**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

| **ý** |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  FOR THE QUARTERLY PERIOD ENDED MARCH 29, 2003** |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                        |   |   |
| **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                               |

 

**COMMISSIONFILE NUMBER  001-11911**

 

**STEINWAY MUSICAL INSTRUMENTS, INC.**

(Exactname of registrant as specified in its charter)

 

| **DELAWARE**                                                     |   | **35-1910745**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **800  South Street, Suite 305  Waltham, Massachusetts**         |   | **02453**                             |
| (Address of Principal  Executive Offices)                        |   | (Zip Code)                            |

 

Registrant’s telephone number including areacode:     **(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, 2003: |   | Class A  |   | 477,953   |
|-----------------------------------------------------------------------------|--------|----------|--------|-----------|
|                                                                        |   | Ordinary |   | 8,428,285 |
|                                                                        |   | Total    |   | 8,906,238 |

 

 

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

**FORM 10-Q**

**INDEX**

 
| **PART  I.** |   | **UNAUDITED  FINANCIAL INFORMATION**                                                                   |
|--------------|--------|--------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                   |
| **Item  1.** |   | **Condensed  Consolidated Financial Statements:**                                                      |
|         |   |                                                                                                   |
|         |   | Condensed  Consolidated Statements of Income  Three months ended March 30, 2002 and March 29, 2003     |
|         |   |                                                                                                   |
|         |   | Condensed  Consolidated Balance Sheets  December 31, 2002 and March 29, 2003                           |
|         |   |                                                                                                   |
|         |   | Condensed  Consolidated Statements of Cash Flows  Three months ended March 30, 2002 and March 29, 2003 |
|         |   |                                                                                                   |
|         |   | Notes  to Condensed Consolidated Financial Statements                                                  |
|         |   |                                                                                                   |
| **Item 2.**  |   | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations**        |
|         |   |                                                                                                   |
| **Item 3.**  |   | **Quantitative and Qualitative Disclosures about  Market Risk**                                        |
|         |   |                                                                                                   |
| **Item 4.**  |   | **Controls and Procedures**                                                                            |
|         |   |                                                                                                   |
| **PART II.** |   | **OTHER INFORMATION**                                                                                  |
|         |   |                                                                                                   |
| **Item 6.**  |   | **Exhibits and Reports on Form 8-K**                                                                   |
|         |   |                                                                                                   |
|         |   | **Signatures**                                                                                         |

 

2

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

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

 

 
|                        |   | **Three  Months Ended** |   |
|-----------------------------|--------|-------------------------|--------|
|                        |   | **March 30,  2002**     |   | **March 29,  2003** |   |
|                        |   |                    |   |   |   |
| Net sales                   |   | $                       | 88,059 |   | $ | 82,509 |   |
| Cost of sales               |   | 62,696                  |   | 61,677 |   |
|                        |   |                    |   |   |   |
| Gross Profit                |   | 25,363                  |   | 20,832 |   |
|                        |   |                    |   |   |   |
| Operating  expenses:        |   |                    |   |   |   |
| Sales and  marketing        |   | 10,681                  |   | 11,013 |   |
| General and  administrative |   | 5,567                   |   | 5,954 |   |
| Amortization                |   | 289                     |   | 289 |   |
| Other operating  expense    |   | 157                     |   | 172 |   |
| Total operating  expenses   |   | 16,694                  |   | 17,428 |   |
|                        |   |                    |   |   |   |
| Income from  operations     |   | 8,669                   |   | 3,404 |   |
|                        |   |                    |   |   |   |
| Interest  expense, net      |   | 3,301                   |   | 2,972 |   |
| Other income,  net          |   | (305                    | )      | (621 | ) |
|                        |   |                    |   |   |   |
| Income before  income taxes |   | 5,673                   |   | 1,053 |   |
|                        |   |                    |   |   |   |
| Provision for  income taxes |   | 1,990                   |   | 370 |   |
|                        |   |                    |   |   |   |
| Net income                  |   | $                       | 3,683  |   | $ | 683 |   |
|                        |   |                    |   |   |   |
| Earnings per  share:        |   |                    |   |   |   |
| Basic                       |   | $                       | 0.42   |   | $ | 0.08 |   |
| Diluted                     |   | $                       | 0.42   |   | $ | 0.08 |   |
|                        |   |                    |   |   |   |
| Weighted average  shares:   |   |                    |   |   |   |
| Basic                       |   | 8,847,372               |   | 8,906,238 |   |
| Diluted                     |   | 8,853,917               |   | 8,906,418 |   |

 

See notes to condensed consolidated financial statements.

 

