss)
to cash flows from operating activities:
Depreciation and amortization 42 3,303 5,518 2,755 11,618
Deferred tax provision (benefit) 769 (776) (2,072) (2,079)
Other 112 47 115 274
Changes in operating assets and liabilities:
Accounts, notes and leases receivable (4,053) 240 (1,215) (5,028)
Inventories (2,945) (4,148) (1,878) 88 (8,883)
Prepaid expense and other current assets (363) 22 147 (57) (251)
Accounts payable 188 845 (821) (108) 104
Other current liabilities (2,347) (3,011) 6,511 1,149 (30) 2,272
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from operating activities (2,766) (6,077) 21,936 2,279 - 15,372
Cash flows from investing activities:
Capital expenditures (46) (963) (34,113) (1,070) (36,192)
Proceeds from disposals of fixed assets 138 138
Changes in other assets 174 (789) (615)
Business acquisition, net of cash acquired (2,643) (2,643)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from investing activities (46) (789) (37,545) (932) - (39,312)
Cash flows from financing activities:
Borrowing under lines of credit 122,393 165,893 1,429 289,715
Repayments under lines of credit (31) (122,393) (164,468) (954) (287,846)
Proceeds from long-term debt 22,500 22,500
Repayments of long-term debt (214) (832) (1,046)
Proceeds from issuance of stock 786 786
Purchase of treasury stock (7,805) (7,805)
Intercompany dividends 1,095 4,800 (5,895) -
Intercompany 9,862 4,648 (18,359) 3,849 -
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from financing activities 2,812 5,743 10,152 (1,449) (954) 16,304
Effect of exchange rate changes on cash (160) (160)
Decrease in cash - (1,123) (5,457) (262) (954) (7,796)
Cash, beginning of year 2,998 8,048 1,414 12,460
----------- ----------- ----------- ----------- ----------- -----------
Cash, end of year $ - $ 1,875 $ 2,591 $ 1,152 $ (954) $ 4,664
=========== =========== =========== =========== =========== ===========
</TABLE>
48
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Non
Guarantor Issuer Guarantor Guarantor
Parent Of Notes Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,051) $ (3,438) $ 16,832 $ 4,676 $ (115) $ 16,904
Adjustments to reconcile net income (loss)
to cash flows from operating activities:
Depreciation and amortization 46 2,742 6,993 2,561 12,342
Deferred tax provision (benefit) 527 (443) (2,433) (2,349)
Other 1 251 14 (26) 240
Changes in operating assets and liabilities:
Accounts, notes and leases receivable 2,702 2,453 (416) 4,739
Inventories (6,936) (12,257) (1,338) 289 (20,242)
Prepaid expense and other current assets 270 (275) 326 44 365
Accounts payable (46) 48 1,532 627 2,161
Other current liabilities (3,884) (5,932) 6,544 2,551 (174) (895)
----------- ----------- ----------- ----------- ----------- ------------
Cash flows from operating activities (4,664) (10,311) 21,994 6,246 - 13,265
Cash flows from investing activities:
Capital expenditures (35) (2,107) (4,601) (1,147) (7,890)
Proceeds from disposals of fixed assets 14 376 121 511
Changes in other assets 148 148
Business acquisitions, net of cash acquired (26,519) (57,708) (2,340) (86,567)
----------- ----------- ----------- ----------- ----------- ------------
Cash flows from investing activities (35) (28,464) (61,933) (3,366) - (93,798)
Cash flows from financing activities:
Borrowing under lines of credit 159,828 167,704 954 328,486
Repayments under lines of credit (19) (131,208) (154,863) (1,099) (287,189)
Proceeds from long-term debt 45,000 45,000
Repayments of long-term debt (1,261) (720) (1,981)
Debt issuance costs (3,920) (22) (3,942)
Proceeds from issuance of stock 693 693
Purchase of treasury stock (483) (483)
Intercompany dividends 450 (450) -
Intercompany 4,508 8,544 (13,364) 312 -
----------- ----------- ----------- ----------- ----------- ------------
Cash flows from financing activities 4,699 37,164 39,746 (1,979) 954 80,584
Effect of exchange rate changes on cash 274 274
Increase (decrease) in cash - (1,611) (193) 1,175 954 325
Cash, beginning of year 1,875 2,591 1,152 (954) 4,664
----------- ----------- ----------- ----------- ----------- ------------
Cash, end of year $ - $ 264 $ 2,398 $ 2,327 $ - $ 4,989
=========== =========== =========== =========== =========== ============
</TABLE>
49
<PAGE>
(20) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited results of operations (in thousands
except share and per share data) for the years ended December 31, 1999 and 2000.
<TABLE>
<CAPTION>
Year Ended December 31, 1999
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 83,134 $ 76,160 $ 72,707 $ 72,635
Gross profit 27,427 24,718 22,059 26,544
Net income 5,188 4,566 3,469 4,122
Basic income per share $ .56 $ .49 $ .38 $ .45
Diluted income per share .56 .49 .37 .45
Weighted average shares:
Basic 9,265,163 9,236,363 9,241,350 9,108,935
Diluted 9,337,044 9,341,506 9,323,630 9,109,043
<CAPTION>
Year Ended December 31, 2000
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 87,775 $ 77,824 $ 75,702 $ 90,397
Gross profit 26,604 24,934 23,442 29,978
Net income 5,207 4,513 2,800 4,384
Basic income per share $ .58 $ .51 $ .31 $ .49
Diluted income per share .58 .51 .31 .49
Weighted average shares:
Basic 8,924,535 8,906,604 8,921,724 8,931,500
Diluted 8,934,965 8,906,606 8,921,724 8,931,500
</TABLE>
50
<PAGE>
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions Balance at
Beginning Costs and and Other End
of Year Expenses (See Note 1) of Year
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Reserves deducted from assets to which they apply:
Allowance for doubtful accounts:
Year ended December 31, 1998 $ 7,504 $ 401 $ (393) (2) $ 7,512
Year ended December 31, 1999 7,512 209 (956) (2) 6,765
Year ended December 31, 2000 6,765 4,394 (3) 218 (2) 11,377
Inventory obsolescence:
Year ended December 31, 1998 3,608 400 (96) 3,912
Year ended December 31, 1999 3,912 450 (531) 3,831
Year ended December 31, 2000 3,831 171 (259) 3,743
Reserves included in other current liabilities:
Accrued warranty expense:
Year ended December 31, 1998 2,102 1,013 (768) 2,347
Year ended December 31, 1999 2,347 805 (822) 2,330
Year ended December 31, 2000 2,330 841 (4) (816) 2,355
Reserve for notes sold with recourse:
Year ended December 31, 1998 1,317 118 1,435
Year ended December 31, 1999 1,435 8 1,443
Year ended December 31, 2000 1,443 (340) 1,103
</TABLE>
Note: (1) Includes foreign currency translation adjustments
(2) Represents accounts written off, net of recoveries; and
reclassifications to and from other accounts
(3) Includes $4,200 related to acquisitions during the year
(4) Includes $40 related to acquisitions during the year
51
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for the fiscal year
ended December 31, 2000, which Proxy Statement will be filed with the Securities
and Exchange Commission no later than 120 days after the end of the fiscal year
covered by this report.
ITEM 11 EXECUTIVE COMPENSATION
The information called for by this item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for the fiscal year
ended December 31, 2000, which Proxy Statement will be filed with the Securities
and Exchange Commission no later than 120 days after the end of the fiscal year
covered by this report.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for by this item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for the fiscal year
ended December 31, 2000, which Proxy Statement will be filed with the Securities
and Exchange Commission no later than 120 days after the end of the fiscal year
covered by this report.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for the fiscal year
ended December 31, 2000, which Proxy Statement will be filed with the Securities
and Exchange Commission no later than 120 days after the end of the fiscal year
covered by this report.
52
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) The following documents are filed as a part of this report:
<TABLE>
<CAPTION>
Sequential
(1) Financial Statements Page Number
-------------------- -----------
<S> <C>
Independent Auditors' Report 19
Consolidated Statements of Income
Years Ended December 31, 1998, 1999 and 2000 20
Consolidated Balance Sheets as of December 31, 1999 and 2000 21
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1999 and 2000 22
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1999 and 2000 23
Notes to Consolidated Financial Statements 24
Schedule II - Valuation and Qualifying Accounts 51
</TABLE>
(3) Exhibits: The Exhibits listed below are filed as part of, or
incorporated by reference into, this Report.
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page Number
--- ----------- -----------
<S> <C>
2.1 Stock Purchase Agreement dated as of July 20, 2000, by and
among Steinway Musical Instruments, Inc, and BIM Holding AG
with respect to all the capital stock of United Musical
Instruments Holdings, Inc. (8)
3.1 Restated Certificate of Incorporation of Registrant (6)
3.2 Bylaws of Registrant (4)
3.3 Amendment No. 1 to Bylaws of Registrant (4)
4.1 Second Amended and Restated Credit Agreement, dated as of
September 14, 2000, among The Selmer Company, Inc.,
Steinway, Inc., and United Musical Instruments USA,
Inc., as borrowers; certain wholly owned subsidiaries of
the borrowers (as may be amended from time to time), as
guarantors; the several lenders from time to time parties
thereto; and GMAC Commercial Credit LLC, as Administrative
Agent (9)
4.2 First Amendment to Second Amended and Restated Credit
Agreement, dated as of March 2, 2001, to the Existing
Credit Agreement, by and among The Selmer Company,
Inc., Steinway, Inc., United Musical Instruments USA,
Inc., as borrowers; certain wholly owned subsidiaries of
the borrowers (as may be amended from time to time), as
guarantors; the several lenders from time to time parties
thereto; and GMAC Commercial Credit LLC, as Administrative
Agent
4.3 Registration Rights Agreement, dated as of August 9,
1993, among Selmer Industries, Inc. and the purchasers of
certain equity securities (1)
4.4 Indenture, dated as of May 25, 1995, among The Selmer
Company, Inc., Selmer Industries, Inc., Steinway Musical
Properties, Inc.,
</TABLE>
53
<PAGE>
<TABLE>
<S> <C>
Steinway, Inc., Boston Piano Company, Inc. and American Bank
National Association, as trustee, including the forms of
Notes and the Guarantee thereon (2)
4.5 Supplemental Indenture dated as of September 14, 2000, by and
among United Musical Instruments Holdings, Inc., United
Musical Instruments USA, Inc. and Firstar Bank of
Minnesota, N.A., as successor trustee (9)
4.6 Exchange Registration Rights agreement, dated as of May 25,
1995, by and among The Selmer Company, Inc., Selmer
Industries, Inc., Steinway Musical Properties, Inc.,
Steinway, Inc., Boston Piano Company, Inc. and
Donaldson, Lufkin & Jenrette Corporation (2)
10.1 Employment Agreement, dated as of June 22, 1993, between
The Selmer Company, Inc. and Thomas Burzycki (1)
10.2 Employment Agreement, dated May 8, 1989, between Steinway
Musical Properties, Inc. and Thomas Kurrer (3)
10.3 Employment Agreement, dated as of May 1, 1995, between
Steinway Musical Properties, Inc. and Bruce Stevens (3)
10.4 Employment Agreement Renewal and Amendment dated January
1, 1997 by and between Steinway Musical Instruments, Inc.
and Bruce Stevens (6)
10.5 Employment Agreement, dated as of May 1, 1995, between
Steinway Musical Properties, Inc. and Dennis Hanson (3)
10.6 Employment Agreement Renewal and Amendment dated January
1, 1997 by and between Steinway Musical Instruments, Inc.
and Dennis Hanson (6)
10.7 Employment Agreement, dated as of January 4, 1999, between the
Registrant and Dana Messina (7)
10.8 Employment Agreement, dated as of January 4, 1999, between the
Registrant and Kyle Kirkland (7)
10.9 Environmental Indemnification and Non-Competition Agreement,
dated as of August 9, 1993, between The Selmer Company, Inc.
and Philips Electronics North American Corporation (1)
10.10 Master Note Purchase and Repurchase Agreement, dated August
31, 2000, by and between Textron Financial Corporation and The
Selmer Company, Inc.
