As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/31/06  Steinway Musical Instruments Inc  10-K       12/31/05    8:3.2M                                   Merrill Corp-MD/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report Pursuant to Section 13 and 15(D)      HTML   2.02M 
 2: EX-4.10     Instruments Defining the Rights of Security         HTML     54K 
                          Holders, Including Indentures                          
 3: EX-21.1     Subsidiaries of the Registrant                      HTML     12K 
 4: EX-23.1     Consents of Experts and Counsel                     HTML      8K 
 5: EX-31.1     302 Certification                                   HTML     15K 
 6: EX-31.2     302 Certification                                   HTML     14K 
 7: EX-32.1     906 Certification                                   HTML     11K 
 8: EX-32.2     906 Certification                                   HTML     11K 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

 

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 Incorporation or Organization)		(I.R.S. Employer Identification No.)
800 South Street, Suite 305,
Waltham, Massachusetts		02453
(Address of Principal Executive Offices)		(Zip Code)
Registrant’s telephone number, including area code
(781) 894-9770
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 is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  o  No  ý

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   Yes  o  No  ý

 

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  ý  No  o

 

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.  ý

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

 

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   o  No  ý

 

The aggregate market value of the Common Stock held by non-affiliates of the registrant was $236,697,002 as of June 30, 2005.

 

Number of shares of Common Stock outstanding as of March 24, 2006:		Class A		477,952
		Ordinary	ý	7,690,858
		Total	ý	8,168,810

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III - Items 10-14 - 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).

 

 

Report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC.  Additionally, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

 

Financial Information by Segment and Geographic Location

 

Information on business segments and geographic areas in which we operated for the years ended December 31, 2005, 2004 and 2003 is contained in Note 17 to the Consolidated Financial Statements included in this report.

 

Musical Instrument Industry

 

We operate two reportable segments within the musical instrument industry: pianos and band & orchestral instruments.

 

Pianos - The overall piano market is comprised of two main categories: grand pianos and upright pianos. Steinway & Sons pianos compete in the high-end segment of the market, whereas our Boston and Essex lines compete in the mid-priced segment of the piano market.

 

During the last few years, increases in piano imports, mainly from China and Indonesia, contributed to an increase in grand piano unit sales in the United States, the world’s largest grand piano market.  While these lower-priced imports have made it possible for more consumers to afford a piano, we believe industry revenues are on the decline as a result of lower average prices.  Since Steinway realizes the majority of its profit from high-end grand piano sales, our results are generally more affected by economic cycles, demographics, and the public’s continued interest in music than by industry trends.  The piano market in China is growing at a rapid pace and is now the second largest grand piano market outside the United States.  We continue to target this region in our distribution strategies. 

 

Band & Orchestral Instruments - Demand for band & orchestral instruments in the domestic market has traditionally been more significantly impacted by factors such as demographic trends and school budgeting rather than by macroeconomic cycles.  Recent studies have emphasized the importance of music education in a child’s development and many school band directors are promoting band programs as social organizations rather than the first step of intensive music study.  We expect this emphasis on music education and steady demographic trends to contribute to a relatively stable domestic market in the near-term.

 

In recent years, there has been an increase in units imported into the domestic market from offshore low-cost producers. This has created a highly price sensitive domestic market where manufacturers have implemented aggressive pricing programs in an attempt to maintain market share positions.  To remain competitive in this market, we now import some student woodwind and brass instruments, primarily entry-level, made to our specifications.  The impact of lower priced imported instruments has also led to consolidation within the industry, leaving Conn-Selmer, Yamaha and Jupiter as the top three remaining competitors.

 

3

 

Business and Products

 

Piano Segment

 

Our piano division concentrates on the high-end grand piano market, handcrafting Steinway pianos in New York and Germany.  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.  We also offer upright pianos as well as two mid-priced lines of pianos under the Boston and Essex brand names.

 

Steinway & Sons - Steinway pianos differ from all others in design specifications, materials used and the assembly process.  We offer two premium-priced product lines under the Steinway & Sons brand: grand pianos and upright pianos.  Grand pianos historically have accounted for the majority of our production.  We offer seven sizes 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 for ebony pianos generally ranging from $40,600 to $103,400 in the United States.  Limited edition pianos and pianos with exotic veneers sell for retail prices of up to $158,200.  In 2005, we sold 3,145 grand pianos, of which 2,114 units were shipped from our New York facility to dealers in the Americas.  The remaining 1,031 units were shipped from our German facility primarily to Europe and Asia.  Our upright pianos offer dealers a complete line of quality pianos to satisfy the needs of institutions and other customers who are constrained by space limitations.  We also provide services such as repair, replacement part sales, tuning and regulation of pianos, and restoration. Restoration services range from repairs of minor damage to complete restorations of vintage pianos.

 

Boston Piano Company - We introduced the Boston line in the early 1990s to allow us to compete in the mid-price category.  Today we offer two complete lines of grand and upright pianos for the mid-priced piano market under the Boston and Essex brand names.  With certain limited exceptions, we allow only Steinway dealers to carry the Boston and Essex piano lines, thereby ensuring that these pianos will be marketed as complementary product lines to the Steinway line.  These pianos, which were designed by us and are produced for us in Asia, provide our dealers with an opportunity to realize better margins in this price range while capturing sales that would have otherwise gone to a competitor.  Also, since our research indicates that the vast majority of Steinway customers have previously owned another piano, Boston and Essex pianos provide future Steinway piano customers with the opportunity to join the Steinway family of owners sooner.  The Boston and Essex product lines also increase our business with our dealers, making us their primary supplier in many instances.  Together, the Boston and Essex product lines offer 13 upright and grand piano sizes, with retail prices ranging from $3,995 to $39,990 in the United States.

 

Band Segment

 

We are the largest domestic producer of band & orchestral instruments and offer a complete line of brass, woodwind, percussion and string instruments with well-known brand names.  We have complemented our domestic manufacturing strategy with a sourcing strategy from Asia to remain competitive in the global marketplace.  Over the past few years, we have established relationships with several overseas manufacturers to produce imported entry-level student instruments to our design specifications.  As part of this global manufacturing strategy, we also began rationalizing our facilities to reduce manufacturing overhead.  We have closed two of our U.S. manufacturing plants, reducing our domestic manufacturing floor space by 20%.

