**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

| **ý** |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|--------|-----------------------------------------------------------------------------------------------|
|       |   |                                                                                          |
|       |   | **FOR THE QUARTERLY PERIOD ENDED JUNE 28, 2003**                                              |
|       |   |                                                                                          |
| **o**      |   | **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 itscharter)

 

| **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 numberincluding area code:              **(781) 894-9770**

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements during the past 90days.  Yes ý   No o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).Yes ý   No o

 

| Number of  shares of Common Stock issued and outstanding as of August 1, 2003: |   | Class A  |   | 477,953   |
|--------------------------------------------------------------------------------|--------|----------|--------|-----------|
|                                                                           |   | Ordinary |   | 8,428,285 |
|                                                                           |   | Total    |   | 8,906,238 |

 

 

----

 

**STEINWAY MUSICALINSTRUMENTS, INC. AND SUBSIDIARIES**

**FORM 10-Q**

**INDEX**

 
| **PART I.**  | **UNAUDITED FINANCIAL INFORMATION**                                                                            |
|--------------|----------------------------------------------------------------------------------------------------------------|
|         |                                                                                                           |
| **Item 1.**  | **Condensed Consolidated Financial  Statements:**                                                              |
|         |                                                                                                           |
|         | Condensed Consolidated Statements of Income  Three months and six months ended June 29, 2002 and June 28, 2003 |
|         |                                                                                                           |
|         | Condensed Consolidated Balance Sheets  December 31, 2002 and June 28, 2003                                     |
|         |                                                                                                           |
|         | Condensed Consolidated Statements of Cash  Flows  Six months ended June 29, 2002 and June 28, 2003             |
|         |                                                                                                           |
|         | Notes to Condensed Consolidated Financial  Statements                                                          |
|         |                                                                                                           |
| **Item 2.**  | **Management’s Discussion and Analysis of  Financial Condition  and Results of Operations**               |
|         |                                                                                                           |
| **Item 3.**  | **Quantitative and Qualitative Disclosures  about Market Risk**                                                |
|         |                                                                                                           |
| **Item 4.**  | **Controls and Procedures**                                                                                    |
|         |                                                                                                           |
| **PART II.** | **OTHER INFORMATION**                                                                                          |
|         |                                                                                                           |
| **Item 4.**  | **Submission of Matters to a Vote of Security  Holders**                                                       |
|         |                                                                                                           |
| **Item 6.**  | **Exhibits and Reports on Form 8-K**                                                                           |
|         |                                                                                                           |
|         | **Signatures**                                                                                                 |

 

2

----

 

**ITEM1.       CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**STEINWAY MUSICALINSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**(In Thousands ExceptShare and Per Share Amounts)**

 
|                       |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|----------------------------|--------|-------------------------|--------|-----------------------|--------|
|                       |   | **June 29,  2002**      |   | **June 28,  2003**    |   | **June 29,  2002** |   | **June 28,  2003** |   |
|                       |   |                    |   |                  |   |   |   |   |   |
| Net sales                  |   | $                       | 78,349 |                  | $      | 78,035 |   | $ | 166,408 |   | $ | 160,544 |   |
| Cost of sales              |   | 53,964                  |   | 55,322                |   | 116,660 |   | 116,999 |   |
|                       |   |                    |   |                  |   |   |   |   |   |
| Gross Profit               |   | 24,385                  |   | 22,713                |   | 49,748 |   | 43,545 |   |
|                       |   |                    |   |                  |   |   |   |   |   |
| Operating expenses:        |   |                    |   |                  |   |   |   |   |   |
| Sales and marketing        |   | 9,949                   |   | 10,944                |   | 20,630 |   | 21,957 |   |
| General and administrative |   | 5,362                   |   | 5,535                 |   | 10,929 |   | 11,489 |   |
| Amortization               |   | 289                     |   | 288                   |   | 578 |   | 577 |   |
| Other operating expense    |   | 250                     |   | 136                   |   | 407 |   | 308 |   |
| Total operating expenses   |   | 15,850                  |   | 16,903                |   | 32,544 |   | 34,331 |   |
|                       |   |                    |   |                  |   |   |   |   |   |
| Income from operations     |   | 8,535                   |   | 5,810                 |   | 17,204 |   | 9,214 |   |
|                       |   |                    |   |                  |   |   |   |   |   |
| Interest expense, net      |   | 3,489                   |   | 3,007                 |   | 6,790 |   | 5,979 |   |
| Other income, net          |   | (1,238                  | )      | (712                  | )      | (1,543 | ) | (1,333 | ) |
|                       |   |                    |   |                  |   |   |   |   |   |
| Income before income taxes |   | 6,284                   |   | 3,515                 |   | 11,957 |   | 4,568 |   |
|                       |   |                    |   |                  |   |   |   |   |   |
| Provision for income taxes |   | 2,200                   |   | 1,355                 |   | 4,190 |   | 1,725 |   |
|                       |   |                    |   |                  |   |   |   |   |   |
| Net income                 |   | $                       | 4,084  |                  | $      | 2,160 |   | $ | 7,767 |   | $ | 2,843 |   |
|                       |   |                    |   |                  |   |   |   |   |   |
| Earnings per share:        |   |                    |   |                  |   |   |   |   |   |
| Basic                      |   | $                       | 0.46   |                  | $      | 0.24 |   | $ | 0.88 |   | $ | 0.32 |   |
| Diluted                    |   | $                       | 0.46   |                  | $      | 0.24 |   | $ | 0.87 |   | $ | 0.32 |   |
|                       |   |                    |   |                  |   |   |   |   |   |
| Weighted average shares:   |   |                    |   |                  |   |   |   |   |   |
| Basic                      |   | 8,860,834               |   | 8,906,238             |   | 8,854,103 |   | 8,906,238 |   |
| Diluted                    |   | 8,915,071               |   | 8,906,238             |   | 8,891,756 |   | 8,906,252 |   |

 

See notes to condensedconsolidated financial statements.

 

3

----

 

**STEINWAY MUSICALINSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(In Thousands)**

** **
|                                                                                                                          |   | **December  31,  2002** |    | **June 28,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|--------------------|--------|
|                                                                                                                          |   |                    |    |               |   |
| ASSETS:                                                                                                                       |   |                    |    |               |   |
| Current assets:                                                                                                               |   |                    |    |               |   |
| Cash                                                                                                                          |   | $                       | 19,099  |               | $      | 7,727 |   |
| Accounts, notes and leases receivable, net  of allowance for bad debts of $11,389 and $11,418 in 2002 and 2003,  respectively |   | 77,421                  |    | 89,339             |   |
| Inventories                                                                                                                   |   | 163,090                 |    | 167,561            |   |
| Prepaid expenses and other current assets                                                                                     |   | 5,227                   |    | 4,367              |   |
| Deferred tax assets                                                                                                           |   | 7,012                   |    | 7,683              |   |
| Total current assets                                                                                                          |   | 271,849                 |    | 276,677            |   |
|                                                                                                                          |   |                    |    |               |   |
| Property, plant and equipment, net of  accumulated depreciation of $55,151 and $60,547 in 2002 and 2003,  respectively        |   | 102,567                 |    | 101,269            |   |
| Trademarks                                                                                                                    |   | 9,651                   |    | 9,949              |   |
| Goodwill                                                                                                                      |   | 29,539                  |    | 30,490             |   |
| Other intangibles, net                                                                                                        |   | 6,936                   |    | 6,394              |   |
| Other assets                                                                                                                  |   | 7,692                   |    | 7,667              |   |
|                                                                                                                          |   |                    |    |               |   |
| TOTAL ASSETS                                                                                                                  |   | $                       | 428,234 |               | $      | 432,446 |   |
|                                                                                                                          |   |                    |    |               |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                     |   |                    |    |               |   |
| Current liabilities:                                                                                                          |   |                    |    |               |   |
| Current portion of long-term debt                                                                                             |   | $                       | 8,055   |               | $      | 8,307 |   |
| Accounts payable                                                                                                              |   | 9,888                   |    | 7,741              |   |
| Other current liabilities                                                                                                     |   | 35,264                  |    | 36,051             |   |
| Total  current liabilities                                                                                                    |   | 53,207                  |    | 52,099             |   |
|                                                                                                                          |   |                    |    |               |   |
| Long-term debt                                                                                                                |   | 192,581                 |    | 189,311            |   |
| Deferred tax liabilities                                                                                                      |   | 22,709                  |    | 23,577             |   |
| Other non-current liabilities                                                                                                 |   | 23,931                  |    | 25,925             |   |
| Total liabilities                                                                                                             |   | 292,428                 |    | 290,912            |   |
|                                                                                                                          |   |                    |    |               |   |
| Commitments and contingent liabilities                                                                                        |   |                    |    |               |   |
|                                                                                                                          |   |                    |    |               |   |
| Stockholders’ equity:                                                                                                    |   |                    |    |               |   |
| Common stock                                                                                                                  |   | 9                       |    | 9                  |   |
| Additional paid-in capital                                                                                                    |   | 73,172                  |    | 73,172             |   |
| Retained earnings                                                                                                             |   | 91,620                  |    | 94,463             |   |
| Accumulated other comprehensive loss                                                                                          |   | (13,142                 | )       | (10,257            | )      |
| Treasury stock, at cost                                                                                                       |   | (15,853                 | )       | (15,853            | )      |
| Total stockholders’ equity                                                                                               |   | 135,806                 |    | 141,534            |   |
|                                                                                                                          |   |                    |    |               |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                               |   | $                       | 428,234 |               | $      | 432,446 |   |

 

See notes to condensedconsolidated financial statements.