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In Thousands)**

 
|                                                                                                                          |   | **December  31,  2002** |    | **March 29,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|---------------------|--------|
|                                                                                                                          |   |                    |    |                |   |
| ASSETS:                                                                                                                       |   |                    |    |                |   |
| Current assets:                                                                                                               |   |                    |    |                |   |
| Cash                                                                                                                          |   | $                       | 19,099  |                | $      | 15,134 |   |
| Accounts, notes  and leases receivable, net of allowance for bad debts of $11,389  and $11,430 in 2002 and 2003, respectively |   | 77,421                  |    | 85,246              |   |
| Inventories                                                                                                                   |   | 163,090                 |    | 162,841             |   |
| Prepaid expenses  and other current assets                                                                                    |   | 5,227                   |    | 4,847               |   |
| Deferred tax  assets                                                                                                          |   | 7,012                   |    | 7,569               |   |
| Total current  assets                                                                                                         |   | 271,849                 |    | 275,637             |   |
|                                                                                                                          |   |                    |    |                |   |
| Property, plant  and equipment, net of accumulated depreciation of $55,151  and $57,714 in 2002 and 2003, respectively        |   | 102,567                 |    | 101,428             |   |
| Trademarks                                                                                                                    |   | 9,651                   |    | 9,741               |   |
| Goodwill                                                                                                                      |   | 29,539                  |    | 29,826              |   |
| Other  intangibles, net                                                                                                       |   | 6,936                   |    | 6,681               |   |
| Other assets                                                                                                                  |   | 7,692                   |    | 7,638               |   |
|                                                                                                                          |   |                    |    |                |   |
| TOTAL ASSETS                                                                                                                  |   | $                       | 428,234 |                | $      | 430,951 |   |
|                                                                                                                          |   |                    |    |                |   |
| LIABILITIES AND  STOCKHOLDERS' EQUITY                                                                                         |   |                    |    |                |   |
| Current  liabilities:                                                                                                         |   |                    |    |                |   |
| Current portion  of long-term debt                                                                                            |   | $                       | 8,055   |                | $      | 8,407 |   |
| Accounts payable                                                                                                              |   | 9,888                   |    | 6,974               |   |
| Other current  liabilities                                                                                                    |   | 35,264                  |    | 39,427              |   |
| Total current  liabilities                                                                                                    |   | 53,207                  |    | 54,808              |   |
|                                                                                                                          |   |                    |    |                |   |
| Long-term debt                                                                                                                |   | 192,581                 |    | 190,956             |   |
| Deferred tax  liabilities                                                                                                     |   | 22,709                  |    | 23,270              |   |
| Other  non-current liabilities                                                                                                |   | 23,931                  |    | 24,729              |   |
| Total  liabilities                                                                                                            |   | 292,428                 |    | 293,763             |   |
|                                                                                                                          |   |                    |    |                |   |
| Commitments and  contingent liabilities                                                                                       |   |                    |    |                |   |
|                                                                                                                          |   |                    |    |                |   |
| Stockholders’  equity:                                                                                                   |   |                    |    |                |   |
| Common stock                                                                                                                  |   | 9                       |    | 9                   |   |
| Additional  paid-in capital                                                                                                   |   | 73,172                  |    | 73,172              |   |
| Retained  earnings                                                                                                            |   | 91,620                  |    | 92,303              |   |
| Accumulated  other comprehensive income                                                                                       |   | (13,142                 | )       | (12,443             | )      |
| Treasury stock,  at cost                                                                                                      |   | (15,853                 | )       | (15,853             | )      |
| Total  stockholders’ equity                                                                                              |   | 135,806                 |    | 137,188             |   |
|                                                                                                                          |   |                    |    |                |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                              |   | $                       | 428,234 |                | $      | 430,951 |   |

 

See notes to condensed consolidated financial statements.

 

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

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In Thousands)**

 
|                                                                          |   | **Three  Months Ended** |   |
|-------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                          |   | **March 30,  2002**     |   | **March 29,  2003** |   |
| Cash flows from  operating activities:                                        |   |                    |   |   |   |
| Net income                                                                    |   | $                       | 3,683  |   | $ | 683 |   |
| Adjustments to  reconcile net income to cash flows from operating activities: |   |                    |   |   |   |
| Depreciation and  amortization                                                |   | 2,777                   |   | 2,818 |   |
| Deferred tax  benefit                                                         |   | (99                     | )      | (123 | ) |
| Other                                                                         |   | 124                     |   | 63 |   |
| Changes in  operating assets and liabilities:                                 |   |                    |   |   |   |
| Accounts, notes  and leases receivable                                        |   | (3,544                  | )      | (7,824 | ) |
| Inventories                                                                   |   | 6,152                   |   | 417 |   |
| Prepaid expenses  and other current assets                                    |   | 970                     |   | 213 |   |
| Accounts payable                                                              |   | (578                    | )      | (2,937 | ) |
| Other current  liabilities                                                    |   | 5,211                   |   | 4,457 |   |
| Cash flows from  operating activities                                         |   | 14,696                  |   | (2,233 | ) |
|                                                                          |   |                    |   |   |   |
| Cash flows from  investing activities:                                        |   |                    |   |   |   |
| Capital expenditures                                                          |   | (1,033                  | )      | (747 | ) |
| Changes in other  assets                                                      |   | 486                     |   | 246 |   |
| Cash flows from  investing activities                                         |   | (547                    | )      | (501 | ) |
|                                                                          |   |                    |   |   |   |
| Cash flows from  financing activities:                                        |   |                    |   |   |   |
| Net borrowings  (repayments) under lines of credit                            |   | (359                    | )      | 363 |   |
| Repayments of long-term  debt                                                 |   | (1,582                  | )      | (1,619 | ) |
| Proceeds from  issuance of stock                                              |   | 23                      |   | — |   |
| Cash flows from  financing activities                                         |   | (1,918                  | )      | (1,256 | ) |
|                                                                          |   |                    |   |   |   |
| Effect of  foreign exchange rate changes on cash                              |   | 11                      |   | 25 |   |
|                                                                          |   |                    |   |   |   |
| Increase  (decrease) in cash                                                  |   | 12,242                  |   | (3,965 | ) |
| Cash, beginning  of period                                                    |   | 5,545                   |   | 19,099 |   |
|                                                                          |   |                    |   |   |   |
| Cash, end of  period                                                          |   | $                       | 17,787 |   | $ | 15,134 |   |
|                                                                          |   |                    |   |   |   |
| Supplemental  Cash Flow Information                                           |   |                    |   |   |   |
| Interest paid                                                                 |   | $                       | 556    |   | $ | 391 |   |
| Taxes paid                                                                    |   | $                       | 1,590  |   | $ | 2,285 |   |

 

See notes to condensed consolidated financial statements.