 

In 2005, sales of sourced products accounted for 35% of our band division revenue.

 

4

 

Approximately 25% of these sales were from our imported entry-level student woodwind and brass instruments.

 

Woodwind and Brass Instruments - We manufacture piccolos, flutes, clarinets, oboes, bassoons, saxophones, trumpets, French horns, tubas, and trombones in our manufacturing facilities in Indiana, Ohio, Wisconsin, and France.  We sell student level instruments in three distinct product groupings: “good” entry-level imported instruments, “better” mid-priced instruments, which are either imported or manufactured by us, and “best” instruments, which are primarily manufactured by us.  In addition, we also manufacture intermediate and professional level woodwind and brass instruments.  Sales of woodwind and brass instruments accounted for 70% of our band division revenue in 2005.

 

We sell our woodwind and brass products under the brand names Bach, Selmer, C.G. Conn, Leblanc, King, Armstrong, Holton, Martin, Yanagisawa,Vito, Emerson, Noblet, Artley and Benge.  Suggested retail prices generally range from $300 to $2,500 for student instruments and from $1,000 to $10,000 for intermediate and professional instruments.  We often customize the products that we sell to professional musicians so that the product meets requested design specifications or has certain sound characteristics.  We believe that specialization of products helps maintain a competitive edge in quality and product design.  Our specialized woodwind and brass instruments sell for up to $27,000.

 

We are the exclusive U.S. distributor for Yanagisawa saxophones and Selmer Paris musical instruments. The Selmer Paris saxophone is the best selling professional saxophone in the world.  Selmer Paris, in turn, has exclusive distribution rights to some of our brass instruments in France. 

 

Percussion Instruments - We manufacture, source, and distribute acoustical and tuned percussion instruments, including outfit drums, marching drums, concert drums, marimbas, xylophones, vibraphones, orchestra bells, and chimes.  We manufacture percussion products in North Carolina and Illinois under the Ludwig and Musser brand names.  Ludwig is considered a leading brand name in acoustical drums and timpani and Musser has a strong market position in tuned percussion products.  Suggested retail prices range from $500 to $5,000 for acoustical drum outfits and from $2,000 to $15,000 for tuned percussion instruments, with specialized tuned instruments purchased by symphonies and orchestras selling for up to $20,000.  Sales of percussion instruments accounted for 14% of our band division revenue in 2005.

 

String Instruments - We assemble and distribute violins, violas, cellos, and basses.  Products are sold under the brand names Glaesel, Scherl & Roth, and William Lewis & Son.  Suggested retail prices generally range from $200 to $4,000 for student instruments and from $1,400 to $4,700 for intermediate and advanced instruments, with specialized instruments selling for up to $13,000. Components are primarily imported from Europe and Asia and assembled at our factory in Ohio.  Sales of string instruments accounted for 3% of our band division revenue in 2005.

 

Accessories - We manufacture mouthpieces and distribute accessories such as music stands, batons, mallets, straps, mutes, reeds, pads, chin rests, strings, bows, cases and instrument care products.  Sales of accessories accounted for 13% of our band division revenue in 2005.

 

5

 

Sales and Marketing

 

Piano Segment

 

We distribute our pianos worldwide through approximately 185 independent dealers who operate nearly 300 showrooms. We also sell our pianos through nine company operated retail showrooms: four in the United States and five in Europe.  We have subsidiaries and dealers in both Japan and China that provide direct access to the growing Asian piano market. Sales to dealers accounted for approximately 75% of piano segment revenue in 2005. The remaining 25% was generated from sales made directly by us at one of our nine company operated retail showrooms.

 

We employ district sales managers whose responsibilities include developing close working relationships with piano dealers. These highly experienced professionals provide dealers with sales training and technical support, and develop sales and marketing programs for the consumer and institutional markets.  These sales managers are also responsible for promoting the Steinway Artist Program described below.

 

Steinway Artist Program - Steinway Artists are world-class pianists who voluntarily endorse Steinway & Sons by selecting the Steinway piano.  Our Steinway Artist program is unique in that we do not pay artists to endorse our 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.  We use these renowned artists in our marketing programs to help reinforce recognition of the Steinway brand name and its association with quality.  The Steinway Artist Program currently includes approximately 1,300 of the world’s finest pianists who perform on Steinway pianos.  In return for their endorsements, Steinway Artists are provided with access to the Concert and Artist Piano Bank.

 

Concert and Artist Piano Bank - To ensure that all pianists, especially Steinway Artists, have a broad selection of instruments to meet their individual touch and tonal preferences, we maintain the Concert and Artist Piano Bank.  The Piano Bank includes approximately 500 instruments worldwide.  Of these instruments, approximately 375 are located in the United States.  In New York City alone, the Piano Bank includes approximately 140 concert grands available for various occasions.  The remaining domestic-based pianos are leased to dealers around the country who actively support the Steinway Artists program.  The Piano Bank promotes our instruments in the music industry and provides management with continual feedback on the quality and performance of recently produced instruments from our most critical customer, the professional pianist.  The Piano Bank instruments are generally sold after five years and replaced with new pianos.

 

Band Segment

 

Our band & orchestral, string and percussion instruments and related accessories are distributed worldwide through approximately 1,700 independent musical instrument dealers and distributors.

 

In North America, we market our products through district sales managers and telemarketing representatives who are responsible for sales within assigned geographic territories. Each district sales manager is also responsible for developing relationships with band & orchestral directors.  These directors represent all levels of music educators, from those who teach elementary school children through those involved at the college and professional levels. These individuals are the primary influencers in the choice of an instrument brand as they will generally refer students to designated dealers for the purchase of instruments.

