**UNITED STATESSECURITIES 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 MARCH 31, 2005**                                        |
|       |       |                                                                                          |
| **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 number including area code:      **(781) 894-9770**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements during the past 90 days.

Yes ý    No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

Yes ý    No o

 
| Number of shares of Common Stock issued and outstanding as of May 5,  2005**:** |   | Class A  |   | 477,952   |   |
|---------------------------------------------------------------------------------|--------|----------|--------|-----------|--------|
|                                                                            |   | Ordinary |   | 7,568,135 |   |
|                                                                            |   | Total    |   | 8,046,087 |   |

 

 

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###### **STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**FORM 10-Q**

**INDEX**

 
| **PART I.**  | **UNAUDITED FINANCIAL INFORMATION**                                                             |       |
|--------------|-------------------------------------------------------------------------------------------------|------------|
|         |                                                                                            |       |
| **Item 1.**  | **Consolidated  and Condensed Consolidated Financial Statements:**                              |       |
|         |                                                                                            |       |
|         | Consolidated Statements of Income  Three months ended March 31, 2005 and March 31, 2004         |       |
|         |                                                                                            |       |
|         | Condensed Consolidated Balance Sheets  March 31, 2005 and December 31, 2004                     |       |
|         |                                                                                            |       |
|         | Consolidated Statements of Cash Flows  Three months ended March 31, 2005 and March 31, 2004     |       |
|         |                                                                                            |       |
|         | Consolidated Statement of Stockholders’  Equity  Three months ended March 31, 2005         |       |
|         |                                                                                            |       |
|         | Notes to Consolidated and 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 6.**  | **Exhibits and Reports on Form 8-K**                                                            |       |
|         |                                                                                            |       |
| ** **   | **Signatures**                                                                                  |       |

 

2

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# **ITEM1**                   CONSOLIDATEDAND CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**Unaudited**

**(In Thousands Except Share and Per ShareAmounts)**

 
| ** **                 | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **March 31, 2005**     | ** ** | **March 31, 2004** | ** ** |
| Net sales                  |       | $                      | 91,342     |   | $ | 90,061 |   |
| Cost of sales              |       | 65,645                 |       | 64,336 |   |
|                       |       |                   |       |   |   |
| Gross profit               |       | 25,697                 |       | 25,725 |   |
|                       |       |                   |       |   |   |
| Operating expenses:        |       |                   |       |   |   |
| Sales and marketing        |       | 11,272                 |       | 11,294 |   |
| General and administrative |       | 6,975                  |       | 6,014 |   |
| Amortization               |       | 282                    |       | 291 |   |
| Other operating expenses   |       | 110                    |       | 28 |   |
| Total operating expenses   |       | 18,639                 |       | 17,627 |   |
|                       |       |                   |       |   |   |
| Income from operations     |       | 7,058                  |       | 8,098 |   |
|                       |       |                   |       |   |   |
| Other income, net          |       | (439                   | )          | (612 | ) |
| Interest income            |       | (970                   | )          | (637 | ) |
| Interest expense           |       | 4,139                  |       | 3,778 |   |
|                       |       |                   |       |   |   |
| Income before income taxes |       | 4,328                  |       | 5,569 |   |
|                       |       |                   |       |   |   |
| Income tax provision       |       | 1,730                  |       | 2,225 |   |
|                       |       |                   |       |   |   |
| Net income                 |       | $                      | 2,598      |   | $ | 3,344 |   |
|                       |       |                   |       |   |   |
| Earnings per share:        |       |                   |       |   |   |
| Basic                      |       | $                      | 0.32       |   | $ | 0.41 |   |
| Diluted                    |       | $                      | 0.32       |   | $ | 0.39 |   |
|                       |       |                   |       |   |   |
| Weighted average shares:   |       |                   |       |   |   |
| Basic                      |       | 8,030,879              |       | 8,210,407 |   |
| Diluted                    |       | 8,241,196              |       | 8,519,707 |   |

 

See notes to consolidated and condensed consolidated financialstatements.

 

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**STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                                                             | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| Assets                                                                                                                 |       |                |       |                   |       |
| Current assets:                                                                                                        |       |                |       |                   |       |
| Cash                                                                                                                   |       | $                   | 24,721     |                   | $          | 27,372 |   |
| Accounts, notes and other receivables, net  of allowances of  $11,836 and $13,271 in 2005 and 2004, respectively       |       | 88,407              |       | 88,059                 |       |
| Inventories                                                                                                            |       | 177,264             |       | 172,346                |       |
| Prepaid expenses and other current assets                                                                              |       | 4,618               |       | 5,937                  |       |
| Deferred tax assets                                                                                                    |       | 14,883              |       | 15,047                 |       |
| Total current assets                                                                                                   |       | 309,893             |       | 308,761                |       |
|                                                                                                                   |       |                |       |                   |       |
| Property, plant and equipment, net of  accumulated depreciation of  $72,463 and $70,473 in 2005 and 2004, respectively |       | 100,216             |       | 102,944                |       |
| Trademarks                                                                                                             |       | 12,058              |       | 12,325                 |       |
| Goodwill                                                                                                               |       | 31,236              |       | 31,854                 |       |
| Other intangibles, net                                                                                                 |       | 5,101               |       | 5,290                  |       |
| Other assets                                                                                                           |       | 16,632              |       | 16,371                 |       |
|                                                                                                                   |       |                |       |                   |       |
| Total assets                                                                                                           |       | $                   | 475,136    |                   | $          | 477,545 |   |
|                                                                                                                   |       |                |       |                   |       |
| Liabilities and stockholders’ equity                                                                              |       |                |       |                   |       |
| Current liabilities:                                                                                                   |       |                |       |                   |       |
| Current portion of long-term debt                                                                                      |       | $                   | 15,005     |                   | $          | 14,212 |   |
| Accounts payable                                                                                                       |       | 14,220              |       | 14,789                 |       |
| Other current liabilities                                                                                              |       | 44,029              |       | 43,892                 |       |
| Total current liabilities                                                                                              |       | 73,254              |       | 72,893                 |       |
|                                                                                                                   |       |                |       |                   |       |
| Long-term debt                                                                                                         |       | 206,570             |       | 208,580                |       |
| Deferred tax liabilities                                                                                               |       | 25,687              |       | 26,240                 |       |
| Other non-current liabilities                                                                                          |       | 23,713              |       | 24,279                 |       |
| Total liabilities                                                                                                      |       | 329,224             |       | 331,992                |       |
|                                                                                                                   |       |                |       |                   |       |
| Commitments and contingent liabilities                                                                                 |       |                |       |                   |       |
|                                                                                                                   |       |                |       |                   |       |
| Stockholders’ equity:                                                                                             |       |                |       |                   |       |
| Common stock                                                                                                           |       | 10                  |       | 10                     |       |
| Additional paid-in capital                                                                                             |       | 81,413              |       | 81,129                 |       |
| Retained earnings                                                                                                      |       | 115,185             |       | 112,587                |       |
| Accumulated other comprehensive loss                                                                                   |       | (3,260              | )          | (737                   | )          |
| Treasury stock, at cost                                                                                                |       | (47,436             | )          | (47,436                | )          |
| Total stockholders’ equity                                                                                        |       | 145,912             |       | 145,553                |       |
|                                                                                                                   |       |                |       |                   |       |
| Total liabilities and stockholders’ equity                                                                        |       | $                   | 475,136    |                   | $          | 477,545 |   |

 

See notes to consolidated and condensed consolidated financialstatements.

 

4

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**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                    | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                    | ** ** | **March 31,  2005**    | ** ** | **March 31,  2004** | ** ** |
| Cash flows from operating activities:                                         |       |                   |       |   |   |
| Net income                                                                    |       | $                      | 2,598      |   | $ | 3,344 |   |
| Adjustments to reconcile net income to cash  flows from operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                                 |       | 2,839                  |       | 2,703 |   |
| Amortization of bond premium                                                  |       | (63                    | )          | (42 | ) |
| Deferred tax benefit                                                          |       | (159                   | )          | (127 | ) |
| Tax benefit from stock option exercises                                       |       | 32                     |       | 642 |   |
| Other                                                                         |       | 131                    |       | 31 |   |
| Changes in operating assets and  liabilities:                                 |       |                   |       |   |   |
| Accounts, notes and other receivables                                         |       | (882                   | )          | (7,706 | ) |
| Inventories                                                                   |       | (7,179                 | )          | (3,955 | ) |
| Prepaid expenses and other assets                                             |       | 1,548                  |       | (494 | ) |
| Accounts payable                                                              |       | (394                   | )          | 517 |   |
| Other liabilities                                                             |       | 1,151                  |       | 6,177 |   |
| Cash flows from operating activities                                          |       | (378                   | )          | 1,090 |   |
|                                                                          |       |                   |       |   |   |
| Cash flows from investing activities:                                         |       |                   |       |   |   |
| Capital expenditures                                                          |       | (1,212                 | )          | (904 | ) |
| Proceeds from disposals of fixed assets                                       |       | 304                    |       | 76 |   |
| Cash flows from investing activities                                          |       | (908                   | )          | (828 | ) |
|                                                                          |       |                   |       |   |   |
| Cash flows from financing activities:                                         |       |                   |       |   |   |
| Borrowings under lines of credit                                              |       | 1,349                  |       | 8,230 |   |
| Repayments under lines of credit                                              |       | (658                   | )          | (7,896 | ) |
| Debt issuance costs                                                           |       | —                 |       | (105 | ) |
| Repayments of long-term debt                                                  |       | (1,595                 | )          | (1,640 | ) |
| Proceeds from issuance of common stock                                        |       | 252                    |       | 4,257 |   |
| Cash flows from financing activities                                          |       | (652                   | )          | 2,846 |   |
|                                                                          |       |                   |       |   |   |
| Effect of foreign exchange rate changes on  cash                              |       | (713                   | )          | (341 | ) |
|                                                                          |       |                   |       |   |   |
| Increase (decrease) in cash                                                   |       | (2,651                 | )          | 2,767 |   |
| Cash, beginning of period                                                     |       | 27,372                 |       | 42,283 |   |
|                                                                          |       |                   |       |   |   |
| Cash, end of period                                                           |       | $                      | 24,721     |   | $ | 45,050 |   |
|                                                                          |       |                   |       |   |   |
| Supplemental Cash Flow Information                                            |       |                   |       |   |   |
| Interest paid                                                                 |       | $                      | 815        |   | $ | 316 |   |
| Taxes paid                                                                    |       | $                      | 3,685      |   | $ | 2,760 |   |
|                                                                          |       |                   |       |   |   |
| Non-cash transaction:                                                         |       |                   |       |   |   |
| Purchase of common stock by issuance of  bonds                                |       | $                      | —     |   | $ | 31,583 |   |

 

See notes to consolidated and condensed consolidated financialstatements.