10.11 Master Note Purchase and Repurchase Agreement, dated August
31, 2000, by and between Textron Financial Corporation and
Emerson Musical Instruments, Inc.
10.12 Distribution Agreement, dated November 1, 1952, by and
between H. & A. Selmer, Inc. and Henri Selmer & Cie (1)
10.13 1996 Stock Plan of the Registrant (4)
10.14 Form of Noncompete Agreement dated July 1996 between
Steinway Musical Instruments, Inc. and each of Thomas
Burzycki, Bruce Stevens, Dennis Hanson and Michael Vickrey (5)
10.15 The Deferred Compensation Incentive Plan for Steinway Musical
Instruments, Inc. effective January 1, 2001
21.1 List of Subsidiaries of the Registrants
23.1 Independent Auditors' Consent - Deloitte & Touche LLP
</TABLE>
- ----------------------
54
<PAGE>
(1) Previously filed with the Commission on February 8, 1994 as an exhibit
to the Registrant's Registration Statement on Form S-1.
(2) Previously filed with the Commission on June 7, 1995 as an exhibit to
the Registrant's Current Report on Form 8-K.
(3) Previously filed with the Commission on June 7, 1995 as an exhibit
to the Registrant's Registration Statement on Form S-4.
(4) Previously filed with the Commission on May 14, 1996 as an exhibit
to the Registrant's Registration Statement on Form S-1.
(5) Previously filed with the Commission on July 25, 1996 as an exhibit to
the Registrant's Amendment No. 2 to Registration Statement on Form
S-1.
(6) Previously filed with the Commission on March 27, 1997 as an exhibit
to the Registrant's Annual Report on Form 10-K.
(7) Previously filed with the Commission on August 16, 1999 as an
exhibit to the Registrant's Quarterly Report on Form 10-Q.
(8) Previously filed with the Commission on July 27, 2000 as an
exhibit to the Registrant's Current Report on Form 8-K.
(9) Previously filed with the Commission on September 29, 2000 as an
exhibit to the Registrant's Current Report on Form 8-K.
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended
December 31, 2000:
<TABLE>
<CAPTION>
Item # Description Filing Date
------ ----------- -----------
<S> <C> <C>
2,7 A report amending the Form 8-K filed on September 29, 2000
to include the financial statements of United Musical
Instruments Holdings, Inc. November 9, 2000
</TABLE>
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STEINWAY MUSICAL INSTRUMENTS, INC.
March 30, 2001 By /s/ Dana D. Messina
- -------------- --------------------
(Date) Dana D. Messina
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Dana D. Messina Director and Chief Executive Officer March 30, 2001
-------------------- (Principal Executive Officer)
Dana D. Messina
/s/ Dennis M. Hanson Chief Financial Officer March 30, 2001
--------------------- (Principal Financial Officer)
Dennis M. Hanson
/s/ Michael R. Vickrey Executive Vice President March 30, 2001
----------------------- (Principal Accounting Officer)
Michael R. Vickrey
/s/ Kyle R. Kirkland Chairman of the Board March 30, 2001
---------------------
Kyle R. Kirkland
/s/ Thomas T. Burzycki Director March 30, 2001
-----------------------
Thomas T. Burzycki
/s/ Bruce A. Stevens Director March 30, 2001
---------------------
Bruce A. Stevens
/s/ Peter McMillan Director March 30, 2001
-------------------
Peter McMillan
/s/ A. Clinton Allen Director March 30, 2001
---------------------
A. Clinton Allen
</TABLE>
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE SELMER COMPANY, INC.
March 30, 2001 By /s/ Dana D. Messina
- -------------- --------------------
(Date) Dana D. Messina
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C> <C>
/s/ Thomas T. Burzycki Director, President and March 30, 2001
----------------------- Chief Executive Officer
Thomas T. Burzycki (Principal Executive Officer)
/s/ Michael R. Vickrey Executive Vice President March 30, 2001
----------------------- and Chief Financial Officer
Michael R. Vickrey (Principal Financial and
Accounting Officer)
/s/ Kyle R. Kirkland Director and March 30, 2001
--------------------- Executive Vice President
Kyle R. Kirkland
/s/ Dana D. Messina Director and March 30, 2001
-------------------- Executive Vice President
Dana D. Messina
</TABLE>
57
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2
<SEQUENCE>2
<FILENAME>a2042378zex-4_2.txt
<DESCRIPTION>EXHIBIT 4.2
<TEXT>
<PAGE>
Exhibit 4.2
FIRST AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT
FIRST AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT
AGREEMENT, dated as of March 2, 2001 (this "AMENDMENT"), to the Existing Credit
Agreement (as hereinafter defined), by and among (i) THE SELMER COMPANY, INC., a
Delaware corporation ("SELMER"), (ii) STEINWAY, INC., a Delaware corporation
("STEINWAY"), (iii) UNITED MUSICAL INSTRUMENTS USA, INC., an Indiana corporation
("UMI" and together with Selmer and Steinway, the "BORROWERS"), (iv) those
signatories hereto and identified on Schedule I (as may be amended from time to
time) as Guarantors (the "GUARANTORS"), (v) the lenders (the "LENDERS") from
time to time party to the Agreement (defined below) and GMAC COMMERCIAL CREDIT
LLC, a New York limited liability company ("GMACCC"), as administrative agent
for the Lenders hereunder.
RECITALS
The Borrowers, Guarantors, GMACCC, as administrative agent and
the Lenders have entered into the Existing Credit Agreement, pursuant to which
the Lenders are providing to Selmer and Steinway a $120,000,000 revolving credit
facility, a $22,500,000 term loan facility and a $45,000,000 term loan facility,
each of which are secured by certain accounts receivable, real estate, and other
collateral of Selmer, Steinway and UMI and guaranteed by the Guarantors and the
parties desire to amend certain provisions of the Existing Credit Agreement as
hereinafter provided.
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" means the Existing Credit Agreement as amended,
supplemented or otherwise modified from time to time up to and including this
Amendment.
"EXISTING CREDIT AGREEMENT" shall mean the Second Amended and
Restated Credit Agreement, dated as of September 14, 2000, among (i) Selmer,
(ii) Steinway, (iii) UMI, (iv) the Guarantors, (v) the Lenders and (vi) GMACCC
as amended or otherwise modified from time to time prior to the First Amendment
Effective Date.
(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.
<PAGE>
ARTICLE II
Representations
1. REPRESENTATIONS. Each of the Borrowers and Guarantors
hereby represents and warrants as follows:
(a) It has full power, authority and legal right, to enter
into this Amendment and perform all of its respective obligations hereunder. The
execution, delivery and performance hereof is within its powers and has been
duly authorized, is 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 which 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 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.
(c) This Amendment has been duly executed and delivered on its
behalf and this Amendment constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles (whether enforcement is sought by proceedings in
equity or at law).
(d) The conditions contained in Article IV hereof have been
satisfied.
(e) Each of the Loan 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 at the end of the definition of
"Lenders" immediately after the words "the Issuing Lender" and before the period
(".") the words "and, solely for the purposes of Section 12.11, any Affiliate of
any Lender."
(b) Section 1.1 of the Existing Credit Agreement is hereby
amended by deleting the definition of "Required Lenders" in its entirety and
replacing it with the following:
<PAGE>
"REQUIRED LENDERS": (i) at any time there are three
(3) or fewer Lenders, all of the Lenders, (ii) at any time there are
four (4) Lenders, at least three (3) Lenders and (iii) at any time
there are more than four (4) Lenders, three (3) or more Lenders holding
in the aggregate at least 66-2/3% Credit Exposure Percentage.
(c) Section 1.1 of the Existing Credit Agreement is hereby
amended (i) by inserting in the seventh line of the definition of the term
"Tangible Net Worth" after the words "6.1(b) hereto," the words "plus (c) the
aggregate amount of Eligible Intellectual Property calculated in accordance with
GAAP consistently applied," and (ii) by deleting in the seventh line the letter
"(c)" and replacing the letter "(d)".
2. AMENDMENT TO SECTION 2.2(a). Section 2.2(a) of the Existing
Credit Agreement is hereby amended (i) by deleting in the second line thereof
after the words "in the form of Exhibit" the letter "N" and replacing it with
the letter "J", and (ii) by deleting in the last line thereof the words "on the
dates specified in Section 5.1(e)" and replacing them with the words "as
specified in the Term A Note".
3. AMENDMENT TO SECTION 5.9. Section 5.9 of the Existing
Credit Agreement is hereby amended by deleting in the second and sixth lines
thereof the words "Administrative Agent" and replacing them with the words
"Required Lenders".
4. AMENDMENT TO SECTION 8.2(c). Section 8.2(c) of the Existing
Credit Agreement is hereby amended by (i) deleting in the fifth line thereof,
after the words "Section 8 hereof" the words "and Section 9.17, and (iii)" and
replacing them with the words ", Section 9.1 hereof, (iii) no Event of Default
has occurred under the Senior Subordinated Note Indenture and (iv)".
5. AMENDMENT TO SECTION 9.1(b). Section 9.1(b) of the Existing
Credit Agreement is hereby amended by deleting in the second line thereof the
words "1.3 to 1 for each period" and replacing them with the words "1.1 to 1 for
each period".
6. AMENDMENT TO SECTION 12.4(b). Section 12.4(b) is hereby
amended by inserting the words "at the direction of the Required Lenders" after
the words "the Administrative Agent" and before the words "shall have the
continuing and exclusive right" where they appear in the second line thereof.
7. AMENDMENT TO SCHEDULE 2.1. Schedule 2.1 to the Existing
Agreement is hereby deleted in its entirety and replaced by Schedule 2.1
attached hereto.
8. AMENDMENT TO SCHEDULE 2.2. The Term Loan A-Payment Schedule
in Schedule 2.2 to the Existing Agreement is hereby amended by deleting in the
last row of the table the number "170,000.00" and replacing it with the words
"all amounts outstanding with respect to Term Loan A".