 

4

----

 

**STEINWAY MUSICALINSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In Thousands)**

 
|                                                                          |   | **Six Months  Ended** |   |
|-------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                          |   | **June 29,  2002**    |   | **June 28,  2003** |   |
| Cash flows from operating activities:                                         |   |                  |   |   |   |
| Net income                                                                    |   | $                     | 7,767  |   | $ | 2,843 |   |
| Adjustments to reconcile net income to cash  flows from operating activities: |   |                  |   |   |   |
| Depreciation and amortization                                                 |   | 5,580                 |   | 5,546 |   |
| Deferred tax benefit                                                          |   | (212                  | )      | (252 | ) |
| Other                                                                         |   | 235                   |   | 179 |   |
| Changes in operating assets and  liabilities:                                 |   |                  |   |   |   |
| Accounts, notes and leases receivable                                         |   | (14,334               | )      | (11,393 | ) |
| Inventories                                                                   |   | (1,221                | )      | (3,463 | ) |
| Prepaid expenses and other current assets                                     |   | (191                  | )      | 1,060 |   |
| Accounts payable                                                              |   | (2                    | )      | (2,382 | ) |
| Other current liabilities                                                     |   | 553                   |   | 657 |   |
| Cash flows from operating activities                                          |   | (1,825                | )      | (7,205 | ) |
|                                                                          |   |                  |   |   |   |
| Cash flows from investing activities:                                         |   |                  |   |   |   |
| Capital expenditures                                                          |   | (2,341                | )      | (1,675 | ) |
| Changes in other assets                                                       |   | 1,135                 |   | 416 |   |
| Cash flows from investing activities                                          |   | (1,206                | )      | (1,259 | ) |
|                                                                          |   |                  |   |   |   |
| Cash flows from financing activities:                                         |   |                  |   |   |   |
| Gross borrowings under lines of credit                                        |   | 18,755                |   | 6,365 |   |
| Gross repayments under lines of credit                                        |   | (14,286               | )      | (6,121 | ) |
| Repayments of long-term debt                                                  |   | (3,166                | )      | (3,240 | ) |
| Proceeds from issuance of stock                                               |   | 406                   |   | — |   |
| Cash flows from financing activities                                          |   | 1,709                 |   | (2,996 | ) |
|                                                                          |   |                  |   |   |   |
| Effect of foreign exchange rate changes on  cash                              |   | (9                    | )      | 88 |   |
|                                                                          |   |                  |   |   |   |
| Decrease in cash                                                              |   | (1,331                | )      | (11,372 | ) |
| Cash, beginning of period                                                     |   | 5,545                 |   | 19,099 |   |
|                                                                          |   |                  |   |   |   |
| Cash, end of period                                                           |   | $                     | 4,214  |   | $ | 7,727 |   |
|                                                                          |   |                  |   |   |   |
| Supplemental Cash Flow Information                                            |   |                  |   |   |   |
| Interest paid                                                                 |   | $                     | 7,652  |   | $ | 7,344 |   |
| Taxes paid                                                                    |   | $                     | 3,767  |   | $ | 4,179 |   |

 

See notes to condensedconsolidated financial statements.

 

5

----

 

**STEINWAY MUSICALINSTRUMENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 28, 2003**

**(Tabular Amounts InThousands Except Share and Per Share Data)**

 

**(1)****      Basis of Presentation**

 

Theaccompanying condensed consolidated financial statements of Steinway MusicalInstruments, Inc. and subsidiaries (the “Company”) for the three months and sixmonths ended June 29, 2002 and June 28, 2003 are unaudited.  In the opinion of management, thesestatements have been prepared on the same basis as the audited consolidatedfinancial statements as of and for the year ended December 31, 2002, andinclude all adjustments which are of a normal and recurring nature, necessaryfor the fair presentation of financial position, results of operations and cashflows for the interim period.  Thecondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes thereto contained in theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,2002 filed with the Securities and Exchange Commission.  The results of operations for the three monthsand six months ended June 28, 2003 are not necessarily indicative of theresults that may be expected for the entire year.

 

Throughoutthis report “we”, “us”, and “our” refer to Steinway Musical Instruments, Inc.and subsidiaries taken as a whole. Effective January 1, 2003, we combined the operations of The SelmerCompany, Inc. (“Selmer”) and United Musical Instruments, Inc. (“UMI”) intoConn-Selmer, Inc. (“Conn-Selmer”). References to Selmer and UMI occur in connection with events orcircumstances prior to the merger.

 

**(2)****      Summary of SignificantAccounting Policies**

 

*Principles ofConsolidation -*Ourconsolidated financial statements include the accounts of our direct andindirect wholly owned subsidiaries, including The Steinway Piano Company, Inc.(“Steinway”) and Conn-Selmer. Significant intercompany balances have been eliminated in consolidation.

 

*Stock-basedCompensation*- We have an employee stock purchase plan (“Purchase Plan”) and a stockplan (“Stock Plan”).  As permitted underaccounting principles generally accepted in the United States of America, wehave elected to continue to follow the intrinsic value method in accounting forour stock-based employee compensation arrangement.

 

6

----

 

The following table illustratesthe effect on net income and earnings per share if we had applied the fairvalue method to measure stock-based employee compensation.

 
|                                                                                                                                          |   | **Three  Months Ended** |       | **Six Months  Ended** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------|------------|
|                                                                                                                                          |   | **June 29,  2002**      |       | **June 28,  2003**    |       | **June 29,  2002** |   | **June 28,  2003** |   |
|                                                                                                                                          |   |                    | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| Net income, as reported                                                                                                                       |   | $                       | 4,084      |                  | $          | 2,160 |   | $ | 7,767 |   | $ | 2,843 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair-value based method for all awards,  net of related tax effects |   | (102                    | )          | (217                  | )          | (205 | ) | (437 | ) |
| Pro forma net income                                                                                                                          |   | $                       | 3,982      |                  | $          | 1,943 |   | $ | 7,562 |   | $ | 2,406 |   |
| Earnings per share:                                                                                                                           |   |                    |       |                  |       |   |   |   |   |
| As reported Basic                                                                                                                             |   | $                       | 0.46       |                  | $          | 0.24 |   | $ | 0.88 |   | $ | 0.32 |   |
| As reported Diluted                                                                                                                           |   | $                       | 0.46       |                  | $          | 0.24 |   | $ | 0.87 |   | $ | 0.32 |   |
| Pro forma Basic and Diluted                                                                                                                   |   | $                       | 0.45       |                  | $          | 0.22 |   | $ | 0.85 |   | $ | 0.27 |   |

 

The fair valueof options on their grant date, including the valuation of the option featureimplicit in our Purchase Plan, was measured using the Black-Scholesoption-pricing model.  Key assumptionsused to apply this pricing model are as follows:

 
|                                                |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|-----------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                |   | **June 29,  2002**      |   | **June 28,  2003**    |   | **June 29,  2002** |   | **June 28,  2003** |   |
| Range of risk-free interest rates                   |   | 3.57%                   |   | 1.86%                 |   | 3.57% |   | 1.86 - 3.12% |   |
| Range of expected life of option grants (in  years) |   | 1 to 6                  |   | 1 to 6                |   | 1 to 6 |   | 1 to 6 |   |
| Expected volatility of underlying stock             |   | 25.7%                   |   | 26.5%                 |   | 25.7% |   | 26.5% |   |

 

The weighted average fair valueof options on their grant date is as follows:

 
|          |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|---------------|--------|-------------------------|--------|-----------------------|--------|
|          |   | **June 29,  2002**      |   | **June 28,  2003**    |   | **June 29,  2002** |   | **June 28,  2003** |   |
|          |   |                    |   |                  |   |   |   |   |   |
| Stock Plan    |   | $                       | — |                  | $      | — |   | $ | — |   | $ | 4.77 |   |
| Purchase Plan |   | $                       | 4.48   |                  | $      | 4.78 |   | $ | 4.48 |   | $ | 4.78 |   |

 

It should benoted that the Black-Scholes option-pricing model was designed to value readilytradable options with relatively short lives and no vesting restrictions.  In addition, option valuation models requirethe input of highly subjective assumptions including the expected pricevolatility.  Because the options grantedare not tradable and have contractual lives of up to ten years, and becausechanges in the subjective input assumptions can materially affect the fairvalue estimate, in management’s opinion, the existing models do not provide areliable measure of the fair value of the options issued under either the StockPlan or Purchase Plan.