 

7

 

As part of our band director outreach and support strategy, we have developed Conn-Selmer University (“CSU”).  Originally created to help graduating music education majors transition into teaching careers, we have expanded CSU to include three additional tracks: one for experienced music educators, another for music dealer representatives, and another for music business students.  We also have an educational director who travels extensively, lecturing and motivating students, educators and parents on the value of music in a child’s development.  We believe that our well-established, long-standing relationships with influential music educators are an important component of our distribution strategy and that our CSU efforts will further enhance these relationships.

 

To reach international markets, we primarily sell our instruments through distributors.  We reorganized our international sales staff to include regional sales directors who have more direct contact with our customers overseas.

 

We support our dealers and distributors through incentive programs, advertising and promotional activities.  We reach our customers through trade shows, educator conferences, print media, direct mail, telemarketing, the Internet and personal sales calls. We also actively advertise in educator and trade publications and provide educational materials, catalogs and product specifications to students, educators, dealers and distributors. 

 

Competition

 

Piano Segment

 

Steinway & Sons - The level of competition our pianos face depends on the market definition.  Steinway & Sons pianos hold a unique position at the top end of the grand piano market, both in terms of quality and price.  While there are many makers of pianos, only a few compete directly with our Steinway brand.  Other manufacturers of primarily higher priced pianos include Bösendorfer and Fazioli.

 

Because Steinway pianos are built to last for generations, used Steinways are the primary competition in our market segment.  It is difficult to estimate the significance of used piano sales, since most are conducted in the private aftermarket.  However, we have increased our emphasis on restoration services and the procurement, refurbishment and sale of used Steinway pianos to help us mitigate the impact of these aftermarket sales on our piano business.

 

Boston Piano Company – While our mid-priced pianos compete with brands such as Baldwin and Schimmel, our primary competition has been from Japanese and Korean manufacturers such as Kawai, Yamaha and Young Chang.  By working with manufacturers in the same geographic areas, we have been able to enjoy labor costs and manufacturing efficiencies similar to those of our primary competitors while offering consumers the added benefit of pianos designed by Steinway & Sons.

 

In recent years, piano manufacturing in China has been growing at a rapid pace.  While the vast majority of the production continues to be upright pianos, Chinese manufacturers have begun producing low-priced, smaller grand pianos.  In 2005, we established a relationship with Pearl River Piano Group, the largest piano manufacturer in China, to build pianos for our Essex line.  Through this new OEM relationship, we will be able to offer pianos priced in a considerably more competitive price range than previously available, bringing a good measure of Steinway design benefits to a wider reach of consumers.  We expect to introduce several new Essex models in 2006.

 

8

 

band manufacturing facilities in Elkhart, Indiana, expires in April 2006 and another agreement covering employees in our piano manufacturing facility in New York expires in December 2006.  We cannot assure investors that we will be able to reach agreements on terms that are acceptable to us, or at all.  If we are unable to negotiate any of our collective bargaining agreements on satisfactory terms prior to expiration, we could experience disruptions in our operations.  Our most recent work stoppage occurred at two of our band & orchestral manufacturing plants in January and March of 2003 and lasted for approximately 13 weeks and 9 weeks, respectively.  Any future prolonged work stoppage or delay in renegotiating collective bargaining agreements could have a material adverse effect on our operations. 

 

Any significant disruption in our supply from key suppliers could delay production and adversely affect our sales

 

Our Boston and Essex piano lines, our Selmer Paris instruments, and many of our student level band & orchestral instruments are sourced from single foreign manufacturers.  We are highly dependent on the availability of essential materials and purchased components from our suppliers, some of which may be available only from limited resources.  Moreover, we are dependent upon the availability of our suppliers to provide material that meets specifications, quality standards and delivery schedules.  Our suppliers’ failure to provide expected raw materials or component parts could adversely affect production schedules and profitability.

 

Although we have had adequate supplies of raw materials and component parts in the past, there is no assurance that we may not experience serious interruptions in the future.  Our continued supply of materials is subject to a number of risks including: 1) the destruction of our suppliers’ facilities or their distribution infrastructure; 2) work stoppages or strikes by our suppliers’ employees; 3) the failure of our suppliers to provide materials of the requisite quality; 4) the failure of essential equipment at our suppliers’ plants; 5) the failure or shortage of supply of raw materials to our suppliers; and 6) contractual amendments and disputes with our suppliers. 

 

We cannot assure investors that our suppliers will continue to provide products to us at attractive prices or at all, or that we will be able to obtain such products in the future from these or other providers on the scale and within the time periods we require.  Furthermore, we cannot assure investors that substitute raw materials or component parts will meet the strict specification and quality standards we impose.  If we are not able to obtain key materials, supplies, components or sourced instruments on a timely basis and at affordable costs, or we experience significant delays or interruptions of their supply, it could have a material adverse effect on our business, financial condition and results of operations.

 

We may be unable to successfully integrate acquisitions of related companies into our business

 

We have historically acquired other businesses whose operations or product lines complement our existing business, including Leblanc in August 2004.  We continually explore new opportunities to enter into business combinations with other companies in order to maintain and grow our revenues and market presence.  These potential transactions with other companies create risks such as difficulty in assimilating the personnel, customers, technology, products and operations with our personnel, customers, technology, products and operations; disruption of our ongoing business, including loss of management focus on existing businesses; and impairment of relationships with existing executives, employees, customers and business partners.  In addition, we may not be able to identify suitable candidates for these transactions or obtain financing or otherwise make these transactions on acceptable terms.  Furthermore, the benefits that we anticipate from these potential transactions may not develop as expected and we cannot be sure that we will recover our investment in any such strategic transaction.

 

12

 

Philips pursuant to the Environmental Indemnity Agreement.  With respect to the other two entities, based on current information concerning estimated cleanup costs at the site, and our share of liability, we do not believe our liability will be material.