9. AMENDMENT TO EXHIBITS J-1 AND J-2 AND J-3. Exhibits J-1,
J-2 and J-3 are hereby deleted in their entirety and replaced by Exhibits J-1,
J-2 and J-3 attached hereto.
<PAGE>
ARTICLE IV
Conditions to Effectiveness
This Amendment, and the modifications to the Existing Credit
Agreement provided for herein, shall become effective on the date (the "FIRST
AMENDMENT EFFECTIVE DATE") on which all of the following conditions have been
(or are concurrently being) satisfied:
1. This Amendment shall have been duly executed and delivered
by each party thereto.
2. Each of the representations and warranties made by the
Borrowers and Guarantors in or pursuant to the Loan Documents shall be true and
correct in all material respects on and as of the First Amendment Effective Date
as if made on and as of such date (except to the extent the same relate to
another, earlier date, in which case they shall be true and correct in all
material respects as of such earlier date).
3. No Default or Event of Default shall have occurred and be
continuing.
4. All corporate and other proceedings, and all documents,
instruments and other legal matters in connection with the transactions
contemplated by the Existing Credit Agreement and this Amendment shall be
reasonably satisfactory in form and substance to the GMACCC, and GMACCC shall
have received such other documents in respect of any aspect or consequence of
the transactions contemplated hereby or thereby as it shall reasonably request.
ARTICLE VII
Miscellaneous
1. PAYMENT OF EXPENSES. Notwithstanding any provisions of
Section 12.8 of the Agreement, the parties shall bear their own costs and
expenses incurred in connection with this Amendment.
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 Loan Documents
shall remain in full force and effect.
3. AFFIRMATION BY LOAN PARTIES. Each Loan Party hereby
reaffirms its obligations under the Loan Documents executed by such Loan 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 GMACCC, as Administrative Agent.
This Amendment may be delivered by facsimile transmission of the relevant
signature pages hereof.
<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.,
Borrower
By /s/ Dennis M. Hanson
-------------------------------------
Title: Vice President
STEINWAY, INC.,
Borrower
By /s/ Dennis M. Hanson
-------------------------------------
Title: Vice President
UNITED MUSICAL INSTRUMENTS USA, INC.,
Borrower
By /s/ Dennis M. Hanson
-------------------------------------
Title: Vice President
GMAC COMMERCIAL CREDIT LLC,
as Administrative Agent and as a Lender
By /s/ Frank Imperato
-------------------------------------
Title: Senior Vice President
GMAC COMMERCIAL CREDIT LLC,
as Lender
By /s/ Frank Imperato
-------------------------------------
Title: Senior Vice President
<PAGE>
SCHEDULE I
GUARANTORS
STEINWAY MUSICAL INSTRUMENTS, INC.,
Guarantor
By: /s/ Dennis M. Hanson
--------------------------------
Title:
800 South Street
Suite 425
Waltham, MA 02453
EMERSON MUSICAL INSTRUMENTS, INC.,
Guarantor
By: /s/ Dennis M. Hanson
--------------------------------
Title:
28135 West Hively Avenue
Elkhart, IN 46517
THE STEINWAY PIANO COMPANY, INC.,
Guarantor
By: /s/ Dennis M. Hanson
--------------------------------
Title:
600 Industrial Parkway
Elkhart, IN 46516
THE SMI TRUST,
Guarantor
By: /s/ Dennis M. Hanson
--------------------------------
Title:
800 South Street
Suite 425
Waltham, MA 02453
<PAGE>
S&B RETAIL, INC.,
Guarantor
By: /s/ Dennis M. Hanson
--------------------------------
Title:
455 Route 17 South
Paramus, New Jersey 07652
BOSTON PIANO COMPANY, INC.,
Guarantor
By: /s/ Dennis M. Hanson
--------------------------------
Title:
37-11 19th Avenue
Long Island City, NY 11105
THE O.S. KELLY CORPORATION,
Guarantor
By: /s/ Dennis M. Hanson
--------------------------------
Title:
P.O. Box 1267
318 E. North Spring Street
Springfield, OH 45503
THE O.S. KELLY COMPANY,
Guarantor
By: /s/ Dennis M. Hanson
--------------------------------
Title:
P.O. Box 1267
318 E. North Spring Street
Springfield, OH 45503
UNITED MUSICAL INSTRUMENTS HOLDINGS, INC.,
Guarantor
By: /s/ Dennis M. Hanson
--------------------------------
Title:
100 Industrial Parkway
Elkhart, IN 46516
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.10
<SEQUENCE>3
<FILENAME>a2042378zex-10_10.txt
<DESCRIPTION>EXHIBIT 10.10
<TEXT>
<PAGE>
Exhibit 10.10
MASTER NOTE PURCHASE AND REPURCHASE AGREEMENT
This Master Note Purchase and Repurchase Agreement (this "Agreement")
is executed as of August 31, 2000 by The Selmer Company, Inc. with an address of
600 Industrial Parkway, Elkhart, IN 46516 ("Selmer") and Textron Financial
Corporation with an address of 701 Xenia Avenue South, Suite 300, Golden Valley,
MN 55416 ("TFC").
RECITALS
A. Selmer manufactures and distributes musical instruments
("Selmer Products") and extends credit to selected retail
dealers of Selmer Products ("Dealers"), facilitating the
acquisition of Selmer Products by such Dealers (the "Floor
Plan");
B. In order to secure the Floor Plan, among other security,
Selmer establishes a first priority security interest in the
Selmer Products financed pursuant to the Floor Plan;
C. Selmer, from time to time, pursuant to powers of attorney
granted to Selmer by Dealers, executes promissory notes on
behalf of Dealers evidencing all or a portion of the
outstanding indebtedness under the Floor Plan (the "Notes");
D. Selmer and TFC intend that TFC will, from time to time, in an
amount not to exceed an aggregate of $15 Million at any time
outstanding and with full recourse to Selmer, purchase the
Notes and take an assignment of all security for, and all
other rights of Selmer associated with, such Notes and the
indebtedness evidenced thereby; and
E. Selmer shall be obligated to repurchase the Notes under the
circumstances set forth in this agreement.
AGREEMENT
In reliance upon the various representations, warranties and covenants
set forth in this Agreement, Selmer and TFC agree as follows:
ARTICLE I - PURCHASE OF NOTES
1.1 PURCHASE OF NOTES. Provided that Selmer is in compliance with, and
is not in breach of, any of its warranties, covenants or other obligations set
forth in this Agreement (and will not be in breach of, or in non-compliance
with, such obligations following the purchase hereinafter described), TFC will
purchase Eligible Notes (as hereinafter defined) from Selmer in an aggregate
amount at any time outstanding not to exceed $15 Million. The purchase price for
each Eligible Note shall be equal to the outstanding principal balance of such
Eligible Note at the time of purchase (the "Purchase Price").
1.2 ELIGIBLE NOTES. An "Eligible Note" is a Note which:
( a ) is not in default;
( b ) conforms to the documentation requirements set forth
in Section 1.4;
<PAGE>
2
( c ) is for a term not to exceed twenty-four (24) months;
( d ) provides for full straight line amortization of the
principal balance thereof (or some other amortization
of principal acceptable to TFC); and
( e ) is from a Dealer with which TFC has not had a prior
unsatisfactory relationship.
In order for TFC to make a determination as to the eligibility of a
Note, Selmer shall submit a list of Dealers to TFC and update such list on a
regular basis. In addition, if TFC's purchase of a Note would result in the
aggregate amount of outstanding principal under all Notes purchased by TFC with
respect to the subject Dealer exceeding $500,000.00, such Note shall not be an
"Eligible Note" unless TFC determines that the creditworthiness of such Dealer
is acceptable.
1.3 MINIMUM YIELD ON PURCHASED NOTES. To the extent that any Eligible
Note purchased by TFC (a "Purchased Note") accrues interest in any month at a
rate (the "Note Rate") less than the Minimum Acceptable Interest Rate (as
hereinafter defined), Selmer agrees to pay to TFC, on or before the twentieth
(20th) day of the following month, the difference between the amount of interest
accrued during such month at the Note Rate and the amount of interest which
would have accrued during such month at the Minimum Acceptable Interest Rate.
The Minimum Acceptable Interest Rate shall be a variable rate per annum,
adjusted monthly, equal to Prime plus three and one-quarter percent (3.25%).
Prime for any month shall be the greater of: (a) the prime commercial rate of
interest per annum published by the index bank referenced in the Purchased Notes
on the last day of the preceding month, or (b) Seven percent (7.0%) per annum.
Unless otherwise specified in the Purchased Notes, all interest calculations
under the Purchased Notes shall be done using a year of 360 days and the actual
number of days elapsed in the computation period.
1.4 REQUEST FOR PURCHASE OF A NOTE. Selmer may, from time to time,
request that TFC purchase Notes. Selmer shall not sell any Note to any other
party unless Selmer has first requested that TFC purchase such Note. Any such
request shall be made by submitting, for each Note, a completed Request for
Purchase of a Note in the form attached hereto as EXHIBIT 1.4(a); and the sole
original of such Note in the form attached hereto as EXHIBIT 1.4(b) ("Original
Note"). In addition, TFC shall have the right to receive copies of the
bookkeeping counterpart of all invoices identifying the indebtedness evidenced
by such Original Note (the "Invoices") and upon such request made by TFC, Selmer
shall deliver the Invoices within seven (7) business days. Such Original Note
shall have been executed on behalf of the Dealer obligated thereon by an
authorized officer of The Selmer Company, Inc., pursuant to a valid power of
attorney, and shall be endorsed to TFC by Selmer as shown in EXHIBIT 1.4(b). The
Invoices and supporting material shall collectively identify the Selmer Products
being sold pursuant thereto by model and serial number, except for various
accessory Selmer Products which do not bear serial numbers and which will not,
in the aggregate, constitute more than five percent (5.0%) of the value of the
Selmer Products identified on the Invoices. Provided that the Original Note is
an Eligible Note, TFC shall pay the Purchase Price for such Note to Selmer, or
Selmer's designee, in immediately available funds, by wire transfer, within
three (3) business days following TFC's receipt of the foregoing documents in
acceptable form. If TFC determines that any Note submitted for purchase is not
an Eligible Note, TFC shall return all documents associated with such submission
to Selmer within five days (5) following TFC's receipt of the foregoing
documents.
1.5 ASSIGNMENT OF SECURITY AND OTHER RIGHTS. In connection with each
Purchased Note, Selmer assigns to TFC all of Selmer's rights to payment of the
indebtedness evidenced by such
<PAGE>
3
Purchased Note, all of Selmer's rights associated with Selmer Products
identified on the Invoices, an undivided joint interest in all other security or
such indebtedness in which Selmer has an interest, and an undivided joint
interest rights of Selmer associated with such indebtedness. The rights of
Selmer described in the foregoing sentence include, but are not limited to,
Selmer's rights under the Security Agreement and Power of Attorney entered into
by Selmer with the applicable Dealer, any Guaranty and Waiver By Individual(s)
or similar instrument(s) executed in connection therewith, and Selmer's interest
under policies of insurance covering Selmer Products owned by the applicable
Dealer. The collection of writings evidencing the rights described in this
Section, including the Purchased Notes, are hereinafter referred to as the
"Chattel Paper."