 

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 29, 2003**

(InThousands Except Share and Per Share Data)

 

**(1)   Basis of Presentation**

 

The accompanyingcondensed consolidated financial statements of Steinway Musical Instruments,Inc. and subsidiaries (the “Company”) for the three months ended March 30, 2002and March 29, 2003 are unaudited.  Inthe opinion of management, these statements have been prepared on the samebasis as the audited consolidated financial statements as of and for the yearended December 31, 2002, and include all adjustments which are of a normal andrecurring nature, necessary for the fair presentation of financial position,results of operations and cash flows for the interim period.  The condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto contained in the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2002 filed with the Securities andExchange Commission.  The results ofoperations for the three months ended March 29, 2003 are not necessarilyindicative of the results that may be expected for the entire year.

 

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

 

**(2)   Summary of Significant Accounting Policies**

 

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

 

*Stock-based Compensation* - We have an employee stock purchaseplan (“Purchase Plan”) and a stock 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 arrangement.

 

6

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

 
|                                                                                                                                         |   | **Period  Ended**   |       |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|
|                                                                                                                                         |   | **March 30,  2002** |       | **March 29,  2003** |   |
|                                                                                                                                         |   |                | ** ** |   | ** ** |
| Net income, as reported                                                                                                                      |   | $                   | 3,683      |   | $ | 683 |   |
| Deduct: Total stock-based employee compensation expense determined  under fair-value based method for all awards, net of related tax effects |   | (102                | )          | (220 | ) |
| Pro forma net income                                                                                                                         |   | $                   | 3,581      |   | $ | 463 |   |
| Earnings per share:                                                                                                                          |   |                |       |   |   |
| As reported Basic and Diluted                                                                                                                |   | $                   | 0.42       |   | $ | 0.08 |   |
| Pro forma Basic and Diluted                                                                                                                  |   | $                   | 0.40       |   | $ | 0.05 |   |

 

The fair value of options on their grant date, including the valuationof the option feature implicit in our Purchase Plan, was measured using theBlack-Scholes option-pricing model.  Keyassumptions used to apply this pricing model are as follows:

 
|                                               |   | **Period Ended**    |   |
|----------------------------------------------------|--------|---------------------|--------|
|                                               |   | **March 30,  2002** |   | **March 29,  2003** |   |
| Range of risk-free interest rates                  |   | 3.57%               |   | 1.86  - 3.12% |   |
| Range of expected life of option grants (in years) |   | 1  to 6             |   | 1  to 6 |   |
| Expected volatility of underlying stock            |   | 25.6%               |   | 25.3% |   |

 

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

 
|          |   | **Period  Ended**   |   |
|---------------|--------|---------------------|--------|
|          |   | **March 30,  2002** |   | **March 29,  2003** |   |
|          |   |                |   |   |   |
| Stock Plan    |   | $                   | — |   | $ | 4.77 |   |
| Purchase Plan |   | $                   | 4.48   |   | $ | 4.78 |   |

 

It should be noted that the Black-Scholesoption-pricing model was designed to value readily tradable options with relativelyshort lives and no vesting restrictions. In addition, option valuation models require the input of highlysubjective assumptions including the expected price volatility.  Because the options granted are not tradableand have contractual lives of up to ten years, and because changes in thesubjective input assumptions can materially affect the fair value estimate, inmanagement’s opinion, the existing models do not provide a reliable measure ofthe fair value of the options issued under either the Stock Plan or PurchasePlan.

 

*Income per Common Share*–**Basic income per share is computed usingthe weighted average number of common shares outstanding during eachperiod.  Diluted income per common sharereflects the effect of our outstanding options using the treasury stock method,except when such items would be

 

7

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antidilutive.  A reconciliationof the weighted average shares used for the basic and diluted computations forthe three month periods ended March 30, 2002 and March 29, 2003 is as follows:

 
|                             |   | **Three  months ended** |   |
|----------------------------------|--------|-------------------------|--------|
|                             |   | **2002**                |   | **2003** |   |
| Weighted average shares:         |   |                    |   |   |   |
| For basic income per share       |   | 8,847,372               |   | 8,906,238 |   |
| Dilutive effect of stock options |   | 6,545                   |   | 180 |   |
| For diluted income per share     |   | 8,853,917               |   | 8,906,418 |   |

 

 

Options to purchase 47,500 and 1,069,000 shares ofcommon stock at prices ranging from $14.73 to $21.94 per share were outstandingduring the quarters ended March 30, 2002 and March 29, 2003, respectively, butwere not included in the computation of diluted net income per share becausethe options’ exercise prices were greater than the average market price of thecommon shares.

 

*Comprehensive Income*–**Other comprehensive income is comprisedof foreign currency translation adjustments, additional minimum pensionliabilities, and unrealized gains and losses on certain long-term assets.  Total comprehensive income for the threemonth periods ended March 30, 2002 and March 29, 2003 is as follows:

 
|                              |   | **Three  months ended** |   |
|-----------------------------------|--------|-------------------------|--------|
|                              |   | **2002**                |   | **2003** |   |
|                              |   |                    |   |   |   |
| Net income                        |   | $                       | 3,683  |   | $ | 683 |   |
| Other comprehensive income (loss) |   | (680                    | )      | 699 |   |
| Total comprehensive income        |   | $                       | 3,003  |   | $ | 1,382 |   |

 

*New Accounting Pronouncements*– On July 30, 2002 the FASB issuedSFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  SFAS No. 146 requirescosts associated with exit or disposal activities to be recognized when thecosts are incurred, rather than at a date of commitment to an exit or disposalplan.  We adopted the provisions of SFASNo. 146, effective January 1, 2003.  Itsadoption did not have any impact on our consolidated financial statements.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transitionand Disclosure-an Amendment of FASB Statement No. 123.”  SFAS No. 148 provides alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFASNo. 123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  We account for stock-based employeecompensation arrangements in accordance with the provisions of AccountingPrinciples Board Opinion No. 25 and comply with the disclosure provisions ofSFAS No. 123 and SFAS No. 148.