 

*Income per Common Share–*Basic income per share is computed using theweighted average number of common shares outstanding during each period.  Diluted income per common share reflects theeffect of our outstanding options using the treasury stock method, except whensuch items would be antidilutive.

 

7

----

 

A reconciliation of theweighted average shares used for the basic and diluted computations is asfollows:

 
|                             |   | **Three  months ended** |   | **Six Months  Ended** |   |
|----------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                             |   | **June 29,  2002**      |   | **June 28,  2003**    |   | **June 29,  2002** |   | **June 28,  2003** |   |
| Weighted average shares:         |   |                    |   |                  |   |   |   |   |   |
| For basic income per share       |   | 8,860,834               |   | 8,906,238             |   | 8,854,103 |   | 8,906,238 |   |
| Dilutive effect of stock options |   | 54,237                  |   | —                |   | 37,653 |   | 14 |   |
| For diluted income per share     |   | 8,915,071               |   | 8,906,238             |   | 8,891,756 |   | 8,906,252 |   |

 

Options topurchase 29,500 shares of common stock at a price of $21.94 per share andoptions to purchase 1,058,400 shares of common stock at prices ranging from$18.55 to $21.94 per share were outstanding during the periods ended June 29,2002 and June 28, 2003, respectively, but were not included in the computationof diluted net income per share because the options’ exercise prices weregreater than the average market price of the common shares.

 

*Comprehensive Income–*Other comprehensive income is comprised of foreigncurrency translation adjustments, additional minimum pension liabilities, andunrealized gains and losses on certain long-term assets.  Total comprehensive income is as follows:

 
|                            |   | **Three  months ended** |   | **Six Months  Ended** |   |
|---------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                            |   | **June 29,  2002**      |   | **June 28,  2003**    |   | **June 29,  2002** |   | **June 28,  2003** |   |
|                            |   |                    |   |                  |   |   |   |   |   |
| Net income                      |   | $                       | 4,084  |                  | $      | 2,160 |   | $ | 7,767 |   | $ | 2,843 |   |
| Other comprehensive income, net |   | 4,180                   |   | 2,186                 |   | 3,500 |   | 2,885 |   |
| Total comprehensive income      |   | $                       | 8,264  |                  | $      | 4,346 |   | $ | 11,267 |   | $ | 5,728 |   |

 

*New AccountingPronouncements –*In April 2003, the FASB issued SFASNo. 149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities.” SFAS 149 amends SFAS 133 to conform and incorporate derivativeimplementation issues and subsequently issued accounting guidance. SFAS 149clarifies under what circumstances a contract with an initial net investmentmeets the characteristic of a derivative, and clarifies when a derivativecontains a financing component that warrants special reporting in the statementof cash flows.  SFAS 149 also amendsother existing pronouncements, resulting in more consistent reporting ofcontracts that are derivatives in their entirety or that contain embeddedderivatives that warrant special accounting. SFAS 149 is effective for contracts entered into or modified afterJune 30, 2003, and should be applied prospectively. However, certain SFAS133 implementation issues that were effective for all fiscal quarters prior toJune 15, 2003, should continue to be applied in accordance with theirrespective effective dates. We are required to adopt SFAS 149 effectiveJuly 1, 2003. We do not believe that the adoption of SFAS 149 will have amaterial effect on our financial position, results of operations or cash flows.

 

In May 2003,the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.” SFAS 150establishes standards for how an issuer classifies and measures certainfreestanding financial instruments with characteristics of both liabilities andequity. SFAS 150 requires that an issuer classify a financial instrument thatis within its scope as a liability (or asset in some circumstances). We arerequired to adopt SFAS 150 effective June 29, 2003.

 

8

----

 

We do not believe that theadoption of SFAS 150 will have a material effect on our financial position,results of operations or cash flows.

 

In May 2003,the Emerging Issues Task Force (“EITF”) reached consensus in EITF 03-04,“Determining the Classification and Benefit Attribution Method for a ‘CashBalance’ Pension Plan,” to specifically address the accounting for certain cashbalance pension plans. The consensus reached in EITF 03-04 requires certaincash balance pension plans to be accounted for as defined benefit plans. Forcash balance plans described in the consensus, the consensus also requires theuse of the traditional unit credit method for purposes of measuring the benefitobligation and annual cost of benefits earned as opposed to the projected unitcredit method. We do not believe that the adoption of EITF 03-04 will have amaterial effect on our financial position, results of operations or cash flows.

 

In May 2003,the EITF reached consensus in EITF 01-08, “Determining Whether an ArrangementContains a Lease,” to clarify the requirements on identifying whether anarrangement should be accounted for as a lease at its inception. The guidancein the consensus is designed to mandate reporting revenue as rental or leasingincome that otherwise would be reported as part of product sales or servicerevenue. EITF 01-08 requires both parties to an arrangement to determinewhether a service contract or similar arrangement is or includes a lease withinthe scope of SFAS No. 13, “Accounting For Leases.” The consensus is to beapplied prospectively to arrangements agreed to, modified, or acquired inbusiness combinations in fiscal periods beginning after May 28, 2003. Wedo not believe the adoption of EITF 01-08 will have a material effect on ourfinancial position, results of operations or cash flows.

 

*Reclassifications*– Certain prior year amounts have been reclassified to conform to the currentyear presentation.

 

**(3)****                                 Inventories**

 

Inventories consist of thefollowing:

 
|            |   | **December  31,  2002** |    | **June 28,  2003** |   |
|-----------------|--------|-------------------------|---------|--------------------|--------|
|            |   |                    |    |               |   |
| Raw materials   |   | $                       | 21,568  |               | $      | 20,671 |   |
| Work in process |   | 56,019                  |    | 60,033             |   |
| Finished goods  |   | 85,503                  |    | 86,857             |   |
| Total           |   | $                       | 163,090 |               | $      | 167,561 |   |

 

9

----

 

**(4)****                                 IntangibleAssets**

 

Amortizable intangible assetsconsist of the following:

 
|                           |   | **December  31,  2002** |   | **June 28,  2003** |   |
|--------------------------------|--------|-------------------------|--------|--------------------|--------|
|                           |   |                    |   |               |   |
| Gross deferred financing costs |   | $                       | 10,751 |               | $      | 10,753 |   |
| Accumulated amortization       |   | (3,951                  | )      | (4,505             | )      |
| Deferred financing costs, net  |   | $                       | 6,800  |               | $      | 6,248 |   |
|                           |   |                    |   |               |   |
| Gross covenants not to compete |   | $                       | 750    |               | $      | 805 |   |
| Accumulated amortization       |   | (614                    | )      | (659               | )      |
| Covenants not to compete, net  |   | $                       | 136    |               | $      | 146 |   |

 

The weightedaverage amortization period for deferred financing costs is 8.75 years, and theweighted average amortization period of covenants not to compete is 8.5years.  Total amortization expense is asfollows:

 
|                 |   | **Three  months ended** |   | **Six months  ended** |   |
|----------------------|--------|-------------------------|--------|-----------------------|--------|
|                 |   | **June 29,  2002**      |   | **June 28,  2003**    |   | **June 29,  2002** |   | **June 28,  2003** |   |
|                 |   |                    |   |                  |   |   |   |   |   |
| Amortization expense |   | $                       | 289    |                  | $      | 288 |   | $ | 578 |   | $ | 577 |   |
|                      |        |                         |        |                       |        |  |  |  |  |  |  |  |  |

 

The following table shows theestimated amortization expense for the remainder of 2003 and the next fivesucceeding fiscal years:

 

Estimated amortization expense:

 
| 2003 |   | $     | 577    |   |
|------|--------|-------|--------|--------|
| 2004 |   | 1,043 |   |
| 2005 |   | 987   |   |
| 2006 |   | 952   |   |
| 2007 |   | 952   |   |
| 2008 |   | 952   |   |

 

10

----

 

**(5)****                                 OtherCurrent Liabilities**

 
|                                 |   | **December  31,  2002** |   | **June 28,  2003** |   |
|--------------------------------------|--------|-------------------------|--------|--------------------|--------|
|                                 |   |                    |   |               |   |
| Accrued payroll and related benefits |   | $                       | 15,287 |               | $      | 17,074 |   |
| Current portion of pension liability |   | 4,111                   |   | 3,317              |   |
| Accrued warranty expense             |   | 2,357                   |   | 2,479              |   |
| Accrued interest                     |   | 2,720                   |   | 2,704              |   |
| Deferred income                      |   | 3,536                   |   | 4,005              |   |
| Other accrued expenses               |   | 7,253                   |   | 6,472              |   |
| Total                                |   | $                       | 35,264 |               | $      | 36,051 |   |

 

Accruedwarranty expense is generally recorded at the time of sale for instrumentswhich have a warranty period ranging from five to ten years.  The accrued expense recorded is based on apercentage of sales and is adjusted periodically following an analysis ofwarranty activity.  Accrued warrantyexpense for instruments that have a warranty period of one year is recordedbased on warranty return trends.  Theaccrued warranty expense activity for the year ended December 31, 2002 and sixmonths ended June 28, 2003 is as follows:

 
|                      |   | **Period  Ended**       |   |
|---------------------------|--------|-------------------------|--------|
|                      |   | **December  31,  2002** |   | **June 28,  2003** |   |
|                      |   |                    |   |   |   |
| Accrued warranty expense: |   |                    |   |   |   |
| Beginning balance         |   | $                       | 2,221  |   | $ | 2,357 |   |
| Additions                 |   | 950                     |   | 611 |   |
| Claims and reversals      |   | (814                    | )      | (489 | ) |
| Ending balance            |   | $                       | 2,357  |   | $ | 2,479 |   |

 

**(6)****                                 Stockholders’Equity**

 

Our commonstock is comprised of two classes: Class A and Ordinary.  With the exception of disparate votingpower, both classes are substantially identical.  Each share of Class A common stock entitles the holder to 98votes.  Holders of Ordinary common stockare entitled to one vote per share. Class A common stock shall automatically convert to Ordinary commonstock if, at any time, the Class A common stock is not owned by an originalClass A holder.  The Chairman and ChiefExecutive Officer own 100% of the Class A common shares, representingapproximately 85% of the combined voting power of the Class A common stock andOrdinary common stock.