 

5

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**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’EQUITY**

**Unaudited**

**(In Thousands Except Share Data)**

 
| ** **                                             | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
|                                                   |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Balance, January 1, 2005                               |       | $                 | 10         |                             | $          | 81,129                 |       | $                                           | 112,587    |                | $          | (737                                  | )          | $ | (47,436 | ) | $ | 145,553 |   |
| Comprehensive income:                                  |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Net income                                             |       |              |       |                             |       | 2,598                  |       |                                        |       |                |       | 2,598                                 |       |
| Foreign currency translation adjustment                |       |              |       |                             |       |                   |       | (2,497                                      | )          |                |       | (2,497                                | )          |
| Unrealized holding loss on marketable securities,  net |       |              |       |                             |       |                   |       | (26                                         | )          |                |       | (26                                   | )          |
| Total comprehensive income                             |       |              |       |                             |       |                   |       |                                        |       |                |       | 75                                    |       |
| Exercise of 12,440 options for shares of  common stock |       |              |       | 252                              |       |                   |       |                                        |       |                |       | 252                                   |       |
| Tax benefit of options exercised                       |       |              |       | 32                               |       |                   |       |                                        |       |                |       | 32                                    |       |
| Balance, March 31, 2005                                |       | $                 | 10         |                             | $          | 81,413                 |       | $                                           | 115,185    |                | $          | (3,260                                | )          | $ | (47,436 | ) | $ | 145,912 |   |

 

See notes to consolidated and condensed consolidated financialstatements.

 

6

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**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED AND CONDENSEDCONSOLIDATED**

**FINANCIAL STATEMENTS**

**MARCH 31, 2005**

 

**Unaudited**

**(Tabular Amounts In Thousands Except Shareand Per Share Data)**

 

**(1)****   Basisof Presentation**

 

The accompanyingconsolidated and condensed consolidated financial statements of SteinwayMusical Instruments, Inc. and subsidiaries (the “Company”) for the three monthsended March 31, 2005 and 2004 are unaudited. In the opinion of management, these statements have been prepared on thesame basis as the audited consolidated financial statements as of and for theyear ended December 31, 2004, and include all adjustments which are of a normaland recurring nature, necessary for the fair presentation of financialposition, results of operations and cash flows for the interim periods.  You should read the consolidated andcondensed consolidated financial statements in conjunction with theconsolidated financial statements and notes thereto contained in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2004 filed with theSecurities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2005 arenot necessarily indicative of the results that may be expected for the entireyear.

 

Throughout this report “we,”“us,” and “our” refer to Steinway Musical Instruments, Inc. and subsidiariestaken as a whole.

 

**(2)****   Summaryof Significant Accounting Policies**

 

*Principles of Consolidation -*Our consolidated financial statementsinclude the accounts of all direct and indirect subsidiaries, all of which arewholly-owned, including The Steinway Piano Company, Inc. (“Steinway”) andConn-Selmer. Inc. (“Conn-Selmer”). Significant intercompany balances have been eliminated in consolidation.

 

*Stock-based Compensation* - We have an employee stock purchaseplan (“Purchase Plan”) and a stock option plan (“Stock Plan”).  As permitted under accounting principlesgenerally accepted in the United States of America, we have elected to continueto follow the intrinsic value method in accounting for our stock-based employeecompensation arrangements.

 

7

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The following table illustrates the effect on net income and earningsper share as if we had applied the fair value method to measure stock-basedemployee compensation:

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                    | ** ** | **March 31, 2005**     | ** ** | **March 31, 2004** | ** ** |
|                                                                                                                                          |       |                   |       |   |   |
| Net income, as reported                                                                                                                       |       | $                      | 2,598      |   | $ | 3,344 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair-value based method for all awards,  net of related tax effects |       | (252                   | )          | (254 | ) |
|                                                                                                                                          |       |                   |       |   |   |
| Pro forma net income                                                                                                                          |       | $                      | 2,346      |   | $ | 3,090 |   |
| Earnings per share:                                                                                                                           |       |                   |       |   |   |
| Basic - as reported                                                                                                                           |       | $                      | 0.32       |   | $ | 0.41 |   |
| Basic - pro forma                                                                                                                             |       | $                      | 0.29       |   | $ | 0.38 |   |
|                                                                                                                                          |       |                   |       |   |   |
| Diluted - as reported                                                                                                                         |       | $                      | 0.32       |   | $ | 0.39 |   |
| Diluted - pro forma                                                                                                                           |       | $                      | 0.28       |   | $ | 0.36 |   |

 

We measuredthe fair value of options on their grant date, including the valuation of theoption feature implicit in our Purchase Plan, using the Black-Scholesoption-pricing model.  There were nostock option awards during the three months ended March 31, 2005 and 2004.  Key assumptions used to apply this pricingmodel to the option feature in the Purchase Plan are as follows:

 
| ** **                                                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Weighted-average interest rates                                                   |       | 2.04%                            |       | 1.26% |   |
| Weighted-average expected life of option  feature in the Purchase Plan (in years) |       | 1.00                             |       | 1.00 |   |
| Weighted-average expected life of option  grants (in years)                       |       | —                           |       | — |   |
| Expected volatility of underlying stock                                           |       | 27%                              |       | 27% |   |

 

The weighted-average fair value of options on their grant date is asfollows:

 
| ** **                      | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                            |       |                             |       |   |   |
| Option feature in Purchase Plan |       | $                                | 7.33       |   | $ | 4.09 |   |
|                                 |            |                                  |            |  |  |  |  |

 

It should be noted thatthe Black-Scholes option-pricing model was designed to value readily tradableoptions 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 our opinion, the existing models do not

 

8

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provide a reliable measure of the fair value of theoptions issued under either the Stock Plan or Purchase Plan.

 

*Earnings per Common Share –*We compute basic earnings per shareusing the weighted-average number of common shares outstanding during each period.  Diluted earnings per common share reflectsthe effect of our outstanding options using the treasury stock method, exceptwhen such options would be antidilutive.

 

A reconciliation of the weighted-average shares used for the basic anddiluted computations is as follows:

 
| ** **                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Weighted-average shares:         |       |                             |       |   |   |
| For basic earnings per share     |       | 8,030,879                        |       | 8,210,407 |   |
| Dilutive effect of stock options |       | 210,317                          |       | 309,300 |   |
| For diluted earnings per share   |       | 8,241,196                        |       | 8,519,707 |   |

 

All outstanding optionswere included in the computation of diluted net earnings per common share forthe three months ended March 31, 2005 and 2004 because the exercise prices ofthe options were less than the average market price of the common shares.

 

*Accumulated Other Comprehensive Income(Loss) –*Accumulated other comprehensive income (loss) is comprised of netincome, foreign currency translation adjustments, additional minimum pensionliabilities, and unrealized gains and losses on available-for-sale (“AFS”)marketable securities.  The components ofaccumulated other comprehensive loss are as follows:

 
| ** **               | ** ** | **Foreign  Currency  Translation  Adjustment** | ** ** | **Unrealized  Holding  Gain/(Loss) on  AFS Securities** | ** ** | **Tax Impact of  Unrealized  Holding  Gain/(Loss) on  AFS Securities** | ** ** | **Additional  Minimum  Pension  Liability** | ** ** | **Tax Impact of  Additional  Minimum  Pension  Liability** | ** ** | **Accumulated Other  Comprehensive  Loss** | ** ** |
|--------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------|------------|
|                     |       |                                           |       |                                                    |       |                                                                   |       |                                        |       |                                                       |       |                                       |       |
| Balance, January 1, 2005 |       | $                                              | 5,746      |                                                    | $          | 157                                                                    |       | $                                           | (63        | )                                                          | $          | (10,802                                    | )          | $ | 4,225 |   | $ | (737 | ) |
| Activity                 |       | (2,497                                         | )          | (44                                                     | )          | 18                                                                     |       | —                                      |       | —                                                     |       | (2,523                                     | )          |
| Balance, March 31, 2005  |       | $                                              | 3,249      |                                                    | $          | 113                                                                    |       | $                                           | (45        | )                                                          | $          | (10,802                                    | )          | $ | 4,225 |   | $ | (3,260 | ) |
|                          |            |                                                |            |                                                         |            |                                                                        |            |                                             |            |                                                            |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |

 

*RecentAccounting Pronouncements –*In December 2004, the FinancialAccounting Standards Board (“FASB”) revised Statement of Financial AccountingStandards (“SFAS”) No. 123, “Share-Based Payments” (SFAS No. 123R). Thisaccounting standard, which was originally effective for interim and annualperiods beginning after June 15, 2005, requires the recognition of compensationexpense related to stock options using the fair value method.  In April 2005, the SEC revised the compliancedate to fiscal years beginning after June 15, 2005.  We plan to adopt SFAS No. 123R in the firstquarter of 2006 using the modified prospective application method. Based oncurrent outstanding awards, expected participation in the Purchase Planconsistent with past patterns, and no significant changes in the number ofshares of outstanding stock, we anticipate an impact on earnings ofapproximately $0.11 per share in additional stock compensation expense in 2006.

 

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In November 2004, theFASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter4” (SFAS No.151). This accounting standard, which is effective for annual periods beginningafter June 15, 2005, requires that abnormal amounts of idle facility expense,freight, handling costs, and wasted materials (spoilage) should be recognizedas current-period charges. The adoption of SFAS No. 151 is not expected to havea material effect on our financial position or results of operations.

 

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,*”* which amends Accounting Principles Board(“APB”) Opinion No. 29, “Accounting for Nonmonetary Transactions.”  Theguidance in APB Opinion 29 is based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged. The guidance in APB Opinion 29, however, included certain exceptionsto that principle. SFAS No. 153 amends APB Opinion 29 to eliminate theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance. A nonmonetary exchange has commercial substance ifthe future cash flows of the entity are expected to change significantly as aresult of the exchange. SFAS No. 153 is effective for fiscal periods beginningafter June 15, 2005.  We do not expect the adoption of SFAS No. 153to have a material impact on our financial position or results of operations.