 

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

 

8

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**(3)   Inventories**

 

Inventories consist of the following:

 
|            |   | **December  31,  2002** |    | **March 29,  2003** |   |
|-----------------|--------|-------------------------|---------|---------------------|--------|
|            |   |                    |    |                |   |
| Raw materials   |   | $                       | 21,568  |                | $      | 20,067 |   |
| Work in process |   | 56,019                  |    | 58,999              |   |
| Finished goods  |   | 85,503                  |    | 83,775              |   |
| Total           |   | $                       | 163,090 |                | $      | 162,841 |   |

 

**(4)   Other (Income) Expense, Net**

 

Other (income) expense, net consists of the following:

 
|                              |   | **Three  months ended** |   |
|-----------------------------------|--------|-------------------------|--------|
|                              |   | **March 30,  2002**     |   | **March 29,  2003** |   |
|                              |   |                    |   |   |   |
| West 57th Building income         |   | $                       | (1,163 | ) | $ | (1,163 | ) |
| West 57th building expenses       |   | 814                     |   | 814 |   |
| Foreign exchange (gain) loss, net |   | 110                     |   | (104 | ) |
| Miscellaneous                     |   | (66                     | )      | (168 | ) |
| Other income, net                 |   | $                       | (305   | ) | $ | (621 | ) |

 

**(5)   Commitments and Contingent Liabilities**

 

Certain environmentalmatters are pending against us, which might result in monetary damages, theamount of which, if any, cannot be determined at the present time.  Philips Electronics, a previous owner of oneof our subsidiaries, has agreed to hold us harmless from any financialliability arising from these environmental matters which were pending as ofDecember 29, 1988.  Management believesthat these matters will not have a material adverse impact on our results ofoperations or financial condition.

 

**(6)   Segment Information**

 

We have identified twodistinct and reportable segments: the piano segment and the band and orchestralinstrument segment.  These segments wereselected based upon the way in which management oversees and evaluates theresults of each operation.  In the past,we have reported net income by segment as our measure of profit or loss. Theseamounts included intercompany allocations of items such as interest and taxesnot completely under the control of the segment. Income from operations is nowutilized by management and by the chief operating decision maker as a moremeaningful 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 corporatecosts that were not allocated to the reportable segments and the remainingintercompany profit elimination.

 

9

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The following tablespresent information about our operating segments for the three month periodended March 30, 2002 and March 29, 2003:

 

 
|                            |   | **Piano  Segment** |   | **Band and  Orchestral Segment** |   | **Other** |   | **Consol** |   |
|---------------------------------|--------|--------------------|--------|----------------------------------|--------|-----------|--------|------------|--------|
| **Three  months ended 2002**    |   | **U.S.**           |   | **Germany**                      |   | **Other** |   | **Total**  |   | **U.S.** |   | **Other** |   | **Total** |   | **& Elim** |   | **Total** |   |
| Net sales to external customers |   | $                  | 23,498 |                             | $      | 8,050     |   | $          | 4,872  |   | $ | 36,420 |   | $ | 50,670 |   | $ | 969 |   | $ | 51,639 |   | $ | — |   | $ | 88,059 |   |
| Income from operations          |   | 2,608              |   | 999                              |   | 749       |   | 4,356      |   | 4,832 |   | 26 |   | 4,858 |   | (545 | ) | 8,669 |   |
|                                 |        |                    |        |                                  |        |           |        |            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                            |   | **Piano Segment** |   | **Band and Orchestral Segment** |   | **Other** |   | **Consol** |   |
|---------------------------------|--------|-------------------|--------|---------------------------------|--------|-----------|--------|------------|--------|
| **Three  months ended 2003**    |   | **U.S.**          |   | **Germany**                     |   | **Other** |   | **Total**  |   | **U.S.** |   | **Other** |   | **Total** |   | **& Elim** |   | **Total** |   |
| Net sales to external customers |   | $                 | 20,414 |                            | $      | 12,732    |   | $          | 2,789  |   | $ | 35,935 |   | $ | 45,458 |   | $ | 1,116 |   | $ | 46,574 |   | $ | — |   | $ | 82,509 |   |
| Income from operations          |   | 273               |   | 1,331                           |   | 794       |   | 2,398      |   | 1,529 |   | 63 |   | 1,592 |   | (586 | ) | 3,404 |   |
|                                 |        |                   |        |                                 |        |           |        |            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**(7)    ****Summary ofGuarantees**

 

During 2001, we completed a $150.0 million 8.75%Senior Note offering.  At the end of2002, we repurchased $4.7 million of these Senior Notes.

 

Our payment obligations under the 8.75% Senior Notesare fully and unconditionally guaranteed on a joint and several basis byConn-Selmer, Steinway, and certain other of our direct and indirectwholly-owned subsidiaries, each a Guarantor (the “GuarantorSubsidiaries”).  These subsidiariesrepresent all of our (the “Issuer”) operations conducted in the UnitedStates.  The remaining subsidiaries,which do not guarantee the 8.75% Senior Notes, represent non-U.S. operations(the “Non Guarantor Subsidiaries”).

 

The following condensed consolidating supplementarydata presents the financial position, results of operations, and cash flows ofthe Guarantor Subsidiaries and the Non Guarantor Subsidiaries.  Separate complete financial statements ofthe respective Guarantors would not provide additional material informationthat would be useful in assessing the financial composition of the GuarantorSubsidiaries.  No single GuarantorSubsidiary has any significant legal restrictions on the ability of investorsor creditors to obtain access to its assets in event of default on theguarantee other than its subordination to senior indebtedness.