 

11

----

 

**(7)****                                 OtherIncome, Net**

 

Other income, net consists ofthe following:

 
|                        |   | **Three  months ended** |   | **Six months  ended** |   |
|-----------------------------|--------|-------------------------|--------|-----------------------|--------|
|                        |   | **June 29,  2002**      |   | **June 28,  2003**    |   | **June 29,  2002** |   | **June 28,  2003** |   |
|                        |   |                    |   |                  |   |   |   |   |   |
| West 57th Building income   |   | $                       | (1,164 | )                     | $      | (1,163 | ) | $ | (2,327 | ) | $ | (2,326 | ) |
| West 57th building expenses |   | 810                     |   | 814                   |   | 1,624 |   | 1,628 |   |
| Foreign exchange gain, net  |   | (584                    | )      | (286                  | )      | (474 | ) | (390 | ) |
| Miscellaneous               |   | (300                    | )      | (77                   | )      | (366 | ) | (245 | ) |
| Other income, net           |   | $                       | (1,238 | )                     | $      | (712 | ) | $ | (1,543 | ) | $ | (1,333 | ) |

 

**(8)****                                 Commitmentsand Contingent Liabilities**

 

We areinvolved in certain legal proceedings regarding environmental matters, whichare described below.  Further, in theordinary course of business, we are party to various legal actions that webelieve are routine in nature and incidental to the operation of ourbusiness.  While the outcome of suchactions cannot be predicted with certainty, we believe that, based on ourexperience in dealing with these matters, their ultimate resolution will nothave a material adverse impact on our business, financial condition, or resultsof operations or projects.

 

We operatemanufacturing facilities at certain locations where hazardous substances(including chlorinated solvents) were used. We believe that an entity that formerly operated one such facility mayhave released hazardous substances at such location, which we leased throughJuly 2001.  We did not contribute tosuch release.  Further, we have acontractual indemnity from certain stockholders of such entity.  This facility is not the subject of a legalproceeding that involves us, nor, to our knowledge, is the facility subject toinvestigation.  However, no assurancecan be given that legal proceedings will not arise in the future and that suchindemnitors would make the payments described in the indemnity.

 

We operateother manufacturing facilities, which were previously owned by PhilipsElectronics North America Corporation (“Philips”).  Philips agreed to indemnify us for any and all losses, damages,liabilities and claims relating to environmental matters resulting from certainactivities of Philips occurring prior to December 29, 1988 (the “EnvironmentalIndemnity Agreement”).  Philips hasfully performed its obligations under the Environmental Indemnity Agreement,which terminates on December 29, 2008. Four matters covered by the Environmental Indemnity Agreement arecurrently pending.  Philips has enteredinto Consent Orders with the Environmental Protection Agency (“EPA”) for onesite and the North Carolina Department of Environment, Health and Natural Resourcesfor a second site, whereby Philips has agreed to pay required responsecosts.  For the third site, the EPA hasnotified us it intends to carry out the final remediation itself.  The EPA estimates that this remedy has apresent net cost of approximately $14.5 million.  Over 40 persons or entities have been named by the EPA aspotentially responsible parties at this site. This matter has been tendered to Philips pursuant to the EnvironmentalIndemnity Agreement.  On October 22,1998, we were joined as defendant in an action involving a site formerlyoccupied by a business we acquired in Illinois.  Philips has accepted the defense of this action pursuant to theterms of the Environmental Indemnity Agreement.  Our potential liability at any of these sites is affected byseveral factors including, but not limited to, the method of remediation,

 

12

----

 

our portion of the materials inthe site relative to the other named parties, the number of partiesparticipating, and the financial capabilities of the other potentiallyresponsible parties once the relative share has been determined.  No assurance can be given, however, thatadditional environmental issues will not require additional, currentlyunanticipated investigation, assessment or remediation expenditures or thatPhilips will make payments that it is obligated to make under the EnvironmentalIndemnity Agreement.

 

We are alsocontinuing existing environmental remediation programs at facilities acquiredin 2000.  We currently estimate thatthis project will take eighteen years to complete, at a total cost ofapproximately $1.0 million.  We haveaccrued approximately $0.6 million for the estimated remaining cost of theseremediation programs, which represents the present value total cost using adiscount rate of 4.75%.  A summary ofexpected payments associated with this project is as follows:

 
|       |   | **Environmental  Payments** |   |
|------------|--------|-----------------------------|--------|
| 2003       |   | $                           | 101    |   |
| 2004       |   | 72                          |   |
| 2005       |   | 72                          |   |
| 2006       |   | 72                          |   |
| 2007       |   | 51                          |   |
| Thereafter |   | 656                         |   |
| Total      |   | $                           | 1,024  |   |

 

The mattersdescribed above and our other liabilities and compliance costs arising underenvironmental laws are not expected to have a material impact on our capitalexpenditures, earnings or competitive position.  However, some risk of environmental liability is inherent in thenature of our current and former businesses and we might, in the future, incurmaterial costs to meet current or more stringent compliance, cleanup or otherobligations pursuant to environmental laws.

 

**(9)****                                 SegmentInformation**

 

We haveidentified two distinct and reportable segments: the piano segment and the bandand orchestral instrument segment. These segments were selected based upon the way in which managementoversees and evaluates the results of each operation.  Management and the chief operating decision maker utilize incomefrom operations as a meaningful measurement of profit or loss for thesegments.  Income from operations forthe reportable segments includes certain corporate costs allocated to thesegments based primarily on revenue, as well as intercompany profit.   Amounts reported as “Other & Elim”include those corporate costs that were not allocated to the reportablesegments and the remaining intercompany profit elimination.

 

13

----

 

The following tables presentinformation about our operating segments for the three month and six monthperiods ended June 29, 2002 and June 28, 2003:

 
| **Three  months ended 2002**    |   | **Piano  Segment** |   | **Band and  Orchestral Segment** |   | **Other********&  Elim** |   | **Consol  Total** |   |
|---------------------------------|--------|--------------------|--------|----------------------------------|--------|------------------------------|--------|-------------------|--------|
|                            |   | **U.S.**           |   | **Germany**                      |   | **Other**                    |   | **Total**         |   | **U.S.** |   | **Other** |   | **Total** |   |   |   |
| Net sales to external customers |   | $                  | 24,984 |                             | $      | 8,534                        |   | $                 | 4,780  |   | $ | 38,298 |   | $ | 39,137 |   | $ | 914 |   | $ | 40,051 |   | $ | — |   | $ | 78,349 |   |
| Income from operations          |   | 3,576              |   | 890                              |   | 707                          |   | 5,173             |   | 3,926 |   | 27 |   | 3,953 |   | (591 | ) | 8,535 |   |
|                                 |        |                    |        |                                  |        |                              |        |                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Three  months ended 2003**    |   | **Piano  Segment** |   | **Band and  Orchestral Segment** |   | **Other********&  Elim** |   | **Consol  Total** |   |
|---------------------------------|--------|--------------------|--------|----------------------------------|--------|------------------------------|--------|-------------------|--------|
|                            |   | **U.S.**           |   | **Germany**                      |   | **Other**                    |   | **Total**         |   | **U.S.** |   | **Other** |   | **Total** |   |   |   |
| Net sales to external customers |   | $                  | 25,971 |                             | $      | 12,271                       |   | $                 | 3,068  |   | $ | 41,310 |   | $ | 35,782 |   | $ | 943 |   | $ | 36,725 |   | $ | — |   | $ | 78,035 |   |
| Income from operations          |   | 2,145              |   | 631                              |   | 456                          |   | 3,232             |   | 3,053 |   | (16 | ) | 3,037 |   | (459 | ) | 5,810 |   |
|                                 |        |                    |        |                                  |        |                              |        |                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Six months  ended 2002**      |   | **Piano  Segment** |   | **Band and  Orchestral Segment** |   | **Other********&  Elim** |   | **Consol  Total** |   |
|---------------------------------|--------|--------------------|--------|----------------------------------|--------|------------------------------|--------|-------------------|--------|
|                            |   | **U.S.**           |   | **Germany**                      |   | **Other**                    |   | **Total**         |   | **U.S.** |   | **Other** |   | **Total** |   |   |   |
| Net sales to external customers |   | $                  | 48,482 |                             | $      | 16,584                       |   | $                 | 9,652  |   | $ | 74,718 |   | $ | 89,807 |   | $ | 1,883 |   | $ | 91,690 |   | $ | — |   | $ | 166,408 |   |
| Income from operations          |   | 6,184              |   | 1,889                            |   | 1,456                        |   | 9,529             |   | 8,758 |   | 53 |   | 8,811 |   | (1,136 | ) | 17,204 |   |
|                                 |        |                    |        |                                  |        |                              |        |                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Six months  ended 2003**      |   | **Piano  Segment** |   | **Band and  Orchestral Segment** |   | **Other********&  Elim** |   | **Consol  Total** |   |
|---------------------------------|--------|--------------------|--------|----------------------------------|--------|------------------------------|--------|-------------------|--------|
|                            |   | **U.S.**           |   | **Germany**                      |   | **Other**                    |   | **Total**         |   | **U.S.** |   | **Other** |   | **Total** |   |   |   |
| Net sales to external customers |   | $                  | 46,385 |                             | $      | 25,003                       |   | $                 | 5,857  |   | $ | 77,245 |   | $ | 81,240 |   | $ | 2,059 |   | $ | 83,299 |   | $ | — |   | $ | 160,544 |   |
| Income from operations          |   | 2,418              |   | 1,962                            |   | 1,250                        |   | 5,630             |   | 4,582 |   | 47 |   | 4,629 |   | (1,045 | ) | 9,214 |   |
|                                 |        |                    |        |                                  |        |                              |        |                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**(10)****                           Summaryof Guarantees**