 

FASB InterpretationNo. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47)an interpretation of FASB Statement No. 143, “Accounting for AssetRetirement Obligations” (SFAS No. 143), clarifies the term conditional assetretirement obligation as used in SFAS No. 143. FIN 47 requires an entity torecognize a liability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonably estimated. Thefair value of a liability for the conditional asset retirement obligationshould be recognized when incurred – generally upon acquisition, construction,or development and (or) through the normal operation of the asset. FIN 47is effective for fiscal years ending after December 15, 2005. We do notexpect the adoption of FIN 47 to have a material effect on our financialposition or results of operations.

 

*Reclassifications* – Certain prior year amountshave been reclassified to conform to the current year presentation.

 

**(3)****   Acquisitions**

 

OnAugust 12, 2004, we acquired substantially all of the assets and assumed theoperating liabilities of G. Leblanc Corporation (“Leblanc”) of Wisconsin, ahigh-quality band instrument manufacturer. We have included the operating results and net assets of Leblanc in ourfinancial statements since the date of acquisition.

 

Weacquired Leblanc because its line of instruments and accessories iscomplementary to our existing product lines, enabling us to gain or strengthenmarket share in certain instrument categories. Under terms of the assets purchase agreement, the Company provisionallydisbursed $37.6 million for the purchase price, of which $4.5 million is beingheld in escrow pending expiration of the indemnification period.  The final purchase price is dependent upon acalculation derived from the closing balance sheet which, when finalized, mayresult in a recovery of a portion of the initial payment, or may require anadditional payment to be made.  At March31, 2005, the Company recognized an expected recovery of $0.8 million of theprovisional purchase price based on current information.  We are still accumulating certain informationrelative to the valuation of property and other assets that may impact thefinal purchase price allocation. Accordingly, the final purchase price allocation may differ from amountspreviously disclosed.

 

10

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**(4)****   Inventories**

 
| ** **      | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------|------------|---------------------|------------|------------------------|------------|
|            |       |                |       |                   |       |
| Raw materials   |       | $                   | 22,365     |                   | $          | 23,439 |   |
| Work in process |       | 54,787              |       | 54,612                 |       |
| Finished goods  |       | 100,112             |       | 94,295                 |       |
| Total           |       | $                   | 177,264    |                   | $          | 172,346 |   |

 

**5)****    Goodwill, Trademarks, and Other Intangible Assets**

 

Intangible assets otherthan goodwill and indefinite-lived trademarks are amortized on a straight-linebasis over their estimated useful lives. Deferred financing costs are amortized over the repayment periods of theunderlying debt.  We test our goodwilland indefinite-lived trademark assets for impairment annually, or on an interimbasis if events or circumstances indicate that the fair value of an asset hasdecreased below its carrying value.  Ourannual impairment assessment is in July.The changes in net carrying amounts ofgoodwill and trademarks are as follows:

 
| ** **                          | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|-------------------|------------|------------------|------------|-----------|------------|
| Goodwill:                           |       |              |       |             |       |      |       |
| Balance, January 1, 2005            |       | $                 | 23,299     |             | $          | 8,555     |       | $ | 31,854 |   |
| Foreign currency translation impact |       | (618              | )          | —           |       | (618      | )          |
| Balance, March 31, 2005             |       | $                 | 22,681     |             | $          | 8,555     |       | $ | 31,236 |   |
|                                |       |              |       |             |       |      |       |
| Trademarks:                         |       |              |       |             |       |      |       |
| Balance, January 1, 2005            |       | $                 | 7,964      |             | $          | 4,361     |       | $ | 12,325 |   |
| Foreign currency translation impact |       | (195              | )          | (72              | )          | (267      | )          |
| Balance, March 31, 2005             |       | $                 | 7,769      |             | $          | 4,289     |       | $ | 12,058 |   |

 

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Wealso carry certain intangible assets that are amortized.  Once fully amortized, these assets areremoved from both the gross and accumulated amortization balance.  These assets consist of the following:

 
| ** **                     | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------|------------|---------------------|------------|------------------------|------------|
|                           |       |                |       |                   |       |
| Gross deferred financing costs |       | $                   | 8,720      |                   | $          | 8,627 |   |
| Accumulated amortization       |       | (4,079              | )          | (3,834                 | )          |
| Deferred financing costs, net  |       | $                   | 4,641      |                   | $          | 4,793 |   |
|                           |       |                |       |                   |       |
| Gross covenants not to compete |       | $                   | 750        |                   | $          | 750 |   |
| Accumulated amortization       |       | (290                | )          | (253                   | )          |
| Covenants not to compete, net  |       | $                   | 460        |                   | $          | 497 |   |

 

The weighted-averageamortization period for deferred financing costs is 9 years, and theweighted-average amortization period of covenants not to compete is 5years.  Total amortization expense is asfollows:

 
| ** **           | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------|------------|----------------------------------|------------|
| ** **           | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                 |       |                             |       |   |   |
| Amortization expense |       | $                                | 282        |   | $ | 291 |   |
|                      |            |                                  |            |  |  |  |  |

 

12

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The followingtable shows the total estimated amortization expense for 2005 and the next fivesucceeding fiscal years:

 

Estimated amortization expense:

 
| 2005 |   | $     | 1,117  |   |
|------|--------|-------|--------|--------|
| 2006 |   | 1,085 |   |
| 2007 |   | 1,084 |   |
| 2008 |   | 940   |   |
| 2009 |   | 549   |   |
| 2010 |   | 466   |   |

 

**(6)****   Other Current Liabilities**

 
| ** **                           | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------|------------|---------------------|------------|------------------------|------------|
|                                 |       |                |       |                   |       |
| Accrued payroll and related benefits |       | $                   | 19,691     |                   | $          | 18,072 |   |
| Current portion of pension liability |       | 2,858               |       | 2,811                  |       |
| Accrued warranty expense             |       | 2,126               |       | 2,139                  |       |
| Accrued interest                     |       | 7,071               |       | 3,257                  |       |
| Deferred income                      |       | 4,906               |       | 4,468                  |       |
| Other accrued expenses               |       | 7,377               |       | 13,145                 |       |
| Total                                |       | $                   | 44,029     |                   | $          | 43,892 |   |

 

Accrued warrantyexpense is recorded at the time of sale for instruments that have a warrantyperiod ranging from one to ten years.  The accrued expense recorded isgenerally based on a percentage of sales and is adjusted periodically followingan analysis of historical warranty activity.

 

The accruedwarranty expense activity for the three months ended March 31, 2005 and 2004,and the year ended December 31, 2004 is as follows:

 
| ** **                          | ** ** | **March 31,  2005** | ** ** | **March 31,  2004** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------|------------|---------------------|------------|---------------------|------------|------------------------|------------|
| Beginning balance                   |       | $                   | 2,139      |                | $          | 2,602                  |       | 2,602 |   |
| Additions                           |       | 235                 |       | 290                 |       | 932                    |       |
| Claims and reversals                |       | (215                | )          | (321                | )          | (1,455                 | )          |
| Foreign currency translation impact |       | (33                 | )          | (12                 | )          | 60                     |       |
| Ending balance                      |       | $                   | 2,126      |                | $          | 2,559                  |       | 2,139 |   |

 

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**(7)****  ****Long-Term Debt**

 

Long-term debt consists of the following:

 
| ** **                            | ** ** | **March 31, 2005** | ** ** |
|---------------------------------------|------------|--------------------|------------|
| Term loans                            |       | $                  | 38,028     |   |
| 8.75% Senior Notes                    |       | 174,345            |       |
| Unamortized bond premium              |       | 1,521              |       |
| Open account loans, payable on demand |       | 7,681              |       |
| Total                                 |       | 221,575            |       |
| Less current portion                  |       | 15,005             |       |
| Long-term debt                        |       | $                  | 206,570    |   |

 

Scheduled payments of long-term debt are as follows:

 
| ** **        | ** ** | **March 31,  2005** | ** ** |
|-------------------|------------|---------------------|------------|
| Remainder of 2005 |       | $                   | 12,993     |   |
| 2006              |       | 8,073               |       |
| 2007              |       | 8,135               |       |
| 2008              |       | 16,508              |       |
| 2009              |       | —              |       |
| Thereafter        |       | 174,345             |       |
| Total             |       | $                   | 220,054    |   |

 

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**(8)****  ****Stockholders’ Equity**

 

Our common stock iscomprised of two classes: Class A and Ordinary. With the exception of disparate voting power, both classes aresubstantially identical.  Each share ofClass A common stock entitles the holder to 98 votes.  Holders of Ordinary common stock are entitledto one vote per share.  Class A commonstock shall automatically convert to Ordinary common stock if, at any time, theClass A common stock is not owned by an original Class A holder.  At March 31, 2005 the Chairman and ChiefExecutive Officer own 100% of the Class A common shares, representingapproximately 86% of the combined voting power of the Class A common stock andOrdinary common stock.

 

**(9)****  ****Facility Rationalization – Band**

 

In 2003, we began a facility rationalization projectto reduce excess manufacturing capacity in our band segment.  As part of this project, we closed ourwoodwind manufacturing facilities in Nogales, Arizona in November 2003.

 

In October 2003, we announced the closure of one ofour woodwind manufacturing facilities in Elkhart, Indiana and our intent totransfer that plant’s production to other company-owned facilities.  In 2004, we recorded $1.4 million inseverance expenses, and ceased operating this facility in April 2004.  All costs associated with this closure werepaid out by December 31, 2004.

 

The accrued severanceliability activity associated with the band segment’s facility rationalizationproject for the three months ended March 31, 2004 was as follows:

 
| Facility  rationalization severance liability: | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------|------------|
| Balance at January 1, 2004                     |       | $          | 1,158      |   |
| Additions charged to cost of sales             |       | 1,412      |       |
| Payments                                       |       | (323       | )          |
| Reversals                                      |       | —     |       |
| Ending balance March 31, 2004                  |       | $          | 2,247      |   |

 

We acquired a manufacturing facility via theacquisition in August 2004 (see Note 3) that had been scheduled for closure bythe predecessor owner.  We ramped downmanufacturing at this facility from the date of acquisition until the end of2004 and vacated this facility in the first quarter of 2005.  We incurred no significant costs as a resultof this closure.  This facility, whichhad a book value of $0.8 million, was classified as held for sale in the firstquarter of 2005 and included as a component of other assets.  This facility, and the Elkhart, Indianafacility closed in 2004 were sold subsequent to quarter-end for combined netexpected proceeds of $0.9 million.  Thegain on the sales is not expected to be significant.