 

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

 

10

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

**CONDENSED CONSOLIDATING STATEMENTS OF INCOME**

**THREE MONTHS ENDED MARCH 29, 2003**

**(In Thousands)**

 
|                                     |   | **Issuer  of Notes** |   | **Guarantor  Subsidiaries** |   | **Non  Guarantor  Subsidiaries** |   | **Reclass/  Eliminations** |   | **Consolidated** |   |
|------------------------------------------|--------|----------------------|--------|-----------------------------|--------|----------------------------------|--------|----------------------------|--------|------------------|--------|
|                                     |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Net sales                                |   | $                    | — |                        | $      | 68,622                           |   | $                          | 17,063 |             | $      | (3,176 | ) | $ | 82,509 |   |
| Cost of sales                            |   | —               |   | 54,096                      |   | 10,709                           |   | (3,128                     | )      | 61,677           |   |
|                                     |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Gross profit                             |   | —               |   | 14,526                      |   | 6,354                            |   | (48                        | )      | 20,832           |   |
|                                     |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Operating expenses:                      |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Sales and  marketing                     |   | —               |   | 8,294                       |   | 2,731                            |   | (12                        | )      | 11,013           |   |
| General and  administrative              |   | 1,204                |   | 3,542                       |   | 1,208                            |   | —                     |   | 5,954            |   |
| Amortization                             |   | 113                  |   | 175                         |   | 1                                |   | —                     |   | 289              |   |
| Other operating  (income) expense        |   | (800                 | )      | 734                         |   | 226                              |   | 12                         |   | 172              |   |
| Total operating  expenses                |   | 517                  |   | 12,745                      |   | 4,166                            |   | —                     |   | 17,428           |   |
|                                     |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Income (loss)  from operations           |   | (517                 | )      | 1,781                       |   | 2,188                            |   | (48                        | )      | 3,404            |   |
|                                     |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Interest  (income) expense, net          |   | (376                 | )      | 3,300                       |   | 48                               |   | —                     |   | 2,972            |   |
| Other income,  net                       |   | —               |   | (535                        | )      | (86                              | )      | —                     |   | (621             | )      |
|                                     |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Income (loss)  before income taxes       |   | (141                 | )      | (984                        | )      | 2,226                            |   | (48                        | )      | 1,053            |   |
|                                     |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Provision for  (benefit of) income taxes |   | (49                  | )      | (451                        | )      | 894                              |   | (24                        | )      | 370              |   |
|                                     |   |                 |   |                        |   |                             |   |                       |   |             |   |
|                                     |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Net income (loss)                        |   | $                    | (92    | )                           | $      | (533                             | )      | $                          | 1,332  |             | $      | (24 | ) | $ | 683 |   |

 

11

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

**CONDENSEDCONSOLIDATING BALANCE SHEETS**

**MARCH 29, 2003**

**(In Thousands)**

 
|                                       |   | **Issuer  of Notes** |   | **Guarantor  Subsidiaries** |   | **Non  Guarantor  Subsidiaries** |   | **Reclass/  Eliminations** |   | **Consolidated** |   |
|--------------------------------------------|--------|----------------------|--------|-----------------------------|--------|----------------------------------|--------|----------------------------|--------|------------------|--------|
| ASSETS                                     |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Current assets:                            |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Cash                                       |   | $                    | — |                        | $      | 2,260                            |   | $                          | 2,030  |             | $      | 10,844 |   | $ | 15,134 |   |
| Accounts, notes and leases receivable, net |   | —               |   | 72,983                      |   | 12,244                           |   | 19                         |   | 85,246           |   |
| Inventories                                |   | —               |   | 131,672                     |   | 32,198                           |   | (1,029                     | )      | 162,841          |   |
| Prepaid expenses and other current assets  |   | 550                  |   | 3,214                       |   | 1,083                            |   | —                     |   | 4,847            |   |
| Deferred tax assets                        |   | —               |   | 6,151                       |   | 5,098                            |   | (3,680                     | )      | 7,569            |   |
| Total current assets                       |   | 550                  |   | 216,280                     |   | 52,653                           |   | 6,154                      |   | 275,637          |   |
|                                       |   |                 |   |                        |   |                             |   |                       |   |             |   |
|                                       |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Property, plant and equipment, net         |   | 147                  |   | 86,580                      |   | 14,701                           |   | —                     |   | 101,428          |   |
| Investment in subsidiaries                 |   | 71,143               |   | 260,616                     |   | —                           |   | (331,759                   | )      | —           |   |
| Trademarks                                 |   | —               |   | 6,280                       |   | 3,461                            |   | —                     |   | 9,741            |   |
| Goodwill                                   |   | —               |   | 18,795                      |   | 11,031                           |   | —                     |   | 29,826           |   |
| Other intangibles, net                     |   | 3,636                |   | 3,036                       |   | 9                                |   | —                     |   | 6,681            |   |
| Other assets                               |   | 1,001                |   | 6,179                       |   | 458                              |   | —                     |   | 7,638            |   |
| TOTAL ASSETS                               |   | $                    | 76,477 |                        | $      | 597,766                          |   | $                          | 82,313 |             | $      | (325,605 | ) | $ | 430,951 |   |
|                                       |   |                 |   |                        |   |                             |   |                       |   |             |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY  |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Current liabilities:                       |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Current portion of long-term debt          |   | $                    | — |                        | $      | 6,460                            |   | $                          | 1,947  |             | $      | — |   | $ | 8,407 |   |
| Accounts payable                           |   | 171                  |   | 4,213                       |   | 2,590                            |   | —                     |   | 6,974            |   |
| Other current liabilities                  |   | (12,721              | )      | 41,358                      |   | 14,767                           |   | (3,977                     | )      | 39,427           |   |
| Total current liabilities                  |   | (12,550              | )      | 52,031                      |   | 19,304                           |   | (3,977                     | )      | 54,808           |   |
|                                       |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Long-term debt                             |   | 145,396              |   | 34,716                      |   | —                           |   | 10,844                     |   | 190,956          |   |
| Intercompany                               |   | (111,507             | )      | 107,502                     |   | 3,986                            |   | 19                         |   | —           |   |
| Deferred tax liabilities                   |   | —               |   | 16,593                      |   | 6,677                            |   | —                     |   | 23,270           |   |
| Other non-current liabilities              |   | 388                  |   | 9,613                       |   | 14,728                           |   | —                     |   | 24,729           |   |
| Total liabilities                          |   | 21,727               |   | 220,455                     |   | 44,695                           |   | 6,886                      |   | 293,763          |   |
|                                       |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Stockholders’ equity                  |   | 54,750               |   | 377,311                     |   | 37,618                           |   | (332,491                   | )      | 137,188          |   |
|                                       |   |                 |   |                        |   |                             |   |                       |   |             |   |
| TOTAL LIABILITIES AND                      |   |                 |   |                        |   |                             |   |                       |   |             |   |
| STOCKHOLDERS’ EQUITY                  |   | $                    | 76,477 |                        | $      | 597,766                          |   | $                          | 82,313 |             | $      | (325,605 | ) | $ | 430,951 |   |