 

In addition, we are continuing an existing environmental remediation plan at a facility we acquired in 2000.  We estimate our costs, which approximate $0.9 million, over a 15 year period.  We have accrued approximately $0.7 million for the estimated cost of this remediation program, which represents the present value total cost using a discount rate of 4.54%.  A summary of expected payments associated with this project is as follows:

 

 

In 2004, we acquired two manufacturing facilities from G. Leblanc Corporation, now Grenadilla, Inc. (“Grenadilla”), for which environmental remediation plans had already been established.  In connection with the acquisition, we assumed the existing accrued liability of approximately $0.8 million for the cost of these remediation activities.  Based on a review of past and ongoing investigatory and remedial work by our environmental consultants, discussions with state regulatory officials, and recent sampling, we estimate the remaining costs of such remedial plans to be $3.1 million as of December 31, 2005.  Pursuant to the purchase and sale agreement, we have sought indemnification from Grenadilla for anticipated costs above the original estimate in the amount of $2.5 million.  We have filed a claim against the escrow and recorded a corresponding receivable for this amount. However, we cannot be assured that we will be able to recover such costs from Grenadilla.

 

Based on our past experience and currently available information, the matters described above and our other liabilities and compliance costs arising under environmental laws are not expected to have a material impact on our capital expenditures, earnings or competitive position in an individual year.  However, some risk of environmental liability is inherent in the nature of our current and former businesses and we may, 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 matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2005.

 

18

 

PART II

 

Item 5.  Markets for Registrant’s Common Equity and Related Stockholder Matters

 

        Our Ordinary common stock is traded on the New York Stock Exchange (“NYSE”) under the “LVB” symbol. The following table sets forth, for the periods indicated, the high and low share prices of our Ordinary common stock as reported on the NYSE.

 

Year Ended December 31, 2005		High			Low
First Quarter		$	31.15		$	26.63
Second Quarter		30.91			26.90
Third Quarter		30.35			25.50
Fourth Quarter		27.80			24.15

 

Year Ended December 31, 2004		High			Low
First Quarter		$	33.90		$	23.25
Second Quarter		36.50			32.10
Third Quarter		35.41			25.59
Fourth Quarter		29.36			26.76

 

We have two classes of common stock: 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 24, 2006, there were 3,546 beneficial shareholders of our Ordinary common stock and two holders of record of the Class A common stock.

 

We are restricted by the terms of our outstanding debt and financing agreements from paying cash dividends on our common stock.

 

We presently intend to retain earnings to reduce outstanding indebtedness and to fund the growth of our business.  The payment of any future dividends will be determined by the Board of Directors in light of conditions then existing, including our results of operations, financial condition, cash requirements, restrictions in financing agreements, tax treatment of dividends, business conditions and other factors.

 

19

 

Item 6.  Selected Consolidated Financial Data

 

The following table sets forth our selected consolidated financial data as of and for each of the five years in the period ended December 31, 2005, as derived from our audited financial statements.  The table should be read in conjunction with our consolidated financial statements, including the footnotes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.

 

(In thousands except share and per share data)

 

Years Ended December 31,		2005				2004 (1)				2003					2002					2001
Income statement data:
Net sales		$	387,143			$	375,034			$	337,220				$	332,297				$	352,612
Gross profit		111,534				109,133				92,553					97,151					103,521
Income from operations		34,837				34,241				22,824					31,399					34,495
Net income		13,792				15,867				9,698					14,909					8,738
Earnings per share:
Basic		$	1.71			$		1.97		$	1.09				$	1.68				$	0.98
Diluted		$	1.67			$		1.91		$	1.09				$	1.68				$	0.98
Weighted average shares:
Basic		8,069,721				8,046,256				8,924,578					8,877,256					8,928,000
Diluted		8,265,234				8,304,066				8,925,672					8,882,165					8,928,000
Balance sheet data (at December 31):
Cash		$	34,952			$	27,372			$		42,283			$		19,099			$		5,545
Current assets		295,731				308,761				288,270					267,346					254,474
Total assets		455,655				477,545				445,665					423,731					409,537
Current liabilities		71,881				72,893				61,304					53,302					49,318
Total debt		204,692				221,208				196,602					200,636					211,203
Stockholders’ equity		148,830				145,553				152,635					131,208					115,773
Other financial data:
Capital expenditures		$		5,004		$	5,186			$			5,462		$			5,604		$		7,141
Margins:
Gross profit		28.8			%	29.1			%	27.4				%	29.2				%	29.4			%
Operating		9.0			%	9.1			%	6.8				%	9.4				%	9.8			%

 

(1)   We acquired Leblanc in August 2004.

 

21

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands)

 

Introduction

 

The following discussion provides an assessment of the results of our operations and liquidity and capital resources together with a brief description of certain accounting policies.  Accordingly, the following discussion should be read in conjunction with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included within this report.

 

Overview

 

We, through our operating subsidiaries, are one of the world’s leading manufacturers of musical instruments.  Our strategy is to capitalize on our strong brand names, leading market positions, strong distribution networks, and quality products.

 

Piano Segment - Sales of our pianos are influenced by general economic conditions, demographic trends and general interest in music and the arts.  The operating results of our piano segment are primarily affected by Steinway & Sons grand piano sales.  Given the total number of these pianos that we sell in any year (3,145 sold in 2005), a slight change in units sold can have a material impact on our business and operating results.  Our results are also influenced by sales of Boston and Essex pianos, which together represented over 50% of total piano units sold but less than 20% of total piano revenues in 2005.  Our Boston and Essex piano lines are manufactured in Asia, each by a single manufacturer.  The ability of these manufacturers to produce and ship products to us could impact our business and operating results.  In 2005, approximately 57% of piano sales were in the United States, 28% in Europe and the remaining 15% primarily in Asia.  For the year ended December 31, 2005, our piano segment sales were $203.5 million, representing 53% of our total revenues.

 

Piano Outlook for 2006 – Overall, we expect a relatively stable year for our piano segment with respect to sales and gross profit.  We intend to focus on reducing existing inventory levels, developing our distribution structure in China and implementing various manufacturing improvement initiatives in the upcoming year.  We currently have sufficient, but not excessive, manufacturing capacity to meet anticipated or increased demand.

 

Band Segment - Our student band instrument sales are influenced by trends in school enrollment, general attitudes toward music and the arts, and our ability to provide competitively priced products to our dealer network.  Management estimates that 85% of our domestic band sales are generated through educational programs; the remainder is sales to amateur or professional musicians or performing groups, including symphonies and orchestras. 