 

During 2001,we completed a $150.0 million 8.75% Senior Note offering.  At the end of 2002, we repurchased $4.7million of these Senior Notes.

 

Our paymentobligations under the 8.75% Senior Notes are fully and unconditionallyguaranteed on a joint and several basis by Conn-Selmer, Steinway, and certainother of our direct and indirect wholly-owned subsidiaries, each a Guarantor(the “Guarantor Subsidiaries”).  Thesesubsidiaries represent all of our (the “Issuer”) operations conducted in theUnited States.  The remainingsubsidiaries, which do not guarantee the 8.75% Senior Notes, represent non-U.S.operations (the “Non Guarantor Subsidiaries”).

 

The followingcondensed consolidating supplementary data presents the financial position,results of operations, and cash flows of the Guarantor Subsidiaries and the NonGuarantor Subsidiaries.  Separatecomplete financial statements of the respective Guarantors would not provideadditional material information that would be useful in assessing the financialcomposition of the Guarantor Subsidiaries. No single Guarantor Subsidiary has any significant legal restrictions onthe ability of investors or creditors to obtain access to its assets in eventof default on the guarantee other than its subordination to seniorindebtedness.

 

Investments insubsidiaries are recorded on the cost method for purposes of the supplementalconsolidating presentation.  Earnings ofsubsidiaries are therefore not reflected in the parent company’s investmentaccounts and earnings.  The principalelimination entries eliminate investments in subsidiaries and intercompanybalances and transactions.

 

14

----

 

**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING STATEMENTS OF INCOME**

**SIX MONTHS ENDED JUNE28, 2003**

**(In Thousands)**

 
|                                    |   | **Issuer  of Notes** |   | **Guarantor  Subsidiaries** |   | **Non  Guarantor  Subsidiaries** |   | **Reclass/  Eliminations** |   | **Consolidated** |   |
|-----------------------------------------|--------|----------------------|--------|-----------------------------|--------|----------------------------------|--------|----------------------------|--------|------------------|--------|
|                                    |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Net sales                               |   | $                    | — |                        | $      | 132,267                          |   | $                          | 34,223 |             | $      | (5,946 | ) | $ | 160,544 |   |
| Cost of sales                           |   | —               |   | 100,761                     |   | 22,071                           |   | (5,833                     | )      | 116,999          |   |
|                                    |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Gross profit                            |   | —               |   | 31,506                      |   | 12,152                           |   | (113                       | )      | 43,545           |   |
|                                    |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Operating expenses:                     |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Sales and marketing                     |   | —               |   | 16,058                      |   | 5,947                            |   | (48                        | )      | 21,957           |   |
| General and administrative              |   | 2,287                |   | 6,683                       |   | 2,519                            |   | —                     |   | 11,489           |   |
| Amortization                            |   | 226                  |   | 349                         |   | 2                                |   | —                     |   | 577              |   |
| Other operating (income) expense        |   | (1,600               | )      | 1,435                       |   | 425                              |   | 48                         |   | 308              |   |
| Total operating expenses                |   | 913                  |   | 24,525                      |   | 8,893                            |   | —                     |   | 34,331           |   |
|                                    |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Income (loss) from operations           |   | (913                 | )      | 6,981                       |   | 3,259                            |   | (113                       | )      | 9,214            |   |
|                                    |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Interest (income) expense, net          |   | (753                 | )      | 6,613                       |   | 119                              |   | —                     |   | 5,979            |   |
| Other income, net                       |   | —               |   | (1,197                      | )      | (136                             | )      | —                     |   | (1,333           | )      |
|                                    |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Income (loss) before income taxes       |   | (160                 | )      | 1,565                       |   | 3,276                            |   | (113                       | )      | 4,568            |   |
|                                    |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Provision for (benefit of) income taxes |   | (56                  | )      | 1,371                       |   | 456                              |   | (46                        | )      | 1,725            |   |
|                                    |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Net income (loss)                       |   | $                    | (104   | )                           | $      | 194                              |   | $                          | 2,820  |             | $      | (67 | ) | $ | 2,843 |   |

 

15

----

 

**STEINWAY MUSICALINSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING BALANCE SHEETS**

**JUNE 28, 2003**

**(In Thousands)**

 
|                                            |   | **Issuer   of Notes** |   | **Guarantor  Subsidiaries** |   | **Non  Guarantor  Subsidiaries** |   | **Reclass/  Eliminations** |   | **Consolidated** |   |
|-------------------------------------------------|--------|-----------------------|--------|-----------------------------|--------|----------------------------------|--------|----------------------------|--------|------------------|--------|
| ASSETS                                          |   |                  |   |                        |   |                             |   |                       |   |             |   |
| Current assets:                                 |   |                  |   |                        |   |                             |   |                       |   |             |   |
| Cash                                            |   | $                     | — |                        | $      | 426                              |   | $                          | 2,072  |             | $      | 5,229 |   | $ | 7,727 |   |
| Accounts, notes and leases receivable, net      |   | —                |   | 77,282                      |   | 12,015                           |   | 42                         |   | 89,339           |   |
| Inventories                                     |   | —                |   | 133,237                     |   | 35,418                           |   | (1,094                     | )      | 167,561          |   |
| Prepaid expenses and other current assets       |   | 329                   |   | 2,860                       |   | 1,178                            |   | —                     |   | 4,367            |   |
| Deferred tax assets                             |   | —                |   | 6,155                       |   | 5,242                            |   | (3,714                     | )      | 7,683            |   |
| Total current assets                            |   | 329                   |   | 219,960                     |   | 55,925                           |   | 463                        |   | 276,677          |   |
|                                            |   |                  |   |                        |   |                             |   |                       |   |             |   |
| Property, plant and equipment, net              |   | 153                   |   | 85,585                      |   | 15,531                           |   | —                     |   | 101,269          |   |
| Investment in subsidiaries                      |   | 71,143                |   | 261,129                     |   | —                           |   | (332,272                   | )      | —           |   |
| Trademarks                                      |   | —                |   | 6,280                       |   | 3,669                            |   | —                     |   | 9,949            |   |
| Goodwill                                        |   | —                |   | 18,795                      |   | 11,695                           |   | —                     |   | 30,490           |   |
| Other intangibles, net                          |   | 3,523                 |   | 2,863                       |   | 8                                |   | —                     |   | 6,394            |   |
| Other assets                                    |   | 1,052                 |   | 6,103                       |   | 512                              |   | —                     |   | 7,667            |   |
| TOTAL ASSETS                                    |   | $                     | 76,200 |                        | $      | 600,715                          |   | $                          | 87,340 |             | $      | (331,809 | ) | $ | 432,446 |   |
|                                            |   |                  |   |                        |   |                             |   |                       |   |             |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |   |                  |   |                        |   |                             |   |                       |   |             |   |
| Current liabilities:                            |   |                  |   |                        |   |                             |   |                       |   |             |   |
| Current portion of long-term debt               |   | $                     | — |                        | $      | 6,484                            |   | $                          | 1,823  |             | $      | — |   | $ | 8,307 |   |
| Accounts payable                                |   | 109                   |   | 4,744                       |   | 2,888                            |   | —                     |   | 7,741            |   |
| Other current liabilities                       |   | (14,029               | )      | 39,659                      |   | 14,420                           |   | (3,999                     | )      | 36,051           |   |
| Total current liabilities                       |   | (13,920               | )      | 50,887                      |   | 19,131                           |   | (3,999                     | )      | 52,099           |   |
|                                            |   |                  |   |                        |   |                             |   |                       |   |             |   |
| Long-term debt                                  |   | 145,395               |   | 38,687                      |   | —                           |   | 5,229                      |   | 189,311          |   |
| Intercompany                                    |   | (110,504              | )      | 106,291                     |   | 4,171                            |   | 42                         |   | —           |   |
| Deferred tax liabilities                        |   | —                |   | 16,533                      |   | 7,044                            |   | —                     |   | 23,577           |   |
| Other non-current liabilities                   |   | 439                   |   | 9,714                       |   | 15,772                           |   | —                     |   | 25,925           |   |
| Total liabilities                               |   | 21,410                |   | 222,112                     |   | 46,118                           |   | 1,272                      |   | 290,912          |   |
|                                            |   |                  |   |                        |   |                             |   |                       |   |             |   |
| Stockholders’ equity                       |   | 54,790                |   | 378,603                     |   | 41,222                           |   | (333,081                   | )      | 141,534          |   |
|                                            |   |                  |   |                        |   |                             |   |                       |   |             |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |   | $                     | 76,200 |                        | $      | 600,715                          |   | $                          | 87,340 |             | $      | (331,809 | ) | $ | 432,446 |   |