 

12

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

**CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS**

**THREE MONTHS ENDED MARCH 29, 2003**

**(In Thousands)**

 
|                                                                                 |   | **Issuer  of Notes** |   | **Guarantor  Subsidiaries** |   | **Non  Guarantor  Subsidiaries** |   | **Reclass/  Eliminations** |   | **Consolidated** |   |
|--------------------------------------------------------------------------------------|--------|----------------------|--------|-----------------------------|--------|----------------------------------|--------|----------------------------|--------|------------------|--------|
| Cash flows from operating activities:                                                |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Net income (loss)                                                                    |   | $                    | (92    | )                           | $      | (533                             | )      | $                          | 1,332  |             | $      | (24 | ) | $ | 683 |   |
| Adjustments to reconcile net income (loss) to cash flows from  operating activities: |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Depreciation and amortization                                                        |   | 127                  |   | 2,308                       |   | 383                              |   | —                     |   | 2,818            |   |
| Deferred tax benefit                                                                 |   | —               |   | (66                         | )      | (57                              | )      | —                     |   | (123             | )      |
| Other                                                                                |   | —               |   | 20                          |   | 43                               |   | —                     |   | 63               |   |
| Changes in operating assets and liabilities:                                         |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Accounts, notes and leases receivable                                                |   | —               |   | (7,313                      | )      | (414                             | )      | (97                        | )      | (7,824           | )      |
| Inventories                                                                          |   | —               |   | 1,863                       |   | (1,494                           | )      | 48                         |   | 417              |   |
| Prepaid expenses and other current assets                                            |   | (43                  | )      | 407                         |   | (151                             | )      | —                     |   | 213              |   |
| Accounts payable                                                                     |   | 73                   |   | (2,720                      | )      | (368                             | )      | 78                         |   | (2,937           | )      |
| Other current liabilities                                                            |   | 1,610                |   | 1,444                       |   | 1,427                            |   | (24                        | )      | 4,457            |   |
| Cash flows from operating activities                                                 |   | 1,675                |   | (4,590                      | )      | 701                              |   | (19                        | )      | (2,233           | )      |
|                                                                                 |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Cash flows from investing activities:                                                |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Capital expenditures                                                                 |   | (2                   | )      | (486                        | )      | (259                             | )      | —                     |   | (747             | )      |
| Changes in other assets                                                              |   | 6                    |   | 240                         |   | —                           |   | —                     |   | 246              |   |
| Cash flows from investing activities                                                 |   | 4                    |   | (246                        | )      | (259                             | )      | —                     |   | (501             | )      |
|                                                                                 |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Cash flows from financing activities:                                                |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Net borrowings (repayments) under lines of credit                                    |   | (2                   | )      | 355                         |   | 363                              |   | (353                       | )      | 363              |   |
| Repayment of long-term debt                                                          |   | —               |   | (1,619                      | )      | —                           |   | —                     |   | (1,619           | )      |
| Intercompany transactions                                                            |   | (1,677               | )      | 6,489                       |   | (4,831                           | )      | 19                         |   | —           |   |
| Cash flows from financing activities                                                 |   | (1,679               | )      | 5,225                       |   | (4,468                           | )      | (334                       | )      | (1,256           | )      |
|                                                                                 |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Effect of exchange rate changes on cash                                              |   | —               |   | —                      |   | 25                               |   | —                     |   | 25               |   |
|                                                                                 |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Increase (decrease) in cash                                                          |   | —               |   | 389                         |   | (4,001                           | )      | (353                       | )      | (3,965           | )      |
| Cash, beginning of period                                                            |   | —               |   | 1,166                       |   | 6,736                            |   | 11,197                     |   | 19,099           |   |
|                                                                                 |   |                 |   |                        |   |                             |   |                       |   |             |   |
| Cash, end of period                                                                  |   | $                    | — |                        | $      | 1,555                            |   | $                          | 2,735  |             | $      | 10,844 |   | $ | 15,134 |   |

 

13

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| **ITEM 2** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS** |
|------------|-------------------------------------------------------------------------------------------------|
|       | **(Dollars  in thousands)**                                                                     |

 

**Introduction**

 

We, through our operating subsidiaries, are a worldleader in the design, manufacture, marketing, and distribution of high qualitymusical instruments.  Our piano divisionconcentrates on the high-end grand piano segment of the industry, handcraftingSteinway pianos in New York and Germany. We also offer vertical 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 brasswind, woodwind, percussion andstringed instruments and related accessories with well known brand names suchas Bach, C.G. Conn, King, and Ludwig. We sell our products through dealers and distributors worldwide.  Our piano customer base consists ofprofessional artists, 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.