1.6 PERFECTION AND PROTECTION OF TFC'S INTEREST IN PURCHASED CHATTEL
PAPER. TFC shall perfect its interest in all purchased Chattel Paper by filing
an appropriate UCC-1 Financing Statement identifying the Chattel Paper to be
purchased. In addition, all original instruments executed between Selmer and the
Dealers associated with purchased Chattel Paper, pursuant to which such Dealers
have granted a security interest in Selmer Products to Selmer, shall be
conspicuously stamped with the legend set forth at EXHIBIT 1.6 hereto.
1.7 ALTERATION OF CHATTEL PAPER AND WAIVER OF RIGHTS. For so long as
there are outstanding amounts owing to TFC under a Purchased Note or Purchased
Notes, Selmer agrees not to amend, supplement or otherwise alter, or waive any
rights under, any of the purchased Chattel Paper associated therewith without
TFC's prior consent. TFC agrees not to amend, supplement or otherwise alter, or
waive any rights under, any purchase Chattel Paper without Selmer's prior
consent, except for purchased Chattel Paper associated with a Purchased Note or
Purchased Notes for which Selmer has failed to honor its repurchase obligations
under this Agreement.
ARTICLE II - REPURCHASE OF NOTES
2.1 REPURCHASE OF NOTES. Selmer shall be obligated, if
requested by TFC, to repurchase all or a portion of the Purchased Notes
under the following circumstances:
(a) Selmer shall be obligated, if requested by TFC, to
repurchase all of the Purchased Notes relating to a particular Dealer if any of
the following occur: (i) such Dealer defaults in the payment of principal and/or
interest under the applicable Purchased Note(s) and such obligation(s) is past
due more than ninety (90) days; (ii) such Dealer is otherwise in default under
the terms of the applicable Purchased Note(s); or (iii) Selmer breaches the
terms of any warranty contained in Sections 3.4 and 3.5 of this Agreement as
such warranty relates to such Dealer or the applicable Purchased Notes; and
(b) Selmer shall be obligated, if requested by TFC, to
repurchase ALL Purchased Notes if Selmer: (i) breaches any provision of this
Agreement, other than the warranties set forth in Sections 3.4 and 3.5 of this
agreement; (ii) is in default under the terms and conditions of any loan, lease,
or similar agreement pursuant to which Selmer's aggregate obligations are $1
Million or more and all applicable grace periods for the cure of such default
have expired; or (iii) is the subject of a bankruptcy, receivership or similar
proceeding which, if involuntary, is not dismissed within thirty (30) days
following its commencement.
In the event that Selmer is obligated to repurchase a Purchased Note
because of a circumstance set forth in the foregoing Subparagraph (a), Clause
(i) or Clause (ii), Selmer shall have the right to cause such Dealer to cure
such default (in its entirety) within thirty (30) days following receipt of
notice from
<PAGE>
4
TFC of the occurrence of such circumstance. In the event that Selmer
is obligated to repurchase some or all of the Purchased Notes because of a
circumstance set forth in the foregoing Subparagraph (a), Clause (iii), or
Subparagraph (b), Clause (i) (expect for Selmer's breach of the warranties
and/or obligations set forth in Sections 1.3, 2.2, 4.1, 4.2(b) and 4.4(b) of
this Agreement), Selmer shall have the right to cure such breach within thirty
(30) days following receipt of notice from TFC of the occurrence of such breach.
2.2 REPURCHASE PRICE. The Repurchase Price for a Purchased Note shall
be equal to all principal, accrued interest and other charges owing to TFC
pursuant to such Purchased Note, and owing to TFC by Selmer pursuant to Section
1.3, as of the date that Selmer pays the Repurchase Price to TFC. Selmer shall
pay the Repurchase Price for a Purchased Note to TFC within fifteen (15) days
following receipt of notice from TFC that Selmer is required to repurchase such
Purchased Note.
2.3 REASSIGNMENT OF RIGHTS. In connection with Selmer's repurchase of a
Purchased Note, TFC shall reassign to Selmer all of TFC's rights in the Chattel
Paper associated therewith previously assigned to TFC by Selmer. TFC warrants
that such assignment of rights shall be free and clear of the interest of any
party claiming such interest through TFC. TFC shall endorse the applicable
Original Note to Selmer, without recourse, and shall return such Original Note
to Selmer together with the Invoices related thereto.
ARTICLE III - WARRANTIES OF SELMER
Selmer continuously warrants to TFC as follows:
3.1 ORGANIZATION. Selmer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite power and authority to own, operate and lease its properties and
to carry on its business as presently being conducted. Selmer is duly qualified
to do business and is in good standing in each jurisdiction in which the
property owned, leased or operated by Selmer, or the nature of the business
conducted by Selmer, makes such qualification necessary, except where the
failure to be so qualified would not have an adverse effect on the financial
condition or business prospects of Selmer (an "Adverse Effect").
3.2 AUTHORIZATION. Selmer has the power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
Selmer has duly approved and authorized the execution and delivery of this
Agreement, and no other proceedings on the part of Selmer are necessary in
connection therewith. This Agreement constitutes a valid and binding obligation
of Selmer, enforceable against Selmer in accordance with its terms.
3.3 AUTHORITY. The compliance by Selmer with the provisions hereof will
not: ( a ) violate any provision of the charter documents or by-laws of Selmer;
( b ) violate any provision of, constitute a default under (or an event which,
with notice or lapse of time or both, would constitute a default under), or
result in the creation of any lien, security interest, charge of encumbrance
upon any of the properties of Selmer, pursuant to the terms of any agreement,
instrument or other obligation to which Selmer is party or by which any of
Selmer's properties are bound; ( c ) violate any order, rule or regulation of
any court or governmental authority; or ( d ) require the consent of, or notice
to, any governmental or regulatory authority.
3.4 PURCHASED CHATTEL PAPER. All of the documents associated with
purchased Chattel Paper contained in Selmer's credit or documentation files are,
in all material respects, what they purport
<PAGE>
5
to be and, as appropriate, are valid and binding obligations of the Dealer
associated therewith, enforceable against such Dealer in accordance with their
terms, except: (a) as enforcement may be limited by bankruptcy or other similar
laws affecting the enforcement of creditors' rights generally; and (b) that the
remedy of specific performance and other forms of equitable relief are subject
to judicial discretion. Selmer has good and marketable title to the purchased
Chattel Paper and to the indebtedness evidenced thereby, free and clear of all
defenses, set-offs, counterclaims, liens and encumbrances of every kind and
nature. Each Purchased Note constitutes a bona fide loan by Selmer to the
applicable Dealer, in an amount equal to the Purchase Price for such Eligible
Note. Selmer has not accepted interest, or any other similar amounts, from any
Dealer obligated on any Purchased Note in advance of any due date occurring
after the date that Selmer completes a Request for Purchase of a Note with
respect thereto.
3.5 PRIORITY OF LIENS AND INSURANCE. Selmer has a perfected security
interest in all Selmer Products owned by each Dealer associated with a Purchased
Note. Selmer has a first priority security interest in each of the Selmer
Products which is identified on the Invoices. Each Dealer associated with a
Purchased Note has obtained property insurance covering its inventory of Selmer
Products for their full replacement value and naming Selmer as Loss Payee.
3.6 REPORTS AND INFORMATION. All reports and information delivered or
conveyed by Selmer to TFC pertaining to the Purchased Notes are accurate and
complete in all material respects.
3.7 LITIGATION. There are no proceedings before any court or
governmental authority (each a "Proceeding") pending or, to the best of Selmer's
knowledge, threatened against Selmer which, if adversely determined, would have
an Adverse Effect. Selmer is not subject to any judgment or other order entered
in any law suit or proceeding which would have an Adverse Effect.
3.8 COMPLIANCE WITH LAWS. The Purchased Notes have been entered into by
Selmer in accordance with all applicable laws and other requirements of
governmental authorities (including, but not limited to, usury, equal credit
opportunity and similar laws or regulations), except where the failure to comply
with such laws, regulations or other requirements would not have an Adverse
Effect.
ARTICLE IV - AFFIRMATIVE AND NEGATIVE COVENANTS OF SELMER
Selmer covenants and agrees with TFC as follows:
4.1 FINANCIAL STATEMENTS. Selmer shall deliver to TFC, within one
hundred twenty (120) days following the close of each of its fiscal years,
Selmer's financial statements, certified by a recognized firm of certified
public accountants as having been prepared in accordance with generally accepted
accounting principles and as presenting fairly the financial condition of Selmer
as of the date thereof and for the period then ended. Selmer shall deliver to
TFC such other financial information as TFC shall reasonably request, including,
within forty-five (45) days following the close of each of Selmer's fiscal
quarters, Selmer's financial statements, certified by the chief financial
officer of Selmer as having been prepared in accordance with generally accepted
accounting principles and in a manner consistent with the normal accounting
practices of Selmer. Each time that Selmer delivers Selmer's financial
statements to TFC, Selmer shall also deliver a certificate from the chief
financial officer of Selmer indicating whether Selmer was in compliance with the
provisions of Section 4.6 of this Agreement as of the date of such financial
statements.
<PAGE>
6
4.2 BOOKS AND RECORDS. Selmer shall: (a) keep accurate and complete
records pertaining to the purchased Chattel Paper, and (b) permit TFC, upon
reasonable notice and at reasonable times, to audit the credit and documentation
files of a Dealer associated with purchased Chattel Paper, or an Eligible Note
which Selmer has requested that TFC purchase.
4.3 ADDITIONAL DOCUMENTATION. Selmer shall execute and deliver to TFC
all additional documents which TFC may, from time to time, determine are
necessary or appropriate to evidence or perfect TFC's interest in the purchased
Chattel Paper.
4.4 EXISTENCE, NAME AND PRINCIPAL PLACE OF BUSINESS. Selmer shall: (a)
maintain its existence in good standing, and (b)deliver to TFC written notice,
at least sixty (60) days in advance, of any proposed change in Selmer's name or
the location of Selmer's principal place of business.
4.5 BREACH OR DEFAULT. Selmer shall notify TFC as soon as reasonably
possible upon the occurrence of any circumstance which puts Selmer in breach of
any of Selmer's covenants, warranties or agreements contained in this Agreement.
4.6 FINANCIAL COVENANTS. Selmer shall not permit its: (a) Tangible Net
Worth (as hereinafter defined) to be less than $41 Million, or (b) the ratio of
its Adjusted Indebtedness (as hereinafter defined) to Tangible Net Worth to be
greater than 2.0 to 1.0. "Tangible Net Worth" means the shareholders equity of
Selmer, increased by Selmer's minimum pension liability and Subordinated Debt
(as hereinafter defined), and reduced by Selmer's intangible assets.
"Subordinated Debt" includes in the Senior Secured Notes (in the original
principal amount of $53 Million) and any other indebtedness of Selmer owing to a
party which has subordinated its right to payment of such indebtedness to the
right of TFC to payment under this Agreement. "Adjusted Indebtedness" means
Selmer's total liabilities, reduced by unfunded pension liability and the
reserves for recourse notes.