 

16

----

 

**STEINWAY MUSICALINSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING STATEMENTS OF CASH FLOWS**

**SIX MONTHS ENDED JUNE28, 2003**

**(In Thousands)**

 
|                                                                                 |   | **Issuer  of Notes** |   | **Guarantor  Subsidiaries** |   | **Non  Guarantor  Subsidiaries** |   | **Reclass/  Eliminations** |   | **Consolidated** |   |
|--------------------------------------------------------------------------------------|--------|----------------------|--------|-----------------------------|--------|----------------------------------|--------|----------------------------|--------|------------------|--------|
| Cash flows from operating activities:                                                |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Net income (loss)                                                                    |   | $                    | (104   | )                           | $      | 194                              |   | $                          | 2,820  |             | $      | (67 | ) | $ | 2,843 |   |
| Adjustments to reconcile net income (loss) to cash flows from  operating activities: |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Depreciation and amortization                                                        |   | 255                  |   | 4,503                       |   | 788                              |   | —                     |   | 5,546            |   |
| Deferred tax benefit                                                                 |   | —               |   | (130                        | )      | (122                             | )      | —                     |   | (252             | )      |
| Other                                                                                |   | —               |   | 90                          |   | 89                               |   | —                     |   | 179              |   |
| Changes in operating assets and liabilities:                                         |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Accounts, notes and leases receivable                                                |   | —               |   | (11,682                     | )      | 409                              |   | (120                       | )      | (11,393          | )      |
| Inventories                                                                          |   | —               |   | (550                        | )      | (3,026                           | )      | 113                        |   | (3,463           | )      |
| Prepaid expenses and other current assets                                            |   | 127                  |   | 1,180                       |   | (247                             | )      | —                     |   | 1,060            |   |
| Accounts payable                                                                     |   | 11                   |   | (2,189                      | )      | (282                             | )      | 78                         |   | (2,382           | )      |
| Other current liabilities                                                            |   | 353                  |   | (154                        | )      | 504                              |   | (46                        | )      | 657              |   |
| Cash flows from operating activities                                                 |   | 642                  |   | (8,738                      | )      | 933                              |   | (42                        | )      | (7,205           | )      |
|                                                                                 |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Cash flows from investing activities:                                                |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Capital expenditures                                                                 |   | (23                  | )      | (1,100                      | )      | (552                             | )      | —                     |   | (1,675           | )      |
| Capital contribution to subsidiary                                                   |   | —               |   | (513                        | )      | 513                              |   | —                     |   | —           |   |
| Changes in other assets                                                              |   | 58                   |   | 358                         |   | —                           |   | —                     |   | 416              |   |
| Cash flows from investing activities                                                 |   | 35                   |   | (1,255                      | )      | (39                              | )      | —                     |   | (1,259           | )      |
|                                                                                 |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Cash flows from financing activities:                                                |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Gross borrowings under lines of credit                                               |   | —               |   | 5,119                       |   | 1,246                            |   | —                     |   | 6,365            |   |
| Gross repayments under lines of credit                                               |   | (3                   | )      | (5,119                      | )      | (1,002                           | )      | 3                          |   | (6,121           | )      |
| Repayment of long-term debt                                                          |   | —               |   | (3,240                      | )      | —                           |   | —                     |   | (3,240           | )      |
| Intercompany transactions                                                            |   | (674                 | )      | 5,817                       |   | (5,185                           | )      | 42                         |   | —           |   |
| Cash flows from financing activities                                                 |   | (677                 | )      | 2,577                       |   | (4,941                           | )      | 45                         |   | (2,996           | )      |
|                                                                                 |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Effect of exchange rate changes on cash                                              |   | —               |   | —                      |   | 88                               |   | —                     |   | 88               |   |
|                                                                                 |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Decrease in cash                                                                     |   | —               |   | (7,416                      | )      | (3,959                           | )      | 3                          |   | (11,372          | )      |
| Cash, beginning of period                                                            |   | —               |   | 1,166                       |   | 6,736                            |   | 11,197                     |   | 19,099           |   |
|                                                                                 |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Cash, end of period                                                                  |   | $                    | — |                        | $      | (6,250                           | )      | $                          | 2,777  |             | $      | 11,200 |   | $ | 7,727 |   |

 

17

----

 

**(11)****                           SubsequentEvents**

 

On August 7,2003, we announced that we will be closing our manufacturing facility inNogales, Arizona, which has been operating at reduced capacity for severalquarters.  Manufacturing operations willcease in the fourth quarter and the final plant closing will be early in2004.  This closure will eliminateapproximately 90 positions.

 

We expect totake charges of approximately $6.3 million during the second half of 2003related to this closing, approximately $0.7 million of which will be severancepayments.  The remainder of the chargewill consist primarily of inventory write-downs and asset impairment costs.

 

18

----

 

**ITEM2****                                     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Introduction**

 

We, throughour operating subsidiaries, are a world leader in the design, manufacture,marketing, and distribution of high quality musical instruments.  Our piano division concentrates on thehigh-end grand piano segment of the industry, handcrafting Steinway pianos inNew York and Germany.  We also offerupright pianos and two mid-priced lines of pianos under the Boston and Essexbrand names.  Moreover, we are thelargest domestic producer of band and orchestral instruments and offer acomplete line of brasswind, woodwind, percussion and stringed instruments andrelated accessories with well known brand names such as Bach, C.G. Conn, King,and Ludwig.  We sell our productsthrough dealers and distributors worldwide. Our piano customer base consists of professional artists, amateurpianists, and institutions such as concert halls, universities, and musicschools.  Our band and orchestralinstrument customer base consists primarily of middle school and high schoolstudents, but also includes adult amateur and professional musicians.

 

**Critical Accounting Policies**

 

The nature ofour business - the production and sale of musical instruments - is such that itrarely involves application of highly complex or subjective accountingprinciples.  The accounting policiesthat are subject to significant management estimates are those normally foundin traditional businesses and include inventory reserves, accounts receivablereserves, reserves on notes receivable, and warranty reserves.  We have significant experience and data onwhich to base these estimates. Historical information is adjusted for specific uncertainties, such asnew product introductions, and contemporaneous information, such as pricefluctuations.  Management regularlyperforms assessments of the underlying assumptions and believes that theyprovide a reasonable basis for the estimates contained in our financialstatements.

 

**Forward-Looking Statements**

 

Certainstatements contained in this document are “forward-looking statements” withinthe meaning of Section 21E of the Securities and Exchange Act of 1934, asamended.  These forward-lookingstatements represent our present expectations or beliefs concerning futureevents.  We caution that such statementsare necessarily based on certain assumptions which are subject to risks anduncertainties which could cause actual results to differ materially from thoseindicated herein.  These risk factorsinclude, but are not limited to, changes in general economic conditions,geopolitical events, increased competition, work stoppages and slowdowns,exchange rate fluctuations, variations in the mix of products sold,fluctuations in effective tax rates resulting from shifts in sources of income,and the ability to successfully integrate and operate acquired businesses.  Further information on these risk factors isincluded in our Annual Report on Form 10-K for the year ended December 31,2002, our Final Prospectus filed in August 1996, and Registration Statement No.333-62790 filed in June 2001, particularly in the sections entitled “RiskFactors.”  We encourage you to readthose descriptions carefully.  Wecaution investors not to place undue reliance on the forward-looking statementscontained in this report.  These statements,like all statements contained in this report, speak only as of the date of thisreport (unless another date is indicated) and we undertake no obligation toupdate or revise the statements except as required by law.