 

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**(10)****   ****Other Income, Net**

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                                 |       |                             |       |   |   |
| West 57th building income            |       | $                                | (1,163     | ) | $ | (1,163 | ) |
| West 57th building expenses          |       | 814                              |       | 814 |   |
| Foreign exchange (gains) losses, net |       | (15                              | )          | (258 | ) |
| Miscellaneous                        |       | (75                              | )          | (5 | ) |
| Other income, net                    |       | $                                | (439       | ) | $ | (612 | ) |

 

**(11)****    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 our experiencein dealing with these matters, their ultimate resolution will not have amaterial adverse impact on our business, financial condition, or results ofoperations.

 

Weoperated manufacturing facilities at certain locations where hazardoussubstances (including chlorinated solvents) were used.  We believe that an entity that formerlyoperated one such facility may have released hazardous substances at suchlocation, which we leased through July 2001. We did not contribute to the release. Further, we have a contractual indemnity from certain stockholders ofthis entity.  This facility is not thesubject of a legal proceeding that involves us, nor, to our knowledge, is thefacility subject to investigation. However, no assurance can be given that legal proceedings will not arisein the future and that such indemnitors would make the payments described inthe indemnity.

 

Weoperate other manufacturing facilities which were previously owned by PhilipsElectronics North America Corporation (“Philips”).  Philips agreed to indemnify us for any andall losses, damages, liabilities and claims relating to environmental mattersresulting from certain activities of Philips occurring prior to December 29,1988 (the “Environmental Indemnity Agreement”). Philips has fully performed its obligations under the EnvironmentalIndemnity Agreement, which terminates on December 29, 2008.  Four matters covered by the EnvironmentalIndemnity Agreement are currently pending. Philips has entered into Consent Orders with the EnvironmentalProtection Agency (“EPA”) for one site and the North Carolina Department ofEnvironment, Health and Natural Resources for a second site, whereby Philipshas agreed to pay required response costs. On October 22, 1998, we were joined as defendant in an action involvinga site

 

16

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formerly occupied by abusiness we acquired in Illinois. Philips has accepted the defense of this action pursuant to the terms ofthe Environmental Indemnity Agreement. For the fourth site, the EPA has notified us it intends to carry out thefinal remediation itself.  The EPAestimates that this remedy has a present net cost of approximately $14.5million. The EPA has named over 40 persons or entities as potentially responsibleparties at this Elkhart, Indiana site, including four Conn-Selmer predecessorentities.  For two of these entities,which were previously owned by Philips, this matter has been tendered toPhilips pursuant to the Environmental Indemnity Agreement.  Our potential liability at any of these sitesis affected by several factors including, but not limited to, the method ofremediation, our portion of the materials in the site relative to that of theother named parties, the number of parties participating, and the financialcapabilities of the other potentially responsible parties once the relativeshare has been determined.  No assurancecan be given, however, that additional environmental issues will not requireadditional, currently unanticipated investigation, assessment or remediationexpenditures or that Philips will make payments that it is obligated to makeunder the Environmental Indemnity Agreement.

 

We arecontinuing an existing environmental remediation program at a facility weacquired in 2000.  We currently estimatethat this project will take eighteen years to complete, at a total cost ofapproximately $0.9 million.  We haveaccrued approximately $0.7 million for the estimated remaining cost of thisremediation program, which represents the present value total cost using adiscount rate of 4.7%.  A summary ofexpected payments associated with this project is as follows:

 
| ** ** | ** ** | **Environmental  Payments** | ** ** |
|------------|------------|-----------------------------|------------|
| 2005       |       | 140                         |       |
| 2006       |       | 75                          |       |
| 2007       |       | 54                          |       |
| 2008       |       | 47                          |       |
| 2009       |       | 47                          |       |
| Thereafter |       | 513                         |       |
| Total      |       | $                           | 876        |   |
|            |            |                             |            |  |

 

In2004, we acquired manufacturing facilities for which environmental remediationprograms had already been established. Based on our current assessment, we have accrued approximately $0.7million for the cost of these remediation programs.

 

Thematters described above and our other liabilities and compliance costs arisingunder environmental laws are not expected to have a material impact on ourcapital expenditures, earnings, or competitive position in any individualyear.  However, some risk of environmentalliability is inherent in the nature of our current and former business and wemight, in the future, incur material costs to meet current or more stringentcompliance, cleanup, or other obligations pursuant to environmental laws.

 

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**(12)****   ****Retirement Plans**

 

We have defined benefit pension plans covering the majority of ouremployees, including certain employees in Germany and the U.K.  The components of net periodic pension costfor these plans are as follows:

 
| ** **                         | ** ** | **Domestic Plans**     | ** ** | **Foreign Plans**      | ** ** |
|------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
| ** **                         | ** ** | **March 31, 2005**     | ** ** | **March 31, 2004**     | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
| Service cost                       |       | $                      | 126        |                   | $          | 286 |   | $ | 168 |   | $ | 167 |   |
| Interest cost                      |       | 566                    |       | 1,033                  |       | 325 |   | 322 |   |
| Expected return on plan assets     |       | (782                   | )          | (1,401                 | )          | (75 | ) | (68 | ) |
| Amortization of prior service cost |       | 76                     |       | 212                    |       | — |   | — |   |
| Amortization of net loss           |       | 114                    |       | 88                     |       | — |   | 19 |   |
| Net periodic benefit cost          |       | $                      | 100        |                   | $          | 218 |   | $ | 418 |   | $ | 440 |   |

 

Weprovide postretirement health care and life insurance benefits to eligiblehourly retirees and their dependents. The components of net periodic pension cost for these benefits are asfollows:

 
| ** **                            | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Service cost                          |       | $                                | 11         |   | $ | 19 |   |
| Interest cost                         |       | 36                               |       | 38 |   |
| Amortization of transition obligation |       | 13                               |       | 13 |   |
| Amortization of net loss              |       | —                           |       | 5 |   |
| Net postretirement benefit cost       |       | $                                | 60         |   | $ | 75 |   |

 

We anticipate domestic pension plan contributions of approximately $1.5million for the current year.  As ofMarch 31, 2005 we have not yet made a contribution to this plan.  Our anticipated contributions to our U.K.pension plan approximate $0.2 million for the current year.  As of March 31, 2005, we have madecontributions of less than $0.1 million to this plan.  Our German plans do not hold any assets andpay participant benefits as incurred. Expected 2005 benefit payments under these plans are $1.1 million.  For the three months ended March 31, 2005, wehave made benefit payments of $0.2 million under these plans.

 

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**(13)****    SegmentInformation**

 

Wehave identified two reportable segments: the piano segment and the band andorchestral instrument segment.  Weconsider these two segments reportable as they are managed separately and theoperating results of each segment are separately reviewed and evaluated by oursenior management on a regular basis. Management and the chief operating decision maker use income fromoperations as a meaningful measurement of profit or loss for the segments.  Income from operations for the reportablesegments includes certain corporate costs allocated to the segments basedprimarily 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.

 

The following tablespresent information about our operating segments for the three-month periodsended March 31, 2005 and 2004:

 
| ** **                      | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
|---------------------------------|------------|-------------------|------------|------------------|------------|-----------|------------|------------|------------|
| **Three months ended 2005**     | ** ** | **U.S.**          | ** ** | **Germany**      | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Other** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
| Net sales to external customers |       | $                 | 25,917     |             | $          | 10,314    |       | $          | 7,544      |   | $ | 43,775 |   | $ | 45,751 |   | $ | 1,816 |   | $ | 47,567 |   | $ | — |   | $ | 91,342 |   |
| Income (loss) from operations   |       | 2,478             |       | 2,206            |       | 551       |       | 5,235      |       | 2,714 |   | (54 | ) | 2,660 |   | (837 | ) | 7,058 |   |
|                                 |            |                   |            |                  |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                      | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
|---------------------------------|------------|-------------------|------------|------------------|------------|-----------|------------|------------|------------|
| **Three months ended 2004**     | ** ** | **U.S.**          | ** ** | **Germany**      | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Other** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
| Net sales to external customers |       | $                 | 26,741     |             | $          | 10,388    |       | $          | 8,588      |   | $ | 45,717 |   | $ | 43,181 |   | $ | 1,163 |   | $ | 44,344 |   | $ | — |   | $ | 90,061 |   |
| Income (loss) from operations   |       | 2,252             |       | 1,556            |       | 1,152     |       | 4,960      |       | 3,789 |   | 35 |   | 3,824 |   | (686 | ) | 8,098 |   |
|                                 |            |                   |            |                  |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**(14)****    Summaryof Guarantees**

 

Our payment obligations under our 8.75% Senior Notes are fully andunconditionally guaranteed on a joint and several basis by Conn-Selmer,Steinway, and certain other of our direct and indirect wholly-ownedsubsidiaries, each a Guarantor (the “Guarantor Subsidiaries”).  These subsidiaries represent all of our (the “Issuer”)operations conducted in the United States. The remaining subsidiaries, which do not guarantee the 8.75% SeniorNotes, represent non-U.S. operations (the “Non Guarantor Subsidiaries”).

 

The following condensedconsolidating supplementary data illustrates the financial position, results ofoperations, and cash flows of the Guarantor Subsidiaries and the Non GuarantorSubsidiaries.  Separate completefinancial statements of the respective Guarantors would not provide additionalmaterial 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.

 

Werecord investments in subsidiaries on the cost method for purposes of thesupplemental consolidating presentation. Earnings of subsidiaries are therefore not reflected in the parentcompany’s investment accounts and earnings. The principal elimination entries eliminate investments in subsidiariesand intercompany balances and transactions.