ARTICLE V - MISCELLANEOUS
5.1 TERM OF AGREEMENT. This Agreement shall be in effect for a period
of one (1) year from the date hereof. TFC may terminate this Agreement if Selmer
is, at any time, obligated to repurchase all Purchased Notes. Any termination or
expiration of this Agreement shall not affect the obligations of Selmer and TFC
under this Agreement with respect to Chattel Paper purchased by TFC from Selmer.
5.2 POWER OF ATTORNEY. Selmer irrevocably appoints TFC, and any person
designated by TFC, for so long as any obligation remains outstanding under any
Purchased Note, as Selmer's true and lawful attorney-in-fact to: (a) endorse, in
TFC's or Selmer's name, any draft or other order for the payment of money
payable to Selmer and related to the purchased Chattel Paper, and (b) execute,
in TFC's or Selmer's name, all other instruments and documents necessary or
appropriate to enable TFC to enforce TFC's rights in the purchased Chattel Paper
against any associated Dealer.
5.3 INTEGRATION, MODIFICATION AND COURSE OF DEALING. This Agreement
constitutes the entire agreement of Selmer and TFC relative to the subject
matter hereof. No modification of, or supplement to, this Agreement shall bind
Selmer or TFC unless in writing and signed by an authorized officer of Selmer or
TFC, as appropriate. No course of dealing and no delay or failure of Selmer or
TFC to exercise any right, power or privilege under this Agreement will affect
any other or future exercise of such right, power or privilege.
<PAGE>
7
5.4 ASSIGNMENT AND DELEGATION. Selmer shall have the right, from time
to time, to sell, assign or otherwise transfer its entire interest in this
Agreement to any entity which it controls, is controlled by, or is under common
control with Selmer. Selmer may not assign or transfer any of its rights or
delegate any of its obligations under this Agreement under any other
circumstances. TFC shall have the right, from time to time, to sell, assign or
otherwise transfer its interest in this Agreement and the purchased Chattel
Paper, either in whole or in part, to any entity which controls, is controlled
by, or is under common control with TFC.
5.5 NOTICES. All notices, requests, demands and other communications
made pursuant to this Agreement (the "Notices") shall be in writing and shall be
sent by certified mail, return receipt requested. All of the Notices shall be
sent to TFC (Attention: Vice President - Operations) or Selmer (Attention: Vice
President of Finance) at the address for such party set forth at the end of this
Agreement or to such other address as such party shall designate from time to
time.
5.6 BINDING EFFECT AND GOVERNING LAW. This Agreement shall not be
deemed to create any right in any party except as provided herein and shall
inure to the benefit of, and by binding upon, the successors and assigns of
Selmer and TFC. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF RHODE ISLAND, WITHOUT REFERENCE TO APPLICABLE
CONFLICT OF LAW PRINCIPLES.
The undersigned, pursuant to due corporate and/or partnership
authority, have caused this Agreement to be executed as of the date set forth
above.
TFC:
TEXTRON FINANCIAL CORPORATION
By: /S/ JOHN K. KING
--------------------------------------
Print Name: JOHN K. KING
-------------------------------
Print Title: VICE PRESIDENT-DIVISION MANAGER
--------------------------------------
Address: 701 Xenia Avenue South, Suite 300
Golden Valley, MN 55416
SELMER:
THE SELMER COMPANY, INC.
By: /S/ MICHAEL R. VICKREY
--------------------------------------
Print Name: MICHAEL R. VICKREY
--------------------------------------
Print Title: EXECUTIVE V.P. - FINANCE
--------------------------------------
Address: 600 Industrial Parkway
Elkhart, IN 46516
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.11
<SEQUENCE>4
<FILENAME>a2042378zex-10_11.txt
<DESCRIPTION>EXHIBIT 10.11
<TEXT>
<PAGE>
Exhibit 10.11
MASTER NOTE PURCHASE AND REPURCHASE AGREEMENT
This Master Note Purchase and Repurchase Agreement (this "Agreement") is
executed as of August 31, 2000 by Emerson Musical Instruments, Inc. with an
address of 28135 West Hively, Elkhart, IN 46517 ("Emerson") and Textron
Financial Corporation with an address of 701 Xenia Avenue South, Suite 300,
Golden Valley, MN 55416 ("TFC").
RECITALS
A. Emerson manufactures and distributes musical instruments ("Emerson
Products")and extends credit to selected retail dealers of Emerson Products
("Dealers"), facilitating the acquisition of Emerson Products by such Dealers
(the "Floor Plan");
B. In order to secure the Floor Plan, among other security, Emerson
establishes a first priority security interest in the Emerson Products financed
pursuant to the Floor Plan;
C. Emerson, from time to time, pursuant to powers of attorney granted
to Emerson by Dealers, executes promissory notes on behalf of Dealers evidencing
all or a portion of the outstanding indebtedness under the Floor Plan (the
"Notes");
D. Emerson and TFC intend that TFC will, from time to time, in an amount
not to exceed an aggregate of $1 Million at any time outstanding and with full
recourse to Emerson, purchase the Notes and take an assignment of all security
for, and all other rights of Emerson associated with, such Notes and the
indebtedness evidenced thereby; and
E. Emerson shall be obligated to repurchase the Notes under the
circumstances set forth in this agreement.
AGREEMENT
In reliance upon the various representations, warranties and covenants set forth
in this Agreement, Emerson and TFC agree as follows:
ARTICLE I - PURCHASE OF NOTES
1.1 PURCHASE OF NOTES. Provided that Emerson is in compliance with, and is
not in breach of, any of its warranties, covenants or other obligations set
forth in this Agreement (and will not be in breach of, or in non-compliance
with, such obligations following the purchase hereinafter described), TFC will
purchase Eligible Notes (as hereinafter defined) from Emerson in an aggregate
amount at any time outstanding not to exceed $1 Million. The purchase price for
each Eligible Note shall be equal to the outstanding principal balance of such
Eligible Note at the time of purchase (the "Purchase Price").
1.2 ELIGIBLE NOTES. An "Eligible Note" is a Note which:
( a ) is not in default;
<PAGE>
2
( b ) conforms to the documentation requirements set forth
in Section 1.4;
( c ) is for a term not to exceed twenty-four (24) months;
( d ) provides for full straight line amortization of the
principal balance thereof (or some other amortization of
principal acceptable to TFC); and
( e ) is from a Dealer with which TFC has not had a prior
unsatisfactory relationship.
In order for TFC to make a determination as to the eligibility of a Note,
Emerson shall submit a list of Dealers to TFC and update such list on a regular
basis. In addition, if TFC's purchase of a Note would result in the aggregate
amount of outstanding principal under all Notes purchased by TFC with respect to
the subject Dealer exceeding $500,000.00, such Note shall not be an "Eligible
Note" unless TFC determines that the creditworthiness of such Dealer is
acceptable.
1.3 MINIMUM YIELD ON PURCHASED NOTES. To the extent that any Eligible Note
purchased by TFC (a "Purchased Note") accrues interest in any month at a rate
(the "Note Rate") less than the Minimum Acceptable Interest Rate (as hereinafter
defined), Emerson agrees to pay to TFC, on or before the twentieth (20th) day of
the following month, the difference between the amount of interest accrued
during such month at the Note Rate and the amount of interest which would have
accrued during such month at the Minimum Acceptable Interest Rate. The Minimum
Acceptable Interest Rate shall be a variable rate per annum, adjusted monthly,
equal to Prime plus three and one-quarter percent (3.25%). Prime for any month
shall be the greater of: (a) the prime commercial rate of interest per annum
published by the index bank referenced in the Purchased Notes on the last day of
the preceding month, or (b) Seven percent (7.0%) per annum. Unless otherwise
specified in the Purchased Notes, all interest calculations under the Purchased
Notes shall be done using a year of 360 days and the actual number of days
elapsed in the computation period.
1.4 REQUEST FOR PURCHASE OF A NOTE. Emerson may, from time to time, request
that TFC purchase Notes. Emerson shall not sell any Note to any other party
unless Emerson has first requested that TFC purchase such Note. Any such request
shall be made by submitting, for each Note, a completed Request for Purchase of
a Note in the form attached hereto as EXHIBIT 1.4(a); and the sole original of
such Note in the form attached hereto as EXHIBIT 1.4(b) ("Original Note"). In
addition, TFC shall have the right to receive copies of the bookkeeping
counterpart of all invoices identifying the indebtedness evidenced by such
Original Note (the "Invoices") and upon such request made by TFC, Emerson shall
deliver the Invoices within seven (7) business days. Such Original Note shall
have been executed on behalf of the Dealer obligated thereon by an authorized
officer of Emerson Musical Instruments, Inc., pursuant to a valid power of
attorney, and shall be endorsed to TFC by Emerson as shown in EXHIBIT 1.4(b).
The Invoices and supporting material shall collectively identify the Emerson
Products being sold pursuant thereto by model and serial number, except for
various accessory Emerson Products which do not bear serial numbers and which
will not, in the aggregate, constitute more than five percent (5.0%) of the
value of the Emerson Products identified on the Invoices. Provided that the
Original Note is an Eligible Note, TFC shall pay the Purchase Price for such
Note to Emerson, or Emerson's designee, in immediately available funds, by wire
transfer, within three (3) business days following TFC's receipt of the
foregoing documents in acceptable form. If TFC determines that any Note
submitted for purchase is not an Eligible Note, TFC shall return all documents
associated with such submission to Emerson within five days (5) following TFC's
receipt of the foregoing documents.
<PAGE>
3
1.5 ASSIGNMENT OF SECURITY AND OTHER RIGHTS. In connection with each
Purchased Note, Emerson assigns to TFC all of Emerson's rights to payment of the
indebtedness evidenced by such Purchased Note, all of Emerson's rights
associated with Emerson Products identified on the Invoices, an undivided joint
interest in all other security or such indebtedness in which Emerson has an
interest, and an undivided joint interest rights of Emerson associated with such
indebtedness. The rights of Emerson described in the foregoing sentence include,
but are not limited to, Emerson's rights under the Security Agreement and Power
of Attorney entered into by Emerson with the applicable Dealer, any Guaranty and
Waiver By Individual(s) or similar instrument(s) executed in connection
therewith, and Emerson's interest under policies of insurance covering Emerson
Products owned by the applicable Dealer. The collection of writings evidencing
the rights described in this Section, including the Purchased Notes, are
hereinafter referred to as the "Chattel Paper."
1.6 PERFECTION AND PROTECTION OF TFC'S INTEREST IN PURCHASED CHATTEL PAPER.
TFC shall perfect its interest in all purchased Chattel Paper by filing an
appropriate UCC-1 Financing Statement identifying the Chattel Paper to be
purchased. In addition, all original instruments executed between Emerson and
the Dealers associated with purchased Chattel Paper, pursuant to which such
Dealers have granted a security interest in Emerson Products to Emerson, shall
be conspicuously stamped with the legend set forth at EXHIBIT 1.6 hereto.