 

19

----

 

**Resultsof Operations**

 

*Three Months Ended June 28, 2003 Compared toThree Months Ended June 29, 2002*

 

*Net Sales -*Netsales remained stable at $78.0 million. Piano sales increased $3.0 million (8%)to $41.3 million in the current period, despite a 4% decrease in Steinway unitshipments and a 13% decrease in Boston product line unit shipments.  The increase was primarily attributable tothe positive foreign exchange impact of $2.5 million.  Band and orchestral instrument sales decreased $3.3 million (8%)on an overall unit decrease of 9%.  Less background brass shipments, resulting from the strike (settled onMay 5, 2003) at our Eastlake, Ohio brass instrument factory, and less tunedpercussion shipments due to the residual impact of the strike at our LaGrange,Illinois facility (settled on March 31, 2003) were the primary causes of thedecrease, although continued competition from foreign imports was also afactor.

 

G*ross Profit-* Gross profit decreased by $1.7 million (7%) to $22.7 million on agross margin decrease from 31.1% to 29.1%. Piano margins decreased from 35.9% in 2002 to 33.1% in 2003 due to fewerproduction days at our domestic manufacturing facility, resulting inunderabsorption of overhead. Unfavorable exchange rates on our Boston pianopurchases also contributed to the decrease. Band and orchestral instrumentmargins decreased from 26.5% in 2002 to 24.6% in 2003.  This decrease was primarily due tounabsorbed overhead resulting from reduced production levels at certain facilitiesand the work stoppage at our brass instrument factory.  Increased pension expense also contributedto the gross profit decrease.

 

*Operating Expenses*- Overall operating expenses increased by $1.1 million (7%) to $16.9 million inthe second quarter.  Excluding theforeign exchange impact of $0.7 million, the increase was less than 3%.

 

*Other Expense, Net -*Other expenses remained flat at $2.3 million. Netinterest expense decreased $0.5 million as a result of lower interest rates,lower borrowings on our line of credit, and interest savings of $0.1 millionassociated with our debt buyback of $4.7 million in December 2002.  This was offset by a decrease inmiscellaneous income and  $0.3 millionless foreign exchange gains in the current period.

 

*Income Taxes*– Our effective tax rate increased from 35.0% to 38.5% primarily due to theunfavorable shift in the ratio of foreign source income to domestic income andthe resultant decrease in use of foreign tax credits in 2003.

 

*Six Months Ended June 28, 2003 Compared toSix Months Ended June 29, 2002*

 

*Net Sales -*Netsales decreased $5.9 million (4%) to $160.5 million in the first half of 2003.Piano sales increased $2.5 million (3%) despite an overall unit shipmentdecrease of 10%.  This decrease, whichresulted from the economic slowdown, was more than offset by a positive foreignexchange impact of $5.0 million in the current period.  Band and orchestral instrument salesdecreased $8.4 million (9%) on an overall unit decrease of 11%.   Lower priced products imported from Asiacontinued to negatively impact our student instrument shipments.  The sales decline was also attributed to thedelay in availability of product resulting from the union strikes at ourLaGrange, Illinois and Eastlake, Ohio plants, which were settled in March andMay, respectively.

 

G*ross Profit-* Gross profit decreased by $6.2 million (13%) to $43.5 million on agross margin decrease from 29.9% to 27.1%. Piano margins decreased from 35.8% in 2002 to 33.0% in 2003 as a resultof lower production levels and underabsorption of overhead at our domesticmanufacturing facility,

 

20

----

 

compounded by a shift in mix tothe lower-margin Boston products. Band and orchestral instrument marginsdecreased from 25.1% in 2002 to 21.6% in 2003. This decrease was due to costs of $1.9 million paid to employees inaccordance with the terms of labor contracts which expired and $1.3 million inunabsorbed overhead and lost profit resulting from the work stoppages at two ofour plants.

 

*Operating Expenses*– Overall operating expenses increased by $1.8 million (6%) to $34.3 million inthe first half of 2003.  Approximately$1.3 million of the increase is attributable to foreign exchange.  The remainder is due to the costs associatedwith the 150th anniversary celebration of our piano division.

 

*Other Expense, net -*Other expenses decreased by $0.6 million (13%) to $4.6million, primarily as a result of lower net interest expense of $0.8million.  Lower interest rates, limitedborrowings on our lines of credit, and our debt buyback of $4.7 million inDecember 2002 contributed $0.5 million to the decrease.  Increased interest income of $0.3 million,resulting from our internal financing of notes receivable that had historicallybeen sold to a third party also contributed to the net decrease.

 

*Income Taxes*– Our effective tax rate increased from 35.0% to 37.8% as a result of theproportion of foreign source income to domestic income and our ability toeffectively utilize foreign tax credits in 2003.

 

**Liquidity and Capital Resources**

 

We have reliedprimarily upon cash provided by operations, supplemented as necessary byseasonal borrowings under our working capital line, to finance our operations,repay long-term indebtedness and fund capital expenditures.

 

Cash used inoperations in the first six months of 2002 was $1.8 million, compared to cashused in operations in the first six months of 2003 of $7.2 million.  This change is primarily due to lowerincome, as well as the change in working capital balances period over periodand payments made on accounts payable. Prior to August 2002, we sold notes receivable generated by our banddivision to third-party financing companies. This practice, which generated $2.6 million in cash in the first half of2002, was not employed in the current period. Additionally, inventory increased in the current period due to the salesslowdown and larger volume of pianos needed for music festival season.

 

Capitalexpenditures of $2.3 million and $1.7 million in the second quarter of 2002 and2003, respectively, were used primarily for the purchase of new machinery andequipment and production and retail facility improvements.  In 2003, we expect to spend approximately$5.0 million for capital projects, consisting mainly of retail facilitybuild-outs, machinery and process improvements, and equipment replacement.

 

**BorrowingAvailability and Activities**

 

Our realestate term loan, acquisition term loan and domestic seasonal borrowingrequirements are accommodated through a committed credit facility with asyndicate of domestic lenders (the “Credit Facility”).  The Credit Facility provides us with apotential borrowing capacity of up to $85.0 million in revolving credit loans,based on eligible accounts receivable and inventory balances.  The acquisition term loan and revolvingcredit loan portions of the Credit Facility bear interest at average 30-dayLIBOR plus 1.75%, and the real estate term loan bears interest at average30-day LIBOR plus 1.5%.   The Creditfacility expires on September 14, 2008. As of June 28, 2003, there were no revolving credit loans outstandingand availability based on eligible accounts receivable and inventory balances,net of letter of credit deductions of $4.5 million, was approximately $80.5million.  Open account loans withforeign

 

21

----

 

banks also provide forborrowings by Steinway’s foreign subsidiaries of up to €17.6 million ($20.1million at the June 28, 2003 exchange rate). We had $1.8 million in foreign loans outstanding as of June 28, 2003.

 

Our long-termfinancing consists primarily of $145.3 million of 8.75% Senior Notes and $50.5million of term loans outstanding under the Credit Facility. Our debtagreements contain covenants that place certain restrictions on us, includingour ability to incur additional indebtedness, to make investments in otherentities and to pay cash dividends.  Wewere in compliance with all such covenants as of June 28, 2003.

 

We expect to continueto focus on working capital management, repaying debt, maintaining andexpanding market share, and improving production efficiency.  We also intend to focus on scaling back thenumber of band division production facilities in the next twelve to eighteenmonths.  We do not expect the cashimpact of our facility rationalization project to materially impact ourliquidity.  We are not aware of anyother trends, demands, commitments, or costs of resources that are expected tomaterially impact liquidity or capital resources.  Therefore, we believe that cash on hand, together with cash flowsanticipated from operations and available borrowings under the Credit Facility,will be adequate to meet existing debt service requirements, fund continuingcapital requirements and satisfy working capital and general corporate needsfor the next twelve months.

 

We havereserved 721,750 shares of our existing treasury stock to be utilized for theexercise of stock options our Amended and Restated 1996 Stock Plan.  These options will have no impact on ourcash flow or the number of shares outstanding unless and until the options areexercised.

 

**ContractualObligations**

 

The following table provides asummary of our contractual obligations at June 28, 2003.

 
|                            |   | **Payments due by period (amounts in 000s)** |    |
|---------------------------------|--------|----------------------------------------------|---------|
| **Contractual  Obligations**    |   | **Total**                                    |    | **Less than  1 year** |   | **1 - 3 years** |   | **3 - 5 years** |   | **More than  5 years** |   |
|                            |   |                                         |    |   |   |   |   |   |   |   |   |
| Long-term debt (1)              |   | $                                            | 197,618 |   | $ | 8,307 |   | $ | 14,500 |   | $ | 16,628 |   | $ | 158,183 |   |
| Operating leases (2)            |   | 276,737                                      |    | 4,709 |   | 8,511 |   | 6,545 |   | 256,972 |   |
| Purchase obligations (3)        |   | 3,208                                        |    | 2,788 |   | 210 |   | 210 |   | — |   |
| Other long-term liabilities (4) |   | 31,189                                       |    | 4,138 |   | 6,426 |   | 8,216 |   | 12,409 |   |
| Total                           |   | $                                            | 508,752 |   | $ | 19,942 |   | $ | 29,647 |   | $ | 31,599 |   | $ | 427,564 |   |

 

----

**Notesto Contractual Obligations:**

 

(1) The natureof our long-term debt obligations is described more fully in the “BorrowingAvailability and Activities” section of “Liquidity and Capital Resources.”