 

**CriticalAccounting Policies**

 

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

 

**Forward-LookingStatements**

 

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

 

14

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**Resultsof Operations**

 

*ThreeMonths Ended March 29, 2003 Compared to Three Months Ended March 30, 2002*

 

*Net Sales -*Net sales decreased $5.6million (6%) to $82.5 million in the first quarter of 2003. Piano sales remainedrelatively stable, decreasing less than $0.5 million (1%) to $35.9 million inthe current period, despite a 15% decrease in Steinway unit shipments and a 9%decrease in Boston product line unit shipments.  The decrease in Steinway shipments, which was more pronounced inthe U.S., with units down 17% as compared to an 11% decrease in shipmentsabroad, was primarily a result of the economic slowdown compounded by theeffects of the war in Iraq.  However,this decrease was mitigated by a positive foreign exchange impact of $2.5million in the current period.  Band andorchestral instrument sales decreased $5.1 million (10%) on an overall unitdecrease of 12%.   Sales were negativelyimpacted by lower student instrument orders from various dealers, who continueto purchase lower priced products imported from Asia.  The sales decline was also attributed to the union strike at ourLaGrange, Illinois plant, which resulted in lost sales of $1.4 million.  This strike and the strike at our Eastlake,Ohio brass instrument factory were settled in the second quarter of 2003.

 

*G**ross Profit-* Gross profit decreased by $4.5 million (18%) to $20.8 million on agross margin decrease from 28.8% to 25.2%. Piano margins decreased from 35.7% in 2002 to 32.9% in 2003 as a resultof lower production levels at our domestic manufacturing facility, compoundedby a shift in mix to the lower-margin Boston products. Band and orchestralinstrument margins decreased from 23.9% in 2002 to 19.3% in 2003.  This decrease was due to costs of $1.9million paid to employees in accordance with the terms of labor contracts whichexpired and $0.9 million in unabsorbed overhead and lost profit resulting fromthe work stoppages at two of our plants.

 

*Operating Expenses* – Overall operatingexpenses increased by $0.7 million (4%) to $17.4 million in the firstquarter.  $0.6 million of this increaseis a result of foreign exchange, and $0.3 million is attributable to severance costs resulting from banddivision staff consolidations in the first quarter of 2003.

* *

*Other Expense, net -*Other expensesdecreased by $0.6 million (22%) to $2.4 million. Interest expense decreased$0.3 million as a result of lower interest rates on our borrowings and interestsavings associated with our debt buyback of $4.7 million in December 2002.  Foreign exchange gains of $0.1 million ascompared to foreign exchange losses of $ 0.1 million in the prior period alsocontributed to the net decrease.

 

*Income Taxes* – Our effective tax rateremained consistent period to period at 35.1% as a result of the ratio offoreign source income and anticipated use of foreign tax credits in 2003.

 

**Liquidityand Capital Resources**

 

We have relied primarily upon cash provided byoperations, supplemented as necessary by seasonal borrowings under our workingcapital line, to finance our operations, repay long-term indebtedness and fundcapital expenditures.

 

Cash provided by operations in the first three monthsof 2002 was $14.7 million, compared to cash used in operations in the firstthree months of 2003 of $2.2 million. This change is primarily due to the change in working capital balancesperiod over period and payments made on accounts payable.  Prior to August 2002, we sold notesreceivable generated by our band division to third-party financingcompanies.  This practice, whichgenerated $2.6 million in cash in the first quarter of 2002, was not

 

15

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employed in the currentperiod.  Additionally, inventoryincreased in the current period due to the sales slowdown and larger volume ofpianos needed for music festival season.

 

Capital expenditures of $1.0 million and $0.7 millionin the first quarter of 2002 and 2003, respectively, were used primarily forthe purchase of new machinery and equipment and production and retail facilityimprovements.  In 2003, we expect tospend approximately $5.0 million for capital projects, consisting mainly ofretail facility build-outs, machinery and process improvements, and equipmentreplacement.

 

## **Borrowing Availability and Activities**

 

Our real estate term loan, acquisition term loan anddomestic seasonal borrowing requirements are accommodated through a committedcredit facility with a syndicate of domestic lenders (the “CreditFacility”).  The Credit Facility providesus with a potential borrowing capacity of up to $85.0 million in revolvingcredit loans, based on eligible accounts receivable and inventorybalances.  The acquisition term loan andrevolving credit loan portions of the Credit Facility bear interest at average30-day LIBOR plus 1.75%, and the real estate term loan bears interest ataverage 30-day LIBOR plus 1.5%.   TheCredit facility expires on September 14, 2008. As of March 29, 2003, there were no revolving credit loans outstandingand availability based on eligible accounts receivable and inventory balances,net of letter of credit deductions of $4.5 million, was approximately $80.5million.  Open account loans withforeign banks also provide for borrowings by Steinway’s foreign subsidiaries ofup to €17.6 million ($19.0 million at the March 29, 2003 exchange rate).  We had $1.9 million in foreign loansoutstanding as of March 29, 2003.

 

Our long-term financing consists primarily of $145.3million of 8.75% Senior Notes and $52.1 million of term loans outstanding underthe Credit Facility. Our debt agreements contain restrictive covenants thatplace certain restrictions on us, including restrictions on our ability toincur additional indebtedness, to make investments in other entities and to paycash dividends.  We were in compliancewith all such covenants as of March 29, 2003.

 

We expect to continue to focus on working capitalmanagement, repaying debt, maintaining and expanding market share, andimproving production efficiency.  Wealso intend to focus on scaling back the number of band division productionfacilities in the next twelve to twenty-four months.  We are not aware of any other trends, demands, commitments, orcosts of resources that are expected to materially impact liquidity or capitalresources.  Therefore, we believe thatcash on hand, together with cash flows anticipated from operations andavailable borrowings under the Credit Facility, will be adequate to meetexisting debt service requirements, fund continuing capital requirements andsatisfy working capital and general corporate needs for the next twelve months.