 

Our sales growth has been adversely affected in recent years by the abundance of competitively priced imported student instruments available to our dealers and their ability to purchase these products directly from offshore sources.  In order to compete with these mass-merchandised offshore instruments, we restructured our product offerings to include quality, competitively priced brand-name imported instruments that are built to our specifications.  We now offer quality-controlled, brand-name products at multiple price points through distribution channels which support the music education market.  Our product offerings are tailored to the needs of traditional school music dealers who provide full-service rental programs to beginning band students, as well as music retailers and e-commerce dealers selling directly to end consumers from their stores or through the Internet.  We believe our product offerings have helped us remain competitive at various price points and will continue to do so in the future.

 

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In 2005, beginner instruments accounted for approximately 65% of band & orchestral unit shipments and approximately 40% of band instrument revenues, with advanced and professional instruments representing the balance. In 2005, approximately 79% of band sales were in the United States, 8% in Europe and the remaining 13% primarily in Canada and Asia.  For the year ended December 31, 2005, our band sales were $183.6 million, representing 47% of our total revenues.

 

Band Outlook for 2006 – We are entering 2006 with increased orders for both U.S. made and sourced products and expect to see improvement in both revenues and gross profit in the coming year.  Focused sales efforts have resulted in an expanding customer base in the U.S, particularly for percussion instruments, and in our export markets.  We are working more closely with our customers to understand their requirements so we may improve the coordination of product availability with their needs.  We expect continued improvement in the flow of sourced product from our suppliers as we monitor their capacity.  Our efforts to improve productivity at our various facilities should continue to yield more efficient production levels.  This, coupled with an increase in sales of sourced products, should lead to improved margins in 2006.

 

Inflation and Foreign Currency Impact - Although we cannot accurately predict the precise effect of inflation on our operations, we do 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 represented 33% of consolidated sales in 2005.  We record sales in euro, Japanese yen, British pounds, and Chinese yuan.  In 2005, we generated 69% of our international sales through our piano segment.  Foreign exchange rate changes impacted sales by less than $1.0 million in the current year.  Although currency fluctuation affects international sales, it also affects cost of sales and related operating expenses.  Consequently, it generally has not had a material impact on operating income.  We use 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 of the affected division.  We do not purchase currency-related financial instruments for purposes other than exchange rate risk management.

 

Taxes – We are subject to U.S. income taxes as well as tax in several foreign jurisdictions in which we do business.  Some of these foreign jurisdictions have higher statutory rates than the United States.  In addition, certain of our operations are subject to both U.S. and foreign taxes.  However, in such cases we receive a credit against our U.S. taxes for foreign taxes paid equal to the percentage that such foreign income (as adjusted for reallocated interest) represents of the total income subject to U.S. tax.  Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income and the absorption of foreign tax credits in the United States.  In 2003, we were able to utilize foreign tax credits carried forward from prior years due to the higher proportion of our foreign source income to overall income.  In 2004, we were able to use the majority, but not all, of the foreign tax credits generated in that period.  However, because the American Jobs Creation Act of 2004 (the “Act”) extended the foreign tax credit carryover period, we were able to recognize a partial benefit for the excess foreign tax credits generated in 2004.  In 2005, we were unable to utilize approximately one third of the foreign tax credits generated in the current period.  This, coupled with the income generated in higher rate jurisdictions such as Germany, resulted in an increase in our overall tax rate in the current year. 

 

The strengthening of our domestic piano and band businesses is expected to result in less effective use of our foreign tax credits and credit carryforwards in the upcoming year.  We also anticipate higher

 

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Overview – In 2005 we continued strengthening our band business.  Our purchase of substantially all of the assets of G. Leblanc Corporation in August 2004 resulted in sales growth for the segment.  We merged the administrative office operations of Leblanc into our existing operations in May 2005, thereby eliminating duplicative administrative costs.   Production at our woodwind facility, which was low in the early part of the year as we trained new workers, had significantly improved by the end of the period, and we continue to experience period over period improvement in our band segment margins. 

 

Our domestic piano division sales decreased due to unusually high turnover in sales personnel at the retail level, coupled with decreased demand for our Boston Piano lines. However, overall piano segment sales remained stable, primarily due to the revenue generated by our European divisions.  Piano margins declined slightly due to inefficiencies at both piano manufacturing facilities.

 

Net Sales – Net sales increased $12.1 million as a result of the increase in band division sales, which was caused primarily by incremental sales of Leblanc product through the first three quarters of 2005.  Overall band unit shipments increased 5.9%, due to the increase in brass and woodwind unit shipments of 9.5% (the largest component of the band business).  Total piano sales remained stable at $203.5 million.  Domestically, sales declined, in part due to attrition of retail sales staff in the early part of the year, as well as the 11% decrease in unit shipments of our Boston piano lines.  In the U.S., mid and lower-priced piano sales are being adversely impacted by the influx of low-priced Asian imports.  However, the shift in mix towards higher priced units sold by our German division resulted in consistent piano segment revenues.

 

Gross Profit – Gross profit improved $2.4 million driven by an increase in band sales and band margins.  Band margins were less affected by atypical charges in the current period. These costs totaled $1.6 million in 2005, and arose from the sell through of purchased Leblanc inventory, which was written up to fair value upon acquisition.  In the prior period, atypical charges totaled $2.6 million, comprised of $1.2 million from the sell through of purchased Leblanc inventory, and $1.4 million from severance costs associated with plant closures.  Band margins also benefited from a large, high margin sales transaction in the beginning of the fourth quarter.  Piano segment gross profit decreased $1.5 million despite the beneficial sales mix towards higher margin grands sold by our German division. The adverse impact of factory inefficiencies due in part to the disruptions caused by implementing production line improvements, as well as a larger book-to-physical inventory adjustment at our domestic piano manufacturing facility were the primary causes of the piano margin decrease.