 

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**STEINWAY MUSICAL INSTRUMENTS, INC.AND SUBSIDIARIES**

**CONSOLIDATING STATEMENTS OF INCOME**

**THREE MONTHS ENDED MARCH 31, 2005**

**Unaudited**

**(In Thousands)**

 
| ** **                        | ** ** | **Issuer  of Notes** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Reclass/  Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------|------------|----------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------|------------|
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Net sales                         |       | $                    | —     |                        | $          | 74,603                           |       | $                          | 20,963     |             | $          | (4,224 | ) | $ | 91,342 |   |
| Cost of sales                     |       | —               |       | 56,567                      |       | 13,371                           |       | (4,293                     | )          | 65,645           |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Gross profit                      |       | —               |       | 18,036                      |       | 7,592                            |       | 69                         |       | 25,697           |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Operating expenses:               |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Sales and marketing               |       | —               |       | 8,318                       |       | 2,954                            |       | —                     |       | 11,272           |       |
| General and administrative        |       | 1,771                |       | 3,612                       |       | 1,592                            |       | —                     |       | 6,975            |       |
| Amortization                      |       | 117                  |       | 162                         |       | 3                                |       | —                     |       | 282              |       |
| Other operating (income) expense  |       | (1,051               | )          | 825                         |       | 336                              |       | —                     |       | 110              |       |
| Total operating expenses          |       | 837                  |       | 12,917                      |       | 4,885                            |       | —                     |       | 18,639           |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Income (loss) from operations     |       | (837                 | )          | 5,119                       |       | 2,707                            |       | 69                         |       | 7,058            |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Other income, net                 |       | (8                   | )          | (416                        | )          | (15                              | )          | —                     |       | (439             | )          |
| Interest income                   |       | (3,665               | )          | (5,950                      | )          | (90                              | )          | 8,735                      |       | (970             | )          |
| Interest expense                  |       | 3,858                |       | 8,942                       |       | 74                               |       | (8,735                     | )          | 4,139            |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Income (loss) before income taxes |       | (1,022               | )          | 2,543                       |       | 2,738                            |       | 69                         |       | 4,328            |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Income tax provision (benefit)    |       | 537                  |       | (30                         | )          | 1,165                            |       | 58                         |       | 1,730            |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Net income (loss)                 |       | $                    | (1,559     | )                           | $          | 2,573                            |       | $                          | 1,573      |             | $          | 11 |   | $ | 2,598 |   |

 

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**STEINWAY MUSICAL INSTRUMENTS, INC.AND SUBSIDIARIES**

**CONSOLIDATING STATEMENTS OF INCOME**

**THREE MONTHS ENDED MARCH 31, 2004**

**Unaudited**

**(In Thousands)**

 
| ** **                        | ** ** | **Issuer  of Notes** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Reclass/  Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------|------------|----------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------|------------|
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Net sales                         |       | $                    | —     |                        | $          | 72,695                           |       | $                          | 21,056     |             | $          | (3,690 | ) | $ | 90,061 |   |
| Cost of sales                     |       | —               |       | 54,533                      |       | 13,392                           |       | (3,589                     | )          | 64,336           |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Gross profit                      |       | —               |       | 18,162                      |       | 7,664                            |       | (101                       | )          | 25,725           |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Operating expenses:               |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Sales and marketing               |       | —               |       | 8,212                       |       | 3,064                            |       | 18                         |       | 11,294           |       |
| General and administrative        |       | 1,360                |       | 3,119                       |       | 1,535                            |       | —                     |       | 6,014            |       |
| Amortization                      |       | 116                  |       | 174                         |       | 1                                |       | —                     |       | 291              |       |
| Other operating (income) expense  |       | (895                 | )          | 620                         |       | 321                              |       | (18                        | )          | 28               |       |
| Total operating expenses          |       | 581                  |       | 12,125                      |       | 4,921                            |       | —                     |       | 17,627           |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Income (loss) from operations     |       | (581                 | )          | 6,037                       |       | 2,743                            |       | (101                       | )          | 8,098            |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Other income, net                 |       | —               |       | (357                        | )          | (255                             | )          | —                     |       | (612             | )          |
| Interest income                   |       | (3,657               | )          | (5,553                      | )          | (29                              | )          | 8,602                      |       | (637             | )          |
| Interest expense                  |       | 3,634                |       | 8,660                       |       | 86                               |       | (8,602                     | )          | 3,778            |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Income (loss) before income taxes |       | (558                 | )          | 3,287                       |       | 2,941                            |       | (101                       | )          | 5,569            |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Income tax provision (benefit)    |       | (217                 | )          | 1,330                       |       | 1,153                            |       | (41                        | )          | 2,225            |       |
|                              |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Net income (loss)                 |       | $                    | (341       | )                           | $          | 1,957                            |       | $                          | 1,788      |             | $          | (60 | ) | $ | 3,344 |   |

 

22

----

 

**STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING BALANCE SHEETS**

**MARCH 31, 2005**

**Unaudited**

**(In Thousands)**

 
| ** **                                      | ** ** | **Issuer  of Notes** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Reclass/  Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------|------------|
| Assets                                          |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Current assets:                                 |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Cash                                            |       | $                    | —     |                        | $          | 42,285                           |       | $                          | 13,440     |             | $          | (31,004 | ) | $ | 24,721 |   |
| Accounts, notes and other receivables, net      |       | —               |       | 78,649                      |       | 9,758                            |       | —                     |       | 88,407           |       |
| Inventories                                     |       | —               |       | 131,645                     |       | 46,816                           |       | (1,197                     | )          | 177,264          |       |
| Prepaid expenses and other current assets       |       | 736                  |       | 2,784                       |       | 1,098                            |       | —                     |       | 4,618            |       |
| Deferred tax assets                             |       | —               |       | 9,700                       |       | 5,183                            |       | —                     |       | 14,883           |       |
| Total current assets                            |       | 736                  |       | 265,063                     |       | 76,295                           |       | (32,201                    | )          | 309,893          |       |
|                                            |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Property, plant and equipment, net              |       | 236                  |       | 81,935                      |       | 18,066                           |       | (21                        | )          | 100,216          |       |
| Investment in subsidiaries                      |       | 69,643               |       | 283,036                     |       | —                           |       | (352,679                   | )          | —           |       |
| Trademarks                                      |       | —               |       | 7,874                       |       | 4,045                            |       | 139                        |       | 12,058           |       |
| Goodwill                                        |       | —               |       | 17,973                      |       | 13,263                           |       | —                     |       | 31,236           |       |
| Other intangibles, net                          |       | 2,821                |       | 2,190                       |       | 90                               |       | —                     |       | 5,101            |       |
| Other assets                                    |       | 3,274                |       | 10,036                      |       | 3,322                            |       | —                     |       | 16,632           |       |
| Total assets                                    |       | $                    | 76,710     |                        | $          | 668,107                          |       | $                          | 115,081    |             | $          | (384,762 | ) | $ | 475,136 |   |
|                                            |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Liabilities and stockholders’ equity       |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Current liabilities:                            |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Current portion of long-term debt               |       | $                    | —     |                        | $          | 7,324                            |       | $                          | 7,681      |             | $          | — |   | $ | 15,005 |   |
| Accounts payable                                |       | 241                  |       | 9,887                       |       | 4,092                            |       | —                     |       | 14,220           |       |
| Other current liabilities                       |       | 7,110                |       | 21,587                      |       | 15,585                           |       | (253                       | )          | 44,029           |       |
| Total current liabilities                       |       | 7,351                |       | 38,798                      |       | 27,358                           |       | (253                       | )          | 73,254           |       |
|                                            |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Long-term debt                                  |       | 175,866              |       | 61,708                      |       | —                           |       | (31,004                    | )          | 206,570          |       |
| Intercompany                                    |       | (137,548             | )          | 138,412                     |       | (864                             | )          | —                     |       | —           |       |
| Deferred tax liabilities                        |       | 45                   |       | 18,783                      |       | 6,859                            |       | —                     |       | 25,687           |       |
| Other non-current liabilities                   |       | 1,032                |       | 1,862                       |       | 20,819                           |       | —                     |       | 23,713           |       |
| Total liabilities                               |       | 46,746               |       | 259,563                     |       | 54,172                           |       | (31,257                    | )          | 329,224          |       |
|                                            |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Stockholders’ equity                       |       | 29,964               |       | 408,544                     |       | 60,909                           |       | (353,505                   | )          | 145,912          |       |
|                                            |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Total liabilities and stockholders’ equity |       | $                    | 76,710     |                        | $          | 668,107                          |       | $                          | 115,081    |             | $          | (384,762 | ) | $ | 475,136 |   |

 

23

----

 

**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATING BALANCE SHEETS**

**DECEMBER 31, 2004**

**Unaudited**

**(In Thousands)**

 
| ** **                                     | ** ** | **Issuer  Of Notes** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Reclass/  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------|------------|----------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------|------------|
|                                           |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Assets:                                        |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Current assets:                                |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Cash                                           |       | $                    | —     |                        | $          | 44,990                           |       | $                          | 14,238     |             | $          | (31,856 | ) | $ | 27,372 |   |
| Accounts, notes and other receivables, net     |       | —               |       | 74,805                      |       | 13,254                           |       | —                     |       | 88,059           |       |
| Inventories                                    |       | —               |       | 127,577                     |       | 46,034                           |       | (1,265                     | )          | 172,346          |       |
| Prepaid expenses and other current assets      |       | 1,007                |       | 3,956                       |       | 974                              |       | —                     |       | 5,937            |       |
| Deferred tax assets                            |       | —               |       | 9,695                       |       | 5,352                            |       | —                     |       | 15,047           |       |
| Total current assets                           |       | 1,007                |       | 261,023                     |       | 79,852                           |       | (33,121                    | )          | 308,761          |       |
|                                           |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Property, plant and equipment, net             |       | 181                  |       | 83,713                      |       | 19,072                           |       | (22                        | )          | 102,944          |       |
| Investment in subsidiaries                     |       | 69,643               |       | 278,513                     |       | —                           |       | (348,156                   | )          | —           |       |
| Trademarks                                     |       | —               |       | 7,625                       |       | 4,700                            |       | —                     |       | 12,325           |       |
| Goodwill                                       |       | —               |       | 17,973                      |       | 13,881                           |       | —                     |       | 31,854           |       |
| Other intangibles, net                         |       | 2,938                |       | 2,352                       |       | —                           |       | —                     |       | 5,290            |       |
| Other assets                                   |       | 3,126                |       | 10,241                      |       | 3,004                            |       | —                     |       | 16,371           |       |
| Total assets                                   |       | $                    | 76,895     |                        | $          | 661,440                          |       | $                          | 120,509    |             | $          | (381,299 | ) | $ | 477,545 |   |
|                                           |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Liabilities and stockholders’ equity      |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Current liabilities:                           |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Current portion of long-term debt              |       | $                    | —     |                        | $          | 6,972                            |       | $                          | 7,240      |             | $          | — |   | $ | 14,212 |   |
| Accounts payable                               |       | 677                  |       | 10,716                      |       | 3,396                            |       | —                     |       | 14,789           |       |
| Other current liabilities                      |       | 5,618                |       | 21,950                      |       | 16,635                           |       | (311                       | )          | 43,892           |       |
| Total current liabilities                      |       | 6,295                |       | 39,638                      |       | 27,271                           |       | (311                       | )          | 72,893           |       |
|                                           |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Long-term debt                                 |       | 175,929              |       | 64,507                      |       | —                           |       | (31,856                    | )          | 208,580          |       |
| Intercompany                                   |       | (137,549             | )          | 139,993                     |       | (2,444                           | )          | —                     |       | —           |       |
| Deferred tax liabilities                       |       | 63                   |       | 18,843                      |       | 7,334                            |       | —                     |       | 26,240           |       |
| Other non-current liabilities                  |       | 892                  |       | 1,784                       |       | 21,603                           |       | —                     |       | 24,279           |       |
| Total liabilities                              |       | 45,630               |       | 264,765                     |       | 53,764                           |       | (32,167                    | )          | 331,992          |       |
|                                           |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Stockholders’ equity                      |       | 31,265               |       | 396,675                     |       | 66,745                           |       | (349,132                   | )          | 145,553          |       |
|                                           |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Total liabilites and stockholders’ equity |       | $                    | 76,895     |                        | $          | 661,440                          |       | $                          | 120,509    |             | $          | (381,299 | ) | $ | 477,545 |   |