1.7 ALTERATION OF CHATTEL PAPER AND WAIVER OF RIGHTS. For so long as there
are outstanding amounts owing to TFC under a Purchased Note or Purchased Notes,
Emerson agrees not to amend, supplement or otherwise alter, or waive any rights
under, any of the purchased Chattel Paper associated therewith without TFC's
prior consent. TFC agrees not to amend, supplement or otherwise alter, or waive
any rights under, any purchase Chattel Paper without Emerson's prior consent,
except for purchased Chattel Paper associated with a Purchased Note or Purchased
Notes for which Emerson has failed to honor its repurchase obligations under
this Agreement.
ARTICLE II - REPURCHASE OF NOTES
2.1 REPURCHASE OF NOTES. Emerson shall be obligated, if requested by TFC,
to repurchase all or a portion of the Purchased Notes under the following
circumstances:
(a) Emerson shall be obligated, if requested by TFC, to repurchase all of
the Purchased Notes relating to a particular Dealer if any of the following
occur: (i) such Dealer defaults in the payment of principal and/or interest
under the applicable Purchased Note(s) and such obligation(s) is past due more
than ninety (90) days; (ii) such Dealer is otherwise in default under the terms
of the applicable Purchased Note(s); or (iii) Emerson breaches the terms of any
warranty contained in Sections 3.4 and 3.5 of this Agreement as such warranty
relates to such Dealer or the applicable Purchased Notes; and
(b) Emerson shall be obligated, if requested by TFC, to repurchase ALL
Purchased Notes if Emerson: (i) breaches any provision of this Agreement, other
than the warranties set forth in Sections 3.4 and 3.5 of this agreement; (ii) is
in default under the terms and conditions of any loan, lease, or similar
agreement pursuant to which Emerson's aggregate obligations are $1 Million or
more and all applicable grace periods for the cure of such default have expired;
or (iii) is the subject of a bankruptcy, receivership or similar proceeding
which, if involuntary, is not dismissed within thirty (30) days following its
commencement.
In the event that Emerson is obligated to repurchase a Purchased Note because
of a circumstance set forth in the foregoing Subparagraph (a), Clause (i) or
Clause (ii), Emerson shall have the right to cause such
<PAGE>
4
Dealer to cure such default (in its entirety) within thirty (30) days following
receipt of notice from TFC of the occurrence of such circumstance. In the event
that Emerson is obligated to repurchase some or all of the Purchased Notes
because of a circumstance set forth in the foregoing Subparagraph (a), Clause
(iii), or Subparagraph (b), Clause (i) (expect for Emerson's breach of the
warranties and/or obligations set forth in Sections 1.3, 2.2, 4.1, 4.2(b) and
4.4(b) of this Agreement), Emerson shall have the right to cure such breach
within thirty (30) days following receipt of notice from TFC of the occurrence
of such breach.
2.2 REPURCHASE PRICE. The Repurchase Price for a Purchased Note shall be
equal to all principal, accrued interest and other charges owing to TFC pursuant
to such Purchased Note, and owing to TFC by Emerson pursuant to Section 1.3, as
of the date that Emerson pays the Repurchase Price to TFC. Emerson shall pay the
Repurchase Price for a Purchased Note to TFC within fifteen (15) days following
receipt of notice from TFC that Emerson is required to repurchase such Purchased
Note.
2.3 REASSIGNMENT OF RIGHTS. In connection with Emerson's repurchase of a
Purchased Note, TFC shall reassign to Emerson all of TFC's rights in the Chattel
Paper associated therewith previously assigned to TFC by Emerson. TFC warrants
that such assignment of rights shall be free and clear of the interest of any
party claiming such interest through TFC. TFC shall endorse the applicable
Original Note to Emerson, without recourse, and shall return such Original Note
to Emerson together with the Invoices related thereto.
ARTICLE III - WARRANTIES OF EMERSON
Emerson continuously warrants to TFC as follows:
3.1 ORGANIZATION. Emerson is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has all
requisite power and authority to own, operate and lease its properties and to
carry on its business as presently being conducted. Emerson is duly qualified to
do business and is in good standing in each jurisdiction in which the property
owned, leased or operated by Emerson, or the nature of the business conducted by
Emerson, makes such qualification necessary, except where the failure to be so
qualified would not have an adverse effect on the financial condition or
business prospects of Emerson (an "Adverse Effect").
3.2 AUTHORIZATION. Emerson has the power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
Emerson has duly approved and authorized the execution and delivery of this
Agreement, and no other proceedings on the part of Emerson are necessary in
connection therewith. This Agreement constitutes a valid and binding obligation
of Emerson, enforceable against Emerson in accordance with its terms.
3.3 AUTHORITY. The compliance by Emerson with the provisions hereof will
not: ( a ) violate any provision of the charter documents or by-laws of Emerson;
( b ) violate any provision of, constitute a default under (or an event which,
with notice or lapse of time or both, would constitute a default under), or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties of Emerson, pursuant to the terms of any agreement,
instrument or other obligation to which Emerson is party or by which any of
Emerson's properties are bound; ( c ) violate any order, rule or regulation of
any court or governmental authority; or ( d ) require the consent of, or notice
to, any governmental or regulatory authority.
<PAGE>
5
3.4 PURCHASED CHATTEL PAPER. All of the documents associated with purchased
Chattel Paper contained in Emerson's credit or documentation files are, in all
material respects, what they purport to be and, as appropriate, are valid and
binding obligations of the Dealer associated therewith, enforceable against such
Dealer in accordance with their terms, except: (a) as enforcement may be limited
by bankruptcy or other similar laws affecting the enforcement of creditors'
rights generally; and (b) that the remedy of specific performance and other
forms of equitable relief are subject to judicial discretion. Emerson has good
and marketable title to the purchased Chattel Paper and to the indebtedness
evidenced thereby, free and clear of all defenses, set-offs, counterclaims,
liens and encumbrances of every kind and nature. Each Purchased Note constitutes
a bona fide loan by Emerson to the applicable Dealer, in an amount equal to the
Purchase Price for such Eligible Note. Emerson has not accepted interest, or any
other similar amounts, from any Dealer obligated on any Purchased Note in
advance of any due date occurring after the date that Emerson completes a
Request for Purchase of a Note with respect thereto.
3.5 PRIORITY OF LIENS AND INSURANCE. Emerson has a perfected security
interest in all Emerson Products owned by each Dealer associated with a
Purchased Note. Emerson has a first priority security interest in each of the
Emerson Products which is identified on the Invoices. Each Dealer associated
with a Purchased Note has obtained property insurance covering its inventory of
Emerson Products for their full replacement value and naming Emerson as Loss
Payee.
3.6 REPORTS AND INFORMATION. All reports and information delivered or
conveyed by Emerson to TFC pertaining to the Purchased Notes are accurate and
complete in all material respects.
3.7 LITIGATION. There are no proceedings before any court or governmental
authority (each a "Proceeding") pending or, to the best of Emerson's knowledge,
threatened against Emerson which, if adversely determined, would have an Adverse
Effect. Emerson is not subject to any judgment or other order entered in any law
suit or proceeding which would have an Adverse Effect.
3.8 COMPLIANCE WITH LAWS. The Purchased Notes have been entered into by
Emerson in accordance with all applicable laws and other requirements of
governmental authorities (including, but not limited to, usury, equal credit
opportunity and similar laws or regulations), except where the failure to comply
with such laws, regulations or other requirements would not have an Adverse
Effect.
ARTICLE IV - AFFIRMATIVE AND NEGATIVE COVENANTS OF EMERSON
Emerson covenants and agrees with TFC as follows:
4.1 BOOKS AND RECORDS. Emerson shall: (a) keep accurate and complete
records pertaining to the purchased Chattel Paper, and (b) permit TFC, upon
reasonable notice and at reasonable times, to audit the credit and documentation
files of a Dealer associated with purchased Chattel Paper, or an Eligible Note
which Emerson has requested that TFC purchase.
4.2 ADDITIONAL DOCUMENTATION. Emerson shall execute and deliver to TFC all
additional documents which TFC may, from time to time, determine are necessary
or appropriate to evidence or perfect TFC's interest in the purchased Chattel
Paper.
4.3 EXISTENCE, NAME AND PRINCIPAL PLACE OF BUSINESS. Emerson shall:
(a) maintain its existence in good standing, and (b) deliver to TFC written
notice, at least sixty (60) days in advance, of any proposed change in Emerson's
name or the location of Emerson's principal place of business.
<PAGE>
6
4.4 BREACH OR DEFAULT. Emerson shall notify TFC as soon as reasonably
possible upon the occurrence of any circumstance which puts Emerson in breach of
any of Emerson's covenants, warranties or agreements contained in this
Agreement.
ARTICLE V - MISCELLANEOUS
5.1 TERM OF AGREEMENT. This Agreement shall be in effect for a period of
one (1) year from the date hereof. TFC may terminate this Agreement if Emerson
is, at any time, obligated to repurchase all Purchased Notes. Any termination or
expiration of this Agreement shall not affect the obligations of Emerson and TFC
under this Agreement with respect to Chattel Paper purchased by TFC from
Emerson.
5.2 POWER OF ATTORNEY. Emerson irrevocably appoints TFC, and any person
designated by TFC, for so long as any obligation remains outstanding under any
Purchased Note, as Emerson's true and lawful attorney-in-fact to: (a) endorse,
in TFC's or Emerson's name, any draft or other order for the payment of money
payable to Emerson and related to the purchased Chattel Paper, and (b) execute,
in TFC's or Emerson's name, all other instruments and documents necessary or
appropriate to enable TFC to enforce TFC's rights in the purchased Chattel Paper
against any associated Dealer.
5.3 INTEGRATION, MODIFICATION AND COURSE OF DEALING. This Agreement
constitutes the entire agreement of Emerson and TFC relative to the subject
matter hereof. No modification of, or supplement to, this Agreement shall bind
Emerson or TFC unless in writing and signed by an authorized officer of Emerson
or TFC, as appropriate. No course of dealing and no delay or failure of Emerson
or TFC to exercise any right, power or privilege under this Agreement will
affect any other or future exercise of such right, power or privilege.
5.4 ASSIGNMENT AND DELEGATION. Emerson shall have the right, from time to
time, to sell, assign or otherwise transfer its entire interest in this
Agreement to any entity which it controls, is controlled by, or is under common
control with Emerson. Emerson may not assign or transfer any of its rights or
delegate any of its obligations under this Agreement under any other
circumstances. TFC shall have the right, from time to time, to sell, assign or
otherwise transfer its interest in this Agreement and the purchased Chattel
Paper, either in whole or in part, to any entity which controls, is controlled
by, or is under common control with TFC.
5.5 NOTICES. All notices, requests, demands and other communications made
pursuant to this Agreement (the "Notices") shall be in writing and shall be sent
by certified mail, return receipt requested. All of the Notices shall be sent to
TFC (Attention: Vice President - Operations) or Emerson (Attention: Vice
President of Finance) at the address for such party set forth at the end of this
Agreement or to such other address as such party shall designate from time to
time.