 

We have reserved 721,750 shares of our existingtreasury stock to be utilized for the issuance of stock options under ourAmended and Restated 1996 Stock Plan. These options will have no impact on our cash flow or the number ofshares outstanding unless and until the options are exercised.

 

16

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**Contractual Obligations**

 

The following tableprovides a summary of our contractual obligations at March 29, 2003.

 
|                            |   | **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)              |   | $                          | 199,363 |   | $ | 8,407 |   | $ | 13,111 |   | $ | 13,295 |   | $ | 164,550 |   |
| Operating leases (2)            |   | 273,176                    |    | 4,421 |   | 7,950 |   | 6,563 |   | 254,242 |   |
| Purchase obligations            |   | 1,168                      |    | 748 |   | 210 |   | 210 |   | — |   |
| Other long-term liabilities (3) |   | 23,487                     |    | 2,440 |   | 4,880 |   | 4,880 |   | 11,287 |   |
| Total                           |   | $                          | 497,194 |   | $ | 16,016 |   | $ | 26,151 |   | $ | 24,948 |   | $ | 430,079 |   |

 

----

**Notes toContractual Obligations:**

 

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

(2) Approximately$261.9 million of our operating lease obligations are attributable to theninety-nine year land lease associated with the purchase of Steinway Hall; theremainder is attributable to the leasing of other facilities and equipment.

(3) Our otherlong-term liabilities consist primarily of pension obligations.

 

**NewAccounting Pronouncements**

 

On July 30, 2002 the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 requires costs associated withexit or disposal activities to be recognized when the costs are incurred,rather than at a date of commitment to an exit or disposal plan.  We adopted the provisions of SFAS No. 146,effective January 1, 2003.  Its adoptiondid not have any impact on our consolidated financial statements.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transitionand Disclosure-an Amendment of FASB Statement No. 123.”  SFAS No. 148 provides alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFASNo. 123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  We account for stock-based employeecompensation arrangements in accordance with the provisions of AccountingPrinciples Board Opinion No. 25 and comply with the disclosure provisions ofSFAS No. 123 and SFAS No. 148.

 

17

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| **ITEM 3** | **QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK** |
|------------|-----------------------------------------------------------------|

 

**We are exposed to market risk associated with changes inforeign currency exchange rates and interest rates.  We mitigate our foreign currency exchange rate risk bymaintaining foreign currency cash balances and holding forward foreign currencycontracts.  These contracts are used asa hedge against intercompany transactions and are not used for trading orspeculative purposes.  The fair value ofthe forward foreign currency exchange contracts is sensitive to changes inforeign currency exchange rates.  Theimpact of an adverse change in foreign currency exchange rates would not bematerially different than that disclosed in the our Annual Report on Form 10-Kfor the year ended December 31, 2002.**

** **

**Although the majority of our long-term debt is at a fixedinterest rate, our revolving loans and term loans bear interest at rates thatfluctuate with changes in LIBOR.  Assuch, our interest expense on our revolving loans and term loans and the fairvalue of its fixed long-term debt are sensitive to changes in market interestrates.  The effect of an adverse changein market interest rates on our interest expense and the fair value of ourlong-term debt would not be materially different than that disclosed in ourAnnual Report on Form 10-K for the year ended December 31, 2002.**

 

 
| **ITEM 4** | **CONTROLS AND PROCEDURES** |
|------------|-----------------------------|

 

Within 90 days prior to filing this report, (the “Evaluation Date”) weevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14).Our disclosure 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. Mr. Messina, our President and Chief Executive Officer, and Mr.Hanson, our Senior Executive Vice President and Chief Financial Officer,reviewed and participated in this evaluation. Based on this evaluation, Messrs.Messina and Hanson concluded that, as of the Evaluation Date, our disclosurecontrols were effective.  Since theEvaluation Date, there have not been any significant changes in our internalaccounting controls or in other factors that could significantly affect thosecontrols.

 

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| **PART  II**    | **OTHER  INFORMATION**                |
|-----------------|---------------------------------------|
|            |                                  |
| **ITEM  6****** | **EXHIBITS  AND REPORTS ON FORM 8-K** |

 

(a)    Exhibits

 

99.1 Certifying letter, Dana D. Messina, President andChief Executive Officer

99.2 Certifying letter, Dennis M. Hanson, SeniorExecutive Vice President and Chief Financial Officer

 

 

(b)    Reports on Form 8-K

 

On March 4, 2003 the Company filed a Current Report onForm 8-K that included a press release issued on February 25, 2003 announcingits results for the fourth quarter ended December 31, 2002 and a press releaseissued on March 3, 2003 announcing that employees of its Conn-Selmer, Inc.division’s Eastlake, Ohio plant went on strike.(1)

 

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(1)  Subsequentto the date of this Quarterly Report on Form 10-Q this strike was settled.

 

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Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrants have dulycaused this report to be signed on their behalf by the undersigned, thereuntoduly 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 8, 2003 |                                                         |

 

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I, Dana D. Messina, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of SteinwayMusical Instruments, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s other certifying officers and I have indicated inthis quarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date: May 8, 2003 |   |                                             |
|-------------------|--------|--------------------------------------------------|
|              |   | /s/ Dana D. Messina                              |   |
|              |   | Dana D. Messina                                  |
|              |   | Director, President and Chief  Executive Officer |

 

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I, Dennis M. Hanson, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of SteinwayMusical Instruments, Inc.;

 

2. Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s other certifying officers and I have indicated inthis quarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date:  May 8, 2003 |   |                                                         |
|----------------------------------------|--------|--------------------------------------------------------------|
|                                   |   |                                                         |
|                                   |   | /s/ Dennis M. Hanson                                         |   |
|                                   |   | Dennis M. Hanson                                             |
|                                   |   | Senior Executive Vice President and  Chief Financial Officer |

 

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