 

24

----

 

**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**CONSOLIDATING STATEMENTS OF CASH FLOWS**

**THREE MONTHS ENDED MARCH 31, 2005**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                           | ** ** | **Issuer  of Notes** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Reclass/  Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------|------------|
| Cash flows from operating activities:                                                |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Net income (loss)                                                                    |       | $                    | (1,559     | )                           | $          | 2,573                            |       | $                          | 1,573      |             | $          | 11 |   | $ | 2,598 |   |
| Adjustments to reconcile net income (loss) to  cash flows from operating activities: |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Depreciation and amortization                                                        |       | 136                  |       | 2,237                       |       | 467                              |       | (1                         | )          | 2,839            |       |
| Amortization of bond premium                                                         |       | (63                  | )          | —                      |       | —                           |       | —                     |       | (63              | )          |
| Deferred tax benefit                                                                 |       | (18                  | )          | (65                         | )          | (76                              | )          | —                     |       | (159             | )          |
| Tax benefit from stock option exercises                                              |       | 32                   |       | —                      |       | —                           |       | —                     |       | 32               |       |
| Other                                                                                |       | —               |       | 183                         |       | (52                              | )          | —                     |       | 131              |       |
| Changes in operating assets and  liabilities:                                        |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Accounts, notes and other receivables                                                |       | —               |       | (4,027                      | )          | 3,145                            |       | —                     |       | (882             | )          |
| Inventories                                                                          |       | —               |       | (4,325                      | )          | (2,786                           | )          | (68                        | )          | (7,179           | )          |
| Prepaid expenses and other assets                                                    |       | 97                   |       | 2,146                       |       | (695                             | )          | —                     |       | 1,548            |       |
| Accounts payable                                                                     |       | (436                 | )          | (829                        | )          | 871                              |       | —                     |       | (394             | )          |
| Other liabilities                                                                    |       | 1,632                |       | (285                        | )          | (254                             | )          | 58                         |       | 1,151            |       |
| Cash flows from operating activities                                                 |       | (179                 | )          | (2,392                      | )          | 2,193                            |       | —                     |       | (378             | )          |
|                                                                                 |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Cash flows from investing activities:                                                |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Capital expenditures                                                                 |       | (74                  | )          | (808                        | )          | (330                             | )          | —                     |       | (1,212           | )          |
| Proceeds from disposal of fixed assets                                               |       | —               |       | —                      |       | 304                              |       | —                     |       | 304              |       |
| Cash flows from investing activities                                                 |       | (74                  | )          | (808                        | )          | (26                              | )          | —                     |       | (908             | )          |
|                                                                                 |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Cash flows from financing activities:                                                |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Borrowings under lines of credit                                                     |       | —               |       | —                      |       | 1,349                            |       | —                     |       | 1,349            |       |
| Repayments under lines of credit                                                     |       | —               |       | (852                        | )          | (658                             | )          | 852                        |       | (658             | )          |
| Repayments of long-term debt                                                         |       | —               |       | (1,595                      | )          | —                           |       | —                     |       | (1,595           | )          |
| Proceeds from issuance of stock                                                      |       | 252                  |       | —                      |       | —                           |       | —                     |       | 252              |       |
| Intercompany transactions                                                            |       | 1                    |       | 2,942                       |       | (2,943                           | )          | —                     |       | —           |       |
| Cash flows from financing activities                                                 |       | 253                  |       | 495                         |       | (2,252                           | )          | 852                        |       | (652             | )          |
|                                                                                 |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Effect of exchange rate changes on cash                                              |       | —               |       | —                      |       | (713                             | )          | —                     |       | (713             | )          |
|                                                                                 |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Increase (decrease) in cash                                                          |       | —               |       | (2,705                      | )          | (798                             | )          | 852                        |       | (2,651           | )          |
| Cash, beginning of period                                                            |       | —               |       | 44,990                      |       | 14,238                           |       | (31,856                    | )          | 27,372           |       |
|                                                                                 |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Cash, end of period                                                                  |       | $                    | —     |                        | $          | 42,285                           |       | $                          | 13,440     |             | $          | (31,004 | ) | $ | 24,721 |   |

 

25

----

 

**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**CONSOLIDATING STATEMENTS OF CASH FLOWS**

**THREE MONTHS ENDED MARCH 31, 2004**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                           | ** ** | **Issuer  of Notes** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Reclass/  Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------|------------|
| Cash flows from operating activities:                                                |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Net income (loss)                                                                    |       | $                    | (341       | )                           | $          | 1,957                            |       | $                          | 1,788      |             | $          | (60 | ) | $ | 3,344 |   |
| Adjustments to reconcile net income (loss) to  cash flows from operating activities: |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Depreciation and amortization                                                        |       | 131                  |       | 2,147                       |       | 425                              |       | —                     |       | 2,703            |       |
| Amortization of bond premium                                                         |       | (42                  | )          | —                      |       | —                           |       | —                     |       | (42              | )          |
| Deferred tax benefit                                                                 |       | —               |       | (65                         | )          | (62                              | )          | —                     |       | (127             | )          |
| Tax benefit from stock option exercises                                              |       | 642                  |       | —                      |       | —                           |       | —                     |       | 642              |       |
| Other                                                                                |       | —               |       | (76                         | )          | 107                              |       | —                     |       | 31               |       |
| Changes in operating assets and  liabilities:                                        |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Accounts, notes and other receivables                                                |       | —               |       | (7,175                      | )          | (531                             | )          | —                     |       | (7,706           | )          |
| Inventories                                                                          |       | —               |       | (2,704                      | )          | (1,352                           | )          | 101                        |       | (3,955           | )          |
| Prepaid expenses and other assets                                                    |       | 152                  |       | (575                        | )          | (71                              | )          | —                     |       | (494             | )          |
| Accounts payable                                                                     |       | 246                  |       | 825                         |       | (554                             | )          | —                     |       | 517              |       |
| Other current liabilities                                                            |       | 2,180                |       | 3,815                       |       | 223                              |       | (41                        | )          | 6,177            |       |
| Cash flows from operating activities                                                 |       | 2,968                |       | (1,851                      | )          | (27                              | )          | —                     |       | 1,090            |       |
|                                                                                 |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Cash flows from investing activities:                                                |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Capital expenditures                                                                 |       | (19                  | )          | (627                        | )          | (258                             | )          | —                     |       | (904             | )          |
| Proceeds from disposal of fixed assets                                               |       | —               |       | 76                          |       | —                           |       | —                     |       | 76               |       |
| Cash flows from investing activities                                                 |       | (19                  | )          | (551                        | )          | (258                             | )          | —                     |       | (828             | )          |
|                                                                                 |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Cash flows from financing activities:                                                |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Borrowings under lines of credit                                                     |       | 32                   |       | —                      |       | 1,654                            |       | 6,544                      |       | 8,230            |       |
| Repayments under lines of credit                                                     |       | —               |       | (6,576                      | )          | (1,320                           | )          | —                     |       | (7,896           | )          |
| Debt issuance costs                                                                  |       | (105                 | )          | —                      |       | —                           |       | —                     |       | (105             | )          |
| Repayments of long-term debt                                                         |       | —               |       | (1,640                      | )          | —                           |       | —                     |       | (1,640           | )          |
| Proceeds from issuance of stock                                                      |       | 4,257                |       | —                      |       | —                           |       | —                     |       | 4,257            |       |
| Intercompany transactions                                                            |       | (7,133               | )          | 10,621                      |       | (3,488                           | )          | —                     |       | —           |       |
| Cash flows from financing activities                                                 |       | (2,949               | )          | 2,405                       |       | (3,154                           | )          | 6,544                      |       | 2,846            |       |
|                                                                                 |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Effect of exchange rate changes on cash                                              |       | —               |       | —                      |       | (341                             | )          | —                     |       | (341             | )          |
|                                                                                 |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Increase (decrease) in cash                                                          |       | —               |       | 3                           |       | (3,780                           | )          | 6,544                      |       | 2,767            |       |
| Cash, beginning of period                                                            |       | —               |       | 12,255                      |       | 8,792                            |       | 21,236                     |       | 42,283           |       |
|                                                                                 |       |                 |       |                        |       |                             |       |                       |       |             |       |
| Cash, end of period                                                                  |       | $                    | —     |                        | $          | 12,258                           |       | $                          | 5,012      |             | $          | 27,780 |   | $ | 45,050 |   |

 

26

----

 
| **ITEM 2** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|------------|------------|-------------------------------------------------------------------------------------------------|

**(Tabular Amounts in Thousands Except Shareand Per Share Data)**

 

**Introduction**

 

We are a world leader inthe design, manufacture, marketing, and distribution of high-quality musicalinstruments.  Our piano divisionconcentrates on the high-end grand piano segment of the industry, handcraftingSteinway pianos in New York and Germany. We also offer upright pianos and two mid-priced lines of pianos underthe Boston and Essex brand names. Moreover, we are the largest domestic producer of band and orchestralinstruments and offer a complete line of brass, woodwind, percussion andstringed instruments and related accessories with well-known brand names suchas Bach, Selmer, C.G. Conn, Leblanc, King, and Ludwig.  We sell our products through dealers anddistributors worldwide. Our piano customer base consists of professionalartists, amateur pianists, and institutions such as concert halls,universities, and music schools.  Ourband and orchestral instrument customer base consists primarily of middle schooland high school students, but also includes adult amateur and professionalmusicians.

 

**Critical Accounting Estimates**

 

Theapplication of many accounting policies involves estimates and assumptions thathave a material impact on our reported results. We establish reserves for inventory, workers compensation, warrantyclaims, accounts receivable, notes receivable, (including recourse reserveswhen our customers have financed notes receivable with a third party), all ofwhich are developed using certain estimates. We have significant experience and data on which to base theseestimates.  Historical information isadjusted for specific uncertainties, such as new product introductions, andcontemporaneous information, such as price fluctuations.  We regularly perform assessments of theunderlying assumptions we use. The impairment (if any) and recoverability oflong-lived assets, the selection of assumptions used to determine pensionexpense or income, the allocation of purchase price for businesses acquired,and certain components of our tax provision calculation, such as valuationallowances on deferred tax assets, the ability to utilize foreign tax credits,and income tax contingencies are based on estimates that require a greaterdegree of management judgment. We believe the assumptions made by managementprovide a reasonable basis for the estimates reflected in our financialstatements.