 

Operating Expenses – Operating expenses increased $1.8 million, despite the decrease in external costs associated with Sarbanes-Oxley compliance efforts, which were approximately $1.2 million less in 2005.  The incremental operating expenses are primarily sales and marketing, $0.9 million of which resulted from commissions associated with the large sales transaction described above.  Piano sales commissions also increased as a result of the favorable performance by the German division.  In addition, this division had incremental public relations and advertising costs of $0.2 million as a result of its 125^th anniversary celebrations. Lastly, $0.9 million in additional operating expenses were associated with Leblanc, and were incurred in the early part of the year, prior to the consolidation of band administrative offices.

 

Non-operating Expenses – Non-operating expenses increased $2.6 million in 2005.  Approximately $0.5 million of this increase relates to losses on extinguishment of debt, which resulted from the buyback of $8.2 million of our 8.75% Senior Notes at 105%, and the write off of the corresponding deferred financing costs.  A shift of $0.3 million from foreign exchange gains to foreign exchange losses also contributed to the expense increase.  We incurred additional interest costs of approximately $0.2 million

 

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due to the increase in interest rates during the year.   The remainder of the expense increase primarily results from reclassification of certain items from non-operating expenses to operating expenses.

 

Results of Operations

 

Fiscal Year 2004 Compared to Fiscal Year 2003

 

												Change
For years ended December 31,		2004					2003					$		%
Net sales
Band		$	171,346				$	157,460				13,886		8.8
Piano		203,688					179,760					23,928		13.3
Total sales		375,034					337,220					37,814		11.2
Cost of sales
Band		137,779					126,369					11,410		9.0
Piano		128,122					118,298					9,824		8.3
Total cost of sales		265,901					244,667					21,234		8.7
Gross profit
Band		33,567			19.6%		31,091			19.7%		2,476		8.0
Piano		75,566			37.1%		61,462			34.2%		14,104		22.9
Total gross profit		109,133					92,553					16,580		17.9
		29.1%					27.4%
Operating expenses		75,255					66,771					8,484		12.7
Facility rationalization		(363		)			2,958					(3,321	)	(112.3	)
Total operating expenses		74,892					69,729					5,163		7.4
Income from operations		34,241					22,824					11,417		50.0
Other income, net		(3,163		)			(3,517		)			354		(10.1	)
Net interest expense		13,437					11,945					1,492		12.5
Income before income taxes		23,967					14,396					9,571		66.5
Income tax provision		8,100			33.8%		4,698			32.6%		3,402		72.4
Net income		$	15,867				$	9,698				6,169		63.6

 

Overview – 2004 was a year committed to improvement of our band business.  We continued the facility rationalization project started in 2003, closing one of our Elkhart, Indiana plants in April 2004 and moving production into existing facilities.  Our redesigned distribution policy enabled us to grow our e-commerce, catalog, music retailer, professional, and export sales categories.  Our expanded product line, which includes lower-priced, brand-name sourced instruments, has been well accepted in the marketplace, and we experienced increases in sales of these products once we worked through product availability issues.  However, we maintained lower-than-normal production levels for certain products in order to manage inventory levels, which adversely impacted margins.  We were presented with the opportunity to purchase substantially all of the assets of G. Leblanc Corporation, which enabled us to strengthen our existing band product lines.  Leblanc faced the same excess capacity issues we have experienced, having announced the closure of one of its manufacturing facilities just prior to the acquisition.  Accordingly, we expect our overall production rationalization activities to extend beyond the timeframe originally anticipated as we factor Leblanc’s production capabilities into our analysis.

 

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Our piano business had a very successful year. Domestic wholesale sales remained strong, and retail sales were bolstered by the two additional retail stores that were fully operational for all of 2004.  Our European business remained stable, while our Asian business improved, primarily due to our Shanghai facility being operational since spring 2004.  Although sales and marketing expenses were higher than expected, these costs were more than offset by margin improvements due to improved production levels, efficiencies, and product mix.

 

Net Sales – Net sales increased $37.8 million.  This resulted in part from a 9% increase in Steinway grand unit shipments, as well as a $6.8 million benefit attributable to foreign exchange.  The total piano sales increase of $23.9 million also reflects the increase in higher-priced retail unit sales resulting from our additional domestic storefronts being operational for the full year, as well as strong wholesale shipments throughout the year.  Band & orchestral instrument sales increased $13.9 million on an overall unit increase of 17%.  The band sales increase includes $9.6 million attributable to the Leblanc acquisition, with the remainder resulting from core business growth, especially professional brass and percussion instruments.

 

Gross Profit – Gross profit improved $16.6 million primarily due to the piano margin improvement from 34.2% to 37.1%.  Higher domestic production levels, overseas production and labor efficiencies, and improved retail sales were the primary driver of the increase.  A shift in our international divisions’ sales mix towards higher margin grands sold also contributed to the improvement.  Although band segment gross profit improved $2.5 million, gross margins declined slightly. Atypical charges affecting margin in 2004 totaled $2.6 million, comprised primarily of severance and higher costs associated with the acquisition write-up of Leblanc inventory to fair value.  In 2003, atypical charges totaled $6.0 million, including severance costs, strike costs, and inventory impairment charges.  Despite the reduction in atypical charges and improved margins on imported student products, gross margins decreased slightly from 19.7% to 19.6%.  This was primarily due to increased freight expenses, production inefficiencies for some woodwind products, and reduced production levels of certain brass instruments.  Significant increases in costs of raw materials such as silver and copper also adversely affected band gross margins.

 

Operating Expenses – Operating expenses increased $5.2 million despite the $3.3 million decrease in impairment charges taken in the prior year.  Over $3.1 million of this increase resulted from external costs associated with our Sarbanes-Oxley compliance project. $2.2 million of the increase is attributable to foreign exchange, and we incurred incremental expenses of $1.4 million associated with Leblanc.  The remainder of the increase resulted primarily from increased advertising and promotional costs and increased bonus payments. 

 

Non-operating Expenses – Non-operating expenses increased $1.8 million primarily due to the additional interest expense resulting from our issuance of $29.0 million of 8.75% Senior Notes in February 2004.