5.6 BINDING EFFECT AND GOVERNING LAW. This Agreement shall not be deemed
to create any right in any party except as provided herein and shall inure to
the benefit of, and by binding upon, the successors and assigns of Emerson and
TFC. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF RHODE ISLAND, WITHOUT REFERENCE TO APPLICABLE CONFLICT OF
LAW PRINCIPLES.
<PAGE>
7
The undersigned, pursuant to due corporate and/or partnership authority, have
caused this Agreement to be executed as of the date set forth above.
TFC:
TEXTRON FINANCIAL CORPORATION
By: /s/ John K. King
---------------------------------
Print Name: John K. King
---------------------------------
Print Title: Vice President-Division Manager
---------------------------------
Address: 701 Xenia Avenue South, Suite 300
Golden Valley, MN 55416
EMERSON:
EMERSON MUSICAL INSTRUMENTS, INC.
By: /s/ M.R. Vickrey
---------------------------------
Print Name: M.R. Vickrey
---------------------------------
Print Title: Treasurer
---------------------------------
Address: 28135 West Hively
Elkhart, IN 46517
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.15
<SEQUENCE>5
<FILENAME>a2042378zex-10_15.txt
<DESCRIPTION>EXHIBIT 10.15
<TEXT>
<PAGE>
Exhibit 10.15
- --------------------------------------------------------------------------------
THE DEFERRED COMPENSATION INCENTIVE PLAN FOR STEINWAY MUSICAL INSTRUMENTS, INC.
- --------------------------------------------------------------------------------
<PAGE>
THE DEFERRED COMPENSATION INCENTIVE PLAN
FOR STEINWAY MUSICAL INSTRUMENTS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ARTICLE I
<S> <C>
Purpose..................................................................................1
ARTICLE II
Definitions..............................................................................1
ARTICLE III
Eligibility & Participation..............................................................3
ARTICLE IV
Contributions............................................................................3
ARTICLE V
Account Allocation & Investment..........................................................4
ARTICLE VI
Trust Provisions.........................................................................4
ARTICLE VII
Distributions............................................................................5
ARTICLE VIII
Vesting & Forfeiture.....................................................................6
ARTICLE IX
Plan Amendment and Termination...........................................................6
ARTICLE X
Administration...........................................................................6
ARTICLE XI
Miscellaneous............................................................................7
</TABLE>
<PAGE>
THE DEFERRED COMPENSATION INCENTIVE PLAN
FOR STEINWAY MUSICAL INSTRUMENTS, INC.
This unfunded Deferred Compensation Plan (the "Plan"), effective as of January
1, 2001, is hereby adopted and established by Steinway Musical Instruments, Inc.
(the "Company") and will be maintained by the Company for the purpose of
providing benefits for Plan Participants and their Beneficiaries, as set forth
herein.
ARTICLE I
PURPOSE
Section 1.1 The purpose of the Plan is to provide the opportunity for
a select group of executives, senior management employees and
Directors of the Company, who constitute a "top hat" group as
defined by ERISA, to receive a portion of their Compensation
in a tax deferred manner.
ARTICLE II
DEFINITIONS
As used in this instrument, the following terms shall have the meaning as
hereinafter set forth:
Section 2.1 "Account" shall mean a bookkeeping account established
pursuant to Article V.
Section 2.2 "Beneficiary" shall mean a person who has become eligible
to participate and for whom an Account is maintained, but who
has ceased to be an Employee of the Company, or a person
entitled to benefits hereunder as Beneficiary of a deceased
Participant or as Beneficiary of a deceased Beneficiary.
Section 2.3 "Board" or "Board of Directors" shall mean the Board of
Directors for Steinway Musical Instruments, Inc.
Section 2.4 "Change in Control" shall mean the occurrence of any one of
the following events:
(i) any "Person," (other than Steinway Musical Instruments,
Inc., or any of its Subsidiaries, or any trustee, fiduciary
or other person or entity holding securities under any
employee benefit plan or trust of the Company or any of its
Subsidiaries), together with all "affiliates" and
"associates" (as such terms are defined in Rule 12b-2 under
the Act) of such person, shall become the "beneficial owner"
(as such term is defined in Rule 13d-3 under the Act),
directly or indirectly, of securities of Steinway Musical
Instruments, Inc. representing 50 percent or more of the
combined voting power of the then outstanding securities of
Steinway Musical Instruments, Inc. having the right to vote
in an election of the Board of Directors of Steinway Musical
Instruments, Inc., ("Voting Securities") (in such case other
than as a result of an acquisition of securities directly
from the Company); or
1
<PAGE>
(ii) persons who, as of the Effective Date, constitute the Board
of Directors of Steinway Musical Instruments, Inc. (the
"Incumbent Directors") cease for any reason, including,
without limitation, as a result of a tender offer, proxy
contest, merger or similar transaction, to constitute at
least a majority of the Board, provided that any person
becoming a director of Steinway Musical Instruments, Inc.
subsequent to the Effective Date shall be considered an
Incumbent Director if such person's election was approved by
or such person was nominated for election by either (A) a
vote of at least a majority of the Incumbent Directors or
(B) a vote of at least a majority of the Incumbent Directors
who are members of a nominating committee comprised, in the
majority, of Incumbent Directors; but provided further, that
any such person whose initial assumption of office is in
connection with an actual or threatened election contest
relating to the election of members of the Board of
Directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than
the Board, including by reason of agreement intended to
avoid or settle any such actual or threatened contest or
solicitation, shall not be considered an Incumbent Director;
or
(iii) the stockholders of Steinway Musical Instruments, Inc.
shall approve (A) any consolidation or merger of Steinway
Musical Instruments, Inc. where the stockholders of Steinway
Musical Instruments, Inc., immediately prior to the
consolidation or merger, would not, immediately after the
consolidation or merger, beneficially own (as such term is
defined in Rule 13d-3 under the Act), directly or
indirectly, shares representing in the aggregate more than
50 percent of the voting shares of the corporation issuing
cash or securities in the consolidation or merger (or of its
ultimate parent corporation, if any), (B) any sale, lease,
exchange or other transfer (in one transaction or a series
of transactions contemplated or arranged by any party as a
single plan) of all or substantially all of the assets of
Steinway Musical Instruments, Inc. or (C) any plan or
proposal for the liquidation or dissolution of Steinway
Musical Instruments, Inc.
Section 2.5 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
Section 2.6 "Committee" shall mean the Compensation Committee of the Board
of Directors of Steinway Musical Instruments, Inc.
Section 2.7 "Company" shall mean Steinway Musical Instruments, Inc., a
Delaware corporation, and all affiliated companies within
the meaning of Section 414 of the Code.
Section 2.8 "Company Contributions" shall mean a contribution made
pursuant to Section 4.1.
Section 2.9 "Competitor" shall mean any person or entity including,
but not limited to, a corporation, association, partnership or
joint venture engaged in the design, manufacture, marketing,
distribution, sales or servicing of new or used musical
instruments.
Section 2.10 "Director" shall mean a member of the Board of Directors.
Section 2.11 "Disability" shall have the meaning set forth in the Savings
Plan for Employees of Steinway Musical Instruments, Inc. and
subsidiaries.
Section 2.12 "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
2
<PAGE>
Section 2.13 "Fiscal Year" shall mean the Company's fiscal year used for
corporate tax reporting purposes.
Section 2.14 "Forfeiture" shall mean the loss of the contingent right of a
Participant or beneficiary to receive future payments under
the Plan.
Section 2.15 "Participant" shall mean any individual who participates or
participated in the Plan in accordance with Section 3.1.
Section 2.16 "Plan Administrator" shall mean the Committee or an individual
designated by the Board of Directors to administer the Plan.
Section 2.17 "Plan Year" shall mean the Fiscal Year.
Section 2.18 "Retirement" shall refer to a Participant's cessation of
employment at the Company upon or after the attainment of age
65.
Section 2.19 "Trust" shall mean the trust established by the Company in
accordance with the provisions of Article VI.
Section 2.20 "Trustee" shall mean the trustee or trustees under the Trust.
Section 2.21 "Year of Service" shall mean a full 12-month period during
which an individual has continuously performed services for
the Company as an employee or Director.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
Section 3.1 The Committee shall meet at least once in each fiscal year
and irrevocably specify, the name of each employee who shall
be entitled to participate in the Plan for such year. The
Committee will exercise full discretion in specifying the
names of eligible employees.
Section 3.2 Any eligible employee described in Section 3.1 will become a
Participant by receiving a discretionary Company Contribution
pursuant to Article IV.
ARTICLE IV
CONTRIBUTIONS
Section 4.1 For any Plan Year, the Company may, in its sole discretion,
make a contribution to the Plan on behalf of eligible
Participants identified under Article III. The method by which
the amount to be allocated for the benefit of each Participant
from the total fund available for allocation shall be
determined by the Committee by taking into account such
factors as the Years of Service achieved and achievable
through age 65. Amounts contributed, if any, are considered
deferred contingent benefits, payable only as provided in this
Plan.
3
<PAGE>
ARTICLE V
ACCOUNT ALLOCATION & INVESTMENT
Section 5.1 The Plan Administrator shall establish and maintain a separate
bookkeeping Account for each Participant. The Account shall
reflect the amounts credited pursuant to the Plan and all
changes in investment values from time to time.
Section 5.2 The Company shall credit to the Account of a Participant an
amount equal to the amount of (i) the Company Contribution
allocated to such Participant under Section 4.1 and (ii) any
income and gains and losses thereon, both realized and
unrealized, from investments made pursuant to Section 5.3
("Additions").
Section 5.3 Additions shall be calculated at the rate computed as if the
Company Contribution had been invested in a book reserve (the
"Investment Account") established for this purpose. For
purposes of computing Additions, Company Contributions shall
be assumed to have been invested in the Investment Account
from and after the date credited to the Participant's Account.
Any funds so credited to the Investment Account may be
invested and reinvested in common and preferred stocks, mutual
funds, mortgages, debentures, bonds, notes or other evidences
of indebtedness, and other forms of securities as may be
selected by the Company in its discretion. In the exercise of
the foregoing discretionary investment powers, the Company may
engage investment counsel and, if so desires, may delegate to
such counsel, full or limited authority to select the assets
in which funds are to be invested. The Participant agrees on
behalf of himself and his Beneficiaries to assume all risk in
connection with any decrease in value of the funds which are
deemed invested in accordance with the provisions of this
Plan.
Section 5.4 The Plan Administrator shall provide the Participant, or
current Beneficiary, as soon as practicable after the end of
such Plan Year, with an annual statement of his or her Account
reflecting the value of the Company Contribution credited to
the Account and any Additions, gains or losses thereon.
Section 5.5 Title to and beneficial ownership of any assets, whether cash
or investments, which the Company may earmark to provide
benefits under this Plan shall, at all times, remain in the
Company, and the Participant and his Beneficiaries shall not
have any property interest whatsoever in any specific assets
of the Employer.
ARTICLE VI
TRUST PROVISIONS
Section 6.1 The Plan Administrator may in its discretion establish a trust
to hold all Company Contributions allocated to the Plan.