 

**Forward-Looking Statements**

 

Certain statements contained in this document are “forward-lookingstatements” within the meaning of Section 21E of the Securities and ExchangeAct of 1934, as amended.  Theseforward-looking statements represent our present expectations or beliefsconcerning future events.  We cautionthat such statements are necessarily based on certain assumptions which aresubject to risks and uncertainties which could cause actual results to differmaterially from those indicated in this report. These risk factors include, but are not limited to, the following:  changes in general economic conditions;geopolitical events; increased competition; work stoppages and slowdowns;exchange rate fluctuations; variations in the mix of products sold; marketacceptance of new band instrument product and distribution strategies; abilityof suppliers to meet demand; fluctuations in effective tax rates resulting fromshifts in sources of income; and the ability to successfully integrate andoperate acquired businesses.  Furtherinformation on these risk factors is included in our Annual Report on Form 10-Kfor the year ended December 31, 2004, our Final Prospectus filed in August1996, and Registration Statement No. 333-62790 filed in June 2001, particularlyin the sections entitled “Risk Factors.” We encourage you to read those descriptions carefully.  We caution investors not to place unduereliance on the forward-looking statements contained in this report.  These statements, like all

 

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statements contained inthis report, speak only as of the date of this report (unless another date isindicated) and we undertake no obligation to update or revise the statementsexcept as required by law.

 

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**Resultsof Operations**

 

*Three Months Ended March 31, 2005 Compared to Three Months Ended March31, 2004*

 
| ** **                 | ** ** | **Quarter Ended**  | ** ** | ** ** | ** ** | **Change**         | ** ** |
|----------------------------|------------|--------------------|------------|------------|------------|--------------------|------------|
| ** **                 | ** ** | **March 31, 2005** | ** ** | ** ** | ** ** | **March 31, 2004** | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
|                       |       |               |       |       |       |               |       |   |   |   |   |   |   |
| Net sales                  |       |               |       |       |       |               |       |   |   |   |   |   |   |
| Band                       |       | $                  | 47,567     |       |       |               | $          | 44,344 |   |   |   | 3,223 |   | 7.3 |   |
| Piano                      |       | 43,775             |       |       |       | 45,717             |       |   |   | (1,942 | ) | (4.2 | ) |
| Total sales                |       | 91,342             |       |       |       | 90,061             |       |   |   | 1,281 |   | 1.4 |   |
|                       |       |               |       |       |       |               |       |   |   |   |   |   |   |
| Cost of sales              |       |               |       |       |       |               |       |   |   |   |   |   |   |
| Band                       |       | 37,814             |       |       |       | 34,316             |       |   |   | 3,498 |   | 10.2 |   |
| Piano                      |       | 27,831             |       |       |       | 30,020             |       |   |   | (2,189 | ) | (7.3 | ) |
| Total cost of sales        |       | 65,645             |       |       |       | 64,336             |       |   |   | 1,309 |   | 2.0 |   |
|                       |       |               |       |       |       |               |       |   |   |   |   |   |   |
| Gross profit               |       |               |       |       |       |               |       |   |   |   |   |   |   |
| Band                       |       | 9,753              |       | 20.5%      |       | 10,028             |       | 22.6% |   | (275 | ) | (2.7 | ) |
| Piano                      |       | 15,944             |       | 36.4%      |       | 15,697             |       | 34.3% |   | 247 |   | 1.6 |   |
| Total gross profit         |       | 25,697             |       |       |       | 25,725             |       |   |   | (28 | ) | (0.1 | ) |
|                       |       | 28.1%              |       |       |       | 28.6%              |       |   |   |   |   |   |   |
|                       |       |               |       |       |       |               |       |   |   |   |   |   |   |
| Operating expenses         |       | 18,639             |       |       |       | 17,627             |       |   |   | 1,012 |   | 5.7 |   |
|                       |       |               |       |       |       |               |       |   |   |   |   |   |   |
| Income from operations     |       | 7,058              |       |       |       | 8,098              |       |   |   | (1,040 | ) | (12.8 | ) |
|                       |       |               |       |       |       |               |       |   |   |   |   |   |   |
| Other income, net          |       | (439               | )          |       |       | (612               | )          |   |   | 173 |   | (28.3 | ) |
| Net interest expense       |       | 3,169              |       |       |       | 3,141              |       |   |   | 28 |   | 0.9 |   |
|                       |       |               |       |       |       |               |       |   |   |   |   |   |   |
| Income before income taxes |       | 4,328              |       |       |       | 5,569              |       |   |   | (1,241 | ) | (22.3 | ) |
|                       |       |               |       |       |       |               |       |   |   |   |   |   |   |
| Income taxes               |       | 1,730              |       | 40.0%      |       | 2,225              |       | 40.0% |   | (495 | ) | (22.2 | ) |
|                       |       |               |       |       |       |               |       |   |   |   |   |   |   |
| Net income                 |       | $                  | 2,598      |       |       |               | $          | 3,344 |   |   |   | (746 | ) | (22.3 | ) |

 

*Overview –*We acquired substantially all of the assets ofG. Leblanc Corporation, a high-quality band instrument manufacturer, in August2004, which drove the band division’s revenue improvement in the currentperiod.  Sales of other band instrumentswere off from the prior period as shipments of certain domestically producedwoodwind instruments and certain new sourced products lagged higher orderintake.  In addition, productiondisruptions resulting from new personnel training at our woodwind facilityadversely impacted band gross margins.

 

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Despite slower retail sales and soft wholesale volume at our Europeanand Asian operations, overall piano performance improved as a result of grossmargin increases and controlled operating expenses.

 

*Net Sales –*The increase in net sales of $1.3 millionresulted from higher band sales offsetting lower piano sales.  Piano division sales decreased $1.9 million,primarily as a result of the $1.4 million decrease in domestic retailsales.  Overall piano unit shipments weredown, with Steinway grand unit shipments decreasing 4% and Boston product unitshipments decreasing 2%.  The impact offewer unit shipments was mitigated by standard sales price increases onSteinway and Boston products.  Our banddivision sales increased $3.2 million primarily as a result of incrementalLeblanc product sales of $5.7 million. Although certain woodwind instruments for which we received orders werenot available for shipment, we were in a strong inventory position on certainLeblanc products, such as clarinets, and were readily able to ship thoseproducts.  Continued improvement in ourpercussion instrument sales also contributed to the overall increase.

 

*G**ross Profit –* Gross profit remained stable for the quarteras the decline in band margins was offset by the improvement in margin for thepiano division.  Piano margins increasedfrom 34.3% to 36.4% despite lower domestic retail sales due to shifts indomestic sales mix to larger, higher margin Steinway grand units. Increasedproduction levels at our German manufacturing facility and lower domesticoverhead expenses also contributed to the margin improvement.  Band gross margins declined from 22.6% to20.5% in the period.  Atypical chargesaffecting margin in 2005 totaled $0.7 million, comprised entirely of chargesthat arose from the write-up of Leblanc inventory to fair value.  Atypical charges affecting margin in 2004included $1.4 million in severance costs associated with the closure of one ofour woodwind manufacturing facilities. Despite the decrease in atypical charges, gross margins declinedprimarily as a result of the factory disruptions caused by production ramp-upefforts and workforce training at our domestic woodwind manufacturing facility.

 

*Operating Expenses* –Operating expenses increased $1.0 million, primarily due to incremental costsof $0.6 million associated with Leblanc. An increase in external costsassociated with the ongoing Sarbanes-Oxley Act compliance efforts alsocontributed to the increase.

 

*Interest Expense and Other Income, Net –*These other expenses increased $0.2 million to$2.7 million due to the lower foreign currency gains in the period.  Increased domestic interest expense due to therise in interest rates and our increased bond debt ($29.0 million issued in February2004) was offset by increased interest income on our band division’s notesreceivable.

 

*Income Taxes**–*Our effective tax rate of 40% isconsistent with the prior period.

 

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**Liquidity and Capital Resources**

 

We have relied primarilyupon cash provided by operations, supplemented as necessary by seasonalborrowings under our working capital line, to finance our operations, repaylong-term indebtedness and fund capital expenditures.

 

Our statements of cashflows for the three months ended March 31, 2005 and 2004 are summarized asfollows:

 
| ** **                                                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net income:                                                                  |       | $        | 2,598      |     | $          | 3,344      |       | $ | (746 | ) |
| Changes in operating assets and liabilities                                  |       | (5,756   | )          | (5,461   | )          | (295       | )          |
| Other adjustments to reconcile net income to  cash from operating activities |       | 2,780    |       | 3,207    |       | (427       | )          |
| Cash flows from operating activities                                         |       | (378     | )          | 1,090    |       | (1,468     | )          |
|                                                                         |       |     |       |     |       |       |       |
| Cash flows from investing activities                                         |       | (908     | )          | (828     | )          | (80        | )          |
|                                                                         |       |     |       |     |       |       |       |
| Cash flows from financing activities                                         |       | (652     | )          | 2,846    |       | (3,498     | )          |
|                                                                              |            |          |            |          |            |            |            |  |  |  |

 

Cashflows from operating activities decreased $1.5 million, resulting in part froma decrease in net income of $0.7 million. Although cash used for accounts receivable decreased during the periodas a result of lower sales volume, cash used for inventory increased $3.2million on lower sell –through of piano inventory coupled with higherproduction levels at certain plants.

 

Theuse of cash for investing activities increased less than $0.1 million asincreased capital expenditures of $0.3 million were offset by proceeds fromdisposals of certain fixed assets from G. Leblanc Corporation, which weacquired in August 2004.  Fewer stockoption exercises resulted in a decrease in cash flows of $4.0 million, causingthe net decrease in cash flows from financing activities of $3.5 million in theperiod.