 

Liquidity and Capital Resources

 

We have relied primarily upon cash provided by operations, supplemented as necessary by seasonal borrowings under our domestic working capital line, to finance our operations, repay long-term indebtedness, finance acquisitions, and fund our capital expenditures.  Our overseas divisions, particularly in Asia, are normally in a borrowing position on their lines.  These borrowings are likely to be less than $10.0 million at any given time.  In 2003, our domestic line went virtually unused for the year, in 2004, our borrowings peaked at approximately $23.0 million, as a result of our acquisition of the

 

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net assets of Leblanc, and in 2005 our borrowings peaked at approximately $11.0 million due to seasonal borrowings.

 

Cash Flows - Our statements of cash flows are summarized as follows:

 

For the years ended December 31,		2005			2004			2003
Net income:		$	13,792		$	15,867		$	9,698
Changes in operating assets and liabilities		6,324			(1,305		)	8,350
Other adjustments to reconcile net income to cash flows from operating activities		11,313			9,311			12,845
Cash flows from operating activities		31,429			23,873			30,893
Cash flows from investing activities		(5,756		)	(40,720		)	(5,452		)
Cash flows from financing activities		(15,860		)	1,019			(2,767		)

 

In 2005, cash flows from operating activities increased $7.6 million despite the increase in cash used for accounts payable of $1.9 million.  This improvement was largely due to the increase in cash provided by inventory and receivables of $8.7 million, which resulted from improved management of work-in-process inventory and receivables collections at our band division.  In 2004, cash flows from operating activities decreased $7.0 million.  This resulted primarily from working capital changes, as inventory increased in part to support our expansion in Asia, and receivables increased in conjunction with band sales increases.  Collectively, these working capital changes used $8.4 million more than in the prior period.  Cash transferred to workers’ compensation and environmental depositary trust funds (which replaced more expensive letters of credit previously used) also negatively impacted cash flows from operating activities.   In 2003, cash flows from operating activities of $30.9 million were driven by our control over inventory, reduced manufacturing levels, and management of our accounts receivable and payable.

 

The use of cash for investing activities decreased $35.0 million, as $36.8 million was used to fund our acquisition of Leblanc in 2004.  In 2005, cash used for acquisitions was limited to the $2.2 million final purchase price adjustment for Leblanc.  Capital expenditures were slightly lower than in prior periods at $5.0 million in 2005, $5.2 million in 2004, and $5.5 million in 2003.  (See Capital Expenditures discussion below.)  The remainder of the decrease is due to the proceeds from sales of fixed assets, which provided an incremental $0.2 million in the period. 

 

In 2005, cash flows from financing activities decreased $16.9 million due in part to the $4.0 million decrease in proceeds from issuance of stock.  In addition, we repaid approximately $1.5 million on our line borrowings in the current year, whereas borrowings provided cash of $2.9 million in the prior period.  Lastly, in December 2005, we repurchased $8.2 million of our own 8.75% Senior Notes at 105% of face value, which resulted in a use of cash of $8.6 million.  In 2004, cash provided by financing activities of $1.0 million resulted from stock option exercises and employee stock purchase plan activities totaling $5.7 million, which more than offset the $4.6 million in net borrowings and scheduled debt repayments.  In 2003, financing activities consisted primarily of scheduled debt repayments of $6.5 million, counterbalanced in part by net borrowings of $2.3 million on our foreign lines of credit.  These borrowings were made primarily to support an increase in working capital. 

 

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Capital Expenditures – Our capital expenditures consist primarily of machinery and equipment upgrades and replacements, facility upgrades, and telephone and computer system enhancements.  We expect capital spending in 2006 to be in the range of $5.0-7.0 million, relating to plant improvements, production equipment purchases, and facility improvements.

 

Seasonality - Consistent with industry practice, we sell band instruments almost entirely on credit utilizing the two financing programs described below.  Due to these programs, we have large working capital requirements during certain times of the year when band instrument receivable balances reach highs of approximately $80-85 million in August and September, and lesser requirements when they are at lows of approximately $70-75 million in January and February.  The financing options, intended to assist dealers with the seasonality inherent in the industry and facilitate the rent-to-own programs offered to students by many retailers, also allow us to match our production and delivery schedules.  The following forms of financing are offered to qualified band instrument dealers:

 

a)     Receivable dating: Payments on purchases made from October through August of the following year are due in October.  Dealers are offered discounts for early payment. 

 

b)    Note receivable financing: Dealers that meet certain credit qualifications may convert open accounts to a note payable to us.  The note program is offered primarily in October and coincides with the receivable dating program.  The terms of the notes generally include payment over a nine to twelve month period with interest ranging from 9-11.5%.  Interest rates are contingent upon credit ratings and borrowing periods.  In certain situations, long term arrangements for up to 36 months may be offered.  In most instances, the note receivable is secured by dealer inventories and receivables.

 

Off Balance Sheet Arrangements –In 2004, certain customers of our Leblanc subsidiary financed notes receivable with a third party, to which we have a recourse obligation.  As of December 31, 2005, $0.5 million of these notes remain outstanding.  We have included a corresponding recourse obligation of $0.1 million in our financial statements at period-end.  Our total maximum recourse obligation under this arrangement includes the outstanding balance on the notes, as well as any interest or late fees that may be incurred by our customers.

 

We generally do not provide extended financing arrangements to our piano dealers.  To facilitate long-term financing required by some dealers, we have arranged financing through third-party providers.  We generally provide no guarantees with respect to these arrangements.

 

Retail Financing Obligations – Certain of our retail sales overseas were financed by our customers through a local bank under an arrangement that included an obligation on our part to repurchase pianos seized by the bank upon default of the customer.  The buyback price is established as a percentage of the original sales price, starting at 80% in the first year and declining to 30% in the fifth year of the loan.

 

This program ceased in the first quarter of 2003. Nevertheless, because our obligation continues until the bank is paid in full by the customer, our commitment can remain outstanding for up to 8 years – the maximum term of the consumer loan.