Except as otherwise provided in the terms of the Trust
Agreement, the Trust will be irrevocable and no portion of the
Trust will be used
4
<PAGE>
for any purpose other than the delivery benefit payments under
the Plan, and the payment of expenses of the Plan and Trust.
Section 6.2 Any Trust which may be established pursuant to Section 6.1
shall be designed as a grantor trust, within the meaning of
section 671 of the Code, of which the Company is the grantor,
and this Plan is to be construed in accordance with that
intention. Notwithstanding any other provision of this Plan,
the Trust will remain the property of the Company and will be
subject to the claims of its creditors in the event of its
bankruptcy or insolvency. No Participant will have any
priority claim on the Trust or any security interest or other
right superior to the rights of a general creditor of the
Company.
ARTICLE VII
DISTRIBUTIONS
Section 7.1 On the first day of the month next following the earlier of
(i) the Participant's Retirement or (ii) Disability,
distribution of the vested portion of the Participant's
Account (as determined under Article VIII) shall commence in
accordance with the provisions of this Plan, in the form of
fifteen (15) substantially equal yearly installments.
Section 7.2 If a Participant's employment hereunder is terminated for any
reason other than death or disability, but before age 65, the
amounts credited as discretionary Company Contributions shall
continue to be held or invested in accordance with Article V
and no distribution shall occur until the Participant shall
have reached age 65. Upon the attainment of age 65,
distribution shall occur in accordance Section 7.1.
Section 7.3 If a Participant should die before distribution of the full
amount of his or her Account has been made to the Participant,
any remaining amounts shall be distributed to the
Participant's Beneficiary. If a Participant has not designated
a Beneficiary, or if no designated Beneficiary is living on
the date of distribution, then, notwithstanding any provision
herein to the contrary, such amounts shall be distributed to
such Participant's estate in a lump sum distribution as soon
as administratively feasible following such Participant's
death.
Section 7.4 Anything herein to the contrary notwithstanding, if, at any
time, a court or the Internal Revenue Service determines that
an amount in a Participant's Account is includible in the
gross income of the Participant and subject to tax, the Board
of Directors of the Company may, in its sole discretion,
permit a lump sum distribution of an amount equal to the
amount determined to be includible in the Participant's gross
income.
Section 7.5 In the event any amount to be paid to the Participant or his
or her Beneficiary pursuant to this Article VII would, in the
Company's judgment, result in nondeductibility under Section
162(m) of the Code, of any portion of such Participant's
income payable by or attributable to the Company for the year
in which such amount is to be paid, such amount shall not be
paid in such year. Such nondeductible amount shall be payable
in the following calendar year, as an addition to the annual
installment scheduled to be paid in such following calendar
year, if applicable, subject to the provisions of this Section
7.5.
5
<PAGE>
ARTICLE VIII
VESTING & FORFEITURE
Section 8.1 A Participant shall become 100% vested in the Company
Contribution, credited to his or her Account, upon the
completion of five (5) Years of Service. Years of Service
completed prior to the effective date of this Plan will be
considered in determining the vested portion of a
Participant's Account.
Section 8.2 Notwithstanding any other provision of the Plan, in the event
of a Change of Control of the Company, all amounts credited to
a Participant's Account under the Plan shall become fully and
immediately vested if, as a result of the Change of Control,
said Participant is terminated from employment without cause
or experiences a significant reduction of duties.
For purposes of the above Section 8.2, the terms "terminated
without cause" and "significant reduction of duties" are
defined in a manner consistent with the meaning given by the
Participant's Employment Agreement, which is hereby
incorporated by reference.
Section 8.3 If at any time prior to the full distribution of a
Participant's Account, the Participant provides services,
directly or indirectly, to a Competitor, whether as an
employee, consultant, partner, principal, agent,
representative or advisor, then, notwithstanding any other
provision of this Plan, such Participant and his or her
Beneficiaries will immediately forfeit any and all vested and
non-vested interests in the discretionary Company
Contributions credited to, and remaining in, his or her
Account, including earnings thereon.
ARTICLE IX
PLAN AMENDMENT AND TERMINATION
Section 9.1 The Committee reserves the right to terminate the Plan at any
time. Such amendment or termination shall be effective as of
the date specified therein and shall be binding upon the Plan
Administrator, all Participants and Beneficiaries, and all
other persons claiming a present or future interest under the
Plan. If the Plan is terminated by the Company, all
Participant Accounts shall immediately become fully vested and
subject to a lump sum distribution within 120 days of the
effective date of such termination.
ARTICLE X
ADMINISTRATION
Section 10.1 The Plan shall be administered by the Plan Administrator,
which shall have complete authority, duty and power to
interpret and construe the provisions of the Plan in its
complete discretion. The Plan Administrator shall have the
duty and responsibility of maintaining records, making the
requisite calculations and disbursing the payments
6
<PAGE>
hereunder. The interpretations, determinations and
calculations of the Plan Administrator shall be final and
binding on all persons and parties concerned. Any
individual(s) serving as the Plan Administrator who is a
Participant will not vote or act on any matter relating solely
to himself or herself. In such case, the members of the
Committee will take such actions, or the Company may appoint
an individual to assist the Committee with such actions. When
making a determination or calculation, the Plan Administrator
shall be entitled to rely on information furnished by a
Participant, a Beneficiary, the Company or the Trustee.
Section 10.2 Expenses of administration shall be paid by the Company. The
Committee shall be entitled to rely on all tables, valuations,
certificates, opinions, data and reports furnished by any
actuary, accountant, controller, counsel or other person
employed or retained by the Company with respect to the Plan.
Section 10.3 Each Participant shall keep the Company informed of his or her
current address and the current address of his or her
designated Beneficiary. The Company shall not be obligated to
search for any person. If such person is not located within
three (3) Years after the date on which payment of the
Participant's benefits payable under this Plan may first be
made, payment may be made as though the Participant or his or
her Beneficiary had died at the end of such three-year period.
Section 10.4 Notwithstanding any provision herein to the contrary, neither
the Company nor any individual acting as an employee or agent
of the Company shall be liable to any Participant, former
Participant, designated Beneficiary, or any other person for
any claim, loss, liability or expense incurred in connection
with the Plan, unless attributable to fraud or willful
misconduct on the part of the Company or any such employee or
agent of the Company.
ARTICLE XI
MISCELLANEOUS
Section 11.1 The Plan constitutes a mere promise by the Company to make
payments in accordance with the terms of the Plan and
Participants and Beneficiaries shall have the status of
general unsecured creditors of the Company. Nothing in the
Plan will be construed to give any employee or any other
person rights to any specific assets of the Company or of any
other person. In all events, it is the intent of the Company
that the Plan be treated as unfunded for tax purposes and for
purposes of Title of ERISA.
Section 11.2 None of the benefits, payments, proceeds or claims of any
Participant or Beneficiary shall be subject to any claim of
any creditor of any Participant or Beneficiary, nor shall any
Participant or Beneficiary have any right to alienate,
anticipate, commute, pledge, encumber or assign any of the
benefits or payments or proceeds which he or she may expect to
receive, continently or otherwise, under the Plan.
Section 11.3 Nothing contained in the Plan shall confer upon any person a
right to be employed or to continue in the employ of the
Company, or interfere in any way with the right of the Company
to terminate the employment of a Participant in the Plan at
any time, with or without cause.
7
<PAGE>
Section 11.4 Any action with respect to the Plan taken by the Company, the
Plan Administrator or the Trustee or any action authorized by
or taken at the direction of the Plan Administrator, the
Company or the Trustee shall be conclusive upon all
Participants and Beneficiaries entitled to benefits under the
Plan.
Section 11.5 Any payment to any Participant or Beneficiary in accordance
with the provisions of the Plan shall, to the extent thereof,
be in satisfaction of claims against the Company, the Plan
Administrator or and the Trustee under the Plan, and the Plan
Administrator may require such Participant or Beneficiary, as
a condition precedent to such payment, to execute a receipt
and release to such effect. If any Participant or Beneficiary
is determined by the Plan Administrator to be incompetent by
reason of physical or mental disability, including minority,
to give a valid receipt and release, the Plan Administrator
may cause the payment or payments becoming due to such person
to be made to another person for his or her benefit without
responsibility on the part of the Plan Administrator, the
Company or the Trustee to follow the application of such
funds.
Section 11.6 The Plan shall be construed, administered, and governed in all
respects under and by the laws of the State of Massachusetts.
If any provision shall be held by a court of competent
jurisdiction to be invalid or unenforceable, the remaining
provisions hereof shall continue to be fully effective.
Section 11.7 Heading and subheadings in this Plan are inserted for
convenience only and are not to be considered in the
construction of the provisions hereof.
8
<PAGE>
IN WITNESS WHEREOF this instrument is executed and delivered on this 20TH day of
JANUARY, 2001.
STEINWAY MUSICAL INSTRUMENTS, INC.
By: /s/ Dennis M. Hanson
--------------------------------------------
Sr. EVP & CFO
-----------------------------------
ATTEST: /s/ Barbara Johnson
--------------------------------------------
9
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>6
<FILENAME>a2042378zex-21_1.txt
<DESCRIPTION>EXHIBIT 21.1
<TEXT>
<PAGE>
Exhibit 21.1
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Steinway Musical Instruments, Inc., a Delaware corporation
The Selmer Company, Inc., a Delaware corporation
Vincent Bach International, a corporation organized under the laws of the
United Kingdom
The Steinway Piano Company, Inc., a Delaware corporation
Steinway, Inc., a Delaware corporation
The O.S. Kelly Corporation, a Delaware corporation
The O.S. Kelly Company, an Ohio corporation
Steinway & Sons, a New York corporation
Boston Piano Company, a Massachusetts corporation
Boston Piano GmbH, a corporation organized under the laws of Germany
Hermann Kluge Beteiligungs-GmbH, a corporation organized under the
laws of Germany
Hermann Kluge GmbH & Co. KG, a limited partnership organized under
the laws of Germany
Bohn Claviaturen GmbH & Co. KG, a limited partnership organized under
the laws of Germany
Bona Sp. Z O.O., a limited liability company organized under the
laws of Poland
Pianohaus Karl Lang GmbH, a corporation organized under the laws of
Germany
S & B Retail, Inc., a Delaware corporation
Steinway & Sons Japan, Ltd., a corporation organized under the laws of
Japan
United Musical Instruments Holdings, Inc., a Delaware corporation
United Musical Instruments USA, Inc., an Indiana corporation
UMI Austria GmbH, a corporation organized under the laws of Austria
The SMI Trust, a Massachusetts business trust
Emerson Musical Instruments, Inc., a Delaware corporation
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>7
<FILENAME>a2042378zex-23_1.txt
<DESCRIPTION>EXHIBIT 23.1
<TEXT>
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-11465 of Steinway Musical Instruments, Inc. on Form S-8 of our report dated
February 22, 2001, appearing in the Annual Report on Form 10-K of Steinway
Musical Instruments, Inc. for the year ended December 31, 2000.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 28, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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