 

## **Borrowing Availability and Activities**

 

Ourreal estate 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 Credit facilityexpires on September 14, 2008.  As ofMarch 31, 2005 there were no revolving credit loans outstanding, andavailability based on eligible accounts receivable and inventory balances wasapproximately $82.5 million.  We alsohave certain non-domestic credit facilities originating from two German banksthat provide for borrowings by foreign subsidiaries of up to €16.3 million($21.2 million at the March 31, 2005 exchange rate), net of borrowingrestrictions of €0.9 million ($1.2 million at the March 31, 2005 exchange rate)and are payable on demand.  Theseborrowings are collateralized by most of the assets of the borrowingsubsidiaries.  A portion of the openaccount loans can be converted into a maximum of £0.5 million ($0.9 million atthe March 31, 2005 exchange rate) for use by our UK branch and ¥700 million($6.5 million at the March 31, 2005 exchange rate) for use by our Japanesesubsidiary. Our Chinese subsidiary also has the ability to convert theequivalent of up to €1.8 million into U.S dollars or Chinese renminbi ($2.3million at the March 31, 2005 exchange rate). We had $4.2 million outstanding as of March 31, 2005 on these credit

 

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facilities.  InJanuary 2005, our Japanese subsidiary entered into a separate revolving loanagreement that provides additional borrowing capacity of up to ¥475 million($4.4 million at the March 31, 2005 exchange rate) based on eligible inventorybalances. The revolving loan agreement bears interest at an average 30-day TokyoInterbank Offered Rate ("TIBOR") (0.1% as of March 31, 2005) plus0.875% and expires on January 31, 2010. As of March 31, 2005, we had $3.5 million outstanding on this revolvingloan agreement.

 

OnFebruary 4, 2004 we purchased 1,271,450 shares of our Ordinary common stockdirectly from our then largest institutional shareholder.  In exchange, we issued $29.0 million inprincipal amount of our 8.75% Senior Notes due 2011 under the existingindenture.  We issued these bonds at apremium of 106.3%.  This transactionincreased our treasury stock by $31.6 million.

 

Ourbond indenture contains limitations based on net income (among other things) onthe amount of discretionary repurchases we may make of our Ordinary commonstock.  As a result of the February 2004stock repurchase, we had approached the limitation.  Although our availability under theselimitations has increased over time as we have earned income, we currently haveno short-term plans to repurchase additional Ordinary common stock eitherdirectly from shareholders or on the open market.

 

Ourlong-term financing consists primarily of $174.3 million of 8.75% Senior Notesand $38.0 million 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 March 31, 2005.

 

InAugust 2004 we purchased substantially all of the assets of G. LeblancCorporation, a manufacturer of high-quality band instruments, for $36.8million.  We funded this acquisition withapproximately $22.0 million in cash, supplemented by borrowings on our creditfacility, which we paid off by December 31, 2004.  However, the final purchase price isdependent upon a calculation derived from the closing balance sheet which, whenfinalized, may result in a recovery of a portion of the initial payment, or mayrequire an additional payment to be made. Neither scenario will have a material impact on our liquidity or cashflows.  We are not aware of any othertrends, 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 flows anticipated from operations and available borrowingsunder the Credit Facility, will be adequate to meet existing debt service requirements,fund continuing capital requirements and satisfy working capital and generalcorporate needs for the next twelve months.

 

Wehave reserved 721,750 shares of our existing treasury stock to be utilized forthe exercise of outstanding stock options under our Amended and Restated 1996 StockPlan.  These options will have no impacton our cash flow or the number of shares outstanding unless and until theoptions are exercised.

 

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**Contractual Obligations**

 

The followingtable provides a summary of our contractual obligations at March 31, 2005:

 
| ** **                      | ** ** | **Payments due by period** | ** ** |
|---------------------------------|------------|----------------------------|------------|
| **Contractual Obligations**     | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **More than  5 years** | ** ** |
|                            |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt (1)              |       | $                          | 315,987    |   | $ | 30,323 |   | $ | 46,065 |   | $ | 35,167 |   | $ | 204,432 |   |
| Operating leases (2)            |       | 272,426                    |       | 4,920 |   | 8,643 |   | 7,585 |   | 251,278 |   |
| Purchase obligations (3)        |       | 13,477                     |       | 13,243 |   | 234 |   | — |   | — |   |
| Other long-term liabilities (4) |       | 24,400                     |       | 3,136 |   | 4,213 |   | 3,213 |   | 13,838 |   |
| Total                           |       | $                          | 626,290    |   | $ | 51,622 |   | $ | 59,155 |   | $ | 45,965 |   | $ | 469,548 |   |

 

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**Notesto Contractual Obligations:**

 

(1) Long-term debt represents long-term debtobligations and the fixed interest on our Notes. The nature of our long-termdebt obligations is described more fully in the “Borrowing Availability andActivities” section of “Liquidity and Capital Resources.”

(2) Approximately $257.0 million of our operatinglease obligations are attributable to the ninety-nine year land leaseassociated with the purchase of Steinway Hall; the remainder is attributable tothe leasing of other facilities and equipment.

(3) Purchase obligations consist of firm purchasecommitments for raw materials, imported products, and equipment.

(4) Other long-term liabilities consist primarily ofthe long-term portion of our pension obligations and obligations under employeeand consultant agreements.

 

**RecentAccounting Pronouncements**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) revisedStatement of Financial Accounting Standards (“SFAS”) No. 123, “Share-BasedPayments” (SFAS No. 123R). This accounting standard, which was originallyeffective for interim and annual periods beginning after June 15, 2005,requires the recognition of compensation expense related to stock options usingthe fair value method.  In April 2005,the SEC revised the compliance date to fiscal years beginning after June 15,2005.  We plan to adopt SFAS No. 123R inthe first quarter of 2006 using the modified prospective application method.Based on current outstanding awards, expected participation in the PurchasePlan consistent with past patterns, and no significant changes in the number ofshares of outstanding stock, we anticipate an impact on earnings ofapproximately $0.11 per share in additional stock compensation expense in 2006.

 

InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment ofARB No. 43, Chapter 4” (SFAS No. 151). This accounting standard, which iseffective for annual periods beginning after June 15, 2005, requires thatabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterials (spoilage) should be recognized as current-period charges. Theadoption of SFAS No. 151 is not expected to have a material effect on ourfinancial position or results of operations.

 

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,*”* which amends Accounting Principles Board(“APB”) Opinion No. 29, “Accounting for Nonmonetary Transactions.”  Theguidance in APB Opinion 29 is based on the principle that exchanges ofnonmonetary

 

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assets should be measured based on the fair value ofthe assets exchanged. The guidance in APB Opinion 29, however, included certainexceptions to that principle. SFAS No. 153 amends APB Opinion 29 to eliminatethe exception for nonmonetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of nonmonetary assets thatdo not have commercial substance. A nonmonetary exchange has commercial substanceif the future cash flows of the entity are expected to change significantly asa result of the exchange. SFAS No. 153 is effective for fiscal periods beginningafter June 15, 2005. We do not expect the adoption of SFAS No.153 to havea material impact on our financial position or results of operations.

 

FASB InterpretationNo. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47)an interpretation of FASB Statement No. 143, “Accounting for AssetRetirement Obligations” (SFAS 143), clarifies the term conditional assetretirement obligation as used in SFAS No. 143. FIN 47 requires an entity torecognize a liability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonably estimated. Thefair value of a liability for the conditional asset retirement obligationshould be recognized when incurred – generally upon acquisition, construction,or development and (or) through the normal operation of the asset. FIN 47is effective for fiscal years ending after December 15, 2005. We do notexpect the adoption of FIN 47 to have a material effect on our financialposition or results of operations.

 

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**ITEM 3**           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

 

**We are exposed to market riskassociated with changes in foreign currency exchange rates and interestrates.  We mitigate a portion of ourforeign currency exchange rate risk by maintaining foreign currency cash balancesand holding forward foreign currency contracts. They are not designated as hedges for accounting purposes.  These contracts relate primarily tointercompany transactions and are not used for trading or speculativepurposes.  The fair value of the forwardforeign currency exchange contracts is sensitive to changes in foreign currencyexchange rates.  The impact of an adversechange in foreign currency exchange rates would not be materially differentthan that disclosed in the our Annual Report on Form 10-K for the year endedDecember 31, 2004.**

 

**Our revolving loans and term loansbear interest at rates that fluctuate with changes in LIBOR and TIBOR.  As such, our interest expense on ourrevolving loans and term loans and the fair value of our fixed long-term debtare sensitive to changes in market interest rates.  The effect of an adverse change in marketinterest rates on our interest expense would not be materially different thanthat disclosed in our Annual Report on Form 10-K for the year ended December31, 2004.**

 

**The majority of our long-term debtis at a fixed interest rate.  Therefore,the associated interest expense is not sensitive to fluctuations in marketinterest rates.  However, the fair valueof our fixed interest debt would be sensitive to market rate changes.  Such fair value changes may affect ourdecision whether to retain, replace, or retire this debt.**

 

**ITEM 4**           CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Ourdisclosure controls and procedures are the controls and other procedures thatwe designed to ensure that we record, process, summarize and report in a timelymanner the information we must disclose in reports that we file with or submitto the SEC. Our Chief Executive Officer and Chief Financial Officer reviewedand participated in this evaluation. Based on this evaluation the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols were effective.  In designingthe Company’s disclosure controls and procedures, the Company’s managementrecognizes that any controls, no matter how well designed and operated, canonly provide reasonable, not absolute, assurance of achieving the desiredcontrol objectives.

 

During the quarter covered by this report, there were no significantchanges in our internal controls other than those related to the integration ofthe Leblanc business, purchased in 2004, into our pre-existing internal controlstructure.  During the most recentquarter, we consolidated benefit programs into the existing Conn-Selmerprograms and procedures.  We expect tocontinue consolidating Leblanc business processes into the Conn-Selmerprocesses and internal control structure during the upcoming quarters.  These changes have not materially affected,and are not reasonably likely to materially affect, the Company's internalcontrol over financial reporting.

 

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**ITEM 6****                  ****EXHIBITS AND REPORTS ONFORM 8-K**

 

(a)   Exhibits

 

10.1   Agreementbetween Conn-Selmer, Inc. and U.A.W. Local 2539

 

31.1   Certificationof the Principal Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002

 

31.2   Certificationof the Principal Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002

 

32.1   Certificationof the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2   Certificationof the Principal Financial Officer pursuant to 18 U.S. C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)   Reportson Form 8-K

 

During the quarter ended March 31, 2005 we filed or furnished thefollowing reports on Form 8-K:

 

(i)    OnMarch 10, 2005, the Company filed a Current Report on Form 8-K that included apress release issued on the same date announcing its earnings for the quarterand year ended December 31, 2004.

 

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Pursuant to the requirements of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on their behalfby the undersigned, thereunto duly authorized.

 

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

 

 

Date:  May 10, 2005

 

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