 

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Our maximum obligation under this arrangement is estimated to be approximately €0.6 million ($0.7 million at the December 31, 2005 exchange rate).  To date, we have not been required to repurchase any pianos under this program and we believe the likelihood of such repurchases in the future is remote.  Accordingly, we have not recognized a liability for this obligation in our financial statements.  Further, in the unlikely event of a repurchase, we believe the proceeds received upon our resale of the piano would exceed the amount payable to the bank.

 

Pensions and Other Postretirement Benefits - When determining the amounts to be recognized in the consolidated financial statements related to our domestic pension and other postretirement benefits, we used a long-term rate of return on plan assets of 9%, which was developed with input from our actuaries and our investment committee, and is consistent with prior years.  We believe that 9% is consistent with the historical long-term return trends on our domestic pension assets and our expectations for future returns. The discount rate utilized for determining future pension obligations for our domestic plans is based on long-term bonds receiving an AA- or better rating by a recognized rating agency.  The resulting discount rate decreased from 6.0% at December 31, 2004 to 5.75% at December 31, 2005.

 

The discount rates and rates of returns on plan assets for our foreign pension and other postretirement benefit plans were similarly developed utilizing long-term rates of return and discount rates reasonably expected to occur in the applicable jurisdiction.

 

Borrowing Activities and Availability - Our real estate term loan, acquisition term loan, and domestic, seasonal borrowing requirements are accommodated through a committed credit facility with a syndicate of domestic lenders (the “Credit Facility”).  The Credit Facility provides us with a potential borrowing capacity of $85.0 million in revolving credit loans, and expires on September 14, 2008. Borrowings are collateralized by our domestic accounts receivable, inventory, and fixed assets.  As of December 31, 2005, there were no revolving credit loans outstanding and availability based on eligible accounts receivable and inventory balances was approximately $83.6 million, net of letters of credit. The real estate term loan is payable in monthly installments of $0.2 million and includes interest at average 30-day LIBOR (2.40% at December 31, 2005) plus 1.5%.  This term loan is secured by all of our interests in the Steinway Hall property.  The acquisition term loan was repayable in monthly installments of $0.4 million through August 2005 and monthly installments of $0.6 million from September 2005 through September 2008.  The acquisition term loan and revolving credit loans bear interest at average 30-day LIBOR plus 1.75%.  Subsequent to year end, the acquisition term loan was paid in full.  All of our borrowings under the Credit Facility are secured by a first lien on our domestic inventory, receivables, and fixed assets.  Open account loans with German banks also provide for borrowings of up to €16.5 million ($19.5 million at December 31, 2005) by Steinway’s foreign subsidiaries.  An additional revolving loan provides borrowing capacity of up to ¥500 million ($4.2 million at the December 31, 2005 exchange rate).

 

On April 19, 2001, we issued $150.0 million 8.75% Senior Notes due 2011.  In December 2002 we repurchased $4.7 million of our Senior Notes at 99.25%.  In December 2005 we repurchased $8.2 million of our Senior Notes at 105%.  In February 2004 we purchased 1,271,450 shares of our Ordinary common stock directly from our then largest institutional shareholder.  In exchange, we issued $29.0 million in principal amount of our 8.75% Senior Notes due 2011 under the existing indenture.  We issued these bonds at a premium of 106.3%.  This transaction increased our treasury stock by $31.6 million. 

 

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We shall use the remainder of the proceeds from issuance of the 7% Senior Notes, supplemented by cash on hand, to pay outstanding debt issuance costs, such as legal fees, and to redeem the remaining $51.6 million of 8.75% Senior Notes, which we have called at 104.375% plus accrued interest. The early retirement of these remaining notes, which will occur in April 2006, will generate a loss on extinguishment of $3.3 million. This loss is comprised of $2.3 million of call premiums paid to bondholders and $1.0 million due to the write-off of the remaining deferred financing costs associated with the 8.75% Senior Notes.

 

We will record interest on both the 8.75% Senior Notes and the 7% Senior Notes for the February – April timeframe during which both series of notes are outstanding. This duplicate interest expense will be offset in part by interest income on the unused debt issuance proceeds and is not expected to be material to the financial statements. Once the duplicate interest period has passed, we expect interest payment savings of approximately $2.3 million per year.

 

Contractual Obligations - The following table provides a summary of our contractual obligations at December 31, 2005.

 

		Payments due by period
Contractual Obligations		Total			Less than 1 year			1 - 3 years			3 - 5 years			More than 5 years
Long-term debt (1)		$	289,846		$	30,471		$	57,288		$	31,325		$	170,762
Capital leases		66			13			30			23			—
Operating leases (2)		268,735			4,698			8,029			7,826			248,182
Purchase obligations (3)		13,367			13,188			159			20			—
Other long-term liabilities (4)		28,226			3,932			3,716			3,369			17,209
Total		$	600,240		$	52,302		$	69,222		$	42,563		$	436,153

 

Notes to Contractual Obligations:

 

(1) Long-term debt represents long-term debt obligations, the fixed interest on our Notes, and the variable interest on our other loans. We estimated the future variable interest obligation using the applicable December 31, 2005 rates. The nature of our long-term debt obligations is described more fully in the “Borrowing Availability and Activities” section of “Liquidity and Capital Resources.”  Changes to our long-term debt structure which occurred subsequent to December 31, 2005 are described in the “Recent Events” section of “Liquidity and Capital Resources.”

 

(2) Approximately $255.4 million of our operating lease obligations are attributable to the ninety-nine year land lease associated with the purchase of Steinway Hall, which is described in Note 13 in the Notes to Consolidated Financial Statements included within this filing; the remainder is attributable to the leasing of other facilities and equipment.

 

(3) Purchase obligations consist of firm purchase commitments for raw materials, finished goods, and equipment.

 

(4) Our other long-term liabilities consist primarily of the long-term portion of our pension obligations, which are described in Note 14 in the Notes to Consolidated Financial Statements included within this filing, and obligations under employee and consultant agreements, which are described in Note 13 in the Notes to the Consolidated Financial Statements included within this filing.

 

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