(2)Approximately $260.8 million of our operating lease obligations are attributableto the ninety-nine year land lease associated with the purchase of SteinwayHall; the remainder is attributable to the leasing of other facilities andequipment.

(3) Purchaseobligations consist of firm purchase commitments for raw materials and equipment.

(4) Our otherlong-term liabilities consist primarily of pension obligations and employmentagreement obligations.

 

22

----

 

**NewAccounting Pronouncements**

 

In April 2003,the FASB issued SFAS No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.” SFAS 149 amends SFAS 133 to conform andincorporate derivative implementation issues and subsequently issued accountingguidance. SFAS 149 clarifies under what circumstances a contract with aninitial net investment meets the characteristic of a derivative, and clarifieswhen a derivative contains a financing component that warrants specialreporting in the statement of cash flows. SFAS 149 also amends other existing pronouncements, resulting in moreconsistent reporting of contracts that are derivatives in their entirety orthat contain embedded derivatives that warrant special accounting.  SFAS 149 is effective for contracts enteredinto or modified after June 30, 2003, and should be applied prospectively.However, certain SFAS 133 implementation issues that were effective for allfiscal quarters prior to June 15, 2003, should continue to be applied inaccordance with their respective effective dates. We are required to adopt SFAS149 effective July 1, 2003. We do not believe that the adoption of SFAS149 will have a material effect on our financial position, results ofoperations or cash flows.

 

In May 2003, the FASB issuedSFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.” SFAS 150 establishes standardsfor how an issuer classifies and measures certain freestanding financialinstruments with characteristics of both liabilities and equity. SFAS 150requires that an issuer classify a financial instrument that is within itsscope as a liability (or asset in some circumstances). We are required to adoptSFAS 150 effective June 29, 2003. We do not believe that the adoption of SFAS150 will have a material effect on our financial position, results ofoperations or cash flows.

 

In May 2003, the EmergingIssues Task Force (“EITF”) reached consensus in EITF 03-04, “Determining theClassification and Benefit Attribution Method for a ‘Cash Balance’ PensionPlan,” to specifically address the accounting for certain cash balance pensionplans. The consensus reached in EITF 03-04 requires certain cash balancepension plans to be accounted for as defined benefit plans. For cash balanceplans described in the consensus, the consensus also requires the use of thetraditional unit credit method for purposes of measuring the benefit obligationand annual cost of benefits earned as opposed to the projected unit creditmethod. We do not believe that the adoption of EITF 03-04 will have a materialeffect on our financial position, results of operations or cash flows.

 

In May 2003,the EITF reached consensus in EITF 01-08, “Determining Whether an ArrangementContains a Lease,” to clarify the requirements on identifying whether anarrangement should be accounted for as a lease at its inception. The guidancein the consensus is designed to mandate reporting revenue as rental or leasingincome that otherwise would be reported as part of product sales or servicerevenue. EITF 01-08 requires both parties to an arrangement to determinewhether a service contract or similar arrangement is or includes a lease withinthe scope of SFAS No. 13, “Accounting For Leases.” The consensus is to beapplied prospectively to arrangements agreed to, modified, or acquired inbusiness combinations in fiscal periods beginning after May 28, 2003. Wedo not believe the adoption of EITF 01-08 will have a material effect on ourfinancial position, results of operations or cash flows.

 

23

----

 

**ITEM 3            QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposedto market risk associated with changes in foreign currency exchange rates andinterest rates.  We mitigate our foreigncurrency exchange rate risk by maintaining foreign currency cash balances andholding forward foreign currency contracts. These contracts are used as a hedge against intercompany transactionsand are not used for trading or speculative purposes.  The fair value of the forward foreign currency exchange contractsis sensitive to changes in foreign currency exchange rates.  The impact of an adverse change in foreigncurrency exchange rates would not be materially different than that disclosedin the our Annual Report on Form 10-K for the year ended December 31, 2002.

 

Although themajority of our long-term debt is at a fixed interest rate, our revolving loansand term loans bear interest at rates that fluctuate with changes inLIBOR.  As such, our interest expense onour revolving loans and term loans and the fair value of its fixed long-termdebt are sensitive to changes in market interest rates.  The effect of an adverse change in marketinterest rates on our interest expense and the fair value of our long-term debtwould not be materially different than that disclosed in our Annual Report onForm 10-K for the year ended December 31, 2002.

 

**ITEM4            CONTROLS AND PROCEDURES**

 

As of the endof the period covered by this report, we evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)). Our disclosure controls andprocedures are the controls and other procedures that we designed to ensurethat we record, process, summarize and report in a timely manner the informationwe must disclose in reports that we file with or submit to the SEC. Mr.Messina, our President and Chief Executive Officer, and Mr. Hanson, our SeniorExecutive Vice President and Chief Financial Officer, reviewed and participatedin this evaluation. Based on this evaluation, Messrs. Messina and Hansonconcluded that, as of the Evaluation Date, our disclosure controls wereeffective.  As of the end of the periodcovered by this report, there have not been any significant changes in ourinternal accounting controls or in other factors that could significantlyaffect those controls.

 

24

----

 

**PART II****           OTHERINFORMATION**

 

**ITEM 4****                                     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

At the Company’s Annual Meeting of Shareholders held on May 2, 2003,the Board of Directors was re-elected in its entirety.  The votes cast for each nominee were asfollows:

 
|                |   | **For**    |   | **Withheld** |
|---------------------|--------|------------|--------|--------------|
|                |   |       |   |         |
| Kyle Kirkland       |   | 52,014,880 |   | 2,000,590    |
| Dana D. Messina     |   | 52,014,687 |   | 2,000,783    |
| John M. Stoner, Jr. |   | 52,016,499 |   | 1,998,971    |
| Bruce A. Stevens    |   | 52,015,790 |   | 1,999,680    |
| A. Clinton Allen    |   | 53,965,586 |   | 49,884       |
| Rudolph K. Kluiber  |   | 53,965,585 |   | 49,885       |
| Peter McMillan      |   | 53,965,586 |   | 49,884       |

 

The proposal to ratify Deloitte & Touche to serve as the Company’sindependent auditors for the fiscal year ending December 31, 2003 was approvedwith 53,986,184 votes cast for, 29,165 votes against, and 121 abstentions.

 

**ITEM 6****                                  EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)          Exhibits

 

10.1 Working Agreement between Conn-Selmer, Inc. and United Automobile,Aerospace and Agriculture Implement Workers of America, Local No. 612

 

10.2 Working Agreement between Vincent Bach Division of Conn-Selmer,Inc. and United Automobile, Aerospace and Agricultural Implement Workers ofAmerica Local No. 364

 

10.3 Agreement between Conn-Selmer, Inc. and U.A.W. Local 2359

 

31.1 Certification of the Principal Executive Officer pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002

 

31.2 Certification of the Principal Financial Officer pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002

 

32.1 Certification of the Principal Executive Officer pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002

 

32.2 Certification of the Principal Financial Officer pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002

 

25

----

 

(b)         Reportson Form 8-K

 

During thequarter ended June 28, 2003, we filed or furnished the following reports onForm 8-K:

 

(i)             OnMarch 31, 2003, the Company filed a Current Report on Form 8-K that included apress release issued on the same day announcing that approximately 500employees of its Elkhart, Indiana plants approved new three-year unioncontracts.  The Company also announcedthat Steinway Musical Instruments, Inc. ‘BB’ corporate credit and ‘BB-’ seniorunsecured ratings were put on CreditWatch with negative implications byStandard and Poor’s Rating Services.

 

(ii)          OnApril 30, 2003, the Company filed a Current Report on Form 8-K that included apress release issued on the same day announcing its results for the firstquarter ended March 29, 2003.

 

(iii) On May 6, 2003, the Company filed a Current Report on Form 8-Kthat included a press release issued on the same day announcing that employeesof its Eastlake, Ohio plant approved a new two-year union contract.

 

26

----

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrants have duly caused thisreport to be signed on their behalf by the undersigned, thereunto dulyauthorized.

 

 
|   | STEINWAY  MUSICAL INSTRUMENTS, INC.                           |
|--------|---------------------------------------------------------------|
|   |                                                          |
|   |  /s/ Dana D. Messina                                     |   |
|   | Dana D.  Messina                                              |
|   | Director,  President and Chief Executive Officer              |
|   |                                                          |
|   |  /s/ Dennis M. Hanson                                    |   |
|   | Dennis M.  Hanson                                             |
|   | Senior  Executive Vice President and  Chief Financial Officer |
|   |                                                          |
|   |                                                          |
| Date:  | August 11,  2003                                              |   |
|        |                                                               |  |  |

 

 